Perspectives

Texas Court includes net loss in apportionment factor denominator

Multistate tax alert | December 18, 2014

​The Court of Appeals, 13th District of Texas (“Court of Appeals”), recently upheld an assessment against a taxpayer, holding that gains were required to be offset against losses from the sale of investments and capital assets in determining the Franchise Tax apportionment factor denominator.

​Texas Franchise Tax apportionment factor denominator

The Court of Appeals, 13th District of Texas (“Court of Appeals”), recently upheld an assessment against a taxpayer, holding that gains were required to be offset against losses from the sale of investments and capital assets in determining the Franchise Tax apportionment factor denominator.1 The case involved the application of Texas Tax Code (“TTC”) § 171.105(b), which for purposes of determining the denominator of the Franchise Tax apportionment factor states: “If a taxable entity sells an investment or capital asset, the taxable entity’s gross receipts from its entire business for taxable margin include only the net gain from the sale” (emphasis added). The taxpayer argued the proper interpretation of this statute was that gains only are included and, thus, losses are disregarded. The Court of Appeals disagreed, siding with the Texas Comptroller (“Comptroller”) and concluding that gains are to be offset by losses from the sale of investments and capital assets.

As of the release date of this Tax Alert, the taxpayer has not filed a petition for review with the Texas Supreme Court; however, the period during which such filing may be made remains open.

In this Tax Alert, we summarize the proceedings and arguments in this pending case and offer some taxpayer considerations.

1 Hallmark Mktg. Co. v. Combs, No. 13-14-00093-CV (Tex. App.—Corpus Christi, Nov. 13, 2014, no pet. h.), available at: http://www.search.txcourts.gov/SearchMedia.aspx?MediaVersionID=d1caed5a-43fe-4ab6-9325-c99cd2d05266&coa=coa13&DT= Opinion&MediaID=4bf9b630-a4c4-4905-9255-9be245eed81b. For the procedural status of the case, see: http://www.search.txcourts.gov/Case.aspx?cn=13-14-00093-CV&coa=coa13.

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