Ezel / Tax Rulings / TX
TX 9810327L Franchise Tax (PRIOR TO 01/01/2008) 1998-10-20

Did a foreign corporation create Texas franchise-tax nexus when its only asset and activity was an interest in an LLC doing business in Texas?

Short answer: No. The foreign corporation's sole asset was a membership interest in an LLC doing business in Texas, it conducted no other activity, and it had no Texas certificate of authority. The Comptroller concluded that mere ownership of the LLC interest did not create nexus under Section 171.001.

Apply this to your situation

This page answers the general question as of 1998. Ezel answers yours, under current Texas tax law, with citations.

Currency note: this ruling is from 1998
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 Code Rules 3.1 and 3.10); documents on STAR may no longer represent current policy even if not marked superseded. The no-nexus result assumes the LLC interest was the corporation's only asset and activity and that it had no Texas certificate of authority. This 1998 ruling predates the margin tax and current nexus rules; confirm present 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

A passive membership interest in a Texas-operating LLC did not create franchise-tax nexus for the foreign corporation.

The membership interest was the corporation's only asset and only activity. It had no Texas certificate of authority and did nothing other than own the interest.

Applying Section 171.001, the Comptroller concluded that the LLC's Texas business was not enough, by itself, to make the passive foreign corporate member subject to franchise tax.

Currency note: This response predates the margin tax and current entity nexus rules. Texas replaced the former franchise tax effective January 1, 2008.

What this means for you

Passive foreign corporate members

On the narrow historical facts, LLC ownership alone did not attribute the LLC's Texas operations to the member.

Tax professionals

Check for registration, management, agency, property, services, or other activities before applying the result.

Common questions

Q: Did the corporation have other assets?
A: No.

Q: Did it have a Texas certificate of authority?
A: No.

Q: Did the LLC interest alone create nexus?
A: No.

Citations and references

  • Texas Tax Code Sec. 171.001

Source

Original ruling text

October 20, 1998

Dear Mr. **:

Thank you for your letter regarding your client and the Texas franchise tax. I
apologize for the delay in responding to your letter.

You stated in your letter and in our October 2, 1998 telephone conversation
that your client, a foreign corporation, holds a membership interest in a
limited liability company that does business in Texas. The membership interest
is the only asset of the client. The client does not have any other activity
other than owning a membership interest in the limited liability company. The
client does not have a certificate of authority to do business in Texas.

Texas Tax Code (TTC) Section 171.001 states that a franchise tax is imposed on
"each corporation that does business in this state or that is chartered or
authorized to do business in this state, and each limited liability company
that does business in this state or that is organized under the laws of this
state or is authorized to do business in this state." Based on the information
provided in your letter and our phone conversation, your client is not subject
to the Texas franchise tax. The mere holding of a membership interest in a
limited liability company that is doing business in Texas does not create nexus
for a foreign corporation.

This response is based on 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

Get today's answer for your situation

You just read a 1998 ruling on this question. Ezel checks current Texas tax law and answers your specific situation, with citations.

Opens in Ezel Pro. Every answer cites the authority it relies on.