What former Texas franchise-tax filing rules applied to a foreign S corporation and its nonresident shareholders?

Plain-English summary

The foreign S corporation filed and paid under the corporate franchise tax; its nonresident shareholders had no Texas filing duty under this letter.

Texas did not impose a personal income tax, but it imposed the former taxable-capital and earned-surplus franchise tax on corporations doing business in Texas or chartered or authorized there.

The corporation had to file an initial report and then annual reports. The initial report was due 89 days after the first anniversary of the earliest of three dates: beginning Texas business, receiving a certificate of authority, or receiving a Texas charter. Annual reports were due May 15.

The letter said nonresident S-corporation shareholders had no filing requirements. The S corporation itself filed franchise-tax reports and was taxed as if it were a C corporation.

What this means for you

Foreign S corporations reviewing historical obligations

Federal pass-through status did not shift the former Texas franchise-tax filing obligation from the corporation to its nonresident shareholders.

Tax professionals

Treat all deadlines and entity rules as historical, and separately evaluate current corporate registration under successor law.

Common questions

Q: Did the S corporation file franchise-tax reports?
A: Yes.

Q: Did its nonresident shareholders file under the rule described?
A: No.

Q: When was the initial report due?
A: 89 days after the first anniversary of the earliest Texas start, authority, or charter date.

Citations and references

• Texas Tax Code Chapter 171
• Former Texas Business Corporation Act Art. 8.01
• 34 Tex. Admin. Code Secs. 3.544, 3.545, 3.548, and 3.556

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9703422L

Original ruling text

March 31, 1997

Dear ***:

Thank you for your letter concerning the franchise tax reporting requirements
for a foreign corporation. The issues raised in your letter have been restated
and addressed below.

Issue 1:
Article 8.01, Admission of a Foreign Corporation, of the Texas Business
Corporation Act discusses the aspects each corporation must consider when
deciding whether or not to obtain a Certificate of Authority in this state. The
appropriate forms for registration may be obtained from Secretary of State,
Statutory Filings Division, Corporations Section, P.O. Box 13697, Austin, Texas
78711-3697. Their telephone number is (512)463-5581.

Issue 2:
Texas does not impose an income tax. However, the state does impose a franchise
tax, which consists of a taxable capital component and an earned surplus
component, on each corporation that does business in this state or that is
chartered or authorized to do business in this state. A copy of the publication
summarizing the general provisions of the tax, The Texas Franchise Tax on
Corporations, is enclosed.

Each corporation subject to the franchise tax must file an initial franchise
tax report and then an annual franchise tax report. The initial report is due
89 days after the first anniversary of the date the corporation began doing
business in Texas, the date the Certificate of Authority was issued, or the
date the Charter (Texas corporations) was granted, whichever is earlier. The
annual report is due May 15 of each year.

Issue 3:
There are no filing requirements for non-resident, Sub S shareholders.

Issue 4:
A corporation, electing S status under the Internal Revenue Code, will file
franchise tax reports and will be taxed as if they were a C corporation.

I have enclosed copies of the franchise tax report forms mentioned above for
your review. I have also enclosed franchise tax Rule 3.544 (Reports and
Payments), Rule 3.545 (Extensions), Rule 3.548 (Taxable Capital: Close and S
Corporations), and Rule 3.556 (Earned Surplus: S Corporations). The Texas Tax
Code (TTC) and the Texas Business Corporation Act are available on the world
wide web (www.capitol.state.tx.us/statutes/statutes.htm). The franchise tax
statute can be found in Chapter 171 of the TTC.

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