Ezel / Tax Rulings / TX
TX 9702409L Franchise Tax (PRIOR TO 01/01/2008) 1997-02-14

Was the ultimate parent limited to a U.S. corporation for the former earned-surplus officer-compensation add-back?

Short answer: No. Neither Section 171.110(c) nor Rule 3.558(h) limited the parent to a U.S. corporation. Texas interpreted the ultimate parent as any corporation exercising ultimate control over the subsidiary, including a foreign corporation.

Apply this to your situation

This page answers the general question as of 1997. Ezel answers yours, under current Texas tax law, with citations.

Currency note: this ruling is from 1997
Subsequent statutory amendments, regulation changes, court decisions, or later rulings may have changed the analysis. Treat this page as historical context, not current tax advice. Verify current law before relying on any specific rule, rate, or position mentioned here.
Disclaimer: This is an official Texas Comptroller of Public Accounts letter published on the State Tax Automated Research (STAR) system. Letters on STAR can be the basis of a detrimental reliance claim only for the taxpayer to whom the letter was directly issued (see 34 Tex. Admin. Code Rules 3.1 and 3.10); documents on STAR may no longer represent current policy even if not marked superseded. This 1997 response applies the former earned-surplus officer-and-director compensation add-back and historical parent-corporation rules. Confirm current law before applying the control definition. Taxpayer-identifying details are redacted. This summary is informational only and is not legal or tax advice. Consult a licensed Texas tax professional about your specific situation.
About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page) is the authoritative source for any reliance.

Plain-English summary

The ultimate parent could be a foreign corporation; it was not limited to a U.S. parent.

The requester interpreted Section 171.110(c) and Rule 3.558(h) as referring to the ultimate U.S. parent for purposes of the former earned-surplus officer-and-director compensation add-back.

Texas rejected that limitation. Neither provision restricted “parent corporation” to a U.S. corporation, so the Department treated any corporation with ultimate control over the subsidiary as the parent.

The letter also referred to Administrative Hearing No. 33,864 and Rule 3.548(e) for further detail.

What this means for you

Multinational corporate groups

The control chain did not stop at the highest U.S. entity under the interpretation stated in this letter.

Tax professionals

Trace ultimate corporate control regardless of the parent's country of incorporation.

Common questions

Q: Was the parent limited to a U.S. corporation?
A: No.

Q: What identified the parent?
A: Ultimate control over the subsidiary.

Q: Which issue used this definition?
A: The former earned-surplus officer-and-director compensation add-back.

Citations and references

  • Texas Tax Code Sec. 171.110(c)
  • 34 Tex. Admin. Code Secs. 3.558(h) and 3.548(e)
  • Administrative Hearing No. 33,864

Source

Original ruling text

February 14, 1997

Dear ***:

Thank you for your January 31, 1997 letter concerning the determination of the
ultimate parent of a subsidiary corporation for purposes of the officer and
director compensation add back for the earned surplus component of the
franchise tax.

In your letter, you were seeking confirmation of your understanding of
Franchise Tax Rule 3.558(h) and Texas Tax Code (TTC) Sec. 171.110(c). You and
I spoke about this issue on February 6, 1997. You interpreted these cites to
mean the ultimate United States (US) parent.

Neither TTC Sec. 171.110(c) nor Rule 3.558(h) limit the definition of parent
corporation to U.S. corporation. Therefore, it has been our interpretation of
these cites to mean any corporation which has ultimate control over a
subsidiary.

I have enclosed a copy of Administrative Hearing number 33,864 for your review.
This hearing deals with the same issue as your letter. I have also enclosed a
copy of Franchise Tax Rule 3.548, Taxable Capital: Close and S Corporations.
Subsection (e) of this rule provides more detailed information about the
determination of a parent corporation.

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

If you have any questions about this or any other franchise tax matter, please
call me at
1-800-531-5441, extension 34612. My direct number is (512) 463-4612. You may
write me at Tax Policy Division, Comptroller of Public Accounts, Austin, Texas
78774.

Sincerely,

Janet Spies
Tax Policy Division

Enclosures

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