Ezel / Tax Rulings / TX
TX 9703776L Franchise Tax (PRIOR TO 01/01/2008) 1997-03-21

Could an S corporation with up to 75 shareholders qualify for the 1998 former Texas earned-surplus report?

Short answer: Not under the statute as it stood on March 21, 1997, because Texas still calculated earned surplus using the 1994 Internal Revenue Code. If pending legislation changed the reference to the 1996 Code, an otherwise qualifying S corporation with 75 or fewer shareholders could use S-corporation treatment on its 1998 franchise-tax report.

Apply this to your situation

This page answers the general question as of 1997. Ezel answers yours, under current Texas tax law, with citations.

Currency note: this ruling is from 1997
Subsequent statutory amendments, regulation changes, court decisions, or later rulings may have changed the analysis. Treat this page as historical context, not current tax advice. Verify current law before relying on any specific rule, rate, or position mentioned here.
Disclaimer: This is an official Texas Comptroller of Public Accounts letter published on the State Tax Automated Research (STAR) system. Letters on STAR can be the basis of a detrimental reliance claim only for the taxpayer to whom the letter was directly issued (see 34 Tex. Admin. Code Rules 3.1 and 3.10); documents on STAR may no longer represent current policy even if not marked superseded. This March 1997 response is conditional on legislation that had not yet passed and does not establish that Texas adopted the 1996 Code reference. It also does not answer the requester's officer-compensation question beyond the shareholder-status issue discussed. Confirm the law enacted for the report year. Taxpayer-identifying details are redacted. This summary is informational only and is not legal or tax advice. Consult a licensed Texas tax professional about your specific situation.
About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page) is the authoritative source for any reliance.

Plain-English summary

The 75-shareholder result depended on pending legislation; current law still referenced the 1994 Code.

Federal law had increased the permitted number of S-corporation shareholders from 35 to 75 for federal tax years beginning after 1996. The letter said that change would first affect a 1998 Texas report because that report used an accounting period ending in 1997.

Texas's statute still required earned surplus to be calculated under the 1994 Internal Revenue Code. The Comptroller had asked the Legislature to update the reference to the 1996 Code, but the statute had not yet changed.

If that legislation passed, an otherwise qualifying corporation with 75 or fewer shareholders could qualify as an S corporation for its 1998 earned-surplus computation.

What this means for you

S corporations researching 1998 reports

The letter offers a conditional forecast, not a final statement of enacted law.

Tax professionals

Verify the Code-conformity statute actually in effect for the report year before applying the 75-shareholder rule.

Common questions

Q: Had Texas already adopted the 1996 Code reference?
A: No.

Q: Would 75 shareholders qualify if the legislation passed?
A: Yes, if the corporation otherwise qualified as an S corporation.

Q: Did the letter finally resolve the officer-compensation add-back?
A: No. Its operative discussion addressed the shareholder-limit issue.

Citations and references

  • Historical Texas statutory reference to the 1994 Internal Revenue Code

Source

Original ruling text

March 21, 1997

Dear **:

In your letter of February 6, you requested a determination regarding the
add-back of officer and director compensation for an S corporation.

You state that federal law has increased the maximum number of shareholders of
an S corporation from 35 to 75. I understand that this provision applies to
federal income tax years beginning after December 31, 1996 and would first
apply on the 1998 franchise tax report (which is based on an accounting period
ending in 1997).

Under the current franchise tax statute, the earned surplus component must be
calculated based on the 1994 Internal Revenue Code (IRC). The agency has asked
the Texas Legislature (which is currently in session) to change the statutory
reference to the 1996 IRC. However, the statute has not been changed at this
time. If this legislation passes, an S corporation with 75 or fewer
shareholders would qualify as an S corporation in computing earned surplus on
the 1998 franchise tax 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

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