Which accounting periods applied to taxable capital and earned surplus on an initial former Texas franchise-tax report?

Plain-English summary

The two former franchise-tax components used separate timing tests on the initial report.

The initial privilege period began when the corporation started doing business in Texas and ended December 31, 1997. The source redacts the exact interval used to state the report's due date.

Rule 3.544(a)(1)(B) required taxable capital to use an accounting period ending at least six months after business began and at least 60 days before the original due date. The corporation's normal December 31 year-end failed that test, so it had to use the calendar month-end nearest its first anniversary of doing business in Texas.

For earned surplus, December 31, 1996 applied if the corporation filed a federal income-tax return ending then. If not, earned surplus also used the calendar month-end nearest the first anniversary.

What this means for you

New corporations reviewing historical initial reports

A normal year-end did not automatically control both former franchise-tax components.

Tax professionals

Apply the taxable-capital and earned-surplus timing tests separately, and do not reconstruct the redacted due-date interval.

Common questions

Q: Did December 31 control taxable capital?
A: No, because it failed the timing criteria stated in the letter.

Q: What date replaced it?
A: The month-end nearest the corporation's first anniversary of doing business in Texas.

Q: When could December 31, 1996 control earned surplus?
A: If the corporation filed a federal income-tax return for a period ending on that date.

Citations and references

• 34 Tex. Admin. Code Sec. 3.544(a)(1)(B)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9704433L

Original ruling text

April 15, 1997

To: ***

Dear ***:

Thank you for your e-mail regarding your client's initial franchise tax report.

Your client's initial franchise tax report will be due X year and X days from
the date the corporation began doing business in Texas. The privilege period
covered by the initial report began on the date in August that they began doing
business in Texas and will end on December 31, 1997.

Franchise tax Rule 3.544, Reports and Payments, provides guidance on the
accounting periods to be used for the two components of the franchise tax.
Subsection (a)(1)(B) of the rule states, in part, the following:

"The taxable capital component of the tax computed on the initial report is
based on the financial condition as of the last accounting period ending date
that is at least six months after the beginning date and at least 60 days
before the original due date. If there is no such ending date, then the
initial report is based on the financial condition on the last day of the
calendar month nearest to the end of the corporation's first year of business.
The earned surplus component of the tax computed on the initial report is based
on the business done during the period beginning on the beginning date and
ending on the last accounting period ending date for federal income tax
purposes that is at least 60 days before the original due date of the initial
report, or, if there is no such ending date, then ending on the day that is the
last day of the calendar month nearest to the end of the corporation's first
year of business."

You stated in your e-mail that your client's normal accounting year end is
December 31. Unfortunately, this date does not meet the criteria stated for
the taxable capital component. Therefore, your client must use the end of the
month nearest to its first anniversary of doing business in Texas as the
measurement date for the taxable capital component of the tax. If your client
filed a federal income tax report for the period ending December 31, 1996, then
this will be the ending date for the earned surplus component of the tax. If
not, then your client must use the month ending nearest its first anniversary
of doing business in Texas as its ending date.

I have attached a copy of franchise tax Rule 3.544, Reports and Payments, for
your review.

If you have questions about this, my internet address is
[email protected]. You may call me at (512) 463-4612 or toll-free at
1-800-531-5441, extension 3-4612.

Sincerely,

Janet Spies
Tax Policy Division

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