200809240L



DATE:  September 1, 2008

TO:  	Tony Luna, Audit Division

FROM:  	Bryant Lomax, Tax Policy Division

SUBJECT:  Section 171.106(f): Apportionment of proceeds from sales of loans or 
securities

Texas Tax Code Section 171.1055 provides for the exclusion of certain receipts 
for margin apportionment. Section 171.106(f) provides: “Notwithstanding Section 
171.1055, if a loan or security is treated as inventory of the seller for 
federal income tax purposes, the gross proceeds of the sale of that loan or 
security are considered gross receipts.” 

For purposes of the foregoing subsection (f), Section 171.0001(13-a) provides, 
in part, that the term security “has the meaning assigned by Section 475(c)(2), 
Internal Revenue Code, and Sections 475(e)(2)(B), (C) and (D) of that code.” 
Section 475(c)(2)(C) defines the term security as including a “note, bond, 
debenture, or other evidence of indebtedness. . . .”

Together, the foregoing franchise tax provisions clearly require that federal 
income tax law determines whether a loan or security is inventory in the hands 
of the seller. Furthermore, the classification of a security under financial 
accounting principles, including FASB Statement No. 115, is not dispositive of 
the treatment of a security for federal income tax purposes. For example, for 
purposes of Section 475, a security may in certain cases qualify for the 
held-for-investment exception to the mark-to-market rules even though, under 
applicable financial accounting principles, the security is classified as 
available for sale. Rev. Rul. 97-39, 1997-2 C.B. 62.

Section 1221(a)(1) states that a capital asset does not include an 
inventoriable asset.  Section 475(a)(1) provides that any security which is 
inventory in the hands of the dealer shall be included in inventory at its fair 
market value.

Under Section 475, a bank that regularly originates and sells loans is a dealer 
within the meaning of Section 475 with respect to the loans originated and 
sold. Rev. Rul. 97-39.  However a bank that engages in no more than negligible 
sales of the acquired securities is not considered a dealer in securities 
unless they elect to be so treated or, for purposes of section 471, accounts 
for any security as inventory.  CFR  1.475(c)-1, paragraph (c)(1)(i).

As a result Section 171.106(f) will apply only to those securities and loans 
for which a taxable entity is required or elects treatment under Section 
475(a)(1) or accounts for such security as inventory under Section 471.  
Section 171.106(f) does not apply to securities or loans for which an election 
is made under Section 475(f).

A taxpayer must keep detailed accounting records to comply with the 
requirements of Sections 475 or 471 and to properly report the relevant 
transactions on its federal income tax returns. 




ACCESSION NUMBER: 200809240L
SUPERSEDED: N
DOCUMENT TYPE: L
DATE: 09/01/2008
TAX TYPE: FRANCHISE