Did the Comptroller finally approve or deny reducing both stated capital and surplus by a subsidiary's pre-acquisition earnings?

Plain-English summary

An April 27, 1988 internal Comptroller memorandum considered a parent corporation's attempt to reduce both stated capital and surplus by a subsidiary's pre-acquisition earnings on its 1988 franchise-tax report.

The memo said the Sun Refining and Marketing and Enserch cases supported excluding a subsidiary's retained pre-acquisition earnings from surplus. But it also stated that taxable capital was the sum of stated capital and surplus, that deficit surplus was reported as zero, and that neither the old nor new statute allowed a surplus deficit to offset stated capital.

On that reasoning, the authors recommended denying the taxpayer's method. They viewed a reduction to both components as inconsistent with the statute and the Comptroller's treatment of other surplus adjustments.

That recommendation is not a verified final decision. The document ends with APPROVED: and DISAPPROVED: lines, and both are blank. STAR therefore supplies no basis for saying whether the recommendation was ultimately accepted.

What this means for you

This document shows the staff's historical reasoning under Texas's former taxable-capital franchise tax: excluding an amount from surplus did not necessarily permit the same amount to reduce stated capital. It does not establish that the Comptroller finally adopted the recommendation, and it does not state current franchise-tax law.

Common questions

Did the memo recommend allowing the reduction? No. It recommended denying the request to reduce both stated capital and surplus by the subsidiary's pre-acquisition earnings.

Why? The authors said a surplus deficit could not offset stated capital and that pre-acquisition earnings should be treated like other surplus adjustments.

Was the recommendation approved? The published copy does not say. Its approval and disapproval lines are blank.

Can this be cited as a final Comptroller ruling? Not from the STAR text provided. It is an internal recommendation with no recorded final action.

Citations and references

• Sun Refining and Marketing case — named in the memorandum for the distinction between pre- and post-acquisition earnings; the memo gives no reporter citation.
• Enserch case — named for the proposition that retained pre-acquisition earnings of a subsidiary should not be included in surplus for franchise-tax purposes; the memo gives no reporter citation.
• The memorandum refers generally to the old and new franchise-tax statutes but cites no section number.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8804L0877G14

Original ruling text

INTEROFFICE BOB BULLOCK
MEMORANDUM COMPTROLLER OF
PUBLIC ACCOUNTS
DATE: April 27, 1988

TO: Jack Roberts
FROM: Willis Whatley, John Moore, Dan Pearson and Wade Anderson

SUBJECT: Pre-Acquisition Earnings

The Court of Appeals determined in the Sun Refining and Marketing case
that
they failed to apprehend the distinction between pre and post acquisition
earnings. Therefore, in accordance with the Enserch case, the retained
pre-acquisition earnings of a "subsidiary should not be included
in....surplus for franchise tax purposes." (emphasis added)

****** has recently submitted a 1988 Franchise Tax Report in
which both the surplus and stated capital of a parent corporation have
been
reduced by the pre-acquisition earnings of their subsidiary. He has
requested that we provide him with a ruling regarding this methodology.

The franchise tax is levied against a corporation's taxable capital.
Taxable capital is defined as the sum of the corporation's stated capital
and surplus. Deficit surplus (as noted on all franchise tax reports) is
reported as zero. There is no provision under the old or new statute for
allowing deficit surplus to offset stated capital.

To deny this method we may well find ourselves in court. However, to
allow
this would be a deviation from the statute as well as long-standing
policy
regarding surplus deficits. In order to maintain consistency, we must
treat pre-acquisition earnings in an identical manner as any other
surplus
adjustment.

We recommend that *****'s request to reduce both stated
capital and
surplus by the subsidiary's pre-acquisition earnings be denied.

APPROVED: DISAPPROVED: