How did a corporation apportion its share of a Texas partnership's receipts under the former taxable-capital and earned-surplus components?

Plain-English summary

The former taxable-capital and earned-surplus components used different partnership-receipt methods.

For taxable capital, a corporate partner generally included its share of the partnership's net profit in gross receipts. It could instead use its share of gross receipts if GAAP allowed those amounts as revenue. Under the net method, the receipts were Texas receipts when the partnership's principal place of business was in Texas.

For earned surplus, the corporation used its share of partnership gross receipts included in its federal taxable income and apportioned those receipts as though it had earned them directly.

The letter's example used a 50% corporate interest in a partnership with $100,000 of sales, $25,000 of which were Texas sales. The corporation included $50,000 in everywhere receipts and $12,500 in Texas receipts.

What this means for you

Corporate partners

Do not assume one partnership-receipts method applies to both former franchise-tax components.

Tax professionals

Identify the partnership's principal place of business, the partner's ownership share, the underlying receipt type, and whether GAAP permits gross-receipts presentation.

Common questions

Q: What was the default taxable-capital method?
A: The corporate partner's share of partnership net profit.

Q: When could gross receipts be used for taxable capital?
A: When GAAP allowed the partner's share as revenue.

Q: How were earned-surplus receipts sourced?
A: As if the corporation earned the underlying partnership receipts directly.

Citations and references

• 34 Tex. Admin. Code Secs. 3.549(e)(29)(A) and 3.557(e)(37)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9710341L

Original ruling text

October 16, 1997

Dear **:

In your letter of October 3, you requested information on the apportionment of
a corporation's income from a partnership.

You indicate that the partnership is a Texas partnership. Therefore, for the
purposes of my response, I presume that the principal place of business of the
partnership is in Texas (see Rule 3.549(e)(29)(A)).

For taxable capital purposes, a corporation should include its share of the net
profit from a partnership in computing gross receipts (the net method).
However, a corporation may use its share of the partnership's gross receipts if
allowed as revenues under GAAP. If the net method is used, the receipts would
be Texas receipts if the principal place of the partnership is in Texas.

In computing the apportionment formula for earned surplus, the corporation
should use its share of the partnership's gross receipts included in federal
taxable income of the corporation. The corporation must apportion these
receipts as though the corporation directly earned the receipts. Therefore, if
the partnership had sales of inventoriable tangible personal property which
were 25% Texas receipts (based on Rule 3.557(e)(37)), the corporation's portion
of the total sales would be included in receipts everywhere and its share of
the Texas receipts of the partnership would be included in Texas receipts. If
the corporation had a 50% partnership interest, 12.5% of the partnership sales
would be included in Texas receipts. In this situation, if the partnership had
$100,000 of sales and $25,000 of those sales were Texas receipts, the
corporation would include $50,000 in receipts everywhere and $12,500 in Texas
receipts.

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