Does a short-lived Delaware LLC that buys a Texas business's assets and liquidates the same day owe Texas franchise tax, and how is the seller's sale receipt sourced?

Plain-English summary

A Texas company planned to sell its entire operating business to a Delaware LLC ("Buyer") created just for the deal. On the day of the sale, Buyer would buy the assets and then, later that same day, liquidate and distribute them to its parent ("Parent"); Buyer's existence would be cancelled the next business day. The question: does this fleeting Buyer owe Texas franchise tax, and how is the seller's sale receipt sourced?

• Buyer owes no franchise tax. Buyer was formed shortly before the sale, held no operating assets and did no business before it, and while it briefly owned the assets it earned no receipts. Critically, the assets would not generate $150,000 or more in gross receipts under Tax Code Sec. 171.105 or Sec. 171.1051 during Buyer's ownership. On those facts, the Comptroller said Buyer will not be considered to owe Texas franchise tax.
• Buyer must still file. It must file a Public Information Report and a No Tax Due Information Report - no tax, but the reports are still required.
• Seller's sale receipt is sourced to Delaware. For apportioning taxable capital and taxable earned surplus, the seller's receipts from the sale are sourced to Delaware to the extent they are allocable to assets sourced under the location-of-payor test (the payor - Buyer/Parent - is a Delaware entity).
• Fact-dependent. The ruling rests on the stated facts (including the IRC Sec. 1060 allocation of the purchase price); different facts could change the answer.

Currency note: This 2001 letter applies the pre-2008 franchise tax built on taxable capital and taxable earned surplus (replaced by the margin tax effective January 1, 2008 under House Bills 3 and 3928). The margin tax's gross-receipts, entity, and sourcing rules differ; confirm current treatment.

What this means for you

Buyers and sellers structuring an asset deal through a new entity

A newly formed acquisition vehicle that never really operates - buying and then liquidating on the same day - was not treated as owing Texas franchise tax under the old law, but it still had to file the No Tax Due and Public Information reports. Forming and dissolving an entity does not, by itself, avoid the filing obligation.

Tax professionals

Two points travel: (1) the $150,000 gross-receipts threshold (measured under Sec. 171.105 / 171.1051, including the Sec. 171.1051(a) exception) drove the "no tax due" conclusion for the transitory entity; and (2) the seller's gain on the intangible/other assets was sourced to Delaware under the location-of-payor rule. Re-verify both under the margin tax, which no longer uses the taxable-capital/earned-surplus framework.

Common questions

Q: Does a short-lived acquisition LLC that liquidates the same day owe Texas franchise tax?
A: On these facts, no. It did no business, earned no receipts, and stayed below the $150,000 gross-receipts threshold under Tax Code Sec. 171.105/171.1051.

Q: If no tax is due, does the entity still have to file anything?
A: Yes. It must file a Texas Franchise Tax Public Information Report and a No Tax Due Information Report.

Q: How is the seller's receipt from the sale sourced?
A: To Delaware, to the extent the receipts are allocable to assets sourced under the location-of-payor test.

Citations and references

Statutes:

• Texas Tax Code Sec. 171.105 - apportionment of taxable capital gross receipts
• Texas Tax Code Sec. 171.1051 - apportionment of taxable earned surplus gross receipts (including the Sec. 171.1051(a) exception)
• Internal Revenue Code Sec. 1060 - allocation of the total consideration among the purchased assets

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200103118L

Original ruling text

March 22, 2001

Dear **:

You have requested a ruling regarding the applicability of Texas franchise tax
to a sale of Texas assets to a Delaware limited liability corporation.

Seller is a Texas corporation that is engaged in an active trade or business
and files an annual Texas franchise tax report. Seller intends to sell, in a
single transaction (the "Sale"), its entire operating assets (the "Operating
Assets"), including both tangible and intangible assets, to a Delaware limited
liability company ("Buyer").

Buyer will be formed not more than two weeks prior to the Sale by a Delaware
limited partnership ("Parent"), which will be Buyer's sole member. Buyer will
secure a certificate of authority from the Secretary of State of Texas. Prior
to the Sale, neither Parent nor Buyer will own any operational assets or engage
in a trade or business.

On the day of the Sale, Buyer first will purchase the Operating Assets and
then, at a later time on the same day, Buyer will liquidate and distribute the
Operating Assets to Parent (the "Liquidation"). These transactions will be
documented by resolutions effected by Parent on the day of the Sale (i)
authorizing Buyer to acquire the Operating Assets and (ii) dissolving Buyer and
distributing the Operating Assets to Parent. A certificate of cancellation
terminating Buyer's existence will be filed with the Delaware Secretary of
State on the first business day following the day of the Sale. A certificate
of withdrawal will be filed with the Texas Secretary of State. The Sale and
Liquidation will not take place during normal business hours; as such, it is
anticipated that the Operating Assets will generate no receipts while held by
Buyer. In no case will the Operating Assets generate $150,000 or more in gross
receipts as computed under either of Texas Tax Code Sections 171.105 or
171.1051 (including the amount excepted under Section 171.1051(a)) while the
Operating Assets are owned by Buyer Following the Liquidation, Parent will use
the Operating Assets to engage in an active business in Texas. Parent will
obtain a certificate of authority from the Texas Secretary of State.

As required by Section 1060 of the Internal Revenue Code of 1986, as amended,
Buyer and Seller will reasonably allocate the total consideration paid for the
entire Operating Assets among such assets.

You have asked if Buyer will be required to pay Texas franchise tax, and what
Buyer's Texas franchise tax filing obligations will be. Based on the
information provided, Buyer will not be required to pay and will not be
considered to owe Texas franchise tax. Buyer will be required to file a Texas
Franchise Tax Public Information Report and a Texas Franchise No Tax Due
Information Report.

For purposes of apportioning taxable capital and taxable earned surplus,
Seller's receipts from the Sale will be sourced to Delaware to the extent such
receipts are allocable to any assets the sale of which are sourced based on the
location of payor test.

This response is based on the facts presented in your letter. If the facts
change or if there are additional relevant facts, the response may change.

If you have additional franchise tax questions, please write me or call me at
1-800-531-5441. My extension is 3-3958.

Sincerely,

Teresa Comer
Tax Policy Division