Did a Texas corporation's gain from selling an interest in a Texas LLC to a Delaware-formed LLC produce Texas gross receipts?

Plain-English summary

The LLC membership interest was an intangible asset, and the gain was not a Texas gross receipt because the payor was legally formed in Delaware.

A Texas corporation transferred its operating business to a new Texas LLC for an 87.5% interest. An unrelated Delaware LLC with its principal place of business in Texas planned to buy that interest for cash and a note.

The Comptroller treated the membership-interest sale as a sale of an intangible. To the extent the gain was recognized as revenue for federal income-tax reporting, it did not produce Texas gross receipts because the payor was legally formed in Delaware.

What this means for you

Sellers of LLC interests

Under this historical ruling, the legal formation of the payor controlled sourcing of the intangible-sale gain, not the target LLC's Texas operations or the buyer's Texas principal place of business.

Tax professionals

Confirm both the asset classification and whether the gain is recognized as federal revenue; the response made its conclusion conditional on those facts.

Common questions

Q: Was the membership interest treated as tangible property?
A: No. It was an intangible asset.

Q: Was the buyer's Texas principal place of business decisive?
A: No. The letter relied on the buyer being legally formed in Delaware.

Citations and references

• The ruling identifies no statute or rule by section number

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9804697L

Original ruling text

April 23, 1998

Dear Mr. **:

Thank you for your letter regarding the sourcing of gross receipts of a seller
of a Texas limited liability company ("LLC") interest to a non-Texas LLC.

You stated in your letter that "A", a Texas corporation, owned and operated a
business with its principal location in Texas until late 1997. "A" also had
business operations in Oklahoma and Louisiana. In mid-December, 1997, "A"
transferred its entire operating business (i.e. all assets and liabilities) to
"B", a newly formed Texas LLC in exchange for 87.5% interest in "B." "C", an
individual resident in Texas, acquired the remaining 12.5% interest in "B" at
the time "B" was formed.

It is anticipated that "D", an LLC formed in Delaware, but having its principal
place of business in Texas, will acquire "A's" 87.5% membership interest in "B"
sometime in April, 1998. "D" and all its members are unrelated in anyway to
"A", "B", or "C." "D" will acquire the 87.5% membership interest in "B" by way
of a cash payment of $11.1X and a note payable of $.4X. "A" will recognize
gain on the sale of its membership interest in "B" for federal income tax
purposes. "C" will continue to own his 12.5% interest in "B" subsequent to the
acquisition. "D" will continue to operate "B" such that "B's" principal place
of business remains in Texas.

Based on this information, the gain on the sale of the membership interest in
"B" will be considered a sale of an intangible asset. The payor, "D", was
legally formed in Delaware. Therefore, to the extent that the gain in
recognized as a revenue for federal income tax reporting purposes, the gain on
the sale of the intangible membership interest in "B" by "A" will not result in
Texas gross receipts.

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