SOAH DOCKET NO. 304-22-0692.13
CPA HEARING NO. 116,254
RE:  **************
TAXPAYER NO:      **************
AUDIT OFFICE:      **************
AUDIT PERIOD:     January 1, 2015 THROUGH December 31, 2015

SOAH DOCKET NO. 304-22-0694.13
CPA HEARING NO. 116,255
RE:  **************
TAXPAYER NO:      **************
AUDIT OFFICE:      **************
AUDIT PERIOD:     January 1, 2016 THROUGH December 31, 2016

SOAH DOCKET NO. 304-22-0695.13
CPA HEARING NO. 116,879
RE:  ************** 
TAXPAYER NO:      ************** 
AUDIT OFFICE:      **************
AUDIT PERIOD:     January 1, 2014 THROUGH December 31, 2014

Franchise Tax/RFD

BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS

GLENN HEGAR
Texas Comptroller of Public Accounts

SARAH BERRY
Representing Respondent

**************
Representing Petitioner

 

COMPTROLLER’S DECISION

This decision is considered final on March 22, 2022, unless a motion for rehearing is timely filed; this date of finality is calculated based on the Administrative Procedure Act (APA).[1]  The failure to timely file a motion for rehearing may result in adverse legal consequences.

Administrative Law Judge (ALJ) Sarah Berry of the State Office of Administrative Hearings (SOAH) issued a Proposal for Decision (PFD) that includes Findings of Fact and Conclusions of Law.  SOAH served the PFD on each party and each party was given an opportunity to file exceptions and replies with SOAH in accordance with SOAH’s rules of procedure.  The ALJ recommended that the Comptroller adopt the PFD as written.

After review and consideration, IT IS ORDERED that the PFD is adopted as changed.[2] 

The results from this Decision are Attachments A.  The ALJ’s letter to the Comptroller is Attachment B.  The PFD as changed is Attachment C.  Attachments A, B, and C are incorporated by reference.

Attachments A reflect liabilities in Hearing Nos. 116,254-255 and a zero amount due in Hearing No. 116,879.

 The total sum of the tax, penalty, and interest is due and payable 20 days after a comptroller’s decision becomes final.^[3]  If such sum is not timely paid, an additional penalty of 10 percent of the taxes due will accrue.

SIGNED on this 25th day of February 2022.

GLENN HEGAR
Comptroller of Public Accounts

By: Lisa Craven
Deputy Comptroller

Attachments A, Texas Notifications of Hearing Results
Attachment B, ALJ’s letter to the Comptroller
Attachment C, Proposal for Decision as changed

 

 

ATTACHMENT C

 

 

SOAH DOCKET NO. 304-22-0692.13
TCPA DOCKET NO. 116,254
**************
Taxpayer No. **************

SOAH DOCKET NO. 304-22-0694.13
TCPA DOCKET NO. 116,255
**************
Taxpayer No. **************

SOAH DOCKET NO. 304-22-0695.13
TCPA DOCKET NO. 116,879
**************
Taxpayer No. **************

v.

TEXAS COMPTROLLER OF PUBLIC ACCOUNTS

BEFORE THE STATE OFFICE OF ADMINISTRATIVE HEARINGS

 

PROPOSAL FOR DECISION

The Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller) audited ************** (Petitioner) for franchise tax compliance for report years 2015 and 2016 and issued an assessment for each year. Petitioner requested redetermination of the assessments, contending the auditor’s amendment to its apportionment of revenue was incorrect. Petitioner also filed a franchise tax refund claim for report year 2014, citing an alleged incorrect apportionment of its revenue for that year. That claim was denied in full, and Petitioner requested a refund hearing. In this Proposal for Decision (PFD), the Administrative Law Judge (ALJ) recommends affirming the assessments and the refund denial.

I.  PROCEDURAL HISTORY, NOTICE, AND JURISDICTION

Staff referred the contested cases to the State Office of Administrative Hearings (SOAH) and, on November 10, 2021, issued Notices of Hearing to Petitioner. On November 19, 2021, ALJ Trevor Moore issued Order No. 1, which set the hearing and joined the cases for the purpose of issuing a single PFD. The record closed on January 24, 2022. **************, Petitioner’s vice president of tax, represented Petitioner, and Sarah Berry represented Staff.

There are no issues of notice or jurisdiction; therefore, those matters are set out in the Findings of Fact and Conclusions of Law without further discussion.

II.  REASONS FOR DECISION

A.  Evidence

Staff submitted the following exhibits for the redetermination hearings (SOAH Docket Nos. 304-22-0692.13 and 304-22-0694.13):

1. Sixty-Day Notification Letter;

2. Texas Notification of Audit Results;

3. Penalty and Interest Waiver Worksheet;

4. Audit Report;

5. Audit Documentation Report; and

6. Petitioner’s Form 10-Q for the Quarter Ended September 30, 2016.

Staff submitted the following exhibits for the refund hearing (SOAH Docket No. 304‑22‑0695.13):

1. Sixty-Day Notification Letter;

2. Refund Denial Letter;

3. Refund Audit Report;

4. Refund Audit Plan;

5. Refund Claim; and

6. Petitioner’s Form 10-Q for the Quarter Ended September 30, 2016.

Petitioner submitted the following exhibits for each hearing, attached to its pleadings:

1.  Hedging Receipts Memorandum;

2.  Hedging Reclass Support Settlement Validation; and

3.  Internal Revenue Code (IRC) § 475(f) Election.

The parties’ exhibits were admitted into the record without objection.

B.  Agreed Adjustments

Staff did not agree to audit adjustments or refunds.

C.  Issues and Facts Established by the Evidence

Petitioner is an electricity producer in the United States and was the reporting entity for its combined group for franchise tax purposes during the 2014 through 2016 franchise tax report years at issue. During those report years, in accordance with its stated Risk Management Policy, Petitioner “entered into natural gas, power, environmental product, fuel oil, and other physical and financial commodity contracts to hedge certain business risks and optimize [its] portfolio of power plants.”[4] Petitioner conducted its hedging and optimization activities “within a structured risk management framework based on controls, policies and procedures,” monitored “through active and ongoing management and oversight, defined roles and responsibilities, and daily risk estimates and reporting.”[5] Petitioner’s primary objective with the hedging transactions was “to hedge against the risk of price fluctuations inherent in the commodities cash market.”[6] In executing its hedging activities, Petitioner was a trader in securities under the applicable definitions in the Internal Revenue Code (IRC) and had made the “mark-to-market” election under IRC § 475(f).[7] 

 In August 2017, Staff initiated a franchise tax compliance audit for report years 2015 and 2016. For those years, Petitioner included the gross proceeds from hedging transactions in Petitioner’s calculation of its Texas franchise tax apportionment factor. The auditor determined that during the federal income tax years corresponding to the report years under audit, Petitioner included its gains and losses from hedging transactions on Schedule D of its Federal Income Tax Return (FITR) Form 1120 and the net income from those transactions was identified as “capital gain net income” (line 8 of Form 1120). Petitioner’s losses from hedging transactions were claimed as part of its costs of goods sold (line 2 of Form 1120).[8] Considering Petitioner’s federal reporting, the auditor concluded Petitioner did not treat the hedging securities as inventory for federal income tax purposes and therefore the gross proceeds from the sales of those securities were not properly considered gross receipts to be included in the calculation of the apportionment factor.[9] Accordingly, the auditor adjusted the calculation of the apportionment factor to remove the gross proceeds from hedging transactions. On May 3, 2018, Staff issued Texas Notifications of Audit Results to Petitioner for the audits of report years 2015 and 2016 that assessed tax and interest. Penalties were waived. Petitioner timely requested redetermination for the audit assessments.

In April 2018, as the audits were being concluded, Petitioner requested a refund of franchise tax for report year 2014. In support of its claim, Petitioner amended its franchise tax return to include gross proceeds from hedging transactions in its apportionment calculation. The auditor determined that during the federal income tax year 2013 corresponding to the franchise tax report year 2014, Petitioner included its gains and losses from hedging transactions on Schedule D of its Federal Income Tax Return (FITR) Form 1120 with the net income from those transactions identified as “capital gain net income” (line 8 of Form 1120). Petitioner’s losses from hedging transactions were claimed as part of its costs of goods sold (line 2 of Form 1120).[10] As in the audits for report years 2015 and 2016, the auditor determined Petitioner did not treat the hedging securities as inventory for federal income tax purposes and therefore the gross proceeds from the sales of those securities were not properly included in the calculation of the apportionment factor. The amended return for report year 2014 was not accepted and the refund request was denied. Petitioner requested a refund hearing.

For each hearing, a single issue remains in contention. Petitioner maintains gross proceeds from its hedging transactions were properly included in calculating its apportionment factor for each of the report years at issue. Staff argues only net proceeds from the hedging transactions are properly included in the apportionment calculation and, therefore, the assessments should be upheld and the refund denied.

D.  ALJ’s Analysis and Recommendations

A franchise tax is imposed on each taxable entity that does business in this state or that is chartered or organized in this state. Tex. Tax Code § 171.001(a). A taxable entity’s franchise tax liability is determined by calculating the entity’s taxable margin, which first includes determining the entity’s revenue. Id. § 171.1011(c). The gross receipts revenue of a taxable entity from its business done in this state includes each sale of tangible personal property delivered to a buyer in this state, the receipts from each rental of property situated in this state, and receipts from each service performed in this state. Id. § 171.103(a). Total revenue is computed by adding the amounts entered as reportable income on the federal income tax return “to the extent the amount entered complies with federal income tax law.” Id. § 171.1011(b); 34 Tex. Admin. Code § 3.587(c)(2).

An entity’s taxable margin is determined by reducing revenue using the costs of goods sold deduction, the compensation deduction, the 70% revenue limitation, or the EZ rate method. Tex. Tax Code §§ 171.101, .1016. The resulting margin is then apportioned to Texas to determine the amount of tax imposed under § 171.002. Id. § 171.103. Generally, a taxable entity’s margin is apportioned to this state by multiplying the taxable entity’s margin by a fraction, the numerator of which is the taxable entity’s gross receipts from business done in this state and the denominator of which is the taxable entity’s gross receipts from its entire business. Id. § 171.106; 34 Tex. Admin. Code § 3.591(c).[11] It is the proper calculation of this apportionment factor that remains at issue in this joined hearing.

A taxable entity “shall exclude from its total revenue . . . the tax basis as determined under the Internal Revenue Code of securities and loans sold.” Tex. Tax Code § 171.1011(g-2). Because it is excluded by statute from a taxable entity’s total revenue, the tax basis of securities sold may not be included in the taxpayer’s gross receipts for calculation of either the numerator or the denominator of the apportionment factor. See id. §§ 171.1011(g-2), .1055(a). The result is that only the net proceeds from the sale of loans or securities are properly included in the apportionment calculation. See Citgo Petroleum Corp. v. Hegar, No. 03-21-00011-CV (Tex. App.—Austin 2021, no pet.). However, there is an exception for securities treated as “inventory.” Specifically, if a security is treated as inventory of the seller for federal income tax purposes, the gross proceeds of the sale of that security are considered gross receipts. Tex. Tax Code § 171.106(f); 34 Tex. Admin. Code § 3.591(e)(16)(A)(a). Therefore, the proper apportionment of Petitioner’s margin depends on whether the securities at issue were treated as inventory for federal income tax purposes during the years at issue.

Federal income tax law determines whether a loan or security is treated as inventory in the hands of the seller. State Tax Automated Research (STAR) Document No. 200809240L (September 1, 2008). The Comptroller has concluded that, in making a determination of whether securities are held as inventory under Tax Code § 171.106(f), auditors should be able to verify whether securities were held in inventory for federal income tax purposes or for the taxpayer’s own investment or cost management by reviewing the taxpayer’s internal records and IRS Form 1120. See, e.g., Comptroller’s Decision Nos. 114,244 through 114,249 (2020), 114,432 through 114,435 (2019), 113,362 and 113,363 (2018); see also STAR Document No. 201311792L (November 21, 2013). Gains and losses generated by securities held in inventory for sale in the ordinary course of business are included in IRS Form 1120, Line 1, as ordinary gains and losses. See id. However, securities held for investment or risk management, not in inventory, are identifiable as reported on line 8 of the Form 1120 as capital gain net income. See id.[12]

Petitioner’s treatment of the securities at issue on its Form 1120 follows from its mark-to-market election for traders treaders in commodities under IRC § 475(f). A taxpayer who is considered a trader is treated as carrying on a trade or business. See IRS Tax Topic 429; see also Comptroller’s Decision No. 113,362, 113,363 (2018).[13] Unlike securities dealers, traders do not maintain an inventory of securities and do not have customers. Id. A trader’s gains and losses on the sales of securities are treated as capital gains and capital losses. Id. However, IRC § 475(f) allows traders in securities to elect mark-to-market treatment for securities held in connection with the taxpayer’s securities trading business. For traders who elect the mark‑to-market treatment, IRC § 475(f)(1)(a) requires that the trader recognize gain or loss on any security held in connection with its business at the close of any taxable year as if such security were sold for its fair market value on the last business day of such taxable year. See IRC § 475(f)(1)(a)(i), (ii). Because traders do not have inventory, this treatment is identical to the treatment of securities held by a dealer that are not held as inventory. See id. § 475(a)(2)(A), (B).

Considering the provisions of the IRC, the Comptroller has concluded the exclusion for securities held as inventory found in Texas Tax Code § 171.106(f) applies only to those securities and loans for which a taxable entity is required or elects treatment under IRC § 475(a)(1) (securities in the inventory of a securities dealer) or accounts for such security as inventory under IRC § 471. See STAR Document No. 200809240L. The exclusion for securities held as inventory does not apply to securities or loans for which an election is made under IRC § 475(f). See id.

The evidence in the record supports a conclusion that, for each report year at issue, Petitioner’s mark-to-market election under IRC § 475(f) was applicable to the securities at issue and Petitioner reported the gains from hedging transactions as capital gain net income and losses as costs of goods sold on its corresponding federal income tax returns. The ALJ concludes that Petitioner did not demonstrate, by a preponderance of the evidence, that the gross proceeds from the transactions at issue were received from securities that Petitioner treated as inventory for federal income tax purposes. Therefore, Petitioner failed to establish error in either the audit adjustments or the refund denial. The assessments and the refund denial should be upheld.

III.  FINDINGS OF FACT

1. During the period at issue, ************** (Petitioner) was an electricity producer in the United States and was the reporting entity for its combined group for franchise tax purposes during the 2014 through 2016 report years at issue.

2. During the report years at issue, in accordance with its stated Risk Management Policy, Petitioner entered into natural gas, power, environmental product, fuel oil, and other physical and financial commodity contracts to hedge certain business risks and optimize its portfolio of power plants.

3. Petitioner conducted its hedging and optimization activities within a structured risk management framework based on controls, policies, and procedures, monitored through active and ongoing management and oversight, defined roles and responsibilities, and daily risk estimates and reporting.

4. Petitioner’s primary objective with its hedging transactions was to hedge against the risk of price fluctuations inherent in the commodities cash market.

5. In executing the hedging activities at issue, Petitioner was a trader in securities under the applicable definitions in the Internal Revenue Code (IRC) and had made the “mark-to-market” election under IRC § 475(f). 

6. In August 2017, Staff initiated a franchise tax compliance audit for report years 2015 and 2016. For those years, Petitioner included the gross proceeds from hedging transactions in Petitioner’s calculation of its Texas franchise tax apportionment factor.

7. The auditor determined that during the federal income tax years corresponding to the report years under audit, Petitioner included its gains and losses from hedging transactions on Schedule D of its Federal Income Tax Return (FITR) Form 1120 and the net income from those transactions was identified as “capital gain net income” (line 8 of Form 1120). Petitioner’s losses from hedging transactions were claimed as part of its costs of goods sold (line 2 of Form 1120). 

8. Considering Petitioner’s federal reporting, the auditor determined Petitioner did not treat the hedging securities as inventory for federal income tax purposes and therefore the gross proceeds from the sales of those securities were not properly considered gross receipts to be included in the calculation of the apportionment factor.

9. The auditor adjusted the calculation of the apportionment factor for each report year 2015 and 2016 to remove gross receipts from hedging transactions.

10. On May 3, 2018, Staff issued Texas Notifications of Audit Results to Petitioner for the audits of report years 2015 and 2016 that assessed tax and interest. Penalties were waived.

11. Petitioner timely requested redetermination for the audit assessments.

12. In April 2018, as the audits were being concluded, Petitioner requested a refund of franchise tax for report year 2014.

13. In support of its refund claim, Petitioner amended its franchise tax return to include gross receipts from hedging transactions in its apportionment calculation.

14. The auditor determined that for the 2013 federal income tax year corresponding to the franchise tax report year 2014, Petitioner included its gains and losses from hedging transactions on Schedule D of its FITR Form 1120 with the net income from those transactions identified as “capital gain net income” (line 8 of Form 1120). Petitioner’s losses from hedging transactions were claimed as part of its costs of goods sold (line 2 of Form 1120). 

15. The auditor determined Petitioner did not treat the hedging securities as inventory for federal income tax purposes on its 2013 FITR and therefore the gross receipts from the sales of those securities were not properly included in the calculation of the apportionment factor. 

16. The amended return for report year 2014 was not accepted and the refund request was denied.

17. Petitioner requested a refund hearing.

18. Staff referred the contested cases to the State Office of Administrative Hearings (SOAH).

19. On November 10, 2021, Staff issued Notices of Hearing to Petitioner. The notices contained a statement of the nature of the hearings; a statement of the legal authority and jurisdiction under which the hearings were to be held; a reference to the particular sections of the statutes and rules involved; and a short, plain statement of the factual matters asserted or an attachment that incorporated by reference the factual matters asserted in the complaints or petitions filed with the state agency.

20. On November 19, 2021, the Administrative Law Judge (ALJ) issued Order No. 1, which set the hearings and joined the cases for the purpose of issuing a single Proposal for Decision.

21. The record closed on January 24, 2022.

IV.  CONCLUSIONS OF LAW

1. The Comptroller has jurisdiction over this matter. See Tex. Tax Code ch. 111.

2. SOAH has jurisdiction over matters related to these hearings, including the authority to issue a proposal for decision with findings of fact and conclusions of law. See Tex. Gov’t Code ch. 2003.

3. Staff provided proper and timely notice of the hearings. See Tex. Gov’t Code ch. 2001; Tex. Tax Code §§ 111.009, .105.

4. Franchise tax is imposed on each taxable entity that does business in this state or that is chartered or organized in this state. Tex. Tax Code § 171.001(a). 

5. A taxable entity’s franchise tax liability is determined by calculating the entity’s taxable margin, which first includes determining the entity’s revenue. Tex. Tax Code § 171.1011(c).

6. The gross receipts revenue of a taxable entity from its business done in this state includes each sale of tangible personal property delivered to a buyer in this state, the receipts from each rental of property situated in this state, and receipts from each service performed in this state. Tex. Tax Code § 171.103(a).

7. Total revenue is computed by adding the amounts entered as reportable income on the federal income tax return “to the extent the amount entered complies with federal income tax law.” Tex. Tax Code § 171.1011(b); 34 Tex. Admin. Code § 3.587(c)(2).

8. An entity’s taxable margin is determined by reducing revenue using the costs of goods sold deduction, the compensation deduction, the 70% revenue limitation, or the EZ rate method. Tex. Tax Code §§ 171.101, .1016.

9. The resulting margin is then apportioned to Texas to determine the amount of tax imposed under Section 171.002. Tex. Tax Code § 171.103.

10. Generally, a taxable entity’s margin is apportioned to this state by multiplying the taxable entity’s margin by a fraction, the numerator of which is the taxable entity’s gross receipts from business done in this state and the denominator of which is the taxable entity’s gross receipts from its entire business. Tex. Tax Code § 171.106; 34 Tex. Admin. Code § 3.591(c).

11. A taxable entity “shall exclude from its total revenue . . . the tax basis as determined under the Internal Revenue Code of securities and loans sold.” Tex. Tax Code § 171.1011(g-2).

12. Because it is excluded by statute from a taxable entity’s total revenue, the tax basis of securities sold may not be included in the taxpayer’s gross receipts for calculation of either the numerator or the denominator of the apportionment factor. See Tex. Tax Code §§ 171.1011(g-2), .1055(a).

13. The result is that only the net proceeds from the sale of loans or securities are properly included in the apportionment calculation. See Citgo Petroleum Corp. v. Hegar, No. 03‑21‑00011-CV (Tex. App.—Austin 2021, no pet. h.).

14. If a security is treated as inventory of the seller for federal income tax purposes, the gross proceeds of the sale of that security are considered gross receipts. Tex. Tax Code § 171.106(f); 34 Tex. Admin. Code § 3.591(e)(16)(a).

15. Federal income tax law determines whether a loan or security is treated as inventory in the hands of the seller. State Tax Automated Research (STAR) Document No. 200809240L (September 1, 2008).

16. In determining whether securities are held as inventory under Tax Code § 171.106(f), auditors should be able to verify whether securities were held in inventory for federal income tax purposes or for the taxpayer’s own investment or cost management by reviewing the taxpayer’s internal records and IRS Form 1120. See, e.g., Comptroller’s Decision Nos. 114,244 through 114,249 (2020), 114,432 through 114,435 (2019), 113,362, 113,363 (2018); see also STAR Document No. 201311792L (November 21, 2013).

17. Gains and losses generated by securities held in inventory for sale in the ordinary course of business are included in IRS Form 1120, Line 1, as ordinary gains and losses. See, e.g., Comptroller’s Decision Nos. 114,244 through 114,249 (2020), 114,432 through 114,435 (2019), 113,362, 113,363 (2018); see also STAR Document No. 201311792L.

18. Securities held for investment or risk management, not in inventory, are identifiable as reported on line 8 of the Form 1120 as capital gain net income. See, e.g., Comptroller’s Decision Nos. 114,244 through 114,249 (2020), 114,432 through 114,435 (2019), 113,362, 113,363 (2018); see also STAR Document No. 201311792L.

19. A taxpayer who is considered a trader is treated as carrying on a trade or business. See Internal Revenue Service (IRS) Tax Topic 429; Comptroller’s Decision No. 113,362, 113,363 (2018).

20. Unlike securities dealers, traders do not maintain an inventory of securities and do not have customers. See IRS Tax Topic 429; Comptroller’s Decision No. 113,362, 113,363 (2018).

21. A trader’s gains and losses on the sales of securities are treated as capital gains and capital losses. See IRS Tax Topic 429; Comptroller’s Decision No. 113,362, 113,363 (2018).

22. IRC § 475(f) allows traders in securities to elect mark-to-market treatment for securities held in connection with the taxpayer’s securities trading business. See IRC § 475(f).

23. Traders who elect the mark-to-market treatment are required to recognize gain or loss on any security held in connection with its business at the close of any taxable year as if such security were sold for its fair market value on the last business day of such taxable year. See IRC § 475(f)(1)(a)(i), (ii). 

24. Because traders do not have inventory, this treatment is identical to the treatment of securities held by a dealer that are not held as inventory. See IRC § 475(a)(2)(A), (B).

25. The exclusion for securities held as inventory found in Texas Tax Code § 171.106(f) applies only to those securities and loans for which a taxable entity is required or elects treatment under IRC § 475(a)(1) (securities in the inventory of a securities dealer) or accounts for such security as inventory under IRC § 471. See STAR Document No. 200809240L.

26. The exclusion for securities held as inventory does not apply to securities or loans for which an election is made under IRC § 475(f). See STAR Document No. 200809240L.

27. Petitioner did not demonstrate, by a preponderance of the evidence, that the gross proceeds from the hedging transactions at issue were received from securities that Petitioner treated as inventory for federal income tax purposes.

28. Petitioner failed to establish error in either the audit adjustments or the refund denial and, therefore, the assessments and the refund denial should be upheld.

SIGNED January 28, 2022.

Trevor Moore
Administrative Law Judge
State Office of Administrative Hearings

 

 

 

ENDNOTES:

[1] The date calculated is 25 days after this decision is signed. See APA, Tex. Gov’t Code § 2001.146(a); S.B. 1095, Acts 2017, 85th Leg.   For additional guidance, refer to the Frequently Asked Questions Related to Motions for Rehearing, found here: http://comptroller.texas.gov/taxes/publications/96-1789.pdf

[2] See Tex. Gov’t Code § 2003.101(e) and (f).

[3] See Tex. Tax Code § 111.0081(c).

[4]  See Staff’s Ex. 6, Calpine Corporation’s Report on Form 10-Q for the Quarter Ended September 30, 2016, at 24 (CPA 089).

[5]  Id. at 94 (CPA 159).

[6]  See Petitioner’s Ex. 1.

[7]  26 U.S.C. § 475.

[8]  See Staff’s Ex. 5 at 51 (Audit Plan, 304-22-0692.13) and Staff’s Ex. 5 at 50 (304-22-0694.13).

[9]  Neither party submitted copies of the Form 1120s cited by the auditor.

[10]  See Staff’s Ex. 4 at 19 (Refund Audit Plan, 304-22-0695.13).

[11]  34 Texas Administrative Code § 3.591 underwent substantial revision and reorganization in 2021. The prior version of Rule 3.591 was in effect during the report years at issue and is the version cited to in this PFD.

[12]  34 Texas Administrative Code § 3.591(b)(5), effective in January 2021, reasserts and expands the cited Comptroller policy and precedent, stating, “Securities and loans held for investment, hedging, or risk management purposes are not inventory.”

[13]  https://www.irs.gov/taxtopics/tc429.html