For former earned-surplus apportionment, was a federal capital-loss carryforward used in the year applied or the year the loss actually occurred?

Plain-English summary

A capital-loss carryback or carryforward was assigned to the year the loss actually occurred, not the year the loss was later used.

Rule 3.557(e)(4) governed excess capital losses over capital gains carried back or forward for federal income-tax purposes. For Texas earned-surplus receipts, the loss belonged in the actual-loss year.

Rule 3.557(e)(3) separately provided that gross receipts included the net capital gain for the year on which the tax was based.

What this means for you

Corporations with capital-loss carryforwards

Using a prior loss on a later federal return did not move that loss into the later year's Texas receipts calculation under the historical rule.

Tax professionals

Track the actual loss year separately from the federal utilization year when reconstructing former earned-surplus apportionment.

Common questions

Q: Did the year the carryforward was used control?
A: No.

Q: What entered gross receipts for the current year?
A: The year's net capital gain under Rule 3.557(e)(3).

Citations and references

• 34 Tex. Admin. Code Sec. 3.557(e)(3), (e)(4)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9804540L

Original ruling text

April 29, 1998

Dear Ms. **:

Thank you for your recent tax help inquiry about the treatment of a prior
year's capital loss carry-forward for franchise tax earned surplus
apportionment purposes.

Franchise Tax Rule 3.557(e)(4) provides that the excess of capital losses over
capital gains which are carried back or carried forward for federal income tax
purposes must be used in computing receipts in the year of the actual loss, not
in the year to which such loss is actually used as a carry-back or
carry-forward. Pursuant to Rule 3.557(e)(3), the net capital gain for the year
upon which the tax is based is the amount to include in gross receipts.

Rule 3.557 and other franchise tax rules and information are available through
the Comptroller's Web Site. The URL for our home page is
. Once our page is displayed on your screen
click on "Texas Taxes." To access the franchise tax rules, you should then
select "Current Tax Rules," "Tax Administration," and "Franchise Tax."

If you have further franchise tax questions, please write me or call me
toll-free at 1-800-531-5441, extension 3-3958. My direct line is 512/463-3958.

Sincerely,

Teresa Comer
[email protected]
Tax Policy Division