What installment-sale gain entered a dissolving LLC's final Texas earned-surplus report after it distributed the note to its members?

Plain-English summary

The dissolving LLC included installment gain reported on its own federal return through dissolution, but excluded later gain reported personally by its members.

The LLC, taxed federally as a partnership, sold its assets on the installment basis for a small down payment and an installment note. It planned to liquidate and distribute the note to its members, who would report later installment-sale gain on their individual federal returns.

The Comptroller divided the income by reporting taxpayer and time:

• Gain reported on the LLC's federal return through the dissolution date entered receipts and taxable earned surplus on the LLC's final report.
• Gain later reported by the members after they received the note did not enter the LLC's final-report earned surplus.

Currency note: This response applies the former earned-surplus tax. Texas replaced that tax with the margin tax effective January 1, 2008.

What this means for you

LLCs liquidating after installment sales

Track the note and each installment by federal reporting period and taxpayer. Distribution of the note shifted later reporting away from the dissolved LLC on these facts.

Tax professionals

The letter does not say all gain disappears at dissolution. The LLC still included income recognized on its own return through the final period.

Common questions

Q: Did the LLC include any installment gain?
A: Yes, gain reported on its federal return through dissolution.

Q: Did it include gain reported later by members?
A: No.

Q: What document was distributed?
A: The installment note receivable.

Citations and references

• The letter cites no specific statute or rule number; it follows the federal reporting of installment gain between the LLC's final period and its members' later returns.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9905778L

Original ruling text

May 14, 1999

Dear **:

Thank you for your recent ruling request about the computation of earned
surplus for a limited liability company (LLC) that will be dissolving.

You state that the LLC (Taxpayer) is being treated as a partnership for federal
income tax purposes. Taxpayer sold its assets on the installment basis with a
small downpayment. Taxpayer will be liquidated and will distribute the
installment note receivable to its members who will then report the installment
sale gain on their personal income tax returns.

To the extent the gain on the installment sale is reported on the LLC's federal
income tax return for the period through the date of dissolution, Taxpayer must
include the income from the installment sale in computing receipts and taxable
earned surplus on the final report. However, the installment sales income
reported by the members would not be included in computing Taxpayer's earned
surplus on the final report.

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 further franchise tax questions, please write me or call me
toll-free at 1-800-531-5441, extension 3-3958. My direct line is 512/463-3958.

Sincerely,

Teresa Comer
Tax Policy Division