How did a parent LLC account for an investment in a subsidiary LLC under the former Texas franchise tax?

Plain-English summary

The parent LLC used cost for taxable capital and removed subsidiary-level items from earned surplus to the extent already reportable by the subsidiary.

Section 171.001(b)(3) treated an LLC as a corporation under the former franchise tax. Rule 3.562 therefore treated the parent LLC as a corporate member of the subsidiary LLC.

For taxable capital, the parent used the cost method for its investment. For earned surplus, it excluded the subsidiary's federal taxable income and gross receipts from the parent's corresponding amounts to the extent the subsidiary would report them.

What this means for you

Related LLCs reviewing historical reports

The two former franchise-tax components did not use the same accounting treatment for the subsidiary investment.

Tax professionals

Apply the cost method to taxable capital, then separately identify subsidiary income and receipts that Rule 3.562 removed from the parent's earned-surplus computation.

Common questions

Q: Was an LLC treated as a corporation?
A: Yes, for the former Texas franchise tax.

Q: What method applied to the investment for taxable capital?
A: The cost method.

Q: Were subsidiary income and receipts automatically included again by the parent?
A: No, not to the extent they would have been reported by the subsidiary.

Citations and references

• Texas Tax Code Sec. 171.001(b)(3)
• 34 Tex. Admin. Code Sec. 3.562

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9707251L

Original ruling text

July 3, 1997

Dear Mr. **:

Thank you for your letter concerning the franchise tax liability of a limited
liability company.

Texas Tax Code Sec. 171.001(b)(3) defines "corporation" to include a limited
liability company (LLC). Because the term "corporation" is not otherwise
defined under Rule 3.562, an LLC is considered a "corporate member" of a
limited liability company. Accordingly, the "parent" LLC (parent) should use
the cost method to account for the investment in the "subsidiary entity"
(subsidiary) for the taxable capital component. For the earned surplus
component, the subsidiary's federal taxable income and gross receipts should be
excluded from the parent's federal taxable income and gross receipts to the
extent that they would have been reported by the subsidiary.

I have enclosed a copy of franchise tax Rule 3.562, Limited Liability
Companies, for your review

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

Enclosure