Texas Supreme Court Ruling – Net Losses Not Included in Apportionment Factor

May 2016 | Posted in Tax Planning and Compliance
Tax Planning and Compliance
Tax Planning and Compliance Blog

On April 15, 2016, the Texas Supreme Court ruled in Hallmark Marketing Company, LLC v. Hegar that net losses on sales of investments and capital assets should not be subtracted from gross receipts when determining the Texas franchise tax apportionment factor.  The Texas Supreme Court’s decision reverses a Texas court of appeals ruling which upheld the Comptroller’s determination that a net loss from investment and capital asset sales could reduce the denominator used to calculate a taxpayer’s franchise tax apportionment factor.

The case arose when Hallmark filed a franchise tax protest suit against the Texas Comptroller seeking a refund of $200,000 in corporate franchise taxes it paid for the 2008 franchise tax year.  During this period, Hallmark incurred a net loss of $628 million from the sale of investments.  The Texas Tax Code provides that “only the net gain” from the sale of investments should be included in gross receipts for apportionment purposes.  However, the Comptroller adopted a rule requiring taxpayers to include a net gain or net loss in the apportionment factor calculation, which resulted in an increase to the apportionment factor and Texas franchise tax for Hallmark.  Both the trial court and the court of appeals found the Texas statute to be ambiguous because the term “net gain” could have two meanings: (1) cumulative gain or loss from all investment sales made throughout the year, or (2) gains from individual sales are included while losses from individual sales are not.  Instead, the Supreme Court focused on the plain language and reading of the statute, and concluded that under no reading can “net gain” include a net loss.  Accordingly, the Supreme Court reversed the court of appeals’ judgment and ruled in favor of Hallmark.

As a result of this decision, gains and losses must still be offset against one another.  However, if after netting, there is a net loss remaining, then the net loss is excluded from the apportionment factor.  Potential refunds may be available for similar situated taxpayers.

For more information on this or any other state and local tax matters, please contact Dan Manley at (214) 393-9452 or Sarah Kesting at (214) 393-9508.

Texas Supreme Court Ruling – Net Losses Not Included in Apportionment Factor
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