After emerging from Chapter 11, must a corporation using fresh start accounting for financial reporting also use it for the Texas franchise-tax taxable-capital report, and can it write down assets?

Plain-English summary

A corporation came out of a Chapter 11 bankruptcy (finalized January 27, 2000) and, for SEC purposes, restated its results using fresh start accounting for the year ended December 31, 1999. It reports taxable capital under the GAAP method and asked whether it could instead use balance sheets without the fresh-start adjustments.

• Use the method GAAP requires. A corporation may report taxable capital using any allowable method under the statute even if it uses a different method for financial or other purposes (Rule 3.547(d)(2)). But if GAAP requires fresh start accounting for the year ended December 31, 1999, then that method must be used for the 2000 regular annual franchise tax report - it can't cherry-pick a non-fresh-start balance sheet.
• But no asset writedown in surplus. The company may not write down assets in computing surplus for taxable capital, even if the writedown is required by fresh start accounting, because Tax Code Sec. 171.109(a)(1) does not allow it.
• Fact-based. The response rests on the facts presented and current law.

Currency note: This 2000 letter applies the pre-2008 franchise tax's taxable-capital / surplus base (replaced by the margin tax effective January 1, 2008 under House Bills 3 and 3928). The margin tax does not use this base; treat as historical and confirm current law.

What this means for you

Corporations reorganizing through bankruptcy

Coming out of Chapter 11 with fresh start accounting meant you generally had to carry that method into your Texas taxable-capital report - you couldn't revert to a pre-fresh-start balance sheet just for tax. The key protection for the state: even where fresh start wrote down your assets, you could not use that writedown to shrink surplus, because the surplus statute disallows asset writedowns.

Tax professionals

Two rules combine here: Rule 3.547(d)(2) ties the taxable-capital method to the corporation's actual (here, GAAP-mandated) accounting, while Sec. 171.109(a)(1) independently bars asset writedowns in computing surplus - so a fresh-start impairment does not reduce the base. All pre-2008; re-verify under the margin tax.

Common questions

Q: If GAAP makes me use fresh start accounting, do I use it for the franchise-tax taxable-capital report too?
A: Yes. You report taxable capital under the method your accounting requires, so fresh start accounting must be used for that year's report (Rule 3.547(d)(2)).

Q: Can I write down assets in computing surplus if fresh start accounting requires it?
A: No. Sec. 171.109(a)(1) does not allow an asset writedown in computing surplus, even when fresh start accounting requires the writedown.

Q: Is this still current law?
A: No. The taxable-capital/surplus base was replaced by the margin tax effective January 1, 2008. This letter is historical; confirm current law.

Citations and references

Statute and rule:

• Texas Tax Code Sec. 171.109(a)(1) - surplus definition; no writedown of assets in computing surplus
• 34 Tex. Admin. Code Sec. 3.547(d)(2) (Franchise Tax Rule 3.547) - taxable capital may be reported under any allowable method regardless of the method used for other purposes

(The letter's extracted text renders the surplus citation with spacing artifacts as "171.1 09(a)(1 )"; it refers to Sec. 171.109(a)(1).)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200009080L

Original ruling text

September 27, 2000

Dear **:

In your letter of August 30, you asked if a company can elect to report taxable
capital based on balance sheets which do not reflect adjustments for fresh
start accounting.

You state that ABC Company filed for bankruptcy under Chapter 11 in 1999. The
bankruptcy was finalized on January 27, 2000. For SEC reporting purposes the
company reflected the bankruptcy results using fresh start accounting for the
accounting year ended December 31, 1999.

For the purposes of my response, I presume that ABC Company uses the generally
accepted accounting principles (GAAP) method to report taxable capital.

The company can report taxable capital using any allowable method under the
statute even if a different method is used for financial or other purposes
(Rule 3.547(d)(2)). If GAAP requires ABC Company to use fresh start accounting
for the accounting year ended December 31, 1999, then that method must be used
for the 2000 regular annual franchise tax report. However, the company may not
write down assets in computing surplus for taxable capital even if the write
down is required by fresh start accounting (Texas Tax Code Sec. 171.1 09(a)(1
)).

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 me toll
free 1-800-531-5441, or our regular number is 512/463-4600. My extension is
3-4817.

Sincerely,

Bob Jeffcoat
Tax Policy Division