How does a mortgage lender apportion the proceeds from selling mortgage loans, and where are its loan-servicing receipts sourced, for Texas franchise tax?

Plain-English summary

A mortgage banking and lending corporation with a nationwide network of branch offices originated and purchased residential real-estate loans, then sold those loans while often retaining the servicing rights. Its representative asked how the (pre-2008) franchise tax apportioned the sale proceeds and the servicing income.

The Comptroller explained:

• Gross receipts for the earned-surplus base means all revenues reportable on the federal return, without deduction for cost of property sold, materials, labor, or other costs (Sec. 171.1121(a)). Only when a corporation sells an investment or capital asset does it report just the net gain (Sec. 171.1051(b)).
• So if the mortgage loans are the corporation's inventory (for federal income tax purposes for the earned-surplus base, or under GAAP for the taxable-capital base), the gross proceeds from the loan sales are reported as gross receipts.
• Loan sales are sales of intangible items, so for both tax bases they are apportioned under the location-of-payor test. Sales to purchasers incorporated outside Texas are not Texas receipts.
• Any loan-servicing receipts are apportioned to the state where the servicing is performed (Sec. 171.103(2), Sec. 171.1032(a)(2)).

These answers presumed the mortgage-loan income was unitary and not subject to the separate treatment of Sec. 171.1061.

Important currency note: STAR marks this document partially superseded on 08/25/2006. For reports due on or after April 21, 2006, receipts from servicing real-property loans are sourced to the location of the property that secures the loan — not where the service is performed. See accession 200604621L for the current policy. The sale-proceeds analysis still turned on the pre-2008 franchise-tax structure, which the 2008 margin tax replaced, so confirm current law.

What this means for you

Mortgage lenders and loan buyers

Whether you report the gross proceeds or only the net gain from selling loans turns on whether the loans are your inventory (gross proceeds) or investment/capital assets (net gain only). Because loan sales are intangibles sourced to the buyer's location, sales to out-of-state buyers fell outside Texas receipts under this letter.

Accountants and tax professionals

Watch the servicing-income sourcing change: this 1995 letter sourced servicing receipts to where the service was performed, but for reports due on or after April 21, 2006 the Comptroller re-sourced real-property loan servicing to the location of the securing property. Also confirm the income is unitary (Sec. 171.1061) and re-verify everything under the current margin tax's apportionment rules.

Common questions

Q: Do you report the full sale price or only the gain when selling mortgage loans?
A: If the loans are your inventory, you report the gross proceeds as gross receipts. Only sales of investments or capital assets are reported at net gain.

Q: Are sales of loans to out-of-state buyers Texas receipts?
A: No. Loan sales are intangibles sourced by the payor's (buyer's) location, so sales to purchasers incorporated outside Texas were not Texas receipts.

Q: Where are loan-servicing receipts sourced?
A: Under this 1995 letter, to where the servicing was performed. For reports due on or after April 21, 2006, real-property loan servicing is sourced to the location of the property securing the loan.

Citations and references

Statutes and rules:

• Tex. Tax Code Sec. 171.106(b) (apportions taxable earned surplus by a gross receipts factor)
• Tex. Tax Code Sec. 171.1121(a) (gross receipts are all revenues reportable on the federal return, without deduction for costs)
• Tex. Tax Code Sec. 171.1051(b) (only the net gain from a sale of an investment or capital asset is a gross receipt)
• Tex. Tax Code Sec. 171.103(2) and Sec. 171.1032(a)(2) (service receipts apportioned to where the service is performed)
• Tex. Tax Code Sec. 171.1061 (separate treatment where income is not unitary)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9502L1354F02

Original ruling text

STAR SUPERSEDED INFORMATION
Accession No.:
Supersede type: Partial
Document superseded on: August 25 2006
Issue that caused the document to be superseded:
Receipts from servicing of real property loans have been sourced to
the location where the service is performed.
For reports due on or after April 21, 2006 those receipts will be
apportioned to the location of the property that secures the loan.
Reason:
Subsequent policy modification. For current policy, please refer to
Accession No.: 200604621L.

February 6, 1995

Dear *****:

This is in response to your inquiry concerning the sale of mortgage
loans for apportionment purposes in reporting a corporation'sfranchise
tax.

You have indicated that the corporation is engaged in the mortgage
banking and lending business. It has a nationwide network of branch
offices that originate and purchase loans on residential real estate.

As you noted, Sec. 171.106(b) of the Texas Tax Code apportions
taxable earned surplus by a gross receipts factor. Sec. 171.1121(a)
of the Tax Code defines gross receipts as all revenues reportable by
a corporation on its federal tax return, without deduction for the
cost of property sold, materials used, labor performed, or other
costs incurred, unless otherwise specifically provided in this
chapter.

Sec. 171.1051(b) holds that if a corporation sells an investment or
capital asset, the corporation would recognize only the net gain
from the sale as a gross receipt for taxable earned surplus.

Under the above provisions, a corporation would report the gross
proceeds from its sales unless the items sold were investments or
capital assets. If the mortgage loans are considered the
corporation's inventory for federal income tax purposes, the
gross proceeds from the sales would be reported as gross receipts
for taxable earned surplus.

For purposes of apportioning taxable capital, the gross proceeds
from the sales would be reported as gross receipts if the mortgage
loans are recognized as the corporation's inventory under Generally
Accepted Accounting Principles.

The loan sales would be considered the sales of intangible items.
For both tax base components, the location of payor test would be
used to apportion these sales. Under the location of payor
apportionment, sales to purchasers incorporated outside Texas
would not be Texas receipts.

In the description of the corporation's activities, reference
was made to the corporation retaining servicing rights to the
loans. If the corporation recognizes any gross receipts from
servicing activities, those receipts would be apportioned to
the state in which the service was performed. Sections
171.103(2) and 171.1032(a)(2), Texas Tax Code.

These responses presume that the income from the mortgage loan
sales is unitary income and is not subject to the provisions of
Section 171.1061 of the Tax Code.

These responses are based on the facts presented. If there are
different or additional facts, the responses may change.

If you have any questions, please call 463-4496.

Sincerely,

Jerry Bobbitt
Tax Administration Division

NOTE: Previous Accession Number 9502208L