Ezel / Tax Rulings / TX
TX 9703676L Franchise Tax (PRIOR TO 01/01/2008) 1997-03-21

How did Texas treat a Qualified Subchapter S Subsidiary under the former franchise tax in March 1997?

Short answer: Texas treated a state-law QSSS as a separate corporation required to file its own franchise-tax report, because the tax applied to each corporation and consolidated reporting was prohibited. For earned surplus, the subsidiary still appeared to need S-corporation status under the 1994 Internal Revenue Code until the Legislature changed Texas's conformity reference.

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 Code Rules 3.1 and 3.10); documents on STAR may no longer represent current policy even if not marked superseded.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 March 1997 response assumes the QSSS was a corporation under state law and applies a historical Texas reference to the 1994 Internal Revenue Code. The Legislature was considering a change, but the letter states it had not occurred. Confirm current law. 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 QSSS was a separate Texas corporation that had to file its own franchise-tax report.

The letter assumed each Qualified Subchapter S Subsidiary was a corporation under state law.

For earned-surplus purposes, Texas still referenced the 1994 Internal Revenue Code. The Comptroller therefore said the subsidiary appeared to need to qualify as an S corporation under that 1994 definition. The agency had asked the Legislature to update the reference to the 1996 Code, but no change had occurred when the letter was issued.

Separately, Section 171.001(a) imposed the former franchise tax on each corporation doing business in Texas or chartered or authorized there. Rule 3.544(c) prohibited consolidated reporting. The QSSS was therefore a separate corporation and had to file a Texas franchise-tax report.

What this means for you

S-corporation groups reviewing historical QSSS structures

Federal treatment did not collapse the parent and subsidiary into one Texas franchise-tax filer under the rule described here.

Tax professionals

Separate the uncertain historical earned-surplus S-status question from the clear separate-entity filing answer.

Common questions

Q: Was the QSSS a separate Texas corporation?
A: Yes.

Q: Did it file its own report?
A: Yes.

Q: Could the parent and QSSS file a consolidated report?
A: No.

Q: Was its earned-surplus S status certain under the 1997 statute?
A: No. The letter said it appeared to require qualification under the 1994 Code definition.

Citations and references

  • Texas Tax Code Secs. 171.001(a) and 171.001(b)(5)
  • 34 Tex. Admin. Code Sec. 3.544(c)

Source

Original ruling text

March 21, 1997

Dear **:

In your letter of February 7, you requested rulings regarding the consequences
of forming a qualified subchapter S subsidiary (QSSS) for franchise tax
purposes.

You state that your firm has several clients who operate as S corporations.
Under new legislation which passed in 1996, S corporations are allowed to own a
QSSS for tax years beginning after December 31, 1996.

For the purposes of my response, I presume that the QSSS's are corporations
under state law. I have restated each ruling request followed by a response.

  1. For purposes of the franchise tax, would a QSSS be considered an S
    corporation?

Response

Under Texas Tax Code (TTC) Sec. 171.001(b)(5), earned surplus must be
calculated based on the Internal Revenue Code (IRC) in effect for the 1994
calendar year. Therefore, for earned surplus purposes it appears that the
corporation would have to qualify as an S corporation as defined in the 1994
IRC. The agency has asked the Texas Legislature (which is currently in
session) to change the statutory reference to the 1996 IRC. However, the
statute has not been changed at this time.

  1. For purposes of the franchise tax, would a QSSS be considered a separate
    corporation?

Response

Yes. Under TTC Sec. 171.001(a), the franchise tax is imposed on each
corporation that does business in Texas or that is chartered or authorized to
do business in Texas. In addition, Rule 3.544(c) specifically prohibits
consolidated reporting.

  1. For purposes of the franchise tax, would a QSSS be required to file a Texas
    franchise tax report?

Response

Yes.

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

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