Did a stock sale and inclusion in a new federal consolidated return end a corporation's former Texas franchise-tax obligation?

Plain-English summary

The stock sale did not end Texas tax status while the corporation's certificate of authority remained active.

The corporation's stock was sold on December 3, 1995, and its federal accounting period ended that day when it joined the buyer's consolidated return. It argued that it should not owe tax for the 1996 privilege period.

The filed 1996 Texas report actually produced no tax because taxable-capital surplus and net taxable earned surplus were both negative.

Section 171.001 still subjected the corporation to both former components because it remained authorized in Texas. The Comptroller said it had to withdraw its certificate of authority to avoid future liability.

What this means for you

Acquired corporations

A change in ownership or federal consolidated-return membership did not itself terminate the historical Texas authorization-based obligation.

Tax professionals

Separate whether a report calculates tax from whether the corporation remains subject and must file or withdraw.

Common questions

Q: Did the corporation owe tax on the filed 1996 report?
A: No, because both reported tax bases were negative.

Q: Was it still subject to the franchise tax?
A: Yes.

Q: How could it avoid future authorization-based liability?
A: By withdrawing its certificate of authority.

Citations and references

• Texas Tax Code Sec. 171.001

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9701097L

Original ruling text

January 7, 1997

RE: ** (RPSC)
Texas Taxpayer Number: **

Dear **

Thank you for your recent correspondence regarding the filing requirements of
your company. I apologize for the delay in responding to you.

You stated in your correspondence that the stock of RPSC was sold on December
3, 1995 to another corporation. As a result, RPSC was included in the federal
consolidated return of the new corporation. RSPC's federal accounting period
began on January 1, 1995 and terminated on December 3, 1995 under federal
consolidated return regulations. You then stated, "as such, RPSC is not
responsible for the tax due on net taxable capital which is a tax for the
privilege period January 1, 1996 to December 31, 1996." Along with your
correspondence you filed a 1996 annual franchise tax report.

Based on the information in the report that you filed, RPSC did not owe any tax
on either the taxable capital or earned surplus components of the tax as they
reported a negative amount of surplus on the taxable capital component and a
negative amount of net taxable earned surplus.

Section 171.001 of the Texas Tax Code imposes a franchise tax on "each
corporation that does business in this state or that is chartered or authorized
to do business in this state." Because RPSC is authorized to do business in
Texas, as evidenced by the Certificate of Authority, RPSC is subject to both
components of the Texas franchise tax.

In order to avoid any further liability, RSPC must withdraw their certificate
of authority. I have enclosed information on withdrawing from the State of
Texas through the Texas Secretary of State. Please direct any future
correspondence with our Agency to the Account Maintenance Division.

This response is based on 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