Did proceeds from selling treasury stock enter taxable-capital gross receipts under the former Texas franchise tax?

Plain-English summary

Treasury-stock sale proceeds were excluded from taxable-capital gross receipts, while dividends were included.

The corporation had repurchased shares and planned to resell them to a Texas purchaser above the acquisition price. Under GAAP, the sale proceeds entered paid-in capital rather than revenue.

Rule 3.549(e)(39) excluded receipts from a corporation's issuance of its capital stock. None of the treasury-stock proceeds therefore entered Texas receipts or everywhere receipts for taxable-capital apportionment.

The corporation's dividends from an out-of-state corporation did enter taxable-capital gross receipts under Rule 3.549(e)(13).

What this means for you

Corporations selling treasury shares

The purchaser's Texas location did not turn the capital-stock issuance proceeds into Texas gross receipts.

Tax professionals

Confirm the transaction is treated as the corporation's capital-stock issuance and distinguish those proceeds from dividend revenue.

Common questions

Q: Did treasury-stock proceeds enter Texas receipts?
A: No.

Q: Did they enter everywhere receipts?
A: No.

Q: Were the dividends included?
A: Yes.

Citations and references

• 34 Tex. Admin. Code Sec. 3.549(b)(5), (e)(13), and (e)(39)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9612857l

Original ruling text

December 2, 1996

Dear **:

In your FAX of November 26, you requested an opinion regarding the computation
of gross receipts for the apportionment of taxable capital for a corporation
that sells treasury stock.

You state that the corporation acquired some of its outstanding shares of stock
and placed them in the treasury. The treasury shares will be sold to a Texas
purchaser at a price in excess of the original acquisition price. Under
generally accepted accounting principles (GAAP), the proceeds from the sale of
the treasury shares are included in paid in capital. The corporation's only
other receipts are dividends from an out-of-state corporation.

None of the proceeds from the sale of the treasury stock are included in gross
receipts everywhere or Texas receipts in computing the apportionment formula
for taxable capital. Specifically, Rule 3.549(e)(39) states that "Receipts
from the issuance by a corporation of its capital stock, are not gross
receipts." This rule provision is in accordance with the definition of gross
receipts in Rule 3.549(b)(5) which states that gross receipts include revenues
".. that would be recognized annually under a generally accepted principles
method of accounting..."

The dividends received by the corporation would be included in computing gross
receipts for the taxable capital component as indicated in Rule 3.549(e)(13).

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 toll free
1-800-531-5441, or our regular number is 512/463-4600. My extension is 3-4662.
You may write me at Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Bob Jeffcoat
Tax Policy Division