Are limited partnerships, a trust, and the holders of the trust interests subject to Texas franchise tax?

Plain-English summary

A taxpayer asked how the (pre-2008) Texas franchise tax applied to a structure involving two limited partnerships (referred to as ABC and EFG), a Trust, and the holders of the trust interests. The Comptroller advised:

• The partnerships and the Trust are not subject to the franchise tax because they are not corporations. Before 2008, the franchise tax reached corporations (and certain other specified entities), not partnerships or trusts.
• The trust-interest holders are not subject to the franchise tax because no single holder could control the Trust.

The Comptroller cautioned that the response rested on the facts presented and could change if the facts changed.

Important currency note: STAR marks this document partially superseded on 12/15/2014 on the taxation of partnerships. The 2007 legislation (House Bills 3 and 3928) restructured the franchise tax into the current margin tax effective January 1, 2008 and made partnerships subject to the tax, so the entity-level result here is historical. Confirm current law.

What this means for you

Businesses using partnerships or trusts to hold Texas activity

Under the pre-2008 rules, the franchise tax turned on corporate form: a partnership or trust simply was not a taxpayer, and neither were individual trust beneficiaries who could not control the trust. Groups relied on that to keep entities out of the tax. The margin tax has since made partnerships themselves taxable, so this result no longer holds.

Accountants and tax professionals

Note the control test for the trust holders: the letter keyed non-taxability to the fact that no one holder could control the Trust. Re-verify entity classification and taxability under the current margin tax rather than relying on this pre-2008 framework.

Common questions

Q: Did the limited partnerships or the trust owe Texas franchise tax?
A: No. The pre-2008 franchise tax reached corporations, not partnerships or trusts, so none of them was subject.

Q: Were the holders of the trust interests taxable?
A: No, because no single holder could control the Trust.

Citations and references

The letter applied the general pre-2008 rule that the franchise tax reaches corporations (and certain specified entities) but not partnerships, trusts, or individuals, without citing specific numbered Tax Code sections. See the verbatim text below.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9311L1276E01

Original ruling text

STAR SUPERSED INFORMATION
Accession No. —
Supersede type - Partial
Document superseded on - 12/15/14
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.

November 5, 1993

Dear *****:

Thank you for your letter (copy attached) dated September 16, 1993,
concerning Texas franchise tax and its application to limited part-
nerships, a trust, and the holders of the trust interests.

ABC, EFG, and the Trust are not subject to franchise tax because they
are not corporations.

The holders of the trust interests would not be subject to franchise
tax because no one holder could control the Trust.

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 any questions, please do not hesitate to write me or call
me toll free at 1-800-531-5441, extension 34662.

Sincerely,

Jerry Oxford
Tax Administration

NOTE: Previous Accession Number 9311155L.6 and/or 9311155L