Texas Letter Ruling Clarifies “Investments” and “Capital Assets”

In a recently published letter ruling, the Texas Comptroller informed a taxpayer that it was required to use in its apportionment formula the gross receipts, not the net gains, from the sale of its intangible assets because the intangibles were not investments and were not “capital assets.” 

Texas franchise tax regulation 3.591 allows a taxpayer to use net gains on sales of intangibles held as capital assets or investments in its apportionment formula. Rule 3.591 defines a capital asset as any “asset, other than an investment, that is held for use in the production of income, and that is subject to depreciation, depletion or amortization.” The rule defines an investment as any “non-cash asset that is not a capital asset.”

The assets at issue were contractual rights to a joint development agreement, rights to service contracts, rights to a confidentiality agreement with the manufacturer, the taxpayer’s proprietary technology, and goodwill. The taxpayer did not create or purchase the assets for investment purposes and did not assign the assets a book value before the sale. Because none of the assets were created or purchased for investment purposes, and the taxpayer had not assigned a book value to the assets, the Comptroller determined that there was no evidence that the assets were capital assets or investments. As a result, the net gain calculation in Rule 3.591(e)(2) was not applicable. 

The letter further provided that the taxpayer should use the same allocation of the sales price to specific assets as used by the taxpayer for federal income tax purposes. The Comptroller plans to amend Rule 3.591 to clarify the definition of an “investment.”

TECHNICAL INFORMATION CONTACT:

Adina Christian
Director
Ryan
512.476.0022
adina.christian@ryan.com