After a 1999 spin-off required two short-period federal returns, did the corporation file one or two Texas franchise-tax reports for 2000?

Plain-English summary

The corporation filed one 2000 Texas franchise-tax report and combined the two 1999 federal short periods on a separate-entity basis.

The corporation was a calendar-year member of a consolidated federal group and considered a 1999 spin-off. The transaction would require two federal returns for 1999: one short period with the former parent and a second short period as a separate entity. Its accounting year would remain unchanged.

Rule 3.544(a)(1)(C) produced one Texas report due May 15, 2000:

• Earned surplus: January 1 through December 31, 1999, combining amounts from both federal short-period returns as though the corporation were separate.
• Taxable capital: financial condition on December 31, 1999, the last accounting-period end in that year.

Currency note: This response applies the former two-component franchise tax. Texas replaced that tax with the margin tax effective January 1, 2008.

What this means for you

Corporations leaving consolidated groups

Multiple federal returns did not necessarily mean multiple Texas reports. The Texas annual period could require combining the federal pieces.

Tax professionals

Preserve separate-entity detail for each federal short period before combining them into the Texas earned-surplus computation.

Common questions

Q: How many Texas reports were required?
A: One annual report for 2000.

Q: How were the two federal returns used?
A: Their amounts were combined on a separate-entity basis for earned surplus.

Q: What date measured taxable capital?
A: December 31, 1999.

Citations and references

• 34 Tex. Admin. Code Sec. 3.544(a)(1)(C)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9905703L

Original ruling text

May 11, 1999

Dear **:

Thank you for your recent ruling request about TOBACCO COMPANY'S possible
spin-off sometime in 1999 from the consolidated group of which it is currently
a member.

You state that the company files a consolidated federal income tax return with
the parent corporation, CORPORATION, and is a calendar year taxpayer. If the
spin-off occurs, TOBACCO COMPANY would be required to file two federal income
tax returns for the 1999 federal tax year: the first with the former parent as
a member of a consolidated group, and the second as a separate entity. No
change in accounting period is anticipated and the company would continue to
file its federal returns thereafter on a calendar year basis. You ask whether
Texas requires the filing of one or two franchise tax reports under this
scenario.

The possible spin-off in 1999 would affect the company's 2000 annual franchise
tax report, due May 15, 2000. Texas would require the filing of one franchise
tax report in this situation.

Under Franchise Tax Rule 3.544(a)(1)(C), the earned surplus component on the
company's 2000 annual report would be based on the period beginning January 1,
1999, and ending with the last accounting period ending date for federal income
tax purposes ending in 1999 (i.e., December 31, 1999). Therefore, the company
would have to combine its amounts, on a separate entity basis, for the two
short period federal income tax returns in computing net taxable earned surplus
on the 2000 report. Rule 3.544(a)(1)(C) also provides that the taxable capital
component of the tax should be based on the financial condition as of the last
day of the last accounting period ending in 1999.

Rule 3.544 and other franchise tax rules and information are available through
the Comptroller's Web Site. The URL for our home page
is:

Once our page is displayed on your screen click on "Texas Taxes." To access
the franchise tax rules, you should then select "Current Tax Rules," "Tax
Administration," and "Franchise Tax."

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 further franchise tax questions, please write me or call me
toll-free at 1-800-531-5441, extension 3-3958. My direct line is
512/463-3958.

Sincerely,

Teresa Comer
Tax Policy Division

c: Steve Koebele, General Counsel