When did a corporation's beneficial interest in a trust owning a Texas real-estate joint venture create former Texas franchise-tax nexus?

Plain-English summary

Control over the trust could pass the Texas real-estate venture's nexus to its corporate beneficiary.

The joint venture and Delaware business trust were not themselves subject to former franchise tax if neither was formed as a corporation or another taxable entity type.

Even so, the trust was doing business in Texas because it held a general-partnership interest in a joint venture that owned Texas real property. Newco, the trust beneficiary, had Texas nexus if it directly or indirectly controlled the trust, including control over the trustee. If that nexus existed, Newco was subject to franchise tax.

If Newco was a non-Texas corporation, dividends and interest it paid to its Texas parent were not included in the parent's Texas receipts for apportionment.

What this means for you

Corporate trust beneficiaries

Beneficial ownership alone was not the full test; direct or indirect control determined the stated nexus result.

Joint ventures and business trusts

An arrangement could be doing business in Texas even if its entity form was not itself within the former franchise-tax base.

Common questions

Q: Was the joint venture automatically subject to franchise tax?
A: No, if it was not formed as a corporation or another taxable entity.

Q: Why was the trust doing business in Texas?
A: It had a general-partnership interest in a venture owning Texas real property.

Q: When did Newco have nexus?
A: If it directly or indirectly controlled the trust or trustee.

Citations and references

• No statute or rule was cited in the letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9609798L

Original ruling text

September 27, 1996

Dear***:

In your letter of September 23, you requested a determination regarding the
application of franchise tax to a group of affiliated financial institutions.

You state that A, a Texas corporation which is not a bank, is the 100%
shareholder of B, a Delaware corporation. B is the 100% shareholder of C, a
Texas corporation which operates a state savings bank in Texas.

A will create a subsidiary, Newco, which will become the beneficiary of a
Delaware Business Trust (the Trust). The Trust will acquire a joint venture
interest with other venturers unrelated to any of A's affiliated entities. The
joint venture will own real property in Texas. The trustee of the Trust will
be an individual who is not directly related to nor has any equity interest in
any of the entities in A's affiliated group, but will be a business partner of
a principal of A. Newco's only connection with Texas is the beneficial
ownership in the Trust.

I have restated each of the rulings you requested followed by a response:

1. The joint venture will not be subject to franchise tax because it is not a
   corporate entity.

Response

If the joint venture is not formed under a state or other law as a corporation
or other entity which can be subject to franchise tax, the joint venture is not
subject to franchise tax.

2. The Trust will not be subject to franchise tax because it is not a
   corporate entity.

Response

If the Trust is not formed under a state or other law as a corporation or other
entity which can be subject to franchise tax, the Trust is not subject to
franchise tax.

3. No activity of the joint venture which may be attributed to the Trust as a
   joint venturer will, in turn, be attributed to Newco.

Response

The Trust is doing business in Texas because it has a general partnership
interest in the joint venture which is doing business in Texas. Obviously, the
joint venture is doing business in Texas because it owns real property in
Texas. Consequently, Newco will have nexus in Texas if Newco has either direct
or indirect control over the Trust (including control over the trustee).

4. Newco will not be considered to be doing business in Texas, and, thus
   subject to franchise tax due to its beneficial ownership in the trust.

Response

If Newco has nexus in Texas as outlined in the response to 3. above, Newco is
subject to franchise tax.

5. Dividend and/or interest payments made from Newco to A will not be Texas
   sourced income with respect to A due to the sourcing requirements of the
   location of the payor rule.

Response

If Newco is a non-Texas corporation, dividends and interest from Newco to A
would not be included in A's Texas receipts for apportionment purposes.

This response is based on the facts presented and current law. If there are
different or additional facts, the response may change.

If you have any questions, you may call me at 463-4817. You may write me at
Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Bob Jeffcoat
Tax Policy Division