In a reorganization, which entities owe Texas franchise tax when a corporate general partner and an out-of-state limited partner hold a Texas-active limited partnership?

Plain-English summary

A corporate group asked the Comptroller how the (pre-2008) franchise tax would apply to a reorganization. A parent corporation ("ABC") withdrew from Texas at the end of 1995 and incorporated a Delaware subsidiary ("ABC Texas"). ABC and ABC Texas then formed a Delaware limited partnership ("ABC Texas I"): ABC Texas held a 1% general-partner interest, and ABC held the remaining 99% as a limited partner. The partnership ran a Texas sales office with one employee and bought silicon wafers from ABC to resell to Texas customers. After the withdrawal, ABC itself had no employees, office, inventory, assets, or sales in Texas.

The Comptroller advised:

1. The general partner is subject to franchise tax. ABC Texas is subject because it is a general partner in a partnership doing business in Texas (Rule 3.546(c)(12)(A)).
2. The limited partner is not subject. ABC is not subject to franchise tax if its only connection with Texas is the limited partnership interest in ABC Texas I (Rule 3.546(c)(12)(B)).
3. The partnership itself is not subject. ABC Texas I is not subject to the tax because partnerships are not subject to it (under the pre-2008 rules).

Important currency note: STAR marks this document partially superseded on 12/15/2014 on the taxation of partnerships. The 2007 legislation (House Bill 3 and House Bill 3928) restructured the franchise tax into the current margin tax effective January 1, 2008 and made partnerships subject to the tax — reversing the "partnership not subject" conclusion here. Treat the entity-level results as historical and confirm current law.

What this means for you

Businesses structuring a Texas reorganization

The pre-2008 outcome turned entirely on general-partner vs. limited-partner status: the general partner was taxable, the limited partner and the partnership were not. Groups used that distinction to isolate Texas exposure in a thin general-partner entity. The margin tax has since made partnerships themselves taxable, so this structure no longer produces the same result — re-verify before relying on it.

Accountants and tax professionals

Note that ABC's withdrawal from Texas left it with no independent Texas activity, so only its limited-partnership interest was at issue — and that interest alone did not create franchise-tax nexus (Rule 3.546(c)(12)(B)). Confirm treatment under the current margin tax and its combined-reporting rules.

Common questions

Q: Which entity owed Texas franchise tax?
A: The general partner (ABC Texas), because it was a general partner in a partnership doing business in Texas.

Q: Did the 99% limited partner owe the tax?
A: No. Its only Texas connection was the limited partnership interest, which did not by itself create franchise-tax nexus.

Q: Was the partnership itself taxed?
A: No — under the pre-2008 rules, partnerships were not subject to the franchise tax. (That changed with the 2008 margin tax.)

Citations and references

Statutes and rules:

• Franchise Tax Rule 3.546(c)(12)(A) (corporate general partner of a partnership doing business in Texas is subject to the tax)
• Franchise Tax Rule 3.546(c)(12)(B) (corporation whose only Texas connection is a limited partnership interest is not subject)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9610805L

Original ruling text

STAR SUPERSED INFORMATION
Accession No. —
Supersede type - Partial
Document superseded on - 12/15/14
Issue(s) that caused the document to be superseded — Taxation of partnerships
Reason(s): The Franchise Tax Code was amended by House Bill 3 and House Bill 3928,
Acts 2007, 80th Legislative Session, effective January 1, 2008 and affected Franchise
tax reports due on or after January 1, 2008. One of the many changes to this Tax Code
subjected partnerships (previously not required to file) to the franchise tax reporting
requirement.

October 1, 1996

Dear **:

In your letter of September 10, you requested a determination regarding the
imposition of franchise tax on various entities involved in a reorganization.

You state that ABC Corporation (ABC) withdrew from Texas on December 31, 1995
(ABC subsequently changed its name to XYZ on July 1, 1996). ABC incorporated
ABC Texas Corporation (ABC Texas) in Delaware as of December 31, 1995. Thus,
ABC owns 100% of the stock of ABC Texas. ABC and ABC Texas formed ABC Texas I,
a Delaware limited partnership, as of December 31, 1995. ABC Texas holds a 1%
interest in ABC Texas I as a general partner while ABC holds the remaining 99%
interest as a limited partner.

ABC Texas I has a sales office with one employee in CITY A. The partnership
purchases silicon wafers from ABC and resells them to customers located in
Texas. As of December 31, 1995, ABC has no employees, office, inventory, fixed
assets, or sales in Texas.

ABC Texas is subject to franchise tax because the corporation is a general
partner in a partnership which is doing business in Texas (see subsection
(c)(12)(A) of enclosed Rule 3.546). However, ABC is not subject to franchise
tax if the company's only connection with Texas involves the limited
partnership interest in ABC Texas I (see subsection (c)(12)(B) of Rule 3.546).
Of course, ABC Texas I is not subject to franchise tax because partnerships are
not subject to the tax.

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, contact Tax Policy Division. You may call toll free
1-800-531-5441, or our regular number is 512/463-4600. My extension is 3-4662.
You may write me at Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Bob Jeffcoat
Tax Policy Division