| (a) Application for exemption. A corporation must apply for an exemption from franchise tax. For provisional exemptions for certain corporations, see subsection (i) of this section; for trade show exemptions, see subsection (j) of this section. (1) A corporation that believes it is exempt from payment of franchise tax must furnish to the comptroller sufficient evidence to establish its exempt status. The corporation claiming the exemption bears the burden to establish its entitlement to exempt status and any doubts will result in a denial of the application for exemption. (2) Except as otherwise provided in subsections (e), (i), and (j) of this section, each corporation must submit to the comptroller: (A) a request for exemption in writing, indicating the particular provision of the Tax Code, Chapter 171, Subchapter B, under which exemption is claimed; (B) a detailed statement of the corporation's past activities, if any, and its future plan of activities, both in relation to the manner in which the corporation proposes to implement the purposes clause in its articles of incorporation or certificate of authority; (C) a copy of the articles of incorporation and, for a foreign corporation, a copy of the application for a certificate of authority; (D) for a homeowners' association only, a copy of all relevant documents, such as, the bylaws or the declaration, specifying the requirements for membership in the association, the classes of membership and the attendant voting rights for each membership class, the conditions or events, if any, resulting in the termination of a membership class or resulting in the reinstatement of a membership class, and a listing of each lot or unit within the association and the name and address of the owner of that lot or unit; and (E) any additional information the comptroller may require to make a determination whether the corporation is eligible for a franchise tax exemption. (b) Actions by comptroller. Upon receipt of an application for exemption, the comptroller's representative will review the application and send the applicant a notification either granting the exemption, or denying the exemption, or requesting additional information. (1) If the exemption is granted, the exemption will be effective from the first date the corporation was eligible for exemption. If the corporation paid any franchise taxes prior to the comptroller's notification granting the exemption for a privilege period after the effective date of the exemption, the corporation may request a refund, subject to the applicable statute of limitations. If the effective date of the exemption occurs after the beginning of a privilege period, the corporation must pay through the end of such privilege period. A corporation that has been subject to the earned surplus component of the tax and becomes eligible for exemption is liable for Tax Code §171.0011 additional tax. The additional tax is equal to 4.5% of the corporation's net taxable earned surplus computed on the period beginning on the day after the last day for which the tax imposed on net taxable earned surplus was computed under Tax Code §171.1532 and ending on the day before the corporation was eligible for exemption. (2) If the exemption is denied or revoked, the corporation may contest the denial or revocation by filing all reports due as required by the comptroller; and (A) paying all amounts of tax, penalty, and interest due and requesting a refund hearing pursuant to the provisions of Chapter 111 of Tax Code; (B) paying all amounts of tax, penalty, and interest due, accompanying the payment with a written protest, and filing suit for the recovery of amounts paid pursuant to the provisions of Chapter 112 of Tax Code; or (C) requesting a redetermination hearing pursuant to Tax Code, §111.009 if the comptroller issues a deficiency determination. (c) Qualification for exemption. (1) Corporations subject to insurance premium taxes. All insurance, surety, guaranty, or fidelity companies that are subject to the annual gross premiums tax levied by Chapter 4 of the Insurance Code, or all insurance organizations, title insurance companies, and title insurance agents that are subject to annual gross premium tax levied by Chapter 9 of the Insurance Code are exempt from payment of the franchise tax regardless of whether any gross premiums taxes are actually paid in any given year. A non-admitted insurance organization that is required to pay a gross premium receipts tax during a tax year is exempted from the franchise tax for the same tax year. The exemption in this paragraph covers the periods upon which the earned surplus component is based, provided the gross premium receipts tax is required to be paid on premiums received or written, as applicable, during the same period. For example, an insurance organization's gross premium receipts tax is due and payable on March 1, 2003, for premiums received during calendar year 2002. The entity would be exempt from franchise tax for the 2003 annual report covering the January 1, 2003 through December 31, 2003 privilege period, if the tax was based on net taxable earned surplus earned in calendar year 2002. (2) Those corporations organized for the exclusive purpose of promoting the public interest of any county, city, town, or other area within the state, must show that promotion of the public interest is the exclusive purpose of the corporation and not merely an incidental result. A corporation will not be considered to be promoting the public interest if it engages in activities to promote or protect the private, business, or professional interests of its members or patronage. (3) A nonprofit corporation seeking franchise tax exemption as a religious organization must be an organized group of people regularly meeting for the primary purpose of holding, conducting, and sponsoring religious worship services according to the rites of their sect. The corporation must be able to provide evidence of an established congregation showing that there is an organized group of people regularly attending these services. A corporation that supports and encourages religion as an incidental part of its overall purpose, or one whose general purpose is furthering religious work or instilling its membership with a religious understanding, will not qualify for exemption under this provision. No part of the net earnings of the organization may inure to the benefit of any private party or individual other than as reasonable compensation for services rendered to the organization. Some examples of corporations that do not meet the requirements for exemption under this definition are conventions or associations of churches, evangelistic associations, churches with membership consisting of family members only, missionary organizations, and groups that meet for the purpose of holding prayer meetings, Bible study or revivals. Although these organizations do not qualify for exemption under this category of exemption as religious organizations, they may qualify for the exemption under Tax Code, §171.063, if they obtain an exemption from the Internal Revenue Service (IRS) under Internal Revenue Code, §501(c). (4) A nonprofit corporation seeking a franchise tax exemption as organized for purely public charity must devote all or substantially all of its activities to the alleviation of poverty, disease, pain, and suffering by providing food, clothing, drugs, treatment, shelter, or psychological counseling directly to indigent or similarly deserving members of society with its funds derived primarily from sources other than fees or charges for its services. If a corporation engages in any substantial activity other than the activities that are described in this section, it will not be considered as having been organized for purely public charity, and therefore, will not qualify for exemption under this provision. No part of the net earnings of the organization may inure to the benefit of any private party or individual other than as reasonable compensation for services rendered to the organization. Some examples of organizations that do not meet the requirements for exemption under this definition are fraternal organizations, lodges, fraternities, sororities, service clubs, veterans groups, mutual benefit or social groups, professional groups, trade or business groups, trade associations, medical associations, chambers of commerce, and similar organizations. Even though not organized for profit and performing services that are often charitable in nature, these types of organizations do not meet the requirements for exemption under this provision. Although these organizations do not qualify for exemption under this category of exemption as charitable organizations, they may qualify for the exemption under Tax Code, §171.063, if they obtain an exemption from the IRS under Internal Revenue Code, §501(c). (5) A nonprofit corporation seeking a franchise tax exemption as an educational organization must show that its activities are devoted solely to systematic instruction, particularly in the commonly accepted arts, sciences, and vocations, and has a regularly scheduled curriculum, using the commonly accepted methods of teaching, a faculty of qualified instructors, and an enrolled student body or students in attendance at a place where the educational activities are regularly conducted. A corporation that has activities consisting solely of presenting public discussion groups, forums, panels, lectures, or other similar programs, may qualify for exemption under this provision, if the presentations provide instruction in the commonly accepted arts, sciences, and vocations. The corporation will not be considered for exemption under this provision if the systematic instruction or educational classes are incidental to some other facet of the corporation's activities. No part of the net earnings of the organization may inure to the benefit of any private party or individual other than as reasonable compensation for services rendered to the organization. Some examples of organizations that do not meet the requirements for exemption under this definition are professional associations, business leagues, information resource groups, research organizations, support groups, home schools, and organizations that merely disseminate information by distributing printed publications. Although these organizations do not qualify for exemption under this category of exemption as educational organizations, they may qualify for the exemption under Tax Code, §171.063, if they obtain an exemption from the IRS under Internal Revenue Code, §501(c). (6) A nonprofit corporation requesting franchise tax exemption as a homeowners' association must prove that it meets all requirements to qualify for the exemption. The corporation must show that it is organized and operated to obtain, manage, construct, and maintain the property in or of a residential condominium or residential real estate development. The corporation also must prove that the condominium project, or, for a real estate development, the related property, is legally restricted for use as residences. Furthermore, the corporation must establish that the collective resident owners of individual lots, residences or units control at least 51% of the votes of the corporation and that voting control, however acquired, is not held by: a single individual or family; one or more developers, declarants, banks, investors, or other similar parties. For example, an association is formed for a residential condominium consisting of 12 units with each unit being entitled to one vote. Each of five individuals separately owns and occupies one unit, a total of five units. A sixth individual owns two units, living in one unit and leasing the other. A seventh individual owns and leases the remaining five units. None of the owners are related. In determining whether the collective resident owners control at least 51% of the votes of the corporation, the sixth owner is a resident owner regarding the one unit in which the owner lives and an investor regarding the other. The collective resident owners, therefore, have a total of six votes. Consequently, since the collective resident owners only have 50% of the votes of the corporation, the association does not meet the requirement that the resident owners must control at least 51% of the votes of the corporation. Accordingly, the corporation does not qualify for the franchise tax exemption as a homeowners' association. (d) Revocation, withdrawal, or loss of exemptions. (1) A corporation that no longer qualifies for the franchise tax exemption is required to notify the comptroller in writing of its change in status. Except as provided in paragraph (2) of this subsection, if at any time the comptroller has reason to believe that an exempt corporation no longer qualifies for exemption, the comptroller's representative will notify the corporation that its exempt status is under review. The comptroller's representative may request additional information necessary to ascertain the continued validity of the corporation's exempt status. If the comptroller determines that a corporation is no longer entitled to its exemption, notification to that effect will be sent to the corporation. The effective date of revocation is the date the corporation no longer qualified for the exemption. The day immediately following the date of withdrawal, loss, or revocation shall be the beginning date for determining the corporation's privilege period and for all other purposes related to franchise tax. (2) For nonprofit corporations granted an exemption under Tax Code, §171.063, the revocation, withdrawal, or loss of the federal income tax exemption automatically terminates the franchise tax exemption. A nonprofit corporation that no longer qualifies for the federal income tax exemption which was the basis for obtaining the franchise tax exemption must notify the comptroller in writing within 30 days of its change in status and must provide a copy of the notice of such revocation, withdrawal, or loss. The effective date of withdrawal or loss is the date of withdrawal or loss of the federal tax exemption. The effective date of a revocation is the date Cont'd... |
