SECTION 3.581. Margin: Taxable and Nontaxable Entities

(a) Effective date. The provisions of this section apply to franchise tax reports originally due on or after January 1, 2008.

(b) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Banking corporation--Each state, national, domestic, or foreign bank, whether organized under the laws of this state, another state, or another country, or under federal law, including a limited banking association organized under Finance Code, Title 3, Subtitle A, and each bank organized under §25(a), Federal Reserve Act (12 U.S.C. §§611 - 631) (edge corporations), but does not include a bank holding company as that term is defined by Bank Holding Company Act of 1956, §2, (12 U.S.C. §1841).

(2) Business trust--An entity as defined by Internal Revenue Code, Treasury Regulation, §301.7701-4(b).

(3) Corporation--An entity formed pursuant to Business Corporation Act, Non-Profit Corporation Act, Professional Corporation Act, or Business Organizations Code, Title 2 or 7, or other equivalent statute of this state or of another jurisdiction.

(4) Escrow--A legal arrangement whereby an asset is delivered to a third party to be held in trust or otherwise pending a contingency or the fulfillment of a condition or conditions in a contract.

(5) Estate of a natural person--An entity as defined by Internal Revenue Code, §7701(a)(30)(D), excluding an estate taxable as a business entity pursuant to Internal Revenue Code, Treasury Regulation, §301.7701-4(b). An estate of a natural person shall include a trust that makes an election under Internal Revenue Code, §645 to be treated and taxed as part of an estate for federal income tax purposes.

(6) 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.

(7) Grantor trust--A trust as defined by Internal Revenue Code, §671 and §7701(a)(30)(E), excluding a trust taxable as a business entity pursuant to Treasury Regulation, §301.7701-4(b).

(8) Holding company--An entity that confines its activities to owning stock in, and supervising management of, other companies.

(9) Joint stock company--A common-law unincorporated business enterprise of natural persons possessing common capital with ownership interests represented by shares of stock.

(10) Joint Venture--A partnership engaged in the joint prosecution of a particular transaction for mutual profit.

(11) Limited liability company--An entity formed pursuant to Limited Liability Company Act, Article 1528n, or Business Organizations Code, Title 3 or 7, or an equivalent statute in another jurisdiction.

(12) 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.

(13) 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.

(14) Natural person--A human being or the estate of a human being. The term does not include a purely legal entity given recognition as the possessor of rights, privileges, and responsibilities, such as a corporation, limited liability company, partnership, or trust.

(15) Partnership--A relationship referred to in Business Organizations Code, §152.051, and Revised Partnership Act, Article 6132b-2.02.

(16) Passive entity--A general or limited partnership or trust other than a business trust that meets the qualifications in Tax Code, §171.0003. See also §3.582 of this title (relating to Margin: Passive Entities).

(17) Professional association--An entity organized under Professional Association Act, Article 1528e, or Business Organizations Code, Title 7, Chapter 302, or an equivalent statute in another jurisdiction.

(18) Qualified REIT subsidiary--An entity as defined by Internal Revenue Code, §856(i)(2).

(19) Real Estate Investment Trust or REIT--An entity as defined by Internal Revenue Code, §856.

(20) Real Estate Mortgage Investment Conduit or REMIC--An entity as defined by Internal Revenue Code, §860D.

(21) Savings and loan association--A savings and loan association or savings bank, whether organized under the laws of this state, another state, or another country, or under federal law.

(22) Self-insurance trust--A trust created and operated according to the provisions of Insurance Code, Chapter 2212, or a predecessor statute.

(23) Sole proprietorship--A natural person carrying on business, if the business is not formed in a manner that limits the liability of the owner. It does not include other entities treated as sole proprietorships for federal tax purposes, unless by statute the form of entity does not afford limited liability protection to the owner and it does not include single member limited liability companies.

(c) Taxable entities include:

(1) partnerships, both general and limited, unless excluded in subsection (d)(2) of this section;

(2) limited liability partnerships;

(3) corporations;

(4) banking corporations;

(5) savings and loan associations;

(6) limited liability companies;

(7) business trusts;

(8) professional associations;

(9) business associations;

(10) joint ventures, except joint operating or co-ownership arrangements meeting the requirements of Treasury Regulation 1.761-2(a)(3) that elect out of federal partnership treatment as provided by Internal Revenue Code, §761(a);

(11) joint stock companies;

(12) holding companies;

(13) combined groups (also see §3.590 of this title (relating to Margin: Combined Reporting)); and

(14) other legal entities.

(d) Nontaxable entities. The following entities are specifically excluded from the definition of taxable entities for purposes of imposition of the franchise tax:

(1) sole proprietorships (does not include single member limited liability companies);

(2) general partnerships where direct ownership is composed entirely of natural persons, and the liability of those persons is not limited (e.g. by registration as a limited liability partnership) under a statute of this state or another state;

(3) passive entities, as determined on a year to year basis (also see §3.582 of this title);

(4) entities exempt under Chapter 171, Subchapter B;

(5) grantor trusts, all of the grantors and beneficiaries of which are natural persons or charitable entities as described in Internal Revenue Code, §501(c)(3);

(6) estates of a natural person;

(7) escrows;

(8) REITs or qualified REIT subsidiaries provided that:

(A) the REIT holds interests in limited partnerships or other entities that are taxable entities and directly hold real estate; and

(B) the REIT does not directly hold real estate, other than real estate it occupies for business purposes; or

(9) REMICs;

(10) nonprofit self-insurance trusts;

(11) trusts qualified under Internal Revenue Code, §401(a); or

(12) trusts or other entities that are exempt under Internal Revenue Code, §501(c)(9).

(e) Single member limited liability company. An entity treated as a sole proprietorship for federal tax purposes is not a sole proprietorship for the purposes of this rule if it is formed in a manner that limits the liability of its owners or members.

Source Note: The provisions of this §3.581 adopted to be effective January 1, 2008, 32 TexReg 10013