The Texas Comptroller of Public Accounts has published a letter from the Tax Policy Division to the Audit Division regarding the apportionment of proceeds from the sale of futures contracts and securities for Texas franchise tax purposes.
The letter states that a taxpayer may include the gross proceeds from the sale of commodities futures contracts or other securities held in inventory for federal income tax purposes in its gross receipts for Texas franchise tax apportionment purposes. However, any proceeds generated from the sale of such commodities futures contracts or other securities to a member of the taxpayer’s combined group may not be included in gross receipts for Texas franchise tax apportionment purposes.
Each entity within the combined group must be examined individually to determine whether it is a dealer in commodities futures contracts or securities held in inventory or whether the entity purchases and sells the futures contracts or securities for its own cost management or investment purposes. Only individual members of the combined group that satisfy Texas Tax Code §171.106(f) are entitled to include the gross proceeds of the sale of loans and securities held in inventory in their gross receipts for Texas franchise tax apportionment purposes. Furthermore, each taxpayer is required to maintain a clear record of transactions with members of its combined group because taxpayers must exclude receipts derived from those transactions from total revenue for Texas franchise tax purposes and from gross receipts for apportionment purposes.
The letter points out that auditors ought to be able to verify whether futures contracts or securities were held in inventory for federal income tax purposes or for the taxpayer’s own investment or cost management by reviewing the taxpayer’s internal records and IRS Form 1120.
Letter No. 201311792L, Texas Comptroller of Public Accounts, November 21, 2013, ¶403-934