Did corporations with more than 35 shareholders add back officer and director compensation under the former earned-surplus tax?

Plain-English summary

Corporations with more than 35 shareholders had to add back officer and director compensation.

Section 171.110(a)(1) required corporations to add officer and director compensation when computing taxable earned surplus. Subsection (a)(2) created an exception for a corporation with no more than 35 shareholders.

The Comptroller presumed each refund claimant had more than 35 shareholders. On that assumption, the exception did not apply, the compensation had to be added back, and the refund claims were denied.

The letter offered a refund hearing if requested within 20 days, a historical taxpayer-specific deadline.

What this means for you

Corporations reviewing historical earned surplus

The shareholder count determined whether the compensation exception applied.

Tax professionals

Verify the actual shareholder count and how shareholders were counted before applying the add-back.

Common questions

Q: What was the general rule?
A: Add back officer and director compensation.

Q: Which corporations received the exception?
A: Those with no more than 35 shareholders.

Q: Why were the refunds denied?
A: The Comptroller presumed each corporation exceeded the shareholder limit.

Citations and references

• Texas Tax Code Sec. 171.110(a)(1)-(2)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9701100L

Original ruling text

January 10, 1997

RE: **
Taxpayer Number **
Report Years 1993-1996

Taxpayer Number **
Report Years 1993 - 1996

Taxpayer Number **
Report Years 1994 - 1996

Dear **:

I have reviewed the refund claims for the aforementioned corporations that you
recently submitted. Your refund claims have been denied.

Texas Tax Code (TTC), Section 171.110(a)(1), states that any compensation of
officers or directors must be added back to compute taxable earned surplus for
a corporation.

TTC, Section 171.110(a)(2) states that a corporation is not required to
add-back the compensation of officers or directors as required by Subsection
(a)(1) if the corporation has no more than 35 shareholders.

I presume that each of the corporations represented in your refund claims have
more than 35 shareholders. Therefore, the corporations are required to
add-back the compensation of the officers and directors when calculating net
taxable earned surplus.

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

You are entitled to a refund hearing. If you would like to request one, please
send your written request within twenty (20) days of the date of this letter to
the Audit Processing Section of Revenue Accounting. This request must be
accompanied by a copy of this letter and any documentation needed to support
your claim.

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