When were foreign-source dividends excluded from former Texas taxable earned surplus and its receipts factors?

Plain-English summary

Qualifying foreign-source dividends were excluded from taxable earned surplus and from both sides of the earned-surplus receipts factor.

The exclusion applied when the foreign amounts entered federal taxable income under I.R.C. Section 78 or Sections 951-964, or when a dividend met Rule 3.555(b)(3), concerning a subsidiary, associate, or affiliate that did not conduct a substantial portion of its business or regularly maintain a substantial portion of its assets in the United States.

Under Rule 3.557(d)(5), an excluded dividend was removed from Texas receipts and receipts everywhere. Other income remained in taxable earned surplus to the extent it was included in reportable federal taxable income.

What this means for you

Corporations receiving foreign income

The historical exclusion depended on the particular federal inclusion provision or the foreign-subsidiary dividend test; foreign source alone was not stated as sufficient.

Tax professionals

Apply the same exclusion consistently to the earned-surplus tax base and its single gross-receipts apportionment factor.

Common questions

Q: Did an excluded dividend remain in the apportionment denominator?
A: No. It was excluded from both Texas receipts and receipts everywhere.

Q: Was all other foreign income excluded?
A: No. Other income was included to the extent it entered reportable federal taxable income.

Citations and references

• Texas Tax Code Sec. 171.110(a)(1)
• I.R.C. Sec. 78 and Secs. 951-964
• 34 Tex. Admin. Code Secs. 3.555(b)(3) and 3.557(d)(5)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9803267L

Original ruling text

March 17, 1998

Dear **

Thank you for your letter concerning the exclusion of foreign income from your
franchise tax reports.

Section 171.110(a)(1) states that the net taxable earned surplus of a
corporation is computed by "determining the corporation's reportable federal
taxable income, subtracting from that amount any amount included in reportable
federal taxable income under Section 78 or Section 951-964, Internal Revenue
Code, and dividends received from a subsidiary, associate, or affiliated
corporation that does not transact a substantial portion of its business or
regularly maintain a substantial portion of its assets in the United States,
and adding to that amount any compensation of officers or directors, or if a
bank, any compensation of directors and executive officers, to the extent
excluded in determining federal taxable income to determine the corporation's
taxable earned surplus."

Foreign source dividends are not included in taxable earned surplus if these
amounts are included in federal taxable income under Internal Revenue Code
(IRC) Section 78 or Section 951-964 or if the dividend meets the definition in
Rule 3.555(b)(3). To the extent the "dividend" is "excluded" from taxable
earned surplus, it is also excluded from Texas receipts and receipts everywhere
in computing receipts for the earned surplus component (see enclosed Rule
3.557(d)(5)).

All other income is included in the calculation of taxable earned surplus to
the extent that it is included in reportable federal taxable income.

Earned surplus is apportioned using a single gross receipts factor. The
numerator of the factor is the corporation's gross receipts from business done
in Texas and the denominator is the corporation's gross receipts from its
entire business. Rule 3.557, Earned Surplus: Apportionment, includes rules for
sourcing different types of receipts, including those listed in your letter.

I will fax the rules mentioned above in separate fax transmissions.

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