| (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.
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