Did installment-sale gain belong in a dissolving S corporation's former Texas franchise-tax final report?

Plain-English summary

The final report included installment gain reported by the S corporation through dissolution, but not gain shareholders reported afterward.

The S corporation had stopped operating, planned to distribute its assets and installment note, file a final report, and dissolve. The Comptroller said any installment-sale gain reported on the corporation's return for January 1, 1996 through dissolution had to enter both receipts and taxable earned surplus on the final Texas report.

After the shareholders received the note, their later installment payments and personally reported gain did not enter the dissolved corporation's final-report earned surplus.

What this means for you

Dissolving S corporations

The reporting entity and timing controlled: corporate-return gain entered the final report; later shareholder-return gain did not.

Shareholders receiving installment notes

The letter distinguishes their later personal reporting from the corporation's final Texas computation.

Common questions

Q: Was all future installment gain accelerated into the final Texas report?
A: No. The letter included only gain reported on the S corporation return through dissolution.

Q: Did later shareholder-reported gain enter corporate earned surplus?
A: No.

Citations and references

• Tex. Tax Code Sec. 171.110(d), as quoted 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/9610790L

Original ruling text

October 16, 1996

Dear **:

In your letter of October 11, you requested a ruling regarding the computation
of earned surplus for an S corporation that will be dissolving.

You state that the S corporation (Taxpayer) finalized its business operations
as of September 30, 1996. Taxpayer will be distributing assets shortly, filing
a final franchise tax report, and dissolving the corporation. Since the last
accounting year end (December 31, 1995), Taxpayer sold an asset and is
reporting the income on the installment method. The shareholders will receive
the installment note receivable when the assets are distributed. After the
distribution. the shareholders will receive the payments on the installment
note and report the installment sales gain on their personal income tax
returns.

To the extent the gain on the installment sale is reported on the S corporation
return for the period from January 1, 1996 through the date of dissolution,
Taxpayer must include the income from the installment sale in computing
receipts and taxable earned surplus on the final report. Specifically, Texas
Tax Code Sec. 171.110(d) states that "...an S corporation's reportable federal
taxable income is the amount of the income reportable to the Internal Revenue
Service as taxable to the corporation's shareholders." However, the
installment sales income reported by the shareholders would not be included in
computing earned surplus on the final report.

This response is based on the facts presented and current law. If there are
different or additional facts, the response may change.

If you have any questions, contact Tax Policy Division. You may call toll free
1-800-531-5441, or our regular number is 512/463-4600. My extension is 3-4662.
You may write me at Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Bob Jeffcoat
Tax Policy Division