What initial and later former Texas franchise-tax reports followed a merger into a newly formed surviving corporation?

Plain-English summary

The new survivor filed an initial report using its February-to-December 1996 activity, while the merged Texas corporation still owed annual and final reports.

Newco was formed February 8, 1996 and survived a December 11, 1996 merger with a Texas corporation and a foreign corporation that had not done business in Texas.

Newco's initial report was due May 7, 1997 and covered the privilege period from February 8, 1996 through December 31, 1997. Its December 31, 1996 accounting year-end met the taxable-capital timing test, so taxable capital and its receipts used February 8 through December 31, 1996.

Assuming Newco filed a federal return ending December 31, 1996, earned surplus and its receipts used the same February 8 through December 31 period.

The next report was the 1998 annual report due May 15, 1998. Its taxable capital used the December 31, 1997 year-end, and earned surplus used calendar-year 1997.

The merged Texas corporation owed its 1996 annual report and a final report through the merger date, due 60 days after the merger. The foreign corporation that had not done business in Texas had no filing requirement.

What this means for you

Corporate merger teams reviewing historical filings

The surviving entity's initial report did not eliminate the predecessor Texas corporation's annual and final-report duties.

Tax professionals

Apply the accounting-period tests separately and verify the survivor's federal return period before using the earned-surplus dates.

Common questions

Q: When was Newco's initial report due?
A: May 7, 1997.

Q: What period supplied the initial component amounts?
A: February 8 through December 31, 1996 on the stated assumptions.

Q: Did the merged Texas corporation still file?
A: Yes, an annual report and a final report.

Citations and references

• 34 Tex. Admin. Code Secs. 3.544(a)(1)(B)-(C), 3.549(d)(3), and 3.557(d)(2)
• Texas Tax Code Sec. 171.0011(c)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9702411L

Original ruling text

February 27, 1997

Dear ***:

Thank you for your recent correspondence regarding the filing requirements for
your client.

You stated in your letter and in our follow-up phone conversation that Newco
came into existence as of February 8, 1996. On December 11, 1996, Newco was
the survivor of a merger with A Co and B Co. A Co is a Texas corporation. B
Co is a foreign corporation which was not doing business in Texas. The normal
accounting year end for Newco will be December 31.

Newco's initial franchise tax report will be due May 7, 1997. That report will
cover the privilege period beginning February 8, 1996 and ending December 31,
1997.

The taxable capital component of an initial report must be based on an
accounting period that is at least six (6) months after the beginning date and
sixty (60) days before the due date. [See Rule 3.544(a)(1)(B).] Your
client's normal accounting year end of December 31, 1996 meets both of these
criteria and should be used on the initial report. For apportionment purposes,
Newco must include the gross receipts based on its activities beginning on
February 8, 1996 and ending on December 31, 1996. [See Rule 3.549(d)(3).]

The earned surplus component of the initial report will be based on the
business done during the period beginning with the beginning date, February 8,
1996 and ending on the last accounting period ending date, used for federal
income tax purposes, that is at least 60 days before the original due date of
the report. [See Rule 3.544(a)(1)(C).] Assuming that Newco files a federal
income tax report for the period ending December 31, 1996, that will be the
accounting period end date for the earned surplus component. Therefore, Newco
will report federal taxable income for the period beginning February 8, 1996
and ending December 31, 1996 for the earned surplus component on its initial
report. For apportionment of earned surplus, Newco will gross receipts for the
period beginning February 8, 1996 and ending December 31, 1996. [See Rule
3.557(d)(2).]

Newco's subsequent report will be the 1998 annual franchise tax report which
will be due May 15, 1998. This report will cover the privilege period
beginning January 1, 1998 and ending December 31, 1998. The taxable capital
component of the tax will be based on Newco's normal accounting year ending
December 31, 1997. The earned surplus component will be based on the period
beginning January 1, 1997 and ending December 31, 1997.

A Co is responsible for a 1996 annual report and a 1996 final report through
the date of the merger. The 1996 annual report was due May 15, 1996. The
final report, according to Section 171.0011(c) of the Texas Tax Code, is due
on the 60th day after the date of the merger. B Co has no filing requirements.

February 27, 1997
Page 2

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

If you have any questions about this or any other franchise tax matter, please
call me at
1-800-531-5441, extension 34612. My direct number is (512) 463-4612. You may
write me at Tax Policy Division, Comptroller of Public Accounts, Austin, Texas
78774.

Sincerely,

Janet Spies
Tax Policy Division