When an out-of-state holding company with no Texas nexus sells the stock of its Texas subsidiary, does the gain from that stock sale get counted in the combined group's Texas-apportioned receipts?

Plain-English summary

This was an anonymous ruling request, so — unlike most PLRs — it provides no detrimental reliance relief even to the taxpayer who asked for it.

An out-of-state holding company (treated as an S corporation for federal purposes) wholly owned two subsidiaries: a Texas corporation that manufactures and provides services in Texas, and a second, out-of-state subsidiary. The three entities file a combined Texas franchise tax report. The holding company itself has no operations, doesn't do business in Texas, and doesn't manage or direct anything for its subsidiaries in Texas. The holding company sold the stock of its Texas subsidiary to an unrelated Texas buyer (treating the sale, for federal tax purposes, as if it were a sale of the subsidiary's assets instead of its stock). The combined group asked whether the gain from that stock sale gets included in the group's Texas-apportioned receipts.

The Comptroller's answer split the calculation in two:

• Everywhere receipts (the apportionment denominator): the combined group MUST include the holding company's net gain from the stock sale (and any other capital assets/investments) in its gross receipts from its entire business — this side of the fraction includes every member's receipts regardless of nexus.
• Texas receipts (the apportionment numerator): the same gain is NOT included here, because the holding company itself has no nexus with Texas — it doesn't maintain a place of business in Texas and doesn't manage, direct, or perform services in Texas for either subsidiary. Only receipts of combined-group members that DO have Texas nexus count toward the numerator.

The result: including this stock-sale gain in the denominator (but not the numerator) actually DILUTES the group's apportionment percentage — a mechanical consequence of how the combined-reporting math works when a no-nexus member has a large one-time capital gain. The Comptroller also confirmed, as background, that stock is treated as an intangible asset for franchise tax purposes (as opposed to a direct sale of the underlying Texas assets), since the subsidiary remained a legally separate, "regarded" entity even though disregarded for other purposes in the fact pattern.

What this means for you

Multistate holding company structures selling a Texas subsidiary's stock

If your parent/holding entity has no independent Texas nexus, a large stock-sale gain still inflates your combined group's everywhere-receipts denominator without adding anything to the Texas-receipts numerator — which can meaningfully lower your apportionment percentage (and therefore your Texas franchise tax) in the sale year. Model this effect before assuming a stock sale is apportionment-neutral.

M&A practitioners structuring divestitures of Texas operating subsidiaries

Whether the selling entity itself has Texas nexus is the single fact that determines whether stock-sale gain lands in the Texas apportionment numerator — nexus of the SUBSIDIARY being sold, or of the BUYER, doesn't matter for this purpose. Confirm the seller's own nexus status as part of pre-transaction tax modeling.

Anyone tempted to rely on this ruling directly

This is an anonymous-request ruling — the Comptroller explicitly notes it provides NO detrimental reliance relief, even to the entity that requested it, because the request didn't disclose the taxpayer's identity as required by Rule 3.1(c)(1)(A). Treat this as informative background, not a protectable position for your own facts.

Common questions

Q: Does a no-nexus parent's gain from selling a Texas subsidiary's stock ever get left out of total (everywhere) receipts?
A: No — everywhere receipts (the apportionment denominator) include the gross receipts of every combined-group member regardless of that member's own nexus with Texas.

Q: Does the buyer's or subsidiary's Texas location put the stock-sale gain into Texas receipts?
A: No — what matters is whether the SELLING entity itself has Texas nexus. Here, the parent holding company had no Texas nexus, so its gain wasn't included in Texas receipts even though it sold a Texas subsidiary to a Texas buyer.

Q: Can I rely on this ruling for my own similar transaction?
A: Not for detrimental reliance relief — this was an anonymous ruling request, and the Comptroller specifically notes that anonymous requests don't get that protection under Rule 3.1(c)(1)(A), even for the requesting taxpayer.

Citations and references

Statutes and rules:

• Tex. Tax Code § 171.001 (Tax Imposed)
• Tex. Tax Code § 171.0002 (Definition of Taxable Entity)
• Tex. Tax Code § 171.101(a) (Determination of Taxable Margin — apportionment factor)
• Tex. Tax Code § 171.103(b) (Gross Receipts from Business Done in this State for Margin)
• Tex. Tax Code § 171.105(b), (c) (Gross Receipts from Entire Business for Margin)
• 34 Tex. Admin. Code Rule 3.586 (Margin: Nexus)
• 34 Tex. Admin. Code Rule 3.590(b)(2)(C), (d)(5)(B) (Margin: Combined Reporting)
• 34 Tex. Admin. Code Rule 3.591(c), (e)(2) (Margin: Apportionment — stock treated as intangible)

Cited case law:

• Hallmark Marketing Co. v. Hegar, 488 S.W.3d 795, 796 (Tex. 2016) (apportionment factor limits franchise tax to Texas-attributable revenue)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MAR
• Opinion: https://star.comptroller.texas.gov/view/201709010L

Original ruling text

September 12, 2017

RE: Private Letter Ruling No. 150410218

Undisclosed Taxpayer

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters, [ENDNOTE 1] in response to your request dated February 3, 2015. Your ruling request does not disclose the identity of the entity to which this request relates. As noted in Rule 3.1(c)(1)(A), detrimental reliance relief is only provided if the entity to which the request relates is identified.

You asked for guidance about the franchise tax consequences of an out-of-state holding company selling a Texas subsidiary.

We issue this private letter ruling based on the facts presented and without any independent verification of the facts presented.

Facts Presented

** is a limited liability company organized in a state other than Texas. ** owns 100% of the stock of two subsidiaries, Corp 1, Inc. (Corp 1) and Corp 2, Inc. (Corp 2).

** has no operating activities, does not do business in Texas, and does not manage, direct, or perform services in Texas for Corp 1 or Corp 2. ** is treated as an S corporation for federal income tax purposes.

Corp 1 is a Texas corporation that manufactures products and provides services to other manufacturers. Corp 1 conducts its business in Texas. Corp 2 is incorporated in a state other than Texas. Corp 2 purchases products from manufacturers, including Corp 1, for resale to its customers. Corp 1 and Corp 2 are treated as qualified subchapter S subsidiaries of ** for federal income tax purposes.

The ruling request states that **, Corp 1, and Corp 2 are members of an affiliated group engaged in a unitary business. **, Corp 1, and Corp 2 file a combined group report.

** sold the stock of Corp 1 to an unrelated Texas corporation. For federal income tax purposes, ** treated the sale of Corp 1 stock as a sale of the assets of Corp 1.

Question, Ruling, and Analysis

Our restatement of your question, our response, and our analysis follow.

Question: Are receipts from **’s sale of Corp 1 stock included in calculating the combined group’s taxable margin?

Ruling: A combined group’s taxable margin equals total margin multiplied by the apportionment factor. ** must include the net gain from the sale of Corp 1 stock, and any other investments and capital assets, in the denominator of the apportionment factor, the combined group’s gross receipts everywhere. Because ** does not have nexus with Texas, ** should not include the net gain from the sale of Corp 1 stock in the numerator of the apportionment factor, the combined group’s gross receipts from business done in Texas.

Analysis:

The franchise tax applies to each taxable entity doing business in Texas or organized in Texas. Section 171.001 (Tax Imposed). Section 171.0002 (Definition of Taxable Entity) identifies all entities that are considered “taxable entities” and specifically includes limited liability companies, such as **, and corporations, such as Corp 1 and Corp 2. As a result, **, Corp 1, and Corp 2 are each taxable entities for Texas franchise tax purposes, even though Corp 1 and Corp 2 are disregarded for federal tax purposes.

**, Corp 1, and Corp 2 file a combined group report. A combined group calculates taxable margin by multiplying total margin by a fraction known as the apportionment factor. Section 171.101(a) (Determination of Taxable Margin). The apportionment factor is designed to limit the franchise tax to revenue attributable to business conducted in Texas. Hallmark Marketing Co. v. Hegar, 488 S.W.3d 795, 796 (Tex. 2016).

A combined group must include in its gross receipts from its entire business, i.e., the denominator of the apportionment factor, the gross receipts of each taxable entity that is a member of the combined group, without regard to whether that entity has nexus with Texas. See Section 171.105(c) (Determination of Gross Receipts from Entire Business for Margin); see also Rule 3.590(b)(2)(C).

When calculating its gross receipts from business done in Texas, i.e., the numerator of the apportionment factor, a combined group must include the gross receipts of each taxable entity that is a member of the combined group and that has nexus with Texas. Section 171.103(b) (Determination of Gross Receipts from Business Done in this State for Margin). In other words, the Texas gross receipts of a combined group do not include the gross receipts from a member that does not have nexus with Texas. See also Rule 3.591(c) (Margin: Apportionment) and Rule 3.590(d)(5)(B).

Rule 3.586 (Margin: Nexus) provides examples of the types of activities that establish nexus and subject a taxable entity to Texas franchise tax. These include maintaining a place of business in Texas or managing, directing, and/or performing services in Texas for subsidiaries.

** sold the stock of Corp 1 to a Texas purchaser. For Texas franchise tax purposes, because Corp 1 is a regarded entity, ** only owns the stock of Corp 1 and is not considered to own Corp 1’s assets directly. Therefore, for Texas franchise tax purposes, ** has receipts from the sale of Corp 1 stock. The sale of stock is treated as the sale of an intangible. See, for example, Rule 3.591(e)(2) (Margin: Apportionment) (treating stock as an intangible that may be held as an investment).

** does not maintain a place of business in Texas and does not manage, direct, or perform services in Texas for Corp 1 or Corp 2. Therefore, ** does not have nexus with Texas.

The combined group must include **’ net gain from the sale of Corp 1 stock, and any other capital assets or investments, in its gross receipts from its entire business. Section 171.105(b). Because ** does not have nexus with Texas, **’ net gain from its sale of Corp 1 stock to a Texas purchaser are not included in the combined group’s gross receipts from business done in Texas.

The Texas Tax Code and Texas Administrative Code are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling #150410218.

Sincerely,

Tax Policy Division – Direct Taxes

Texas Comptroller of Public Accounts

ENDNOTE

1. Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.