Ezel / Tax Rulings / TX
TX 9709255L Franchise Tax (PRIOR TO 01/01/2008) 1997-09-25

How did the former Texas franchise tax define taxable capital, surplus, and net taxable capital?

Short answer: Taxable capital consisted of the corporation's stated capital plus surplus. Net taxable capital was the taxable-capital amount after apportionment and allowable deductions. The letter directed readers to Section 171.101 and Rule 3.550 for stated capital, and Section 171.109 and Rule 3.551 for surplus.

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 Code Rules 3.1 and 3.10); documents on STAR may no longer represent current policy even if not marked superseded.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 1997 response is a high-level description of the former taxable-capital and earned-surplus system, not a calculation for stated facts. Consult the cited provisions and confirm current law before applying it. 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

Taxable capital was stated capital plus surplus; net taxable capital was the apportioned amount after allowable deductions.

The former franchise tax had taxable-capital and earned-surplus components. Earned surplus began with federal taxable income and applied modifications.

The taxable-capital component combined stated capital—described in Section 171.101 and Rule 3.550—with surplus, defined in Section 171.109 and Rule 3.551. After apportionment and allowable deductions, the result was net taxable capital.

What this means for you

Businesses reviewing historical Texas reports

Net taxable capital was not simply book equity; the statutory sequence required stated capital, surplus, apportionment, and deductions.

Tax professionals

Use the cited definitions for the detailed classification rules because this letter provides only the framework.

Common questions

Q: What made up taxable capital?
A: Stated capital plus surplus.

Q: What made it net taxable capital?
A: Apportionment and allowable deductions.

Q: Did the letter provide a taxpayer-specific calculation?
A: No.

Citations and references

  • Texas Tax Code Secs. 171.101 and 171.109
  • 34 Tex. Admin. Code Secs. 3.550 and 3.551

Source

Original ruling text

September 25, 1997

To: **

Dear **:

Thank you for your e-mail in which you requested information on the definition
of net taxable capital.

As you know, the franchise tax consists of two components: Taxable Capital and
Earned Surplus. The earned surplus component includes federal taxable income
with modifications. The taxable capital component includes a corporation's
stated capital (capital stock) plus surplus. Net taxable capital is the amount
of taxable capital after apportionment and any allowable deductions.

For the statutory definition of stated capital see Texas Tax Code (TTC) Sec.
171.101. Surplus is defined in the statute in TTC Sec. 171.109. Chapter 171
of the TTC can be viewed on the world wide web at
. Rule 3.550,
Taxable Capital: Stated Capital and Rule 3.551, Taxable Capital: Surplus,
further define these terms. These rules can be viewed at
.

If you have questions about this, you may call me at 1-800-531-5441, extension
3-4612, or e-mail me at the address below.

Sincerely,

Janet Spies
Tax Policy Division
[email protected]

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