Ezel / Tax Rulings / TX
TX 9809159L Franchise Tax (PRIOR TO 01/01/2008) 1998-09-22

Could an S corporation include capital losses, including excess losses after netting gains, in the former Texas earned-surplus calculation?

Short answer: Yes. Rule 3.556(e)(9) included both capital gains and capital losses in the S corporation's federal-taxable-income and earned-surplus calculation. Gains and losses were netted, and any excess capital loss was allowed as an additional reduction of federal taxable income for franchise-tax reporting.

Apply this to your situation

This page answers the general question as of 1998. Ezel answers yours, under current Texas tax law, with citations.

Currency note: this ruling is from 1998
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 Code Rules 3.1 and 3.10); documents on STAR may no longer represent current policy even if not marked superseded. The ruling applies the pre-2008 earned-surplus rules for S corporations, which Texas replaced with the margin tax effective January 1, 2008; confirm current federal and Texas loss treatment. 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

An S corporation included capital gains and losses in earned surplus, and excess capital losses could further reduce federal taxable income.

Rule 3.556(e)(9) required capital gains and capital losses to enter the federal-taxable-income and earned-surplus computation. The corporation first netted gains and losses. If losses exceeded gains, the remaining capital loss was allowed as an additional reduction for franchise-tax reporting.

Currency note: This is a historical S-corporation earned-surplus rule. Texas replaced the former franchise tax with the margin tax effective January 1, 2008.

What this means for you

S corporations reviewing historical reports

The former Texas calculation did not ignore pass-through capital losses; it incorporated netting and the excess-loss reduction described.

Tax professionals

The letter is short and states no dollar or carryforward facts. Apply only the computation rule it gives.

Common questions

Q: Were capital gains included?
A: Yes.

Q: Were capital losses included?
A: Yes.

Q: What happened to excess losses after netting?
A: They further reduced federal taxable income for the former report.

Citations and references

  • 34 Tex. Admin. Code Sec. 3.556(e)(9)

Source

Original ruling text

September 22, 1998

Dear Mr. **:

Thank you for your letter concerning capital gains and losses of an S
corporation.

Rule 3.556, Earned Surplus: S Corporations, subsection (e)(9) discusses capital
gains and losses of an S Corporation. Specifically, this section means that
both capital gains and capital losses are included in the calculation of
federal taxable income and earned surplus. As the gains and losses are netted
in the calculation, any excess capital losses are allowed as a further
reduction of federal taxable income for franchise tax reporting purposes.

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

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