Ezel / Tax Rulings / TX
TX 9811328L Franchise Tax (PRIOR TO 01/01/2008) 1998-11-30

Did a Texas professional association become subject to franchise tax because it elected federal S-corporation treatment?

Short answer: No. The Comptroller looked to the entity's legal formation for Texas franchise-tax status. Assuming the entity was legally organized as a professional association under the Texas Business Corporation Act, it was not a corporation subject to the tax. Its federal S-corporation or check-the-box classification did not change that Texas result.

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 Code Rules 3.1 and 3.10); documents on STAR may no longer represent current policy even if not marked superseded.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 answer assumes valid legal organization as a professional association under the cited historical act. This 1998 ruling predates the margin tax and current entity definitions; confirm present professional-entity and tax 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 federal S-corporation election did not make a legally organized Texas professional association subject to the former franchise tax.

The requester described an "S Corp. P.A." The Comptroller assumed the entity was legally formed as a professional association under Article 1528f of the Texas Business Corporation Act and had elected S-corporation treatment under federal check-the-box rules.

Texas looked to legal formation. Section 171.001 taxed corporations and listed several included entity forms, but the response said a professional association was not a corporation. Federal classification did not alter its Texas status.

Currency note: This ruling applies historical entity definitions before the margin tax. Confirm current professional-association and taxable-entity law.

What this means for you

Professional associations with federal elections

Federal tax classification and state legal form answered different questions. Under this historical ruling, legal PA form controlled Texas liability.

Tax professionals

Verify the entity's actual formation document and governing statute before relying on the result.

Common questions

Q: Did the S election control Texas status?
A: No.

Q: What controlled?
A: Legal organization as a professional association.

Q: Is this current margin-tax law?
A: No. It is a 1998 ruling under the former tax.

Citations and references

  • Texas Tax Code Sec. 171.001
  • Texas Business Corporation Act art. 1528f, ch. 18, title 32

Source

Original ruling text

November 30, 1998

To: **

Dear Mr. **:

Thank you for your email regarding **'s organized as an "S" Corp.
P.A.

I presume that the entity you are asking about is legally organized as a
Professional Association (PA) under Article 1528f, chapter 18, title 32 of the
Texas Business Corporation Act. And that the PA has elected to be taxed as an
"S Corporation" under the IRC's "check the box" provisions.

Texas Tax Code 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. Corporations are defined to include S
corporations, Close Corporations, Professional Corporations, Limited Liability
Companies, Banking Corporations and Savings & Loan Associations.

In determining an entities liability for Texas franchise tax, we consider the
legal formation of an entity. Because Professional Associations are not
corporations they are not subject to the Texas franchise tax. IRC "check the
box" provisions will not have any effect on an entity's status for Texas
franchise tax reporting purposes.

If you have questions about this, you may call me at 1-800-531-5441, extension
3-4612, or e-mail me at the address below.

Sincerely,

Janet Spies

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