How were distributions from funds treated as series of one trust sourced for former Texas franchise-tax apportionment?

Plain-English summary

Trust-income distributions were sourced according to the trust's principal place of business for both former franchise-tax components.

The prospectus described each fund as a series of the trust, so the Comptroller presumed the funds were parts of the trust rather than separate entities.

Federal income-tax characterization did not control Texas apportionment. Rule 3.549(b)(6) placed the trust's principal place of business at the location of its day-to-day operations. If those operations were equally or fairly evenly divided among multiple states, the commercial domicile controlled. The letter applied the same definition to earned surplus.

What this means for you

Trusts with multiple fund series

The historical sourcing analysis looked through the individual fund series to the operating location of the trust itself.

Tax professionals

Confirm whether each fund is actually part of one trust, then establish the trust's day-to-day operating location before using commercial domicile as the tie-breaker.

Common questions

Q: Did federal characterization of the distribution control?
A: No.

Q: What if day-to-day operations were evenly split among states?
A: The trust's commercial domicile controlled.

Citations and references

• 34 Tex. Admin. Code Sec. 3.549(b)(6)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9802279L

Original ruling text

February 13, 1998

Dear Mr. **:

In your letter of February 4, you requested a determination regarding the
apportionment of income from various funds.

Page 18 of the prospectus states that each fund "...is a series of the Trust."
Therefore, I presume that the funds are not separate entities from the trust
(i.e., each fund is a part of the trust).

Distributions of trust income are apportioned based on the principal place of
business of the trust for both the earned surplus and taxable capital
components of the franchise tax. That is, the characterization of the income
for federal income tax purposes is not controlling for franchise tax
apportionment purposes. The principal place of business of a trust for taxable
capital purposes is defined in Rule 3.549(b)(6) as "...the location of its
day-to-day operations. Where the day-to-day operations are equally or fairly
evenly in more than one state, the principal place of business is the
commercial domicile." The same definition applies for earned surplus purposes.

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