How did two successive mergers affect receivable collections, final reporting, and the new surviving corporations' initial franchise-tax reports?

Plain-English summary

The successive mergers did not shift Company A's historical receipts or earned surplus to the new survivors, and collecting A's existing receivables did not create new gross receipts for Company C.

Company A first completed a multiple survivor merger with newly formed Company B. The plan left A's existing trade receivables with A. A then merged out of existence into newly formed Delaware Company C, which acquired those receivables.

The Comptroller reached these reporting conclusions:

• C's collection of A's existing receivables produced no gross receipts for C under Hearing Decision 21,122;
• A owed its 1998 annual report and a final report within 60 days of the merger into C, including earned surplus from October 1, 1997 through the merger date;
• B's initial-report due date did not change, and B did not include A's earned surplus or gross receipts for either tax component; and
• C's initial-report due date likewise did not change, and C did not include A's earned surplus or gross receipts for either component because A reported its own final-period amounts.

What this means for you

Corporations completing multi-step mergers

The former tax followed the separate reporting periods and formation timing described in the merger structure rather than automatically transferring the disappearing corporation's receipts to each survivor.

Tax professionals

Trace each entity, formation date, asset allocation, and report obligation separately. The response relied on B being formed two to three weeks before its merger and C being formed immediately before its merger.

Common questions

Q: Did C recognize new gross receipts when it collected A's old receivables?
A: No.

Q: Did A still file after merging out of existence?
A: Yes. It owed an annual report and a final report.

Q: Did B or C absorb A's former gross receipts for their initial reports?
A: No, under the facts and provisions applied in the letter.

Citations and references

• Texas Business Corporation Act Arts. 1.02A(12)(a) and 5.01B(2)
• Texas Tax Code Secs. 171.0011, 171.152(a), and 171.153(a)(3)
• 34 Tex. Admin. Code Secs. 3.565(d), 3.567, and 3.568
• Hearing Decision 21,122 (microfiche 8901H0931A01)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9804696L

Original ruling text

April 15, 1998

Dear Mr. **:

Thank you for your recent letter about the franchise tax treatment of certain
entities.

Your letter and our subsequent telephone conversations provide the following.
On March 31, 1998, Company A, a Texas corporation that has been in existence
for several years, effected a multiple survivor merger as described in Article
1.02A(12)(a) of the Texas Business Corporation Act (the "TBCA") with its
recently formed wholly-owned subsidiary, Company B, also a Texas corporation.
Pursuant to the merger, Company A merged with and into Company B, with both
Company A and Company B surviving the merger. Company B was formed two to
three weeks prior to the date of merger. Pursuant to Article 5.01B(2) of the
TBCA, the plan of merger provided for the allocation and vesting of Company A's
assets and liabilities between Company A and Company B. Company A's existing
trade accounts receivable, which are for sales and services revenue previously
recognized by Company A, remained with Company A pursuant to the plan of
merger.

Immediately after the merger described above, Company A merged with and into
Company C, a newly-formed Delaware corporation that was a wholly-owned
subsidiary of Company A's parent company at the time of this merger, with
Company C surviving. Thus, Company A merged out of existence, and Company C
owns Company A's existing trade account receivable.

All of the entities are on the accrual basis for accounting and federal income
tax purposes with September 30 fiscal year ends.

Your understanding that Company C's collection of Company A's existing trade
accounts receivable will not give rise to any gross receipts for Company C's
Texas franchise tax reporting purposes is correct, pursuant to HD 21122
(microfiche number 8901H0931A01).

Pursuant to Franchise Tax Rule 3.568, Company A is required to file its 1998
annual report based on its September 30, 1997 fiscal year end. In addition,
under Texas Tax Code Section 171.0011 and Franchise Tax Rule 3.567, Company A
is required to file a final franchise tax report within 60 days of its merger
into Company C. The final report will include Company A's earned surplus from
October 1, 1997 through the date of its merger into Company C.

Because Company B was formed two to three weeks prior to the March 31, 1998
merger date, the provisions of Section 171.152(a) do not apply. Accordingly,
the multiple survivor merger will not change the due date of Company B's
initial franchise tax report. Nor will it require Company B to take into
account any of Company A's earned surplus or gross receipts for earned surplus
purposes. In addition, the multiple survivor merger will not require Company B
to take into account any of Company A's gross receipts for taxable capital
purposes. The provisions of Section 171.153(a)(3) and Rule 3.565(d) do not
apply.

Because Company C was formed immediately prior to its merger with Company A,
the provisions of Section 171.152(a) do not apply. Accordingly, the merger of
Company A into Company C will not change the due date of Company C's initial
franchise tax report. The merger will not require Company C to take into
account any of Company A's earned surplus or gross receipts for earned surplus
purposes. Pursuant to Section 171.0011 and Rule 3.567, Company A will compute
and report its earned surplus tax base and gross receipts for earned surplus
purposes on the final franchise tax report it must file upon its merger into
Company C. In addition, the merger will not require Company C to take into
account any of Company A's gross receipts for taxable capital purposes, because
the provisions of Section 171.153(a)(3) do not apply.

This response is based on the facts as presented in your letter and our
subsequent telephone conversations. If the facts change or if there are
additional relevant facts, the response may change.

If you have any questions about this or any other franchise tax matters, please
write me or call me toll free at 1-800-531-5441, extension 33958.

Sincerely,

Teresa Comer
Tax Policy Division