When an S corporation acquires a Texas limited partnership through general-partner and limited-partner LLCs, which entities owe Texas franchise tax?

Plain-English summary

A Delaware S corporation ("COMPANY A") planned to acquire a Texas limited partnership engaged in mining ("ALP"). It would do so through two Delaware LLCs it controlled: G.P. LLC (GPLLC) would act as the partnership's general partner, and L.P. LLC (LPLLC) would hold a limited-partner interest. The taxpayer set out its own conclusions and asked the Comptroller to confirm them for the (pre-2008) franchise tax.

The Comptroller agreed with each conclusion:

1. The S corporation is not subject. Company A is not subject to either component of the franchise tax because of its investment in GPLLC or LPLLC.
2. The general-partner LLC is subject to both components. GPLLC is subject to both franchise-tax components because it will act as the general partner in ALP (Rule 3.546(c)(2)).
3. The partnership itself is not subject. ALP is not subject to the franchise tax because it is a partnership, not a corporation or an LLC.
4. The limited-partner LLC is not subject. LPLLC is not subject to either component because its investment in ALP is a limited partnership interest (Rule 3.546(c)(2)).

The Comptroller added that if LPLLC were eliminated and the limited partnership interest were held directly by Company A, Company A would still not be subject to either component of the franchise tax.

Important currency note: STAR marks this document partially superseded on 12/18/2014 on the taxation of partnerships. 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 "partnership not subject / limited partner not subject" conclusions here. Treat the entity-level results as historical and confirm current law.

What this means for you

Investors acquiring a Texas partnership

The structure concentrated all franchise-tax exposure in a thin general-partner LLC while leaving the parent corporation and the limited-partner LLC untaxed — and holding the limited interest directly changed nothing. That was standard pre-2008 planning. The margin tax now taxes partnerships themselves, so the same structure will not produce the same result — re-verify.

Accountants and tax professionals

Note that being an LLC did not shield GPLLC: as general partner it was subject to both components, exactly like a corporate general partner. The limited-partner LLC and the S-corp parent were out of scope only because their ties ran through a limited interest. Confirm under the current margin tax.

Common questions

Q: Which entity actually owed the franchise tax?
A: The general-partner LLC (GPLLC), on both components, because it acted as general partner of a Texas-active limited partnership.

Q: Did the controlling S corporation owe franchise tax?
A: No — not through its investment in either LLC, and not even if it held the limited partnership interest directly.

Q: Was the limited-partner LLC subject?
A: No. Its investment in the partnership was a limited partnership interest, which did not create franchise-tax liability.

Citations and references

Statutes and rules:

• Franchise Tax Rule 3.546(c)(2) (an LLC acting as general partner of a Texas-active limited partnership is subject to the tax; a limited-partner LLC is not)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9710257L

Original ruling text

STAR SUPERSED INFORMATION
Accession No. —
Supersede type - Partial
Document superseded on - 12/18/14
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 7, 1997

Dear Mr. **:

Thank you for your letter concerning the application of Texas franchise tax law
to limited partnerships, limited liability companies and corporations.

Your letter contained the following facts:

1. Your Client (COMPANY A) - a Delaware S corporation that is otherwise (except
   for this possible acquisition) not taxable in Texas.

2. G.P. LLC (GPLLC) - a Delaware LLC controlled by COMPANY A that will act as
   general partner in the acquired partnership.

3. Acquired limited partnership (ALP)- a Texas limited partnership engaged in
   the mining business in the state of Texas.

4. L.P. LLC (LPLLC) - a Delaware LLC controlled by COMPANY A that will own a
   limited partnership interest in A.L.P.

You correctly stated the following conclusions in your letter.

1. Your client will not be subject to either component of the franchise tax in
   Texas because of its investment in GPLLC or LPLLC.

2. GPLLC will be subject to both components of the Texas franchise tax because
   it will be acting as the general partner in ALP. [Rule 3.546(c)(2)]

3. ALP is not subject to the franchise tax because it is a partnership, not a
   corporation or a LLC.

4. LPLLC will not be subject to either component of the franchise tax because
   its investment in ALP is in the form of a limited partnership interest. [Rule
   3.546(c)(2)]

You then asked what the franchise tax consequences would be if the LPLLC were
eliminated and the limited partnership interest was held directly by COMPANY A.
COMPANY A would still not be subject to either component of the franchise tax.

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

If you have any questions about this or any other franchise tax matter, please
call me at
1-800-531-5441, extension 34612. My direct number is (512) 463-4612. You may
write me at Tax Policy Division, Comptroller of Public Accounts, Austin, Texas
78774.

Sincerely,

Janet Spies
Tax Policy Division