Reed Smith Client Alerts

On Friday, April 21, 2023, the Texas Supreme Court signaled further interest in two cases addressing whether the proceeds from the sale of certain securities treated as inventory for federal income tax purposes are properly included in the franchise tax apportionment factor on a gross basis, rather than net. Specifically, the Texas Supreme Court reversed its prior denial of review in Citgo Petroleum Corp v. Hegar and requested briefing on the merits in that case, as well as briefing in Conagra Brands, Inc. v. Hegar. Both of these cases were wins for the Texas Comptroller at the intermediate appellate court level. Taxpayers with receipts from the sale of securities should evaluate the potential impact of a reversal by the Texas Supreme Court.

Auteurs: Danielle Ahlrich

Citgo Reinstated

As discussed in our October 2022 Client Alert, the Texas Third Court of Appeals held in Citgo Petroleum Corp v. Hegar1 that receipts from the sale of non-inventory securities, which the taxpayer elected to be treated as inventory using mark-to-market accounting for federal income tax purposes under Internal Revenue Code (“IRC”) Sections 475(e) and 475(f), were properly included in the company’s franchise tax apportionment factor at net rather than at gross. The Texas Supreme Court denied Citgo’s Petition for Review in September 2022. Citgo then filed a Motion for Rehearing, which asserted that the Court of Appeals’ opinion was contrary to recent Texas Supreme Court precedent and overly deferential to the Texas Comptroller. Citgo also implored the high court to hear the case due to the importance and reach of the issue. On this point, Citgo relied heavily upon amici briefs filed by the Council on State Taxation and the Texas Taxpayers and Research Association. In a rare move, the Texas Supreme Court granted Citgo’s Motion for Rehearing and withdrew its prior denial of Citgo’s Petition for Review. The Court also ordered briefing on the merits. The Court did not, however, grant review of the case. Thus, the Court may ultimately decline to take up the matter following full briefing.

Conagra Avoids Denial of Review

The same day, the Texas Supreme Court also requested briefing on the merits in Conagra Brands, Inc. v. Hegar.2 Conagra also concerns the gross versus net treatment of receipts from the sale securities for franchise tax apportionment purposes, but the facts and arguments vary from those in Citgo. Conagra, one of North America’s leading food companies, argues that its commodity hedges (used to protect against inventory price risk) were treated as inventory for federal tax purposes and, therefore, are entitled to inclusion in its Texas franchise tax apportionment factor on a gross basis. Conagra relies on IRC Section 1221 and federal case law treating inventory surrogates, such as commodity hedging contracts for raw food materials, similar to actual inventory.