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Texas Comptroller’s Voluntary Disclosure Process

It is not uncommon for Texas taxpayers to engage in a transaction in which they do not collect or pay Texas sales tax, believing the transaction to be nontaxable, only to later find out they had a tax responsibility.  Other taxpayers may be entirely unaware that a Texas sales tax or franchise tax responsibility exists at all.  In these and other cases, taxpayers may find relief by taking advantage of the Texas Comptroller’s “voluntary disclosure” program.

What is a Voluntary Disclosure?

As discussed in Comptroller Publication 96-576, the Comptroller’s Voluntary Disclosure Program provides taxpayers with an opportunity to voluntarily report and pay taxes owed for prior periods. [1] As the name suggests, the key here is that participation must be voluntary – taxpayers will only qualify if they have not been previously contacted by the Comptroller, either verbally or in writing, concerning a liability or estimated liability.

If admitted to the program, the Comptroller and taxpayer will enter into a “Voluntary Disclosure Agreement” (“VDA”) that will provide specific terms such as the period for which the taxpayer must report transactions, payment terms, and deadlines.  The taxpayer will then list all taxable transactions for the specified period, and make a payment (either partial or full, depending on the specific VDA terms) of the related tax amount.

The taxpayer may also be able to streamline and speed up this process by entering into a “Fast-Track VDA.”  This essentially requires that all documents, including the VDA and list of taxable transactions, as well as payment, be submitted up front.  While not advisable in all cases, there are circumstances where this option has substantial merit.

What are the benefits of a Voluntary Disclosure?

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Unprecedented state revenues allowed Texas lawmakers this year to propose reducing school property taxes by billions of dollars to help ease some of the burden on property owners through increased exemptions, reductions in school district tax rates and limitations on appraised values for certain properties. It was an arduous journey, with lawmakers tackling the issue in the regular legislative session and in two of the special called sessions in 2023.

Property taxes accounted for slightly over half of the total tax revenue (PDF) for local and state government in 2021 and slightly under half in 2022 (Exhibit 1). This fall, with the passage of Proposition 4, Texas voters elected to put some money back into property owners’ pockets.

EXHIBIT 1: TAX REVENUE BY SOURCE, 2021-2022
IN BILLIONSTYPE OF TAXTAX AMOUNT / PERCENT OF TOTAL TAX17.5%​17.5%20.3%​20.3%7.1%​7.1%7.2%​7.2%24.8%​24.8%25.5%​25.5%50.6%​50.6%47.0%​47.0%OTHER STATE TAXES (click to hide)LOCAL SALES TAXES (click to hide)STATE SALES TAX (click to hide)LOCAL PROPERTY TAX (click to hide)20212022$0$20$40$60$80$100$120$140$160$180
Type of Tax 2021 Tax Amount Percent of Total Tax 2022 Tax Amount Percent of Total Tax
Local Property Tax $73.5 50.6% $79.4 47.0%
State Sales Tax $36.0 24.8% $43.0 25.5%
Local Sales Taxes $10.4 7.1% $12.2 7.2%
Other State Taxes $25.5 17.5% $34.2 20.3%
TOTAL TAXES $145.4 100.00% $168.8 100.0%

Source: Texas Comptroller of Public Accounts


Investing in Public Programs

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Employee Exits: Texas Non-Compete Agreements In Post-Employment Disputes

In a recent post, I addressed the applicable framework under Texas law when employees not subject to non-compete agreements leave a job to compete with a former employer. This article addresses Texas law on non-compete covenants and its impact on potential disputes when covered employees exit and work in competitive roles.

Employers and employees alike have legitimate interests in these circumstances. Employers have an interest in protecting their investment in competitive information and knowledge held by the employee. On the flipside, exiting employees have a legitimate interest in earning a livelihood—and sometimes their only viable alternative might require a competitive role.

Recent Regulatory Scrutiny of Non-Compete Agreements

Because non-compete agreements can be used abusively, negatively impacting employees and burdening the free market, legislators and regulators have widely acted to restrain freedom of contract in connection with their use. A prospective federal regulatory proposal may soon eliminate their use in employment relationships nationwide.[i] But for the time being, Texas employers and employees would do well to familiarize themselves with the framework described below.

How Can Non-Compete Agreements Restrain Competition from Employees?

The “teeth” that compel compliance with covenants not to compete are (1) damage awards and (2) injunctive relief. Additionally, requests for injunctive relief to enforce non-compete covenants benefit from a special rule: the proponent need only show a substantial breach of a covenant for entitlement to a permanent injunction. See Butler v. Arrow Mirror & Glass, Inc., 51 S.W.3d 787, 795 (Tex. App.–Houston [1st Dist.] 2001, no pet.) (holding that a showing of irreparable harm was not necessary to support the lower court’s issuance of a permanent injunction); but see Argo Grp. US, Inc. v. Levinson, 468 S.W.3d 698, 702 (Tex. App.—San Antonio 2015, no pet.) (holding that a plaintiff seeking a temporary injunction under Tex. Bus. Com. Code § 15.51 must show a probable, imminent, and irreparable injury in the interim before trial); Primary Health Physicians, P.A. v. Sarver, 390 S.W.3d 662, 664–65 (Tex. App.–Dallas 2012, no pet.) (same). This significantly relaxes the proof required to support a permanent injunction.[ii]

These enforcement mechanisms drastically alter the legal framework governing relationships between employees and their former employers. Unless they are restrained voluntarily by agreement, former employees have a common law right to compete. Consequently, unless a non-compete agreement applies, in typical cases courts will not issue an injunction to restrain competitive conduct by a former employee post-exit. For the same reason, damage awards are not available in these circumstances unless the competing former employee’s pre-exit conduct breached a fiduciary duty or misappropriated a trade secret.
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Texas Tax Roundup | April 2023: Pleas To The Jurisdiction, Retail And Wholesale Franchise Tax Rate, And More

Howdy folks, and welcome back to another edition of the Texas Tax Roundup, where we gab about all things Texas tax and perhaps even some things Texas tax adjacent. As ole T.S. once put it, “April is the cruelest month” [1]—although maybe not for the same reasons he had. Because instead of “breeding lilacs out of the dead land”[2] or some such, which implies at least a glimmer of hope (although that might be why he thought it was so cruel, him being a bit of a downer, you know), April 2023 showered us with a string of taxpayer defeats, the one bright spot being a smackdown on a plea to the jurisdiction by the Texas Comptroller.

Court Opinions
Franchise Tax
Plea to the Jurisdiction/Total Revenue

Hibernia Energy, LLC v. Hegar, No. 03-21-00527-CV (Tex. App.—Austin Apr. 21, 2023, no pet. h.)—The Texas Third Court of Appeals affirmed the trial court’s judgment denying the Comptroller’s plea to the jurisdiction but also denying a taxpayer’s/consultant’s claim for refund for franchise taxes attributable to the inclusion in total revenue of gains from the sale of oil-and-gas leasehold interests.

The taxpayer, a limited liability company, acquired oil-and-gas leasehold interests in 2010, and then sold these interests in 2012 and 2014 at a gain of $95,866,370 and $296,691,853 for each year respectively. The taxpayer included these gains in its total revenue for purposes of determining its franchise tax liability for the respective franchise tax report years and paid the taxes.

In 2015, the taxpayer hired a consultant that filed a refund claim on the taxpayer’s behalf for the franchise taxes paid that were attributable to these gains.[3] The reason given for why the taxpayer was entitled to a refund was that it had overstated total revenue by including gains whose inclusion was not required under applicable law.

A limited liability company by default is treated as a partnership for federal income tax purposes.[4] A partnership is required to file a Form 1065, U.S. Return of Partnership Income to “report the income, gains, losses, deductions, credits, and other information about the operation of the partnership.”[5]

Under the Texas franchise tax, the total revenue of a taxable entity treated as a partnership for federal income tax purposes is calculated by first adding up the amounts reportable as income on various lines on the entity’s Form 1065:
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Texas: Administrative Judges Rulings On Tax Matters

Proposed Rules

General

34 Tex. Admin. Code § 3.9 (Electronic Filing of Returns and Reports; Electronic Transfer of Certain Payments by Certain Taxpayers) (proposed at 47 Tex. Reg. 3106 (May 27, 2022))—The Texas Comptroller proposed amendments to this rule to address reporting requirements for distributors of certain off-highway vehicles that were added as a result of SB 586, 87th Leg., R.S. (2021).  Prior to SB 586, Tex. Tax Code § 151.482 (Reports by Manufacturers and Distributors) only required manufacturers of such vehicles to file reports with the Comptroller.  See HB 1543, 86th Leg., R.S. (2019).

Notable Additions to the State Automated Research System

General

Fraudulent Transfers

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The Statute Of Frauds In Texas

The statute of frauds is an affirmative defense in a breach of contract suit that, where applicable, renders a contract unenforceable.[1] It exists to “prevent fraud and perjury in certain kinds of transactions by requiring agreements to be set out in a writing signed by the parties.”[2] In order to be enforceable, a contract that is subject to the statute of frauds must be in writing and signed by the person to be charged with the promise or agreement (or by someone lawfully authorized to sign for them).

The statute, in other words, bars claims arising out of unenforceable oral promises, unless the defendant’s fraud prevented the necessary writing.[3] If contract provisions that are subject to the statute of frauds are not severable from those outside the statute, the entire contract is unenforceable unless it satisfies the statute.[4]The question of whether the statute of frauds applies is a matter of law.[5] The statute of frauds does not apply to a fully executed contract.[6] Generally, the statute of frauds applies to contracts regarding marriage, suretyship, sales of real estate, goods priced at $500.00 or more under the Uniform Commerical Code (UCC), and contracts that are not performable in one year. There are, however, a few applications that are specific to Texas.

Texas-Specific Statute of Frauds Considerations

In Texas, the statute of frauds is located in chapter 26 of the Texas Business and Commerce code. Section 26.01(b) applies the statute to contracts regarding: marriage (“or on consideration of nonmarital conjugal cohabitation”), suretyship, contracts that are not to be performed within one year from the date of making the agreement, promises by an executor or administrator to answer out of his own estate for any debt or damage due from his testator or intestate, certain medical arrangements, and sales of real estate or leases of real estate for a term longer than one-year,[7] and certain payments related to mineral interests.

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Fraudulent Transfers Under Texas Law

Texas law prohibits a debtor who is subject to a valid judgment from moving assets out of reach of creditors in order to hinder, delay, or defraud a judgment creditor. This legal restriction applies even if the transfer takes place before the entry of a judgment against them.  A fraudulent transfer is voidable under Texas law. So, one may ask, shat is a fraudulent transfer? The Texas Uniform Fraudulent Transfer Act (TUFTA) supplies an answer.

Texas Uniform Fraudulent Transfer Act (TUFTA)

The Texas Uniform Fraudulent Transfer Act (TUFTA) prohibits a debtor from defrauding creditors by placing assets beyond their reach. The TUFTA provides creditors with legal recourse when a debtor engages in a fraudulent transfer. Where a debtor engages in a fraudulent transfer,[1]a creditor may void the transfer.

What Is a Fraudulent Transfer?

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IRS Announces Tax Relief To Texans Due to Severe Winter Weather

One of the most devastating major winter storms in the history of the State of Texas has finally passed.  Recognizing the significant emotional and financial toll the storm has taken on Texans, the IRS recently released an announcement indicating that residents and businesses in all 254 Texas counties may qualify for tax relief.  See TX-2021-02 (Feb. 22, 2021).  This Insight summarizes some of the more noteworthy relief provisions.

Postponement of Certain Tax Deadlines

Both the Internal Revenue Code and the governing regulations provide authority for the IRS to provide relief to those affected by a federally declared disaster.  Exercising this authority, the IRS has declared that certain taxpayers “that reside or have a business in all 254 Texas counties qualify for tax relief.”  These taxpayers include:

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Freeman Law: The Tax Court In Brief

The Week of February 22 – February 26, 2021

Llanos v. Commissioner | February 22, 2021 | Kerrigan, K. | Dkt. No. 8424-19L 

Short Summary:  IRS assessed § 6702 penalties against petitioner for filing frivolous returns. Eventually the IRS issued a Final Notice of Intent to Levy, to which the taxpayer timely request a CDP hearing. At the CDP hearing, the petitioner indicated that he had not received the required notices of deficiency for the civil penalties. Petitioner did not request any collection alternatives. The settlement officer upheld the levy action, and petitioner filed in tax court. Tax court held for the IRS.

Key Issue:  Whether petitioner made a “meaningful” challenge to the penalties so as to trigger a de novo review, and whether the levy action was appropriate.

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TEXAS STATE Tax Credits And Incentives
State Of Texas: Manufacturing Exemptions

State sales and use tax exemptions are available to taxpayers who manufacture, fabricate or process tangible personal property for sale.

Texas sales and use tax exempts tangible personal property that becomes an ingredient or component of an item manufactured for sale, as well as taxable services performed on a manufactured product to make it more marketable.

The exemption also applies to tangible personal property that makes a chemical or physical change in the product being manufactured and is necessary and essential in the manufacturing process. Some items, such as hand tools, are excluded from the exemption. A hammer, for example, is taxable even if it is used in fabricating a product for sale.

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So You Made Money On GameStop, Now What? A Primer On Capital Gains

The GameStop stock saga will undoubtedly go down in history as one of the most mystifying market events Wall Street has ever seen. Indeed, the markets have seen a massive influx of new retail investors into the space. But many of these investors have not previously participated in the market.[1] As noted by CNBC:

There were 3.7 million downloads of Robinhood in January, according to app market intelligence firm SensorTower, even with the millennial-favored stock trading app’s unpopular decision to put trading restrictions on a handful of stocks during GameStop’s climb. After the GameStop drama in February, downloads are still tracking strongly with 1.8 million month-to-date.[2]

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Recent Tax Court Decision: Economic Substance And the Step Transaction Doctrine

A recent Tax Court case illustrates the reach of the economic substance doctrine and the step transaction doctrine.  For the benefit of our readers, we have briefed the case below:

Complex Media, Inc. v. Comm’r, T.C. Memo. 2021-14 | February 10, 2021 | Halpern, J. | Dkt. Nos. 13368-15 and 19898-17

Short Summary: Taxpayer-corporation (Corp.) acquired the assets of a business from a third-party partnership (P’ship).  In exchange for the transferred assets, Corp. issued approximately 5 million shares of common stock.  Immediately thereafter, Corp. redeemed 1.875 million of the common shares held by P’ship in exchange for $2.7 million in cash and Corp’s obligation to make an additional payment of $300,000 a year later.  P’ship paid the cash and assigned its right to the additional payment to one of its partners in redemption of that partner’s interest in P’ship.  Corp. claimed an increased basis of $3 million in intangible assets it acquired from P’ship and amortized that additional basis under I.R.C. § 197(a). The IRS disallowed the deductions under I.R.C. § 197(a).

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