Texas Comptroller of Public Accounts    STAR System


9211R1201F10 



STAR SUPERSEDED WITHOUT SUMMARY 

Accession No.(s): 9211546R

Document superseded on: 08/15/2013 



STATE OF TEXAS
COMPTROLLER OF PUBLIC ACCOUNTS
FRANCHISE TAX

Rule 3.551. Taxable Capital: Surplus.

(a) Effective date. The provisions of this rule apply to franchise tax reports 
originally due on or after January 1, 1988.

(b) Date upon which based. A corporation filing an annual report must report 
surplus based on its last accounting period ending date in the previous 
calendar year, or, if there is no accounting period ending in the previous 
calendar year, then as of December 31 of the previous calendar year.

(c) Definitions.

(1) Amortization - The accounting process of allocating the cost of assets to 
expense in a systematic and rational manner over the period expected to benefit 
from the use of the assets.

(2) Depletion - The accounting process of allocating the cost of natural 
resources to expense in a systematic and rational manner over the period during 
which the natural resources are consumed.

(3) Depreciation - The accounting process of allocating the cost of tangible 
assets to expense in a systematic and rational manner over the period expected 
to benefit from the use of the assets.

(4) Investee - An enterprise which issues voting stock held by an investor.

(5) Tax effect - Any change in cumulative federal income tax liability which 
results from the different accounting treatment of a transaction for franchise 
tax purposes than that accorded for federal income tax purposes.

(6) Unrealized, estimated, or contingent loss or obligation - An appropriation 
of retained earnings for any purpose or an account established to record a loss 
or obligation anticipated to occur and the amount of which is estimated as of 
the date on which the tax is based (e.g., self-insurance, warranty, 
litigation). 

(7) Write-down of assets - Any reduction or offset of the cost of an asset 
through use of a valuation, allowance, reserve or contra-asset account, or 
through direct write-off of the asset (except a write-off to reflect the 
asset's permanent decline in value). 

(d) General rules of application.

(1) Accounting methods.

(A) Installment sales. In reporting sales made on an installment basis, the 
installment sales method of accounting is acceptable for franchise tax purposes 
only when GAAP (as defined in Rule 3.547 concerning Accounting Methods) allows 
its use.

(B) Partnerships/joint ventures. In reporting an investment in a partnership or 
joint venture, the equity method of accounting must be used.

(C) Oil and gas corporations. Corporations with $1 million or more of taxable 
capital must report all oil and gas exploration and production activities 
according to the successful efforts or the full cost methods of accounting. 
Acceptable oil and gas reserve estimating methods to be used in amortizing 
intangible drilling costs are listed in Rule 3.553 concerning Methods for 
Estimating Oil and Gas Reserves. Corporations with less than $1 million of 
taxable capital, as determined in accordance with the Tax Code, 171.109(c), may 
report their oil and gas exploration and production activities using the same 
method selected to compute their federal income tax.

(D) Other. For more information on methods of accounting for franchise tax 
purposes, see Rule 3.547 concerning Accounting Methods.

(2) Tax effect. A surplus adjustment will be reported net of any applicable tax 
effect.

(3) Intercompany tax accounts. A liability account for income taxes owed by one 
member of a consolidated group to a second member of the group is excluded from 
the surplus of the first member only if the related receivable account is 
included in the surplus of the second member. Intercompany tax accounts must be 
reported on a consistent basis among members of the same consolidated group.

(4) S corporations. An S corporation must calculate its franchise tax in the 
same manner as any other corporation. For example, accumulated and other 
adjustment accounts are included in surplus, as are previously taxed income, 
accumulated earnings and profits, and all other amounts included in the surplus 
of any other corporation. For more information on an S corporation utilizing 
the method of accounting used on its federal income tax return, see Rule 3.548 
concerning Close and S Corporations.

(e) Specific rules. Specific rules of application include, but are not limited 
to, the following.

(1) Amortization of goodwill. The amortization of goodwill is excluded from 
surplus except when goodwill is included in the parent's cost of a subsidiary 
investment. Investments in subsidiary corporations or other investee's must 
reflect the cost method of accounting in accordance with the Tax Code, 
171.109(h).

(2) Deferred investment tax credit. For reports due on or after January 1, 
1992, deferred investment tax credit is included in surplus. For reports due 
between January 1, 1988, and December 31, 1991, deferred investment tax credit 
may be excluded from surplus.

(3) Foreign currency transactions. Realized gains, unrealized gains, and 
unrealized losses resulting from foreign currency transactions are included in 
surplus. Realized losses are excluded from surplus.

(4) Foreign currency translations. Foreign currency translations are 
disregarded when computing surplus. Unrealized gains resulting from foreign 
currency translations are not included in surplus. Unrealized losses from 
foreign currency translations are not allowable reductions to surplus.

(5) Income taxes payable. Amounts accrued in excess of actual liability for 
income taxes relating to current or prior periods (e.g., amounts accrued which 
relate to a period under IRS audit which has not been agreed to by the 
corporation) are included in surplus.

(6) Deferred income taxes. For reports due on or after January 1, 1992, 
deferred income taxes are included in surplus. For reports due prior to January 
1, 1992, deferred income taxes may be excluded from surplus to the extent they 
are recognized under generally accepted accounting principles.

(7) Employee benefits. Liabilities for employee compensation and benefits 
(e.g., pensions, bonuses, vacations, retirement, medical, insurance, post 
retirement, and other similar benefits) are included in surplus to the extent 
they are not debt as of the accounting year end upon which the return is based.

(8) Public utility corporations. Revenue from temporary or bonded rate 
increases of a public utility company is included in surplus.

(9) Treasury stock. The amount paid for treasury shares is excluded from 
surplus. See also Rule 3.550 concerning Stated Capital.

(10) Write-off of assets. A direct write-off of all or a portion of the cost of an 
asset to reflect a permanent decline in the asset's value, the direct cause of 
which is a specifically identifiable event, is excluded from surplus.

(11) Redeemable preferred stock. Redeemable preferred stock is not included in 
surplus if it is debt.

(12) Surplus deficit. A surplus deficit can be subtracted from stated capital.

(13) Dividends. Dividends that are not paid within one year from the date of 
declaration will be included in surplus.


Effective Date: November 10, 1992
Filed with Secretary of State: October 20, 1992


 
Comptroller of Public Accounts




ACCESSION NUMBER: 9211546R   
SUPERSEDED: Y
DOCUMENT TYPE: R
DATE: 11/10/1992
TAX TYPE: FRANCHISE