How did an acquired company report the former Texas franchise tax after changing from a December 31 to March 31 year-end?

Plain-English summary

The company needed neither Texas permission nor a short-period franchise-tax report.

After a change in corporate control, the taxpayer changed its accounting period from December 31 to March 31 and planned a short federal return for January through March 1997.

For Texas purposes, its 1998 annual report used different measurement periods for the two former franchise-tax components:

• Taxable-capital receipts covered the 12 months ending March 31, 1997, and stated capital and surplus were measured as of March 31, 1997.
• Earned surplus and its receipts covered January 1 through March 31, 1997.

The letter directed the taxpayer to Rule 3.544(a)(1)(C).

What this means for you

Companies changing fiscal year-ends

A short federal income-tax year did not automatically require a short-period Texas franchise-tax report under the historical rule described here.

Tax professionals

Keep the taxable-capital and earned-surplus measurement periods separate; they did not use identical periods in this transition year.

Common questions

Q: Did the company need permission to change its accounting period?
A: No.

Q: Did it file a short-period Texas franchise-tax report?
A: No.

Q: What period applied to earned surplus?
A: January 1 through March 31, 1997.

Citations and references

• 34 Tex. Admin. Code Sec. 3.544(a)(1)(C)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9709252L

Original ruling text

September 9, 1997

Dear Ms. **:

In your letter of August 7, you requested permission to change the accounting
period for **.

You state that COMPANY A is a wholly owned subsidiary of COMPANY B, a German
company. The controlling interest in COMPANY B was acquired by another German
company, COMPANY C. As a result, COMPANY A was required to change its
accounting period from December 31 to March 31. Accordingly, COMPANY A will
file a short year U.S. corporation income tax return for the period from
January 1, 1997 through March 31, 1997.

For the purposes of my response, I presume that COMPANY A changed its
accounting period to March 31 for financial purposes. I also presume that
COMPANY A filed its 1997 regular annual franchise tax report (due May 15, 1997)
based on the accounting year ended December 31, 1996.

First, COMPANY A does not have to obtain permission to change the company's
accounting period.

Second, under the circumstances you describe, COMPANY A should not file a short
period franchise tax report. Instead, the taxable capital and earned surplus
components on the 1998 regular annual report (due May 15, 1998) should be based
on the following:

For the taxable capital component, receipts should be computed for the 12
months ended March 31, 1997. The stated capital and surplus should be computed
as of March 31, 1997.

The taxable earned surplus and receipts for the earned surplus component should
be based on the period from January 1, 1997 through March 31, 1997.

I have enclosed Rule 3.544 which describes the reporting requirements. You
should carefully review Rule 3.544(a)(1)(C) which addresses the periods upon
which the regular annual report is based.

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