by Mark Curriden, Senior Legal Affairs Writer
NOVEMBER 29 — The Texas Supreme Court ruled today that the franchise tax applied to limited partnerships is constitutional and is not a personal income tax.
The much-anticipated decision came in a seven-to-two opinion in which the state’s highest court said that the 2006 margin tax levied by the Texas Legislature against limited partnerships does not qualify as a personal individual income tax because the money has not yet been distributed to the individual partners.
The justices ruled that limited partnerships are an entity, not people, when it comes to Article VIII, Section 24 of the Texas Constitution, also known as the Bullock Amendment.
The case, generally known as Allcat Claims Service, came in a direct petition to the state Supreme Court. The state legislature passed the franchise tax on limited partnerships in 2006 as part of its efforts to fix Texas’ public-school financing statutes, which had been declared unconstitutional a year earlier.
The tax generates more than $4 billion annually, a significant portion of which helps funds public schools. But that amount is far less than what state legislators expected.
Allcat, which is an insurance adjustment firm, contended that taxing limited-partnerships income violated the ban on levying personal-income taxes without voters’ approval under the Texas Constitution. They argued that the tax is on income distributed to partners and not on an entity distinct from its partners.
Justice Phil Johnson, writing for six other justices, summed up the court’s view of the plaintiff’s argument in three words:
“We reject it.”
“Simply put, under Texas law the entity theory applies to partnership income and profits. Individual partners do not own any of either while they remain in the partnership’s hands and have not been distributed to the partners,” Justice Johnson wrote in the 32-page opinion.
“And while a partner’s interest in the partnership represents the right to receive the partner’s share of partnership profits when they are distributed, it does not follow that for purposes of the Texas franchise tax such right constitutes a partner’s ‘share’ of any partnership income or profits while the partnership retains the income and profits without having distributed any of them to the partner. The Bullock Amendment does not preclude the taxation of business entities for the privilege of doing business in Texas and taking advantage of the option to limit the liability of the owners of a business as Allcat does by means of the limited partnership structure.”
The Texas Supreme Court also rejected Allcat’s jurisdictional claims.
Mark Curriden is senior legal affairs writer for TexasLawbook.net and is Writer in Residence at SMU Dedman School of Law.