Could a corporation eliminate transactions between partnerships by applying consolidated-reporting principles under the former Texas franchise tax?

Plain-English summary

The Tax Policy Director rejected using consolidated-reporting principles to eliminate transactions between partnerships.

The letter gave four reasons to continue the taxpayer's administrative hearing:

• eliminating the partnership transactions would be equivalent to consolidation, contrary to the statute and agency rulings;
• the former tax included gross receipts without deducting expenses;
• partnership receipts were includable whether distributed or not because a partner was credited with profit or loss according to its interest; and
• Administrative Hearing H-34,567 concerned using partnership gross receipts rather than net profit, not consolidation.

For earned-surplus apportionment, the letter said to use the corporation's share of a partnership's gross receipts regardless of ownership percentage. For taxable capital, the corporation could use its share if GAAP allowed the amount as revenue. The company had elected to report partnership receipts on a gross rather than net basis.

What this means for you

Corporate partners

The policy position did not permit interpartnership transactions to be removed by treating related partnerships as a consolidated group.

Tax professionals

The letter distinguished partnership receipts from subsidiary-corporation receipts and distinguished the earned-surplus rule from the GAAP-dependent taxable-capital treatment.

Common questions

Q: Were undistributed partnership receipts included?
A: Yes. The letter said partnership receipts were includable whether distributed or not.

Q: Did H-34,567 approve consolidation?
A: No. The Director said that hearing addressed gross receipts versus net partnership profit, not consolidation.

Q: Did the Director end the dispute?
A: No. The letter recommended that the taxpayer continue through the hearings process.

Citations and references

• Administrative Hearing H-34,567 (1998)
• The statute and earned-surplus apportionment rule discussed in the letter are not identified by section number

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9806346L

Original ruling text

June 2, 1998

Dear **,

Following our meeting last Friday, I met with Jerry Bobbitt and Teresa Comer to
discuss **'s hearing. I believe this hearing should proceed for the
following reasons:

1. To eliminate the transactions between the partnerships would be the
   equivalent of allowing consolidation which is contrary to the statute and our
   rulings.

2. The statute contemplates the inclusion of gross receipts without deduction
   of expenses. The earned surplus apportionment rule requires the use of the
   corporation's share of the gross receipts of a partnership regardless of the
   ownership percentage. For taxable capital, a corporation may use its share of
   the partnership's gross receipts if allowed as revenue under GAAP. I understand
   the company exercised its option to use gross rather than net in reporting the
   partnership receipts.

3. Partnership receipts are includable whether distributed or not. The
   foundation for this is found in partnership law. Under partnership law, a
   partner is credited with profit or loss according to the partner's interest. As
   you will recall, I was concerned about the distinction between corporations and
   partnerships regarding constructive receipt. There is no constructive receipt
   from subsidiary corporations because there is no automatic right to receive
   even though a controlling parent company could cause distributions to be made.

4. The fact the term "consolidation" was used in H-34,567 (1998) is immaterial.
   The term was misused in my opinion as "consolidation" was not at issue. The
   issue was whether the corporation could use "gross receipts" rather than the
   "net profit" of the partnership. The ALJ found the corporation could use "gross
   receipts", but his decision really had nothing to do with whether the
   corporation and partnership could be consolidated.

Essentially, you have asked me to find as a matter of policy that the
principles of consolidated reporting be applied to the transactions with
partnerships. I cannot agree with this.

I realize you disagree with the conclusions. However, I believe it is
appropriate that you continue your legal battle through the hearings process.

Sincerely,

Wade Anderson
Director, Tax Policy

cc: Dean Krohn, Legal Services
Teresa Comer, Tax Policy