Texas Letter Ruling Declines Capital or Investment Processing for Goodwill and Government Permits and Licenses – Tax


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On July 22, 2016, the Texas Comptroller of the Public Accounts issued a letter authorizing the proper allocation of gross proceeds from the sale of substantially all of the assets of a Texas-based company to a Delaware-incorporated entity.1 Specifically, the decision provides guidance on the allocation of gross proceeds from the sale of tangible personal property located in Texas at the time of sale, tangible personal property deployed outside the United States at the time of sale, and certain legal and contractual rights, including goodwill, government permits and licenses. The decision is notable for its determination that goodwill, and perhaps government permits, are not treated as capital assets.


A Texas-based oil and gas services company (Seller) has sold substantially all of its assets to a Delaware-incorporated entity (Buyer). The terms of the sale were defined in an asset purchase agreement. At the time of the sale, the company’s assets included tangible personal property located in Texas, tangible personal property deployed outside the United States, and tangible personal property with an unlabeled location. The vendor has also transferred a number of legal and contractual rights, including rights arising from government licenses and permits, goodwill and the value of the vendor as a going concern.

Treatment of tangible personal property

Under Text. Tax Code Ann. Second. 171.103(a)(1) and 34 Tex. Admin. CodeSec. 3.591(e)(29), transactions involving the sale of tangible personal property give rise to receipts in Texas when the tangible personal property is delivered or shipped to a buyer in Texas. Furthermore, under 34 Tex. Admin. CodeSec. 3.591(e)(29)(A), delivery is complete upon transfer of possession or control of ownership to buyer and the location of the title of passage is not relevant in determining the gross receipts of the Texas. The Monitor indicated that under these rules, the seller’s sale of tangible personal property located in Texas gives rise to Texas receipts. However, Seller’s sale of tangible personal property deployed in a foreign jurisdiction at the time of sale does not result in Texas receipts.

Treatment of legal and contractual rights

In addition to tangible personal property, the seller also sold a number of legal and contractual rights.2 34 Text. Admin. CodeSec. 3.591(e) gives examples of what constitutes intangible assets in Texas. Although contract rights are not specifically listed as intangible property in the settlement, the Monitor explained that he has always maintained that contract rights are intangible property.3 The monitor has indicated that the assets identified by the seller as “included contracts” and “insurance” are intangible assets. The controller explained that under 34 Tex. Admin. CodeSec. 3.591(e)(21)(B), gross receipts from the sale of intangible assets are allocated based on the payer’s location, which is the payer’s legal domicile.4 The legal domicile of a corporation is its state of incorporation.5 Thus, the sale of the contractual rights by Seller constitutes the sale of intangible property, the proceeds of which must be attributed to Delaware, the state in which Buyer is incorporated.

Treatment of other intangible assets

The taxpayer had requested that the remaining intangible assets6 be divided under 34 Tex. Admin. CodeSec. 3.591(e)(2) as fixed assets or investments and be reduced by the asset base. The monitor said there was no evidence that the intangibles were investments or fixed assets and that no book value had been assigned to them. Therefore, the gross gains could not be offset against other capital losses.7

Allocation of the sale price to the assets

The taxpayer also sought guidance on the correct allocation of the sale price to the specific assets sold in the agreement. The controller explained that under 34 Tex. Admin. CodeSec. 3.591(d)(4), when calculating gross receipts for apportionment, a taxable entity is deemed to have elected to use the same methods it used to file its federal income tax return. Thus, the same valuation method used for federal income tax purposes should be used for allocation calculations in Texas. As a result, the Texas value of the assets in the buyer’s hands will be the same as the Federal value.


This decision by the Monitor is noteworthy because it determined that goodwill, and possibly government permits, are not treated as capital assets. This determination is confusing because a capital asset is defined in Texas as “[a]any asset, other than an investment, which is held for the purpose of producing income and which is subject to depreciation, depletion or amortization.”8 The monitor suggests that, at least in this decision, the goodwill and other intangible assets at issue (including government permits) are not held for use in the generation of revenue and are not amortized. The comptroller’s logic is unclear, especially in light of the fact that Section 197 of the tax code, adopted by Texas for franchise tax purposes, defines goodwill and government permits as depreciable assets.9 In deviating from its previous policy in this decision, ratepayers should be aware that the Monitor has taken an aggressive stance that could justify filing under either established policy (goodwill, permits and licenses are capital asset and may be offset by other capital assets) or the new policy (these assets should be treated at their gross value) which, if it survives, may be challenged and potentially overturned by the courts.

In Hallmark Marketing Co. vs. Hegar,ten the Texas Supreme Court has ruled that the comptroller cannot offset net losses from sales of fixed assets and investments against other gross receipts in determining the denominator of the Texas franchise tax sales factor. In Punch, the comptroller sought to offset capital losses with other gross receipts in the denominator to increase the Texas allocation factor. In this decision, the comptroller used the disqualification of intangible assets from the treatment of fixed assets to prevent the taxpayer from offsetting his income. Taxpayers should be aware that the law in the area of ​​gross receipts set-off in Texas is unstable, somewhat contradictory, and potentially hanging by very fine threads.

Finally, in the decision, the Monitor promises a prospective revision of its rule11 “to clarify the definition of ‘investment’.” Thus, this decision may be interpreted as being based on a future version of the rule (potentially applicable retroactively) rather than the current promulgated version of the rule. If so, the monitor would be setting an unfortunate precedent by basing a decision on a future version of a rule that has yet to be enacted.


1 Letter decision n° 201607948L, Texas Comptroller of Public Accounts, July 22, 2016.

2 The decision lists these rights as follows: (1) rights under a joint development agreement for advanced oil production technology with a major oil company; (2) rights under a field service contract with a major oil company; (3) rights under a master service agreement with a major oil company; (4) rights under an agreement with a major oil company to provide inspection services; (5) rights under a confidentiality agreement with Seller’s proprietary technology manufacturer; (6) rights arising from all governmental authorizations and pending applications for governmental authorizations, including rights arising from consent, license, franchise, permit, exemption, authorization or the registration granted; (7) rights and interests arising out of insurance on Seller or its assets in the event of causation or liability; (8) any goodwill associated with Seller or assets purchased from Seller; and (9) the residual value created by Seller as a going concern.

3 Quoting to Letter Decision No. 9205L1173C11,Texas Comptroller of Public Accounts, May 22, 1992 and Ruling Letter No. 9404L1356C11, Texas Comptroller of Public Accounts, April 1, 1994.

434TEX. ADMIN. CODE § 3.591(b)(8).

534TEX. ADMIN. CODE § 3.591(b)(7).

6 Goodwill, the value of the seller as a going concern, and rights arising from all pending government permissions and applications for government permissions, including rights arising from consent, license, franchise, permit , exemption, authorization or registration granted.

7 The decision does not specifically state how the vendor intended to offset capital gains and losses, but it should be noted that capital compensation might have been available to the vendor if proceeds from the sale of goodwill and government licenses turned out to be capital gains. . Although the facts indicate that there was no basis in the goodwill, the seller potentially had alternative arguments regarding the valuation of the basis not raised in the decision as a means of reducing the gain.

834TEX. ADMIN. CODE § 3.591(b)(1).

9 IRC § 197(d)(1)(D).

ten Hallmark Marketing Co. v. Hegar, 488 SW3d 795 (Texas 2016). For a discussion of this case, see GT SALT Alert: Texas Supreme Court Nixes Netting Investment Loss Against Other Receipts.

11 The Monitor referred to “rule 3.291”, a sales tax rule, when he determined that it would change the definition of “investment”. The controller likely intended to refer to “Rule 3.591” instead, which was referenced throughout the letter.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.


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