Ezel / Tax Rulings / TX
TX 9710319L Franchise Tax (PRIOR TO 01/01/2008) 1997-10-01

Was gain from selling subsidiary stock to an Ohio corporation a Texas receipt for former taxable-capital apportionment, and did a Section 338(h)(10) election change the result?

Short answer: The gain was included in everywhere receipts but not Texas receipts because securities sales were sourced to the payor's legal domicile and the buyer was an Ohio corporation. The seller had to calculate gain using the cost method. The federal Section 338(h)(10) election did not affect the seller's taxable-capital computation.

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 Code Rules 3.1 and 3.10); documents on STAR may no longer represent current policy even if not marked superseded.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 applies former taxable-capital law and assumes the seller used GAAP and the stock qualified as an investment under Rule 3.549(b)(3). Different accounting methods, asset classification, or buyer domicile could change the result. Confirm current law. 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 stock-sale gain entered everywhere receipts but not Texas receipts because the buyer was domiciled in Ohio.

The corporation sold all stock of a wholly owned subsidiary to an Ohio corporation. Assuming the seller used GAAP and the stock was an investment under Rule 3.549(b)(3), Rule 3.549(e)(39) sourced the securities sale to the payor's location.

The seller therefore excluded the gain from Texas receipts but included it in everywhere receipts under Rule 3.549(e)(3). It also had to use the cost method to calculate the stock-sale gain.

The parties' federal Section 338(h)(10) election did not change the seller's taxable-capital computation.

What this means for you

Corporations selling subsidiary stock

Under this former rule, the buyer's legal domicile controlled Texas sourcing of investment-stock gain.

Tax professionals

Confirm investment status and accounting method before applying the payor-location rule, and do not automatically import federal deemed-sale treatment into taxable capital.

Common questions

Q: Was the gain a Texas receipt?
A: No.

Q: Was it included in everywhere receipts?
A: Yes.

Q: Did Section 338(h)(10) change taxable capital?
A: No.

Citations and references

  • 34 Tex. Admin. Code Sec. 3.549(b)(3), (e)(3), and (e)(39)
  • I.R.C. Sec. 338(h)(10)

Source

Original ruling text

October 1, 1997

Dear Mr. **:

In your letter of September 22, 1997, you requested information regarding the
apportionment of a stock sale for taxable capital purposes.

You indicate that COMPANY A sold 100% of the stock of a wholly owned subsidiary
to an Ohio corporation. You also indicate that the buyer and seller plan to
make an Internal Revenue Code (IRC) Sec. 338(h)(10) election.

For the purposes of my response I presume that COMPANY A uses the generally
accepted accounting principles (GAAP) method to report taxable capital (i.e.,
the company does not qualify to use the federal income tax method) and that the
stock qualifies as an investment as defined in Rule 3.549(b)(3).

Under Rule 3.549(e)(39), sales of securities are apportioned based on the
location of payor. Therefore, the gain on the sale of the subsidiary stock
would not be apportioned to Texas because the legal domicile of the purchaser
is outside Texas. However, the gain would be included in computing gross
receipts everywhere as indicated in Rule 3.549(e)(3). You should note that
COMPANY A must use the cost method of accounting to calculate the gain on the
sale of stock.

The federal income tax election under IRC Sec. 338(h)(10) would not affect the
computation of taxable capital for COMPANY A.

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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