The issue of whether receipts from the sale of securities should be included in the franchise tax apportionment factor on a gross or net basis may be heard by the Texas Supreme Court after all. There are two cases, Citgo Petroleum Corp v. Hegar and Conagra Brands, Inc. v. Hegar, for which the court has requested briefing on the merits addressing this issue. While these cases are pending, taxpayers should evaluate whether to file protective refund claims to preserve their rights.

About the Court Cases

In the Citgo case, the Texas Third Court of Appeals held that receipts from the sale of non-inventory securities that were treated as inventory for federal income tax purposes using mark-to-market accounting should be included in the company's franchise tax apportionment factor on a net, rather than gross, basis. The Texas Supreme Court initially denied Citgo's petition for review, but Citgo then filed a motion for rehearing, arguing that the Court of Appeals' opinion was contrary to recent Texas Supreme Court precedent. The Texas Supreme Court granted Citgo's motion for rehearing and ordered briefing on the merits.

In the Conagra case, the Texas Third Court of Appeals also addressed the gross versus net treatment of receipts from the sale of securities for franchise tax apportionment purposes. Conagra argued that its commodity hedges, used to protect against inventory price risk, should be treated as inventory for federal tax purposes and included in its Texas franchise tax apportionment factor on a gross basis. However, the Court of Appeals disagreed, holding that the gross treatment for receipts from the sale of inventory securities did not apply to receipts from non-inventory securities, regardless of whether the securities were treated in a manner similar to inventory for federal income tax purposes. Conagra subsequently petitioned the Texas Supreme Court for review, for which the court requested briefing on the merits.

Next Steps

As a result of the developments in these two cases, the issue whether receipts from the sale of securities should be included in the franchise tax apportionment factor on a gross or net basis remains unsettled. Taxpayers engaged in hedging or futures transactions who filed franchise tax returns on a net basis should consider filing protective refund claims, as this remains an open issue until the Texas Supreme Court takes further action in Citgo and Conagra.