If a company keeps legal title but transfers the beneficial (equitable) ownership of its assets to limited partnerships, who owes Texas franchise tax on the income?

Plain-English summary

A company whose business is the bulk storage, handling, and transfer of chemicals and petrochemicals planned to keep legal title to its assets but transfer the beneficial (equitable) interest to two limited partnerships, then act as those partnerships' agent in operating the assets. The limited partnerships would be owned by two first-tier subsidiaries — one holding a 99% limited-partner interest and one holding a 1% general-partner interest. The company asked the Comptroller to confirm the Texas franchise tax consequences.

The Comptroller worked through five points:

1. Do the assets need to be recorded to vest equitable ownership? The Comptroller declined to answer — whether a document must be recorded to have legal effect is not a tax question and is beyond the agency's review.
2. Is the income attributed to the limited partnerships? Yes. Because the documents make the company the agent of the limited partnerships, income received from the transferred assets is attributed to the limited partnerships, not to the company that holds bare legal title.
3. Does the corporate general partner file a Texas franchise report? Yes. A corporation is doing business in Texas — and thus subject to franchise tax — if it acts as a general partner in a limited partnership doing business in Texas. The 1% corporate general partner must file.
4. Is the corporate limited partner subject to the tax? No. A corporation that is merely a limited partner and does nothing else in Texas is not doing business in Texas.
5. Is the limited partnership itself taxable? No. Limited partnerships were not subject to Texas franchise tax (§ 171.001), so although the income is booked on the partnership's records, the partnership owes no franchise tax.

The through-line: for the pre-2008 franchise tax, beneficial ownership and the agency relationship — not bare legal title — controlled where income was attributed, and only the corporate general partner was pulled into the tax.

Important currency note: This 2000 letter reflects the franchise tax before the 2008 overhaul. The premise that a limited partnership is not a taxable entity is exactly what changed: under the current margin-based franchise tax, partnerships are generally taxable entities, and STAR marks this document partially superseded on the taxation of partnerships. Treat the entity-level outcomes as historical.

What this means for you

Businesses separating legal title from beneficial ownership

The Comptroller's willingness to follow beneficial ownership plus a genuine agency arrangement is the durable idea here: who holds bare legal title did not control the tax result; the documented agency and equitable interest did. If you use nominee/agent structures, the paperwork establishing agency and beneficial ownership matters. But do not assume the entity-level outcome (partnership pays nothing) still holds — that changed in 2008.

The general-partner nexus point

As in the Comptroller's other partnership letters of this era, placing a corporation as a general partner of a Texas-active partnership subjects that corporation to Texas franchise tax. Expect the general-partner entity to carry a filing obligation.

Accountants and tax professionals

Two cautions: (1) the Comptroller will not opine on non-tax legal questions such as recording requirements, so do not read this letter as blessing the transfer's legal validity; and (2) the entity-level partnership conclusions predate the margin tax and should be re-verified for any current structure.

Common questions

Q: If I keep legal title but transfer beneficial ownership, whose income is it for franchise tax?
A: In this letter, because the company acted as the limited partnerships' agent, the income from the transferred assets was attributed to the limited partnerships — the beneficial owners — not to the company holding bare legal title.

Q: Did the limited partnership owe Texas franchise tax?
A: Not under the pre-2008 tax addressed here (§ 171.001). That result changed in 2008, when partnerships became generally taxable entities.

Q: Which entity had to file?
A: The corporate general partner (here, the 1% owner), because acting as general partner in a Texas-active limited partnership is "doing business" in Texas. A corporate limited partner with no other Texas activity did not.

Q: Did the Comptroller decide whether the transfer had to be recorded?
A: No. It said recording requirements are not based on tax law and are outside the agency's authority to rule on.

Citations and references

Statutes and rules:

• Tex. Tax Code § 171.001 (franchise tax imposed on corporations; partnerships not subject under the pre-2008 tax)
• Franchise Tax nexus rules for corporate general and limited partners (as applied by the Comptroller in this letter)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200012943L

Original ruling text

STAR SUPERSED INFORMATION
Accession No. —
Supersede type - Partial
Document superseded on - 12/10/14
Issue(s) that caused the document to be superseded — Taxation of partnerships
Reason(s): The Franchise Tax Code was amended by House Bill 3 and House Bill 3928,
Acts 2007, 80th Legislative Session, effective January 1, 2008 and affected Franchise
tax reports due on or after January 1, 2008. One of the many changes to this Tax Code
subjected partnerships (previously not required to file) to the franchise tax reporting
requirement.

December 12, 2000

To: XXXXXXXXXXX

Dear XXXXXXXXXXX:

This letter is in response to your ruling request regarding the franchise tax
consequences of a transfer of a beneficial interest in assets by your client
("the Company").

You state that the Company's primary business is the for-hire bulk storage,
handling, and transfer of chemicals and petrochemicals. The Company receives
chemical and petrochemicals ("Products") transported by its customers by tank
truck, railcar, containerized modes of transport, pipeline, and by marine
vessels and stores the Product in bulk storage tanks located on its property.
At a customer's direction, the Company redelivers the Product by one of the
modes of transport. Additionally, the Company also operates and owns various
assets used to treat, store, and dispose of hazardous waste and to clean
railcars.

The Company intends to transfer the beneficial interest in its various assets
to two limited partnerships, but intends to retain legal title to the assets.
One limited partnership will hold a beneficial interest in the assets of a line
of business that store, handles and transfers the Products. Another limited
partnership will hold a beneficial interest in the assets of a line of business
that treats, stores, and disposes of hazardous waste and that cleans railcars.

The limited partnerships will be owned by two first-tier subsidiaries of the
Company. One subsidiary will own a 99% limited partner interest in the limited
partnerships, and the other subsidiary will own a 1% general partner interest
in the limited partnerships. The Company will execute documents transferring
the assets and making the limited partnerships responsible for all rights,
obligations, liabilities and benefits incident to the assets transferred.

You asked this agency to address the following specific points:

1. Provided that the documents are legally executed to convey the
   equitable/beneficial interest in the assets to the limited partnerships, the
   assets would not need to be recorded to vest such equitable/beneficial
   ownership in the limited partnership.

Response: Whether a document must be recorded to have legal effect is beyond
the scope of this agency's review. Recording requirements, if any, are not
based on tax laws; therefore, this office is unable to provide an opinion as to
the legality of the transfer.

2. As the owner of legal title, the Company will continue to receive income
   from the assets as a receiving agent, but income received from the transferred
   assets will be properly reflected on the limited partnership's books.

Response: Based on the document submitted that the Company is to serve as the
agent of the limited partnerships, this office agrees that income received from
the transferred assets is attributed to the limited partnerships.

3. The corporate general partner will file a Texas franchise report to reflect
   the 1% interest in the limited partnership.

Response: This office agrees with the statement. A corporation is considered
to be doing business in Texas (and therefore, subject to franchise tax) if that
corporation is acting as a general partner in a limited partnership which is
doing business in Texas.

4. The corporate limited partner will perform no other activity in Texas, other
   than hold a limited partner interest in a limited partnerships that does
   business in Texas, and will not be subject to the Texas franchise tax.

Response: This office agrees with the statement. A corporation that is a
limited partner in a limited partnership is not considered to be doing business
in Texas, if that corporation has no other activities in Texas.

5. Income received from the transferred assets will be properly reflected on
   the limited partnership's books, however the limited partnership will not be
   subject to the Texas franchise tax.

Response: See response to No. 2 related to income. Because limited
partnerships are not subject to Texas franchise tax (See Tax Code 171.001),
this office agrees with the statement.

The responses are based on the facts and information presented. If there are
different or additional facts, the responses may change.

If you have questions about this, my internet address is
, or you may call toll-free at 1-800-531-5441,
extension 3-4612.

Sincerely,

Janet Spies
Tax Policy Division
Texas State Comptroller