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.


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.


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.

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