| (a) The provisions of this section apply to franchise tax reports originally due on or after January 1, 1990. (b) The provisions of the Texas Close Corporation Law (or the close corporation law of the state of incorporation of a foreign corporation) will determine if a corporation with no more than 35 shareholders is eligible to file under the Tax Code, §171.113, as a close corporation. Shares held by an association, estate, trust, partnership, corporation, or any other legal entity will be treated as being held by one shareholder unless it is determined that the entity was organized for the primary purpose of holding stock in the close corporation. (c) The provisions of the Internal Revenue Code (26 United States Code §§1361 et seq.) will determine if a corporation is eligible to file under the Tax Code, §171.113, as an S corporation. An S corporation must otherwise calculate the taxable capital component of its
franchise tax in the same manner as any other corporation. For example, accumulated and other adjustment accounts are included in surplus, as are previously taxed income, accumulated earnings and profits, and all other amounts included in surplus under the Tax Code, §171.109. (d) A corporation will be eligible to file an annual report under the Tax Code, §171.113, if it is a close corporation or has elected to be an S corporation prior to January 1 of the reporting year. A corporation will be eligible to file an initial report under the Tax Code, §171.113, if it is a close corporation or has elected to be an S corporation prior to the original due date (without extensions) of the initial report. (e) A subsidiary corporation cannot report its franchise tax under the Tax Code, §171.113, if its parent corporation is not eligible to report under the Tax Code, §171.113. For purposes of the Tax Code, §171.113, a corporation
is considered a parent corporation if it ultimately controls the subsidiary even though the control may arise through any series or group of other subsidiaries or entities. (1) Control is presumed if a corporation directly or indirectly owns, controls, or holds a majority of the outstanding voting stock of the subsidiary. (A) No presumption, either of control or of absence of control, arises if such ownership, control, or holding of voting stock is less than a majority but more than 20%. (B) Absence of control is presumed if such ownership, control, or holding of voting stock is 20% or less. (2) In determining if a corporation is a parent, the comptroller will take into account ownership through a related corporation, corporate group, or other noncorporate entity. If the corporation has control, as defined in paragraph (1) of this subsection, of a related corporation, corporate group, or other noncorporate
entity that owns a close corporation, the entire stock of the close corporation owned by the related corporation, corporate group, or other noncorporate entity will be considered controlled by the corporation owning the related corporation, corporate group, or other noncorporate entity. Examples are as follows. (A) Corporation A owns 10% of a close corporation and 60% of Corporation B, which owns 41% of the same close corporation. Corporation A would be considered a parent of the close corporation with 51% stock ownership because it has control of the stock owned by Corporation B. (B) Corporation A owns 10% of a close corporation and 15% of Corporation B, which owns 90% of the same close corporation. Corporation A would not be considered a parent of the close corporation because it does not have control of the stock owned by Corporation B. (C) Corporation A owns 100% of 10 corporations, each of which owns 10% of the stock of a
close corporation. Corporation A would be considered a parent of the close corporation because it has control of all of the stock of the corporations owning the close corporation. (D) Corporation A holds a 70% interest in a partnership that owns 60% of a close corporation. Corporation A owns the remaining 40% of the same close corporation. Corporation A would be considered a parent of the close corporation because it controls 100% of the stock of the close corporation. (f) Effective with reports originally due between January 1, 1992, and December 31, 1993, an eligible corporation under the Tax Code, §171.113, must provide written notice to the comptroller of its election to use the federal income tax method of reporting the taxable capital component of its franchise tax. (1) Notification must be postmarked on or before the original due date (not the extended due date) of the report in which the election applies.
(2) The election may be made on the extension request form provided by the comptroller or on the franchise tax report if an extension is not requested. (g) Effective with reports originally due on or after January 1, 1994, an eligible corporation under the Tax Code, §171.113, must provide written notice to the comptroller of its election to use the federal income tax method of reporting the taxable capital component of its franchise tax. (1) Notification must be postmarked on or before the extended due date of the report in which the election applies. (2) The election must be made on the corporation's franchise tax report. (h) For more information on the federal income tax method of reporting the taxable capital component of the franchise tax, see §3.547 of this title (relating to Taxable Capital: Accounting Methods).
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