TX: Federal disregarded LLCs subject to franchise tax

In a recent private letter ruling, the Texas Comptroller of Public Accounts ruled that single-member LLCs wholly owned by a tax-exempt IRC section 401(a) pension trust must file franchise tax reports. The LLCs were limited partners in a limited partnership that owned Texas real estate and therefore had Texas nexus. Because they were disregarded for federal income tax purposes, the LLCs did not file federal income tax returns. Their owner, the tax-exempt IRC section 401(a) trust, filed IRS Form 5500, Annual Return/Report of Employee Benefit Plan, and IRS Form 990-T, Exempt Organization Business Income Tax Return.

The Comptroller first ruled that the LLCs were regarded entities for purposes of the Texas franchise tax. Although the section 401(a) trust was not a taxable entity, the LLCs were legal entities separate from the trust, and the tax-exempt status of the trust did not extend to the LLCs. As such, the two LLCs were required to prepare separate pro forma federal income tax returns as if they were subject to federal income tax. To determine Texas total revenue, which is based on line items from the relevant federal forms, the Comptroller noted that unrelated business income reported by the trust on Form 990-T represented income derived from the LLCs. As such, these amounts should be included in the LLCs’ total revenue calculation. Finally, because the trust owned more than 50 percent of the two LLCs, the Comptroller concluded that, if the LLCs were unitary, they must file a combined report. For more information on this private letter ruling, please contact Doug Maziur at 713-319-3866.