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

Plain-English summary

A taxpayer asked how the (pre-2008) Texas franchise tax applied to a limited partnership (LP), a trust, and the holders of the trust's interests. The Comptroller advised:

• The LP and the trust are not subject to franchise tax because they are not corporations. At the time, the franchise tax reached corporations (and LLCs, banks, and savings and loan associations) — not partnerships or trusts.
• The holders of the trust interests are not subject either, because no one holder could control the trust, directly or indirectly, and the trust's only connection with Texas appeared to be its role as a limited partner and its ownership of the corporation that served as the general partner.

The Comptroller stressed the response was based on the facts presented and could change if the facts changed.

Important currency note: The 2007 legislation (House Bill 3 and House Bill 3928) restructured the franchise tax into the current margin tax effective January 1, 2008 and made partnerships subject to the tax — reversing the premise that a partnership escapes the tax. STAR marks this document partially superseded (12/15/2014) on the taxation of partnerships. Treat the entity-level conclusions as historical and confirm current law.

What this means for you

Businesses using partnership or trust structures

Before 2008, keeping activity inside a partnership or trust — rather than a corporation — kept it outside the franchise tax entirely. That is no longer true: the margin tax now reaches partnerships, so this structure does not produce the same result today.

Accountants and tax professionals

Two facts carried the beneficiaries here: no single holder controlled the trust, and the trust's only Texas tie was a limited-partnership interest plus ownership of the general-partner corporation. Confirm entity classification and control under the current margin tax before relying on this outcome.

Common questions

Q: Were the limited partnership and the trust subject to the pre-2008 franchise tax?
A: No. Neither is a corporation, and the pre-2008 tax reached only corporations (and LLCs, banks, and S&Ls).

Q: Were the holders of the trust interests subject?
A: No — no single holder could control the trust, and the trust's only Texas connection was a limited-partnership interest and its ownership of the general-partner corporation.

Q: Does this still apply?
A: Not for entity-level status. The 2008 margin tax made partnerships taxable, so re-verify current law.

Citations and references

The letter applied the general scope of the pre-2008 franchise tax (which reached corporations, LLCs, banks, and savings and loan associations, but not partnerships or trusts) and cited no specific Tax Code section. 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/9410L1358G03

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.

October 19, 1994

Dear ****:

Thank you for your letter (copy attached) dated August 31, 1994, concerning
Texas franchise tax and its application to limited partnerships, a trust,
and the holders of the trust interests.

LP 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, either directly or indirectly.
Also, the Trust's only connection with Texas appears to be as a limited
partner and as owner of the corporation which is the general partner.

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 1-800-252-1381, extension 3-4662.

Sincerely,

Jerry Oxford
Tax Administration

NOTE: Previous Accession Number 9410311L