Alert
Texas Courts on Gains Reporting: What Partnerships and S Corps Should Know
Partnerships and S corporations (S corps) in Texas with asset sales may now have increased clarity on reporting gains on the Texas franchise tax return following a court ruling.
On June 14, 2024, the Supreme Court of Texas denied Hibernia Energy’s petition for review in the case of Hibernia Energy, LLC and Ryan LLC, As Assignee v. Glenn Hegar, Comptroller of Public Accounts of the State of Texas and Ken Paxton, Attorney General of the State of Texas.
Who's Affected by the Texas Supreme Court Decision?
Partnerships and S corps with sales of assets may be impacted by this decision.
Background on Ruling
The Texas Court of Appeals, third district affirmed the decision that Hibernia Energy, LLC’s gain on the sale of leasehold interests was reportable income, and thus, Hibernia should report the income on the Texas Franchise Tax Return. Therefore, their request for a refund was denied.
Hibernia acquired leasehold interests in oil-and-gas properties in 2010 and subsequently sold the interests in 2012 and 2014. Hibernia calculated the gains on its 2014 and 2015 Texas Franchise Tax reports by subtracting a simulated cost basis from the gross proceeds. Hibernia didn’t report the gains on Form 1065. Hibernia filed a refund claim for franchise taxes paid on the gain.
The court ruled that the gains should have been reported on Form 1065, Schedule K Line 11. The instructions on Form 1065 clearly state any other income should be reported on Schedule K Line 11. Therefore, Hibernia was correct in the initial Texas franchise tax report by including the gains in total revenue.
Since the income was reportable, the appellants aren’t entitled to a refund. Any reportable income should be included in total revenue when calculating the Texas Franchise Tax liability.
We’re Here to Help
If you have questions about this decision or its impacts on filing taxes for Texas franchises, please contact your Moss Adams professional.