Did a corporation independently tax two short federal periods after its stock changed owners, or combine them on its former Texas report?

Plain-English summary

The corporation combined its two short federal periods into one calendar-year Texas computation.

An unrelated buyer acquired the corporation's stock on July 31, 1995, producing a seven-month federal return under the old parent and a five-month return under the new parent. Because the letter assumed only stock ownership changed, the corporation did not compute two separate Texas liabilities.

For the 1996 annual report, earned surplus used January 1 through December 31, 1995, so the two federal-return amounts were combined. The apportionment numerator combined Texas receipts from both periods, the denominator combined total receipts from both periods, and that single factor applied to combined earned surplus. Taxable capital used the December 31, 1995 financial condition if the corporation used GAAP and a calendar year-end.

What this means for you

Corporations sold midyear

A stock-ownership change alone did not split the same legal entity into two former Texas franchise-tax computations.

Consolidated-group tax preparers

Short federal returns under different parents still fed one full-year state earned-surplus and receipt calculation on these facts.

Common questions

Q: Were the seven- and five-month periods taxed independently?
A: No.

Q: How was the apportionment factor calculated?
A: By adding both periods' Texas receipts for the numerator and both periods' total receipts for the denominator.

Q: What fact was essential to the answer?
A: The corporation kept the same legal status; only its stock ownership changed.

Citations and references

• 34 Tex. Admin. Code Sec. 3.544(a)(1)(C), 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/9610800L

Original ruling text

October 10, 1996

Dear **:

In your FAX of October 7, you requested information regarding the filing
requirements for ** (SECURITY INC.).

You state that the stock of SECURITY INC. was sold on July 31, 1995 (due to the
sale of its parent corporation) to an unrelated purchaser. As a result,
SECURITY INC. has a seven month federal income tax return under the old parent
corporation and a five month return under the new parent corporation. You also
indicate that the two federal income tax returns cover the 1995 calendar year.

My response is based on the presumption that the only effect of the stock
purchase was the change in stock ownership. That is, SECURITY INC. did not
reincorporate in another state or otherwise change its legal status.

I have restated your questions followed by a response.

1. Are the two periods calculated independently and the resulting tax
   liabilities added together?

Response

No. SECURITY INC. should compute franchise tax for the 1996 regular annual
report as follows:

The earned surplus component (including receipts for the apportionment formula)
should be based on the period from January 1, 1995 through December 31, 1995
(see Rule 3.544(a)(1)(C) (enclosed)). Therefore, SECURITY INC. must combine
the amounts for the two short period federal income tax returns in computing
net taxable earned surplus on the 1996 report.

If SECURITY INC. is using the generally accepted accounting principles method
and the normal accounting year end is December 31, the taxable capital should
be based on the financial condition as of December 31, 1995. In computing the
apportionment formula, SECURITY INC. should use receipts for the 1995 calendar
year accounting period (Rule 3.544(a)(1)(C)).

2. Is the numerator of the factor the sum of the seven and five month Texas
   receipts and the denominator the sum of the seven and five month total
   receipts, and then is this blended factor applied to the combined earned
   surplus (seven and five month amounts added together)?

Response

Yes. See response to No. 1.

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