SECTION 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.

Source Note: The provisions of this §3.582 adopted to be effective January 1, 2008, 32 TexReg 10015; amended to be effective December 31, 2009, 34 TexReg 9464; amended to be effective June 28, 2016, 41 TexReg 4649