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Ezel / Tax Rulings / TX
TX 9611082L Franchise Tax (PRIOR TO 01/01/2008) 1996-11-26

Was a qualified settlement fund subject to the former Texas franchise tax?

Short answer: No, on the Comptroller's stated understanding. The letter said a qualified settlement fund could not be a corporation, LLC, bank, or savings and loan association under state or foreign law. Because it could not be one of those listed taxable entities, the fund was not subject to the former franchise tax.

Apply this to your situation

This page answers the general question as of 1996. Ezel answers yours, under current Texas tax law, with citations.

Currency note: this ruling is from 1996
Subsequent statutory amendments, regulation changes, court decisions, or later rulings may have changed the analysis. Treat this page as historical context, not current tax advice. Verify current law before relying on any specific rule, rate, or position mentioned here.
Disclaimer: This is an official Texas Comptroller of Public Accounts letter published on the State Tax Automated Research (STAR) system. Letters on STAR can be the basis of a detrimental reliance claim only for the taxpayer to whom the letter was directly issued (see 34 Tex. Admin. Code Rules 3.1 and 3.10); documents on STAR may no longer represent current policy even if not marked superseded. This 1996 answer is expressly based on the writer's understanding, research, and a prior telephone conversation that the fund could not be a corporation, LLC, bank, or savings and loan association. Verify the fund's actual legal form and current Texas taxable-entity law. Taxpayer-identifying details are redacted. This summary is informational only and is not legal or tax advice.
About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page) is the authoritative source for any reliance.

Plain-English summary

The qualified settlement fund was not subject to the former franchise tax because it was not a listed taxable corporate entity.

The Comptroller stated an understanding that a qualified settlement fund could not be a corporation, limited liability company, bank, or savings and loan association under the laws of any state or country.

On that understanding, the fund could not be one of the listed entities subject to the former franchise tax, so Texas said it was not taxable.

What this means for you

Settlement administrators

The no-tax answer depended on the fund's legal form rather than merely its settlement purpose.

Tax professionals

Verify the entity classification and governing law independently; the letter frames the classification as the writer's understanding.

Common questions

Q: Was the fund subject to the former franchise tax?
A: No, on the stated understanding.

Q: Why not?
A: It could not be one of the listed corporate taxable entities.

Q: Did the letter cite a statute?
A: No.

Citations and references

  • The letter relies on the writer's stated research and prior correspondence rather than a cited provision.

Source

Original ruling text

November 26, 1996

Dear **:

In your letter of November 14, you requested information regarding the tax
treatment of qualified settlement funds.

As I indicated in my previous letter dated January 12, 1995, I understand that
a qualified settlement fund cannot be a corporation, limited liability company,
bank, or savings and loan association under the laws of any state or country.
My understanding is based on my research and my telephone conversation with
** of your office on January 10, 1995. Based on my understanding,
a qualified settlement fund is not subject to franchise tax because it cannot
be a taxable entity as listed above.

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

If you have any questions, contact Tax Policy Division. You may call toll free
1-800-531-5441, or our regular number is 512/463-4600. My extension is 3-4662.
You may write me at Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Bob Jeffcoat
Tax Policy Division

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