If Texas adopted the 1996 Internal Revenue Code definition, would 1997 federal changes count when determining S-corporation status?

Plain-English summary

If Texas adopted the proposed 1996-Code definition, federal provisions specified in that Code but effective in 1997 would count.

The requester asked how the term “Internal Revenue Code” would operate under CSHB 4. The Comptroller cautioned that the bill might contain no tax increases or other tax-statute changes.

The letter then gave a conditional answer: if that bill or another law changed Texas's definition to the IRC in effect for the 1996 calendar year, changes specified in the 1996 Code but effective in 1997 would be recognized for franchise-tax purposes.

As an example, a corporation with up to 75 shareholders could qualify as an S corporation for taxable earned surplus for a federal tax year beginning after 1996, assuming it otherwise qualified under federal law.

What this means for you

Businesses researching historical S-corporation treatment

The letter explains how a proposed conformity date would work; it is not proof that the proposal became law.

Tax professionals

Separate the conditional statutory-conformity analysis from the federal eligibility example, and verify the law actually enacted for the report year.

Common questions

Q: Did the letter say CSHB 4 had become law?
A: No.

Q: What was the 75-shareholder example?
A: A federal change effective for tax years beginning after 1996 that would be recognized if Texas adopted the described 1996-Code definition.

Q: Did meeting the shareholder limit automatically make a corporation an S corporation?
A: No. It still had to satisfy the other federal requirements.

Citations and references

• CSHB 4, as discussed in the May 27, 1997 letter

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9705775L

Original ruling text

May 27, 1997

Dear **:

In your FAX of April 18, you requested confirmation of the definition of
"Internal Revenue Code" (IRC) as it appears in CSHB4.

At this time, it appears that CSHB4 may not contain any increases or other
changes in the tax statutes. In any case, if CSHB4 or any other legislation
does change the statutory definition of the IRC to the IRC in effect for the
1996 calendar year, changes which are specified under the 1996 IRC which become
effective in 1997 will be recognized in computing franchise tax. For example,
if the number of shareholders in an S corporation were increased to 75 for a
federal tax year beginning after 1996, the corporation would qualify as an S
corporation in computing taxable earned surplus (if the corporation otherwise
qualified as an S corporation for IRC purposes).

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