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 Topics
 
Related Articles
 
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 (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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