TX 9712384L Franchise Tax (PRIOR TO 01/01/2008) 1997-12-03

Were an S corporation and its wholly owned qualified subchapter S subsidiary treated as one taxpayer or as separate corporations for former Texas franchise tax?

Short answer: They were separate Texas franchise-tax entities even though federal income-tax law treated the QSSS as a division of its S-corporation parent. Section 171.001 imposed tax on each corporation, and Rule 3.544(c) did not allow consolidated reporting. The Comptroller expressly deferred the request's other four questions while revising Rule 3.556.

Apply this to your situation

This page answers the general question as of 1997. Ezel answers yours, under current Texas tax law, with citations.

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 Code Rules 3.1 and 3.10); documents on STAR may no longer represent current policy even if not marked superseded.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 1997 response applies former franchise-tax law and answers only the separate-entity question. It expressly withholds answers to four other questions while Rule 3.556 was being revised. Confirm current law and do not infer the withheld results. Taxpayer-identifying details are redacted. This summary is informational only and is not legal or tax advice. Consult a licensed Texas tax professional about your specific situation.

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

A QSSS and its S-corporation parent remained separate corporations for Texas franchise tax.

Federal income-tax treatment made the wholly owned QSSS a division of its parent. Texas nevertheless imposed franchise tax on each corporation under Section 171.001, and Rule 3.544(c) did not allow the two corporations to file a consolidated report.

The taxpayer asked five questions, but the letter answered only this first one. The Comptroller deferred Questions 2 through 5 until Rule 3.556 had been revised and adopted.

What this means for you

S corporations with a QSSS

Federal disregarded-division treatment did not by itself combine the two legal corporations for the former Texas franchise tax.

Tax professionals

Do not use this letter as authority for the four unanswered QSSS issues; it establishes only separate-entity reporting.

Common questions

Q: Did Texas follow federal division treatment?
A: No.

Q: Could the parent and QSSS report on a consolidated basis?
A: No.

Q: Did the Comptroller resolve the other requested issues?
A: No.

Citations and references

Texas Tax Code Sec. 171.001
34 Tex. Admin. Code Secs. 3.544(c) and 3.556

Source

STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
Opinion: https://star.comptroller.texas.gov/view/9712384L

Original ruling text

December 3, 1997

Dear Mr. **:

In your letter of November 20, you requested responses to various questions
regarding the application of franchise tax to a Qualified Subchapter S
subsidiary (QSSS) and its parent S corporation.

You indicate that X is a Texas corporation that has elected to be treated as an
S corporation for federal income tax purposes. X formed a wholly owned
subsidiary (Y) in 1997 which qualifies as a QSSS. Accordingly, X treats Y as a
division for federal income tax purposes.

At this time, we are revising Rule 3.556 to address the franchise tax treatment
of a QSSS and its parent corporation. Therefore, I am unable to respond to
Questions 2 through 5 in your letter. I will respond to these inquiries when
Rule 3.556 has been revised and adopted.

I have restated your first question followed by a response:

Will X and Y be treated as distinct and separate entities for Texas
franchise tax purposes even though they are treated as one corporation for
federal income tax purposes?

Response

Yes. Under Texas Tax Code 171.001 the franchise tax is imposed on each
corporation. Furthermore, consolidated reporting of corporations is not
allowed (see Rule 3.544(c)).

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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