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Ezel / Tax Rulings / TX
TX 9703418L Franchise Tax (PRIOR TO 01/01/2008) 1997-03-10

How did the former Texas franchise tax define taxable capital and surplus?

Short answer: Taxable capital was the corporation's stated capital plus surplus. Section 171.109(a)(1) defined surplus as net assets minus stated capital and said it included unrealized, estimated, or contingent losses or obligations and asset writedowns. Rules 3.550 and 3.551 provided further detail.

Apply this to your situation

This page answers the general question as of 1997. Ezel answers yours, under current Texas tax law, with citations.

Currency note: this ruling is from 1997
Subsequent statutory amendments, regulation changes, court decisions, or later rulings may have changed the analysis. Treat this page as historical context, not current tax advice. Verify current law before relying on any specific rule, rate, or position mentioned here.
Disclaimer: This is an official Texas Comptroller of Public Accounts letter published on the State Tax Automated Research (STAR) system. Letters on STAR can be the basis of a detrimental reliance claim only for the taxpayer to whom the letter was directly issued (see 34 Tex. Admin. Code Rules 3.1 and 3.10); documents on STAR may no longer represent current policy even if not marked superseded. This 1997 response defines terms under the former taxable-capital franchise-tax component and a historical Business Corporation Act. It is not a current margin-tax definition. Confirm current law. Taxpayer-identifying details are redacted. This summary is informational only and is not legal or tax advice. Consult a licensed Texas tax professional about your specific situation.
About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page) is the authoritative source for any reliance.

Plain-English summary

Taxable capital combined stated capital and surplus; surplus was net assets minus stated capital.

Section 171.101(a)(1) defined taxable capital by reference to stated capital under the former Texas Business Corporation Act plus the corporation's surplus.

Section 171.109(a)(1) defined surplus as net assets minus stated capital. The definition included unrealized, estimated, or contingent losses or obligations and any writedown of assets.

Rules 3.550 and 3.551 supplied more detail on stated capital and surplus.

What this means for you

Businesses reviewing historical taxable capital

Surplus was a statutory balance-sheet concept, not simply retained earnings or cash on hand.

Tax professionals

Use the cited former statute and rules for detailed classifications, especially contingent items and writedowns.

Common questions

Q: What made up taxable capital?
A: Stated capital plus surplus.

Q: How was surplus defined?
A: Net assets minus stated capital.

Q: Did surplus include contingent losses and asset writedowns?
A: Yes, under the quoted statutory definition.

Citations and references

  • Texas Tax Code Secs. 171.101(a)(1) and 171.109(a)(1)
  • Former Texas Business Corporation Act Art. 1.02
  • 34 Tex. Admin. Code Secs. 3.550 and 3.551

Source

Original ruling text

March 10, 1997

Dear ***:

Thank you for your recent email request regarding the definition of taxable
capital.

The statutory definition, found in the Texas Tax Code (TTC) Section
171.101(a)(1), is the "corporation's stated capital, as defined by Article
1/02, Texas Business Corporation Act, and the corporation's surplus..." The
term "surplus" is defined in TTC 171.109(a)(1) as "the net assets of a
corporation minus its stated capital." That section also states that "surplus
includes unrealized, estimated, or contingent losses or obligations or any
writedown of assets..."

More detailed information about both stated capital and surplus for the taxable
capital component of the franchise tax can be found in Rule 3.550 and Rule
3.551. I have attached copies of these rules to this response.

If you have questions about this, my internet address is
[email protected]. You may call me at (512) 463-4612 or toll-free at
1-800-531-5441, extension 3-4612.

Sincerely,

Janet Spies
Tax Policy Division

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