Texas ALJ Affirms Combined Reporting Requirement For Commonly-Owned Brother-Sister Entities

A Texas Administrative Law Judge (ALJ) recently affirmed that the requisite controlling interest for filing combined group reports may be held by a set of several common owners in accordance with the legal definition of an "affiliated group" for Revised Texas Franchise Tax (RTFT) purposes.1 Common ownership was determined under a plain reading of the RTFT statutes even though none of the common owners held more than a 50 percent ownership interest.

Background

The taxpayer was a taxable entity2 formed in Texas that provided medical services to patients. Company A, an entity related to the taxpayer, was a Nevada entity authorized to conduct business in Texas that performed management services for the taxpayer including accounting services, maintaining medical records, leasing office space, purchasing office equipment and medical devices, hiring and paying employees, and billing and collecting for medical services provided by the taxpayer. For the 2008-2011 tax years that were at issue, the taxpayer and Company A originally filed separate RTFT reports, each on a combined group basis and each serving as the reporting entity for the corresponding reports. More than 50 percent of both the voting power and beneficial interest of the taxpayer and Company A was collectively owned by the same persons, although none of the owners independently held over 50 percent of these interests.

The taxpayer and Company A later filed amended RTFT reports for the 2008-2011 tax years, asserting that they were members of the same affiliated group under a controlling interest owned by common owners, and conducted a single unitary business. As a result of eliminating intercompany transactions on the amended reports, the taxpayer claimed a total refund of $778,895 for the 2008-2011 tax years.

The Texas Comptroller of Public Accounts denied the taxpayer's refund claims, contending that the taxpayer and Company A were not members of the same affiliated group and, thus, were ineligible to file as members of the same combined group. According to the Comptroller, no single shareholder in either entity, at any time during the refund period, controlled over 50 percent of the total combined voting power of all classes of stock in both taxable entities, or owned directly or indirectly more than 50 percent of the beneficial ownership interest in the voting stock of both taxable entities. The Comptroller did not question that the two entities were engaged in a unitary business. In response to the Comptroller's denial, the taxpayer and Company A timely filed a request for a refund hearing to appeal the denial.

Since there was no factual dispute between the Comptroller and...