Is a foreign corporation that is a general partner in a partnership owning a Texas apartment building subject to Texas franchise tax?

Plain-English summary

A Wisconsin corporation owned a general-partnership interest in a Wisconsin partnership whose primary asset was an apartment building in Texas. The taxpayer asked whether the corporation was subject to the Texas franchise tax.

The Comptroller advised yes:

• A foreign corporation that is a general partner in a partnership doing business in Texas is itself considered to be doing business (to have nexus) in Texas.
• The partnership is doing business in Texas because it owns real property (the apartment building) located in Texas.
• Therefore the corporation is subject to both the taxable-capital and earned-surplus components of the franchise tax (Rules 3.546 and 3.554).

The letter added a structuring point: if the Wisconsin partnership were converted to a Wisconsin limited liability company, the corporation would no longer be subject to the franchise tax, because merely holding a membership interest in an LLC doing business in Texas does not create nexus for the member. The LLC itself — deemed a corporation for franchise-tax purposes — would have Texas nexus and be subject to the tax.

Important currency note: This letter applies the pre-2008 franchise tax. The 2007 legislation (House Bills 3 and 3928) restructured the tax into the current margin tax effective January 1, 2008 and made partnerships taxable, so these entity-level results may no longer hold. Confirm current law.

What this means for you

Out-of-state owners of Texas real estate

Holding Texas real estate through a partnership pulled the corporate general partner into the franchise tax. Under the pre-2008 rules, shifting to an LLC moved the tax to the LLC and off the corporate member — a distinction that the later margin tax changed.

Accountants and tax professionals

The nexus hook was general-partner status combined with the partnership's Texas real property. Note the LLC contrast: a member's LLC interest did not create member-level nexus, unlike a general-partnership interest. Re-verify under the margin tax.

Common questions

Q: Why did the Wisconsin corporation have Texas franchise-tax nexus?
A: Because it was a general partner in a partnership doing business in Texas (owning a Texas apartment building), which made the corporation itself a Texas taxpayer under both components.

Q: Would converting the partnership to an LLC change that?
A: Yes. The corporate member would no longer be subject, though the LLC itself (treated as a corporation) would be.

Citations and references

Statutes and rules:

• Franchise Tax Rule 3.546 (Taxable Capital: Nexus)
• Franchise Tax Rule 3.554 (Earned Surplus: Nexus)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9401148L

Original ruling text

January 12, 1994

Dear **:

In your letter of December 30, you requested a determination whether a
Wisconsin corporation, which owns a general partnership interest in a Wisconsin
partnership whose primary asset is an apartment building located in Texas, is
subject to the Texas franchise tax.

The Wisconsin corporation has sufficient nexus in Texas to subject it to the
Texas franchise Tax. A foreign corporation that is a general partner in a
partnership doing business in Texas is considered to be doing business (to have
nexus) in Texas. The partnership is considered to be doing business in Texas
because it owns real property located in Texas. Therefore, the corporation is
subject to both the taxable capital and earned surplus components of the
franchise tax. I have enclosed copies of Rules 3.546, Taxable Capital: Nexus,
and 3.554, Earned Surplus: Nexus.

If the Wisconsin partnership is converted to a Wisconsin limited liability
company, the corporation would no longer be subject to the franchise tax. The
limited liability company (deemed a corporation for franchise tax purposes)
would have nexus in Texas and be subject to the franchise tax. However, the
mere holding of a membership interest in a limited liability company that is
doing business in Texas does not create nexus for the Wisconsin corporation.

This response is based on the facts presented in your letter and current law.
If there are additional or different facts, the response may change.

If you have any further questions about this or any other franchise tax matter,
you may write me at Tax Administration Division, Comptroller of Public
Accounts. You may call toll free 1-800-531-5441, extension 34932. My direct
number is 512-463-4932.

Very truly yours,

Gloria E.R. Dossett
Tax Administration Division