34 Tex. Admin. Code § 3.582 - Margin: Passive Entities
(a)
Effective Date. The provisions of this section apply to franchise tax reports
originally due on or after January 1, 2008, unless otherwise
provided.
(b) Definitions. The
following words and terms, when used in this section, shall have the following
meanings, unless the context clearly indicates otherwise:
(1) Active trade or business--For the
purposes of this section only:
(A) an entity
conducts an active trade or business if the activities include active
operations that form a part of the process of earning income or profit, and the
entity performs active management and operational functions;
(B) activities performed by the entity
include activities performed by persons outside the entity, including
independent contractors, to the extent that the persons perform services on
behalf of the entity and those services constitute all or part of the entity's
trade or business; or
(C) an entity
conducts an active trade or business if assets, including royalties, patents,
trademarks, and other intangible assets, held by the entity are used in the
active trade or business of one or more related entities.
(2) Business trust--An entity as defined by
Internal Revenue Code, Treasury Regulation, §301.7701-4(b).
(3) Federal gross income--Income that is
reported on the entity's federal income tax return, to the extent the amount
reported complies with federal income tax law.
(4) General partnership--A partnership as
described in Revised Partnership Act, Article 6132b-1.01 et. seq., or Business
Organizations Code, Title 4, Chapter 152, or an equivalent statute in another
jurisdiction.
(5) Limited liability
partnership--A partnership registered pursuant to Revised Partnership Act,
Article 6132b-3.08, or Business Organizations Code, Title 4, Chapters 152 and
153, Subchapter H, or an equivalent statute in another jurisdiction.
(6) Limited partnership--A partnership formed
pursuant to Revised Partnership Act, Article 6132a-1, or Business Organizations
Code, Title 4, Chapter 153, or an equivalent statute in another
jurisdiction.
(7) Net capital
gains--Net capital gains as defined under the Internal Revenue Code.
(8) Net gains--Net gains as defined under the
Internal Revenue Code.
(9)
Non-controlling interest--For the purposes of this section only, an interest
that is less than or equal to 50% that is held by an investor, either directly
or indirectly, in an investee.
(10)
Security--
(A) an instrument defined by
Internal Revenue Code, §475(c)(2), where the holder of the instrument has
a non-controlling interest in the issuer/investee;
(B) an instrument described by Internal
Revenue Code, §475(e)(2)(B), (C), (D);
(C) an interest in a partnership where the
investor has a non-controlling interest in the investee;
(D) an interest in a limited liability
company where the investor has a non-controlling interest in the investee;
or
(E) a beneficial interest in a
trust where the investor has a non-controlling interest in the
investee.
(c)
Qualification as a passive entity. To qualify as a passive entity:
(1) the entity must be one of the following
for the entire period on which the tax is based:
(A) general partnership;
(B) limited partnership;
(C) limited liability partnership;
or
(D) trust, other than a business
trust; and
(2) at least
90% of an entity's federal gross income for the period on which margin is based
must consist of the following sources of income:
(A) dividends, interest, foreign currency
exchange gain, periodic and nonperiodic payments with respect to notional
principal contracts, option premiums, cash settlements or termination payments
with respect to a financial instrument, and income from a limited liability
company;
(B) distributive shares of
partnership income to the extent that those distributive shares of income are
greater than zero;
(C) net capital
gains from the sale of real property, net gains from the sale of commodities
traded on a commodities exchange, and net gains from the sale of securities;
and
(D) royalties from mineral
properties, bonuses from mineral properties, delay rental income from mineral
properties and income from other nonoperating mineral interests including
nonoperating working interests not described in subsection (d)(2) of this
section.
(3) An entity
with no federal gross income does not qualify as a passive entity under
paragraph (2) of this subsection.
(d) The income described by subsection (c)(2)
of this section, does not include:
(1) rent;
or
(2) income received by a
nonoperator from mineral properties under a joint operating agreement if the
nonoperator is a member of an affiliated group and another member of that group
is the operator under the same joint operating agreement.
(e) Conducting an active trade or business.
To be considered a passive entity, an entity may not receive more than 10% of
its federal gross income for the period on which margin is based from
conducting an active trade or business. Income described by subsection (c)(2)
of this section, may not be treated as income from conducting an active trade
or business.
(f) Activities that do
not constitute an active trade or business:
(1) ownership of a royalty interest or a
nonoperating working interest in mineral rights;
(2) payment of compensation to employees or
independent contractors for financial or legal services reasonably necessary
for the operation of the entity; and
(3) holding a seat on the board of directors
of an entity does not, by itself, constitute conduct of an active trade or
business.
(g) Reporting
requirement for passive entities. If an entity meets all of the qualifications
in subsection (c) of this section for the period upon which the franchise tax
is based, the entity owes no tax; however, the entity may be required to file a
No Tax Due Report subject to the following paragraphs:
(1) Passive entities registered or required
to be registered. A partnership or trust that qualifies as a passive entity for
the period upon which the franchise tax is based, and is registered or required
to be registered with the comptroller's office or with the secretary of state's
office, is required to file a No Tax Due Report with the comptroller's
office.
(2) Passive entities not
registered or otherwise required to be registered. A partnership or trust that
qualifies as a passive entity for the period upon which the franchise tax
report is based, and is not registered or otherwise required to be registered
with the comptroller's office or with the secretary of state's office, is not
required to file a No Tax Due Report with the comptroller's office.
(3) Information Report. An entity that
qualifies as a passive entity is not required to file a Public Information
Report or an Ownership Information Report with the comptroller's office;
however, a limited partnership that qualifies as a passive entity may be
required to file a periodic report with the secretary of state's office. For
more information, see Business Organization Code, Title 4, Chapter 153,
Subchapter G.
(h)
Unregistered entities that no longer qualify as passive. A passive entity that
is not registered with the comptroller's office or with the secretary of
state's office and that no longer qualifies as passive, must register with the
comptroller's office and begin filing annual franchise tax reports.
(1) For the periods that the entity does not
qualify as passive, see §
3.584 of this title (relating to
Margin: Reports and Payments).
(2)
For periods that the entity subsequently qualifies as passive, see subsection
(g)(1) of this section.
(i) Response to notification required. If a
passive entity receives notification in writing from the comptroller asking if
the entity is taxable, the entity must reply to the comptroller within 30 days
of the notice.
Notes
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