Did a corporation owe a payment with its 1998 annual-report extension request when its prior initial report showed zero taxable capital and zero taxable earned surplus?

Plain-English summary

The corporation owed no tax payment with its 1998 annual-report extension request because its initial report showed zero for both former tax bases.

The corporation had filed its initial report in July 1997 and owed no tax because it reported no net taxable capital and no net taxable earned surplus. It planned to extend its 1998 annual report from May 15 to August 15, 1998 and was required to pay tax by electronic funds transfer.

It selected the Section 171.202(e)(2)(B) option based on 100 percent of the tax reported as due for the previous calendar year. Because the previous report was an initial report, Rule 3.575 required a payment equal to the greater of:

• net taxable capital from the initial report multiplied by 0.25%; or
• net taxable earned surplus from the initial report multiplied by 4.5%.

Both reported amounts were zero, so no payment accompanied the extension request.

What this means for you

Electronic-funds-transfer taxpayers

Under the historical option applied here, a zero-tax initial report could result in a zero extension payment when both statutory calculations were zero.

Tax professionals

The result depended on the taxpayer's selected extension-payment option, the initial report being timely filed for the calculation, and both reported tax bases being zero.

Common questions

Q: Did the extension eliminate the annual report?
A: No. It extended the filing deadline to August 15, 1998.

Q: Which prior report controlled the calculation?
A: The corporation's initial franchise-tax report.

Q: Why was the required payment zero?
A: Both net taxable capital and net taxable earned surplus were reported as zero.

Citations and references

• Texas Tax Code Sec. 171.202(d), (e), including Sec. 171.202(e)(2)(B)
• 34 Tex. Admin. Code Sec. 3.575

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9805658L

Original ruling text

May 15, 1998

Dear Mr. **:

Thank you for your recent franchise tax ruling request on behalf of UTILITY
COMPANY A. You asked whether UTILITY COMPANY A is required to pay any
franchise tax with its request for an extension to file its 1998 annual report.

UTILITY COMPANY A filed its initial franchise tax report in July 1997 for the
privilege period ending December 31, 1997. Because the report, which was based
on December 31, 1996 financial information, reflected no net taxable capital or
net taxable earned surplus, UTILITY COMPANY A owed no tax.

On May 15, 1998, UTILITY COMPANY A will file a request to extend until August
15, 1998, the requirement to file its 1998 annual franchise tax report.
Because UTILITY COMPANY A is required to make its tax payments by electronic
funds transfer, Sections 171.202(d) and (e) of the franchise tax law apply to
their extension request.

UTILITY COMPANY A has selected the extension payment option set out in Section
171.202(e)(2)(B), which provides that it must pay 100 percent of the tax
reported as due for the previous calendar year on the report due in the
previous calendar year and filed on or before May 14. Because UTILITY COMPANY
A's previous report was its initial report, the 100 percent payment under
Section 171.202(e)(2)(B) and Franchise Tax Rule 3.575 must equal the greater
of:

(1) an amount produced by multiplying the net taxable capital, as reported on
the initial report filed on or before May 14 of the year for which the
extension is requested, by 0.25% for the 1995 and later reports; or

(2) an amount produced by multiplying the net taxable earned surplus, as
reported on the initial report filed on or before May 14 of the year for which
the extension is requested, by 4.5% for the 1995 and later reports.

Therefore, because UTILITY COMPANY A reported zero (0) net taxable capital and
zero (0) net taxable earned surplus on its initial report, UTILITY COMPANY A is
not required to make any tax payment with its request to extend the filing of
its 1998 annual report to August 15, 1998.

This response is based on the facts as presented in your letter. If the facts
change or if there are additional relevant facts, the response may change.

If you have any questions, please write me or call me at 463-3958.

Sincerely,

Teresa Comer
Tax Policy Division