Can the sole shareholder of a dissolved corporation claim a sales tax refund for bad debts on accounts receivable that were assigned to the shareholder as part of the dissolution?

Plain-English summary

This 1993 Comptroller letter denies a sales/use tax refund claim tied to bad debts on leases that had originally been made and reported by a corporation that no longer exists.

A leasing corporation dissolved, and its sole shareholder received all of the corporation's accounts receivable in exchange for the shareholder's stock in the company. The shareholder then tried to write off some of those taxed accounts as bad debts and claim a sales/use tax refund for the tax that had been collected and paid on them.

The Comptroller's office denied the request for two reasons grounded in the Texas Business Corporation Act:

• The right didn't exist before dissolution. Article 7.12(a)(3) preserves remedies and claims that existed prior to a corporation's dissolution. Because the refund claim wasn't due before the corporation dissolved, dissolution didn't create or transfer a right to a refund. Had the corporation itself claimed the bad debts before dissolving, a credit might have been available to the shareholder.
• A dissolution followed by asset distribution isn't a merger or consolidation. The shareholder argued the dissolution and assignment of receivables should be treated as a de facto merger, which would have preserved refund rights. The Comptroller found this unsupported by Article 5.10(B)(1), which bars treating this kind of dissolution process as a merger or consolidation.

The letter also notes that the Comptroller's office has consistently denied sales tax refunds to firms claiming bad debts on sales or leases that were not originally made and reported by the firm making the claim — reinforcing that the bad-debt refund follows the entity that reported and paid the original tax, not whoever later ends up holding the receivable.

What this means for you

Business owners and shareholders winding down a corporation

If your corporation is dissolving and you're the one who will end up holding its accounts receivable, don't assume you can later claim a sales/use tax refund for bad debts on those accounts. Under this ruling's reasoning, only the entity that originally made and reported the sale or lease can claim the bad-debt credit or refund — and that right has to have existed before dissolution. If bad debts are foreseeable, it may be worth addressing the credit or refund claim before the corporation dissolves, while the original taxpayer entity still exists.

Accountants and tax professionals

This letter illustrates that the Comptroller will not treat a dissolution-plus-distribution-to-sole-shareholder structure as a merger or consolidation for purposes of preserving tax remedies, citing Article 5.10(B)(1) of the Texas Business Corporation Act. It also confirms the office's general practice of denying bad-debt refunds to any party other than the firm that originally made and reported the taxable sale or lease.

Common questions

Q: Why was the refund denied?
A: Because the shareholder claiming the refund wasn't the entity that originally made and reported the taxed leases, and the refund right wasn't due before the corporation dissolved — so it wasn't a claim or remedy preserved by Article 7.12(a)(3) of the Texas Business Corporation Act.

Q: Could the corporation have preserved the refund by claiming the bad debts before dissolving?
A: The letter says that possibility exists: "Had the dissolving corporation claimed the bad debts prior to dissolution, a credit may be due to the sole shareholder."

Q: Why didn't treating the dissolution as a "de facto merger" help the taxpayer?
A: The taxpayer argued the dissolution and assignment of receivables to the sole shareholder should be viewed as a merger, which would have preserved the right to a refund. The Comptroller found Article 5.10(B)(1) of the Texas Business Corporation Act bars treating this kind of dissolution process as a merger or consolidation.

Q: Is this a general rule for all bad-debt refund claims?
A: The letter states the office has "consistently denied sales tax refunds to firms claiming bad debts on sales or leases not originally made and reported by the firm claiming the bad debt," suggesting this reasoning reflects a broader, consistent Comptroller position rather than a one-off decision.

Citations and references

Statutes cited:

• Article 7.12(a)(3), Texas Business Corporation Act — dissolution does not impair remedies or claims that existed prior to dissolution
• Article 5.10(B)(1), Texas Business Corporation Act — bars treating this dissolution/distribution process as a merger or consolidation

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9302L1222C01

Original ruling text

February 11, 1993

Dear *****:

Your sales/use tax refund request of November 30, 1992, has been
forwarded to me by Sandi Skaggs of our Revenue Accounting Division.

The refund request concerns taxes originally collected and paid by a now
dissolved corporation, ** Leasing Corporation of Texas. The sole
shareholder of the dissolved corporation, * , received all
accounts receivables in exchange for stock held in the corporation.
****, is attempting to claim a refund for taxed accounts that are
being written off as bad debts.

Article 7.12. (a)(3) of the Texas Business Corporation Act (enclosed)
states that a dissolution "shall not take away or impair any remedy to or
against a corporation, its officers, directors, or shareholders, for any
right or claim existing prior to such dissolution." The refund in this
case was not due prior to dissolution. Had the dissolving corporation
claimed the bad debts prior to dissolution, a credit may be due to the
sole shareholder.

Our office has consistently denied sales tax refunds to firms claiming
bad debts on sales or leases not originally made and reported by the firm
claiming the bad debt. Your firm would like to view the dissolution and
assignment of account receivables as a de facto merger which would
preserve the rights to a refund. This position is not supported by
Article 5.10. (B)(1) of the Texas Business Corporation Act (enclosed).
This section appears to bar treating the dissolution process presented
as a merger or consolidation.

This opinion is based upon the facts presented. If there are additional
or different facts, the opinion may change.

You may call me toll free at 1-800-531-5441, ext. 5-0613. The direct
line is 512/475-0613. You may also write to Tax Administration Division,
Comptroller of Public Accounts.

Sincerely,

Kevin Koller
Tax Administration Division