What former Texas franchise-tax reports and additional tax applied when a corporation planned to dissolve in 1996?

Plain-English summary

A corporation planning to dissolve owed a final-report additional tax, and delaying dissolution beyond year-end changed the required report year.

The corporation had already filed its 1996 annual report and an October 1996 final report. The Comptroller said dissolution made the former additional-tax provision apply because the corporation would cease being subject to the earned-surplus component. The additional tax was 4.5% of net taxable earned surplus for the period after the last period taxed through the date liability ended.

If dissolution occurred by December 31, 1996, those filings addressed the stated sequence. If it did not, the corporation had to file both a 1997 annual report and a 1997 final report, and the payment made with the 1996 final report would transfer to the 1997 annual report.

What this means for you

Corporations winding up under former law

The dissolution date determined whether the final filing stayed in 1996 or shifted into the 1997 report cycle.

Tax professionals reviewing historical liabilities

This letter describes repealed-era franchise-tax components and 1996 corporate procedures, not today's margin-tax rules.

Common questions

Q: Why did the additional tax apply?
A: Dissolution would make the corporation no longer subject to the earned-surplus component.

Q: What if dissolution slipped past December 31, 1996?
A: Both 1997 annual and final reports became due.

Q: What happened to the payment made with the 1996 final report?
A: It would be transferred to the 1997 annual report.

Citations and references

• Tex. Tax Code Sec. 171.151(3), as cited in the letter
• Tex. Tax Code Sec. 171.0011, as cited in the letter
• Texas Business Corporation Act art. 6.06, as cited in the letter

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9610089L

Original ruling text

October 22, 1996

RE: Taxpayer Number **

Dear **:

Thank you for your letter concerning your liability for Texas
franchise tax.

You stated in your letter (and our records confirm) that your
corporation did file two reports with our agency this year. The
first report was the 1996 Annual franchise tax report which was
due May 15, 1996. The second report was the 1996 Final franchise
tax report which you filed on October 7, 1996.

The franchise tax law requires that a corporation pay a franchise
tax for "a regular annual period beginning each year on January 1
and ending the following December 31." [Section 171.151(3) of
the Texas Tax Code (TTC)] Accordingly, your corporation filed
its 1996 annual franchise tax report, on May 15, 1996, covering
the privilege period that began January 1, 1996 and will end
December 31, 1996. Both components of the franchise tax, taxable
capital and earned surplus, for the 1996 privilege period were
based on your normal accounting year, December 31, 1995.

In addition to an annual franchise tax report, the law imposes
"an additional tax" on a corporation "that for any reason becomes
no longer subject to the earned surplus component of the tax."
[Section 171.0011 TTC] "The additional tax is equal to 4.5
percent of the corporation's net taxable earned surplus computed
for the period beginning on the day after the last day for which
the tax imposed on net taxable earned surplus was computed" on
the 1996 annual report "and ending on the date the corporation is
no longer subject to the earned surplus component of the tax."

Because you are planning to dissolve your corporation, the
additional tax requirement applies to your corporation as it will
no longer be subject to the earned surplus component of the
franchise tax. You complied with this provision of the law by
filing a final report and paying the additional tax on October 7,
1996.

According to our records, your corporation has not yet dissolved.
If the dissolution does not occur before December 31, 1996, you
will be required to file both a 1997 annual and a 1997 final
report. The payment you made on the 1996 final franchise tax
report will be transferred to the 1997 annual report if you do
not dissolve by December 31, 1996.

To dissolve your corporation, pursuant to Article 6.06 of the
Texas Business Corporation Act, you must provide the Secretary of
State with (1)the appropriate filing fee of $40; (2) Articles of
Dissolution 6.06 (two copies) which includes a Resolution of
Board of Directors or a shareholder consent to dissolve; and (3)
a Certificate of Account Status, form 05-305 from the
Comptroller, which requires that all tax liabilities due the
Comptroller be paid in full. A Certificate of Account Status
may be requested from our Account Maintenance Division at
1-800-531-5441, extension 3-3601. This information
should be mailed to the Secretary of State; Statutory Filing
Division, Corporation Section; P.O. Box 13697; Austin, Texas
78711-3697. Their phone number is (512) 463-5581. The Secretary
of State does accept some documentation via FAX. Contact them
for procedures.

I apologize for any misinformation you may have received. If you
have any additional questions regarding your franchise tax
reporting responsibilities, please contact Teresa Comer in our
Tax Policy Division. She can be reached, toll-free, at 1-800-
531-5441, extension 3-3958.

Sincerely,
Glen Hunt, Director
Tax Policy Division