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Texas Supreme Court Reviews Security Sales in Franchise Tax Apportionment

Tax Development Oct 10, 2023

Apportionment Factor Security Sales Before the Texas Supreme Court

The Texas Supreme Court (“Court”) has requested full briefing on the merits in Citgo Petroleum Group Corp.,1 following the Court’s reinstatement of Citgo’s Petition for Review earlier this year. This request puts the case in lockstep with Conagra Brands Inc.2 Both companies are contesting the Comptroller’s interpretation of the apportionment language in Texas Tax Code Section 171.106(f). That provision allows taxpayers to include the gross proceeds from the sale of a security in gross receipts for Texas franchise tax apportionment purposes, if the security is “treated as inventory of the seller for federal income tax purposes.”

Citgo and Conagra are aligned in raising the alarm that the court of appeals’ decision ignores the verbiage “treated as” and only allows securities that are actually held in inventory for sales to customers to be included in the apportionment factor as gross receipts. Both the Council On State Taxation and the Texas Taxpayers and Research Association have supported the taxpayers’ appeals through amicus briefs filed with the Court.

Both cases involve securities that are hedges of commodities used in producing  goods that the business sells. In addition, both taxpayers assert that Internal Revenue Code (IRC) Section 475(a) is not determinative of when a security is treated as inventory for Texas franchise tax or federal income tax purposes. However, the facts and arguments start to diverge from that point.

Citgo relies on the fact it elected, under IRC Section 475(e), to use the same mark-to-market accounting for its securities, as would a dealer in securities, impacting the timing, amount, and character of the sales proceeds. Citgo also notes that its hedging securities were held and used in a manner necessary to effectuate the sale of its inventory.

Conagra relies on the fact that its federal income tax inventory accounting includes the results of its hedging security sales. Conagra’s cost of raw materials was included in its inventory amounts, which in turn are used to compute its cost of finished goods sold. Based on IRC Section 471, the hedging transactions were included in “Purchases” on Schedule A of its federal income tax return (the predecessor of the current Form 1125-A). As such, the hedging transactions were a direct component of Conagra’s “Ending Inventory.” Conagra further notes that as required by IRC Section 446(b), its hedging securities followed the same accounting method and accounting period as the inventory that was hedged to clearly reflect income.

The taxpayers now await the Supreme Court’s ruling on whether to grant oral argument in the cases. If you have questions how these cases could impact your business, please reach out to one of the experts below.

1 See, Citgo Petroleum Corp. v. Hegar, No. 21-0997.
2 See, Conagra Brands Inc. v. Hegar, No. 22-0790.


Mark L. Nachbar

Sandi Farquharson

Robert Hoyt

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