United States: Texas Comptroller Revises Policy Regarding Claiming Of Temporary Business Loss Carryforward For Combined Groups

On April 9, the Texas Comptroller's Tax Policy Division announced a change in the Comptroller's interpretation of Texas Tax Code Section 171.111(d), which provides that a taxable entity loses its right to claim the temporary business loss carryforward when the entity "changes combined groups."1 The change to the policy applies retroactively to all open tax years, and allows a taxable entity to retain its carryforward in several situations.

Statutory and Regulatory Background

The temporary business loss carryforward is designed to provide a transition from the loss carryforwards held by entities prior to the enactment of the Revised Texas Franchise Tax (RTFT). Taxable entities were required to notify the Comptroller on their first RTFT report due on or after January 1, 2008 that they intended to take the credit.2 Taxable entities that notified the Comptroller are allowed to elect to claim the credit for up to 20 consecutive privilege periods until the election is revoked or September 1, 2027, whichever is earlier.3 The credit is equal to the taxable entity's business loss carryforwards calculated under the former Texas franchise tax multiplied by 2.25 percent for reports due between 2008 and 2017, and multiplied by 7.75 percent for reports due between 2018 and 2027, with such amount multiplied again by 4.5 percent (the former earned surplus franchise tax rate) in each specific year.4 The statute specifically states that both the election to take the credit and the credit itself cannot be conveyed, assigned or transferred, and a taxable entity loses the right to claim the credit if the entity changes combined groups after June 30, 2007.5

The Comptroller's regulation clarifies the following regarding the composition of combined groups and the application of the business loss carryforward:

  • If a member of a combined group changes combined groups after June 30, 2007, the business loss carryforward of the departing member is no longer included in the credit calculation of the group and the related share of the credit carried over from a prior year is lost to the group.
  • The business loss carryforward does not follow the member to a separately filed report or another combined group.
  • In the case of a member merging into another member of the group, the business loss carryforwards of both members remain with the group.
  • In the case of a member dissolving, terminating or otherwise leaving the group, the member's carryover is no longer eligible for use.
  • If the combined group adds members, the credit of the existing group is unaffected but is not allowed for the new members.6

An example in the regulation explains that when one member of a four-member combined group leaves the group, the total business loss carryforward of the group in calculating the credit is reduced by the amount of the departing member's carryforward, and the carryover credit is likewise reduced. In the event of a merger between two members of the combined group, the carryforward and credit would not be affected.7

Comptroller Guidance – Leaving, Joining and Creating Combined Group

The guidance issued by the Comptroller clarifies when an entity is considered to change combined groups. Previously, as explained in the guidance, the Comptroller determined that a taxable entity "changed combined groups" whenever the common owner of a combined group changed. As a result, whenever the common owner of the group changed, the Comptroller took the position that a new combined group was created and consequently, all members lost their credits and the new combined group was not entitled to prospectively claim the credit.

Under the new policy, the disallowance of the credit is determined on an entity-by-entity basis. An entity is considered to change combined groups and loses the right to claim the credit in three situations: (1) when the entity leaves a combined group, (2) when an entity joins an existing combined group, or (3) when an entity's acquisition results in the creation of a new combined group. The changes in policy in the guidance are effective immediately and retroactively. The Comptroller has indicated that taxpayers whose temporary business loss carryforward credits were previously revoked under the prior policy may claim the credit for any years still open under the statute of limitations by filing an amended Texas Franchise Tax Report.

Entity Leaves Combined Group

According to the Comptroller's guidance, a member will be considered to leave a combined group in three instances: (1) the member ceases to be engaged in a unitary business with other member entities, (2) the member no longer shares common ownership with the other member entities, or (3) the member terminates or dissolves. If any of these events occur, both the member leaving the group as well as the remaining members of the group lose the right to claim the departing member's credit.

Two examples are provided in the guidance. In the first example, a natural person (A) that owns two entities (X and Y) comprising a combined group sells X to another natural person. X loses the right to claim its credit, but Y retains its credit because it did not leave the combined group (despite the fact that is not within a combined group as a result of the sale). Under the Comptroller's guidance, Y would retain its credit even if A were to subsequently sell Y to another natural person. In the second example, a natural person (A) that owns four entities (A, B, C and D) sells C and D to a third party. In this instance, C and D lose the right to claim its credits. Combined group members A and B retain their credits.

Entity Joins Existing Combined Group

An entity joins an existing combined group after two conditions have been met: (1) the common owner or a member entity of an existing combined group acquires a controlling interest in the entity, and (2) the acquired entity is engaged in a unitary business with member entities of the combined group. In an example contained in the Comptroller's guidance, two entities comprising a combined group (X and Y) that are owned by a natural person are acquired by a corporation (A) that is part of an existing combined group. As X and Y have changed combined groups, they lose their right to claim the credit, but the original members of A's combined group do not lose their right to claim the credit.

Entity's Acquisition Creates New Combined Group

An entity's acquisition by another taxable entity results in the creation of a new combined group when: (1) a controlling interest is acquired by another taxable entity, and (2) the entities are engaged in a unitary business. In an example contained in the Comptroller's guidance, two entities in a combined group that are owned by the same natural person are acquired by a (formerly) separate filing corporation, and the business between the two entities and the corporation is unitary. The acquisition therefore results in the creation of a new combined group, and the two entities cannot claim the credit since they have changed their combined group. On the other hand, the acquiring corporation does not lose its credit.

No Change in Combined Group

Finally, if the common owner of the members of a combined group changes without a change in the underlying members of the group, the combined group can still claim the credit of the member entities. Corporate reorganizations (like intergroup mergers and the creation of new member entities) that do not result in member entities leaving the combined group will not impact the group's ability to claim existing credits.

Three examples in the guidance explain the concepts. In the first example, two entities in a combined group that are owned by the same natural person are sold to another natural person. Since there is no change in the combined group (as no entity has left the combined group), the entities may still claim the credit. In the second example, a natural person (A) that owns four entities (A, B, C and D) merges C with D, with D surviving the merger. In this instance, the combined group may continue to claim the credit for both members C and D. In the third example, two natural people that own two entities, A and B, form a new parent holding company that will be owned by the natural persons and will in turn own A and B. In this instance, A and B have not changed combined groups and the combined group may continue to claim the credit for both members A and B.

Commentary

The change in the Comptroller's policy makes it clear that the determining factor is whether the entity earning the credit has changed combined groups rather than whether the common owner of the group has changed. Thus, the analysis focuses on whether an entity that has earned the credit leaves, joins or forms a new combined group. The change settles a limited amount of situations where the Comptroller historically has taken a restrictive stance on what constituted a change in the combined group, and may be particularly helpful to combined groups that want to engage in internal restructurings but have been concerned about whether the business loss carryforward would be retained. It is intriguing that the Comptroller's guidance does not address or reference the Comptroller's regulation dealing with the business loss carryforward in any way, given that the example in the regulation are similar to some of the examples contained in the Comptroller's newly released guidance. It will be interesting to see whether the existing regulation is modified in any way in light of the Comptroller's guidance.

A combined group that is considering the acquisition of another combined group should carefully consider whether there is a benefit in having the acquiring combined group join the acquired combined group and having the acquired combined group continue as the reporting entity on behalf of the newly formed group. If the acquiring group has little or no temporary business loss carryforward credits but the acquired group has a significant amount of credits available, if the acquired group were to join in the acquiring group's Texas report, all of those credits would be lost. Since Texas law does not mandate that an acquiring taxpayer or combined group be the surviving combined group, certain taxpayers may find it advantageous to let the acquired combined group continue as the reporting group on behalf of the newly formed combined group.

The Comptroller is charged with interpreting and administering a complex tax law utilizing several undefined compound terms (e.g., "common owner or owners" and "changes combined groups"). Despite the arguably positive development provided by the Comptroller's guidance, temporary credit controversies are likely to continue.

Footnotes

1 Letter No. 201404878L, Texas Comptroller of Public Accounts (April 9, 2014).

2 TEX. TAX CODE ANN. § 171.111(a).

3 Id.

4 TEX. TAX CODE ANN. § 171.111(b).

5 TEX. TAX CODE ANN. § 171.111(d).

6 34 TEX. ADMIN. CODE § 3.594(c)(3).

7 34 TEX. ADMIN. CODE § 3.594(c)(4).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions