Can a corporation use push-down accounting to revalue its assets when computing taxable capital for the Texas franchise tax?

Plain-English summary

A taxpayer asked whether push-down accounting could be used to compute taxable capital for the pre-2008 Texas franchise tax. The Comptroller said no.

• GAAP is the default. A corporation computes its surplus, assets, and debts under generally accepted accounting principles (GAAP) unless the statute provides otherwise (Tax Code Sec. 171.109(b)).
• Push-down is barred. Sec. 171.109(m) and Comptroller's Rule 3.547(d)(3)(A) specifically prohibit the push-down method when computing surplus, so a corporation cannot revalue its assets under push-down accounting for taxable capital.
• The example. For a corporation with $100 of historic capital whose stock was purchased for $500 with a properly made IRC Sec. 338(h)(10) election, the corporation must use the $100 historic cost - not the stepped-up $500 - to calculate its taxable capital.

Currency note: This letter describes the pre-2008 franchise tax and its taxable-capital base, replaced by the margin tax effective January 1, 2008 under House Bills 3 and 3928. The margin tax does not use a taxable-capital base; confirm present law.

What this means for you

Corporations after a stock acquisition (pre-2008)

Even if your books were revalued for financial or federal-tax purposes (for example, after a Sec. 338(h)(10) election), the franchise tax made you keep the historic cost for taxable capital. A purchase price above historic capital did not raise your taxable-capital base.

Tax professionals

The letter treats push-down as a specific statutory override of the general GAAP rule: Sec. 171.109(m) and Rule 3.547(d)(3)(A) control over Sec. 171.109(b). The 338(h)(10) example shows the point - the federal stepped-up basis does not flow into the Texas taxable-capital computation.

Common questions

Q: Can I use push-down accounting for Texas taxable capital?
A: No. Sec. 171.109(m) and Rule 3.547(d)(3)(A) prohibit it when computing surplus.

Q: After a 338(h)(10) stock purchase, what value do I use?
A: Historic cost - in the letter's example, $100, not the $500 purchase price.

Q: Isn't everything computed under GAAP?
A: GAAP is the default under Sec. 171.109(b), but specific provisions like Sec. 171.109(m) override it.

Citations and references

Statutes and rules:

• Texas Tax Code Sec. 171.109(b) - surplus, assets, and debts computed under GAAP unless otherwise provided
• Texas Tax Code Sec. 171.109(m) - push-down accounting may not be used to compute surplus
• Comptroller's Franchise Tax Rule 3.547(d)(3)(A), 34 Tex. Admin. Code - a corporation may not revalue assets under push-down accounting for taxable capital
• Internal Revenue Code Sec. 338(h)(10) - federal stock-purchase election referenced in the letter's example

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200111632L

Original ruling text

November 29, 2001

TO: **

Dear **:

Thank you for your email regarding push-down accounting and how we account for
such in calculating taxable capital for Texas franchise tax reports.

The statutes and rules I mention below, as well as other related materials, are
available online at http://www.window.state.tx.us/taxinfo/frantax.html.

A corporation must compute its surplus, assets, and debts according to
generally accepted accounting principles (GAAP) unless provided for otherwise.
Texas Tax Code (TTC) Section 171.109(b). The statute does provide exceptions
to the GAAP standard, including the use of FIT accounting methods for certain
corporations. However, the FIT provision is limited to accounting methods and
can be overridden by another specific provision of the statute such as TTC
Section 171.109(m).

The push-down method of accounting cannot be used in computing a corporation's
surplus. TTC Section 171.109(m); Comptroller's Rule Section 3.547(d)(3)(A).
Consequently, a corporation cannot revalue its assets for computation of
taxable capital pursuant to push-down accounting.

In the example you give of a corporation with historic capital of $100 where
the stock was purchased for $500 with a properly made Section 338(h)(10)
election, the corporation will use the historic cost of $100 to calculate its
taxable capital for Texas franchise tax purposes.

This response is based on the facts presented and current law. If there are
different or additional facts, the response may change.

If you need any additional information, please feel free to send me electronic
mail at , or you can call me at 1.800.531.5441,
extension 34629.

Sincerely,

Lowell Olsen Dunn
Tax Policy Division