How were franchise-tax auditors to adjust pre-1988 surplus for unbooked employee post-retirement-benefit liabilities supported by actuarial studies?

Plain-English summary

This internal audit memorandum allowed a pre-1988 franchise-tax surplus reduction for unbooked employee post-retirement-benefit liabilities only when the taxpayer had at least one actuarial study.

If studies existed for each adjustment year, auditors used the study's liability amount, choosing the most conservative amount when multiple liabilities were calculated. A parent-and-subsidiary liability had to be allocated among the corporations based on employee counts.

If only one year's study existed, auditors discounted that liability to the report year using the attached schedule and then applied an employee ratio comparing report-year employees with study-year employees. The memo said no tax-effect adjustment should be made because the unbooked liability had not affected income, tax expense, or retained earnings.

The source refers to attached discount factors, examples, and schedules that are not reproduced in the extracted text, so this page does not invent the missing numerical details.

Common questions

Was an actuarial study required? Yes, at least one.

How were group liabilities allocated? Among the represented corporations based on employee counts.

Was a tax-effect adjustment made? No.

Does this page supply the missing discount factors? No. They are referenced but not present in the source text preserved below.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9002L0992D11

Original ruling text

INTEROFFICE BOB
BULLOCK
MEMORANDUM
COMPTROLLER OF
PUBLIC ACCOUNTS

Date: February 7, 1990

AM 1419

To: Franchise Tax Auditors

From: Janet Spies, Audit Headquarters via: Harold
Lee

Subject: Employee Post retirement Benefits

For pre-1988 franchise tax reports, taxpayers can reduce surplus for
"unbooked" employee Post retirement benefit liabilities. In order
for a taxpayer to qualify for this adjustment, they must have at
least one actuarial study.

If the taxpayer that you are auditing has an actuarial study for
each year in which they want the adjustment, you should use the
liability computed in the study to reduce audited surplus. (If more
than one liability amount is calculated, use the most conservative
amount to reduce surplus.) You will often find that the liability
computed in the study is for a parent corporation and its
subsidiaries. Before making an adjustment, you must allocate the
liability among the corporations represented in the study (allocate
based on the number of employees of each corporation).

If the taxpayer has a study for only one year, regardless of the
year, you will "discount" the liability back to the correct year
using the following formula:

Liability percent
amount in year -- factor from = Discounted
of study attached Sch. Liability

To discount back another year, start with the discounted liability
and divide by the appropriate factor on the attached schedule. The
discounted liability amount will then be multiplied by an employee
ratio to determine the amount of the adjustment to surplus. The
employee ratio is calculated as follows:

of employees in report year / # of employees in year of study

Again, if the liability computed in the original study is for a
parent corporation and its subsidiaries, the discounted liability
must be allocated among the corporations represented (i.e. the # of
employees used in the numerator of the employee ratio should reflect
only the employees of the corporation requesting the adjustment).

On the following pages you will find a chart with the factors used
to discount, examples, and scheduling information.

Note: No adjustment for tax effect should be made when adjusting
for these "unbooked" liabilities, as there has been no affect on the
calculation of income, tax expense, or retained earnings.