noting that standing “is determined at the time suit is filed”
How later courts described this case
- noting that standing “is determined at the time suit is filed”
- outlining elements of constitutional standing: (1) concrete injury to plaintiff and (2) real controversy between parties (3) that will be resolved by court
Written by the judges who cited it.
The opinion
TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN
NO. 03-21-00527-CV
Appellants, Hibernia Energy LLC; and Ryan, LLC, as Assignee // Cross Appellants,
Glenn Hegar, Comptroller of Public Accounts of the State of Texas, and
Ken Paxton, Attorney General of the State of Texas
v.
Appellees, Glenn Hegar, Comptroller of Public Accounts of The State of Texas, and
Ken Paxton, Attorney General of The State of Texas //
Cross Appellees, Hibernia Energy LLC; and Ryan, LLC, as Assignee
FROM THE 261ST DISTRICT COURT OF TRAVIS COUNTY
NO. D-1-GN-20-002649, THE HONORABLE AMY CLARK MEACHUM, JUDGE PRESIDING
MEMORANDUM OPINION
Hibernia Energy, LLC and Ryan, LLC appeal from the trial court’s final judgment
denying their claim for a refund of franchise taxes. See Tex. Tax Code § 112.151. Appellants
contend that the trial court misconstrued the applicable state and federal tax laws in determining
the amount of taxes they owed by including the gains from Hibernia’s sale of oil-and-gas-
leasehold interests in their “total revenue.” See id. § 171.1011(c)(2). On cross-appeal, the
Comptroller and Attorney General (collectively, the Comptroller) argue that the trial court erred
in denying their plea to the jurisdiction. For the following reasons, we affirm the trial court’s
final judgment.
BACKGROUND
Hibernia is a limited liability company that acquired leasehold interests in several
oil-and-gas properties shortly after it was formed in 2010. Those interests are central to this
dispute. In 2012 and 2014, Hibernia sold its leasehold interests and reported to the Comptroller
on its corresponding franchise-tax reports—for tax-report years 2013 and 2015—gains of
$95,866,370 and $296,691,853, respectively. The 2013 reported gain was entirely attributable
to the sale of some of the interests at issue, and $295,888,093 of the 2015 reported gain was
attributable to the sale of the remaining interests. Hibernia arrived at its respective reported
gains by subtracting its “simulated cost basis” (i.e., its purchase price, with some adjustments not
at issue here) from the gross proceeds received on the sales. Hibernia included these gains in the
determination of its total revenue and its corresponding liability for franchise taxes and paid the
taxes. See id. §§ 171.002 (providing for franchise-tax rate of either 0.75% or 0.375% of taxable
margin, as applicable), .101 (providing for determination of entity’s taxable margin, of which
total revenue is component), .1011 (providing for determination of entity’s total revenue).
Thereafter, in late 2015, Hibernia engaged Ryan and authorized it—through a
limited power of attorney—to represent it before the Comptroller. Through Ryan, Hibernia filed
a request for a total tax refund of $2,749,437.53 for the two tax years at issue (2013 and 2015).
See id. § 111.104(b) (providing for filing of “tax refund claim”). As support, Hibernia attached
to its refund request (a) amended franchise-tax reports for 2013 and 2015, removing the roughly
$391 million in gains from the sale of the leasehold interests that it had previously reported, and
(b) a “Statement of Grounds” explaining that it had “overstated” its total revenue by erroneously
including the gains from its sale of the leasehold interests when such inclusion is purportedly not
required under applicable law.
2
Through an informal-review process, the Comptroller disagreed with and
disallowed Hibernia’s proposed adjustments, see id. § 111.1042, and in October 2016 Hibernia
requested a formal hearing, see id. § 111.105. After the formal hearing before an administrative
law judge (ALJ), the Comptroller issued a March 12, 2020 decision adopting the ALJ’s
recommendation that Hibernia’s requested refund be denied. Hibernia timely filed a motion for
rehearing, see id. § 111.105(c), (d), which the Comptroller denied, and then timely filed this suit,
see id. § 112.151.
Meanwhile, on December 6, 2017, Hibernia and Ryan executed a “Texas
Franchise Tax Refund Purchase Agreement” whereby Hibernia sold to Ryan all of its “right,
title, and interest in and to” Hibernia’s entitlement to “receive certain franchise tax refunds,”
estimated at $2,749,437.53, “pursuant to [the] refund claims filed by” Hibernia for tax years
2013 and 2015. Contemporaneously with that agreement, Hibernia executed one of the
Comptroller’s approved forms—Form 00-985, entitled “Assignment of Right to Refund”—
wherein Hibernia (“assignor”) assigned to Ryan (“assignee”) “all rights and interest to the tax
refund[s]” at issue, including the “right to file a request for a refund and to receive the refund.”
Hibernia filed its Original Petition and Request for Disclosure in the trial court
May 13, 2020. Although the petition identified only Hibernia as a plaintiff, Ryan was listed as
the party “[r]espectfully submitti[ng]” the petition, as represented by the listed undersigned
counsel. On November 5, 2020, Hibernia and Ryan, “as Assignee,” filed a First Amended
Petition, identifying Ryan as a plaintiff for the first time. This pleading was again “[r]espectfully
submitted” by Ryan, through the same undersigned counsel as the original petition. The
Comptroller filed a plea to the jurisdiction, in which it argued that Hibernia lacked standing to
bring the suit and that Ryan failed to exhaust its administrative remedies and timely file suit.
3
The trial court denied the plea to the jurisdiction, after which the parties filed cross-motions
for summary judgment regarding the merits of appellants’ entitlement to a refund. In a final
judgment, the trial court granted the Comptroller’s motion and denied appellants’ motion. The
parties each timely perfected appeal—the Comptroller of the denial of its plea to the jurisdiction,
and appellants of the final judgment denying their summary-judgment motion and granting the
Comptroller’s.
RELEVANT TAXATION SCHEMES
The federal income-tax laws and the Texas franchise-tax laws intersect in this
case. For federal-income-tax purposes, the Internal Revenue Code (I.R.C.) treats limited liability
companies as partnerships unless they file an election to be treated otherwise. See Treas. Reg.
§ 301.7701–3(b) (providing for default treatment of business entities not classified as
corporations). Partnerships are not subject to federal income taxes.1 See I.R.C. § 701 (“Partners,
not partnership, subject to tax”). For partnerships, the entity’s income is “passed through” to the
partners, who then pay federal income taxes based on their allocable shares. See id.; United
States v. Woods, 571 U.S. 31, 38 (2013). While partnerships do not themselves pay federal
income taxes, the entities are required to file informational returns—currently, Form 1065, with
attendant schedules—which allocate to partners their proportional shares of gains, losses, and
other information necessary to calculate and report their individual income-tax liability. See
I.R.C. § 6031(a) (requiring partnerships to “make a return for each taxable year, stating
specifically the items of its gross income and the deductions allowable . . . and such other
1
When referencing the federal income-tax laws and scheme, our use of the term
“partnership” in this opinion includes limited liability companies, such as Hibernia, and the term
“partners” includes a limited liability company’s members; we also note that it is undisputed that
Hibernia did not elect to be treated at the federal-tax level as anything other than as a partnership.
4
information . . . the Secretary may by forms and regulations prescribe”); Treas. Reg.
§ 1.6031(a)–1 (“Return of partnership income”); Woods, 571 U.S. at 38; see also I.R.C. § 701
(stating that partners “shall be liable for income tax only in their separate or individual
capacities”).
In contrast, Texas does not tax individuals’ income but does tax entities (via the
franchise tax) for the privilege of doing business in the state, treating limited liability companies
as taxable entities in their own right.2 See Tex. Tax Code §§ 171.001 (imposing franchise tax
on each “taxable entity” doing business in state), .0002 (defining “taxable entity” to include
limited liability companies). An entity’s franchise-tax liability is determined based on amounts
“reportable as income” on specific lines of its federal informational tax return. See id.
§ 171.1011(c)(2). Section 171.1011 requires that “the amounts reportable as income” on the
specified Form 1065 lines be summed as a first step in computing total revenue. See id.
§ 171.1011(c)(2)(A). While Hibernia reported nothing on its federal tax return on the line at
issue here—line 11, Schedule K—the Texas statute requires not what an entity “reports” but,
rather, the amounts “reportable.” See id. (emphasis added). Line 11 is where a partnership must
report “any other item of income” not reported elsewhere on the information return. See
Department of the Treasury, IRS, 2014 Instructions for Form 1065, at 24, available at
https://www.irs.gov/pub/irs-prior/i1065--2014.pdf (last accessed Apr. 14, 2023);3 see also Treas.
Reg. § 1.6031(a)–1(a)(2) (“The partnership return must contain the information required by the
prescribed form and the accompanying instructions.”).
2
It is not disputed that Hibernia is subject to the Texas franchise tax.
3
While new instructions are published each year, the applicable instructions for the two
tax years at issue do not differ in any significant respect affecting the issues here; for
convenience, we therefore cite the 2014 instructions.
5
Both the federal and state taxation schemes recognize the reality that partnerships
and limited liability companies can and do have gains, losses, and income at the entity level.
See, e.g., 26 U.S.C. § 703(a) (“The taxable income of a partnership shall be computed in the
same manner as in the case of an individual except that—(1) the items described in section
702(a) shall be separately stated, and (2) the following deductions shall not be allowed to the
partnership . . . .”); Tex. Tax Code § 171.1011 (specifying items of income to be used in
computing taxable margin for entities treated as partnerships at federal level). However, because
partnerships are not taxed at the federal level but are liable for Texas franchise taxes, the
conceptual dispute in this case asks: How is Hibernia’s “pass-through” status under federal law
properly converted into “taxable entity” status under Texas law? The specific dispute concerns
not whether Hibernia had any gains at the federal level but whether Hibernia was required
to report them on line 11, Schedule K of Form 1065 such that they needed to be included in
the company’s “total revenue” used to compute its franchise-tax liability, and thus whether
appellants are entitled to a refund.4 See Tex. Tax Code §§ 171.101, .1011.
DISCUSSION5
The Comptroller’s Plea to the Jurisdiction
We first address the Comptroller’s assertion on cross-appeal that the trial court
erred in denying his plea to the jurisdiction. In two issues, the Comptroller contends that neither
4
The amount of refund to which appellants are entitled, if they are entitled, is undisputed;
instead, the only issue is whether appellants are entitled to a refund as a matter of law.
5
The standard of review applying to summary judgments—de novo—is well-established
and need not be recited here, see, e.g., Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 661
(Tex. 2005). We also note the established rule that conclusions of law, questions of statutory
construction, and the trial court’s jurisdiction are reviewed de novo. See Lockheed Martin Corp.
v. Hegar, 601 S.W.3d 769, 774 (Tex. 2020) (statutory construction and conclusions of law);
Texas Dep’t of Parks & Wildlife v. Miranda, 133 S.W.3d 217, 226 (Tex. 2004) (jurisdiction).
6
Hibernia nor Ryan has a right to maintain this tax-refund suit. The Comptroller’s arguments as
to both appellants hinge on the 2017 assignment and its purported effect on subsequent events
and statutory requirements.
As to Hibernia, the Comptroller argues that (1) the company did not satisfy the
statutory prerequisite to suit of filing a motion for rehearing (MFR) with the Comptroller, see
id. § 112.151(a)(2)(A); see also Tex. Gov’t Code § 311.034 (“Statutory prerequisites to suit,
including the provision of notice, are jurisdictional requirements in all suits against a
governmental entity.”); and (2) the company does not have standing to bring this suit, see
Heckman v. Williamson County, 369 S.W.3d 137, 150 (Tex. 2012). The Comptroller argues that
Ryan also did not file an MFR, see Tex. Tax Code § 112.151(a)(2)(A), and failed to timely file
suit by not being added as a plaintiff until nearly six months after the Comptroller denied
Hibernia’s MFR, see id. § 112.151(c). All these arguments depend on us agreeing with the
Comptroller that the 2017 assignment to Ryan of “all rights and interest” to the refund claim
extinguished Hibernia’s rights under both the Tax Code and the general constitutional principles
of standing such that its actions taken in further pursuit of a refund, from that moment forward,
were “null and void.” But, as explained below, we do not agree with the Comptroller.
Section 112.151 of the Tax Code expressly waives the Comptroller’s
governmental immunity to allow a tax-refund suit by a person who has (1) filed a tax-refund
claim under Section 111.104 and (2) filed an MFR as provided by Section 111.105.6 See id.
§ 112.151(a). The Comptroller argues that although Hibernia met the first requirement, it did not
meet the second because it was not authorized to file an MFR when, upon the 2017 assignment,
6
The statute also requires the person to have paid any additional tax found due in a
jeopardy or deficiency determination for the relevant tax period, but the Comptroller has made
no claim of any outstanding taxes due. See Tex. Tax Code § 112.151(a)(3).
7
it “ceased” being the “tax refund claimant” referenced in Section 111.105; thus, Hibernia’s
MFR was purportedly “null and void.” See id. § 111.105(c) (“A tax refund claimant who is
dissatisfied with the decision on the [Section 111.104 tax-refund] claim is entitled to file a
motion for rehearing . . . .”). The Comptroller’s argument continues: due to the assignment,
Ryan became the statutory “tax refund claimant” and was the party required to file an MFR and
this lawsuit within the statutory timeframes. Because Ryan failed to do either, the Comptroller’s
argument concludes, the trial court lacked jurisdiction over this lawsuit.
The Comptroller argues alternatively that Hibernia lacked standing to bring this
lawsuit because it no longer had an alleged, concrete injury after it sold to Ryan its rights to
any potential refund—thereafter, Hibernia had been “fully compensated” and was “no longer
injured.” See Heckman, 369 S.W.3d at 150 (outlining elements of constitutional standing:
(1) concrete injury to plaintiff and (2) real controversy between parties (3) that will be resolved
by court); see also Texas Ass’n of Bus. v. Texas Air Control Bd., 852 S.W.2d 440, 446 n.9 (Tex.
1993) (noting that standing “is determined at the time suit is filed”). We conclude that each of
the Comptroller’s arguments—as to standing, the MFR requirement, and the timeliness of the
lawsuit—are belied by the common law and the applicable statutory text.
Texas common law has long recognized that when a cause of action is assigned,
the assignee may sue either in its name or in the name of its assignor—either way, the trial court
has subject-matter jurisdiction, and both the assignor and assignee are deemed to have standing
to maintain the action. See Eagle Supply & Mfg. L.P. v. Landmark Am. Ins., 630 S.W.3d 342,
351–52 (Tex. App.—Eastland 2021, pet. denied) (citing Texas Mach. & Equip. Co. v. Gordon
Knox Oil & Expl. Co., 442 S.W.2d 315, 317 (Tex. 1969)); Insurance Network of Tex. v. Kloesel,
266 S.W.3d 456, 465 (Tex. App.—Corpus Christi–Edinburg 2008, pet. denied); see also
8
Kerlin v. Sauceda, 263 S.W.3d 920, 932 (Tex. 2008) (Brister, J. concurring) (“[I]t has long been
the rule that an assignee . . . can sue in the name of his assignors . . . .”); Seiter v. Marschall,
147 S.W. 226, 228 (Tex. 1912) (citing “repeated holdings of our courts” allowing assignee to
prosecute and maintain cause in assignor’s name and not be required to become party of record).
Furthermore, when a party has initiated a lawsuit in its name but thereafter assigns the rights to
the lawsuit’s claims to another party, the original party may continue to prosecute the suit to
completion in its own name, whether or not the assignee is added or substituted as a party.
See Gordon Knox, 442 S.W.2d at 316–17. Because an assignee “stands in the shoes” of the
assignor, the assignee obtains all the rights, title, and interest that the assignor had at the time of
the assignment, including all remedies that were available to the assignor against a debtor for
enforcement of the obligation, such as an applicable statute of limitations. See Thweatt v.
Jackson, 838 S.W.2d 725, 727–28 (Tex. App.—Austin 1992), aff’d, 883 S.W.2d 171 (Tex. 1994).
On the basis of this common law, we conclude that although Hibernia assigned to
Ryan its rights to the tax-refund claim in the midst of the administrative-review process,
Hibernia nonetheless was entitled to both continue prosecuting its tax-refund claim, including the
filing of an MFR, in its own name and also subsequently file this tax-refund suit in its own name.
See Gordon Knox, 442 S.W.2d at 316–17. We see no reason why the common-law rule that an
assignor may continue to maintain a pending action after the rights to the claims therein have
been assigned should not also apply to pending administrative claims. Furthermore, because
Ryan stepped into Hibernia’s shoes, all of Hibernia’s rights and remedies as to these refund
claims were imputed to Ryan, including the timely filing of an MFR as a statutory prerequisite to
suit and the timely filing of suit after the Comptroller denied the MFR. See Thweatt, 838 S.W.2d
at 727–28.
9
The relevant statutes support this holding because, although they do not define
“tax refund claimant,” in context the term can only reasonably—and unremarkably—mean a
person who has filed a tax-refund claim. Section 111.104 allows only certain persons to file
such claim: (1) the person “who directly paid the tax” or (2) that person’s attorney, assignee, or
other successor. Tex. Tax Code § 111.104(b). It is undisputed, and the record establishes, that
Hibernia paid the tax and filed the tax-refund claim, prior to the 2017 assignment—at that
juncture, Hibernia was the only party (as between it and Ryan) who could have filed a tax-refund
claim. See id. Thus, Hibernia is the “tax refund claimant” with respect to the tax-refund claims
at issue, and it is the statutorily designated party to whom rights related thereto attached. Section
111.105(a) authorizes a “person claiming a refund under Section 111.104” (i.e., tax-refund
claimant) to request a formal hearing and, if dissatisfied with the Comptroller’s decision
thereafter, to file an MFR. See id. § 111.105(a), (c). It follows, therefore, that Hibernia is the
very “tax refund claimant” authorized to file a motion for rehearing pursuant to Section 111.105
and required to file a tax-refund suit in district court. See id. §§ 111.105, 112.151. While post-
assignment the common law would have permitted Ryan to usher the refund claim through the
administrative process and ultimately file this lawsuit, neither the statutes nor the common law
required that, and we refuse to hold that Hibernia’s common-law rights to maintain and pursue
the claim were thereby extinguished, especially when the statutes expressly support its continued
rights as the “tax refund claimant.”
For the same reasons, we overrule the Comptroller’s arguments that Ryan lacks
standing to maintain this suit because it did not itself file an MFR or timely file its lawsuit (by
being added as a plaintiff too late). Because it “stands in the shoes” of Hibernia, Ryan had the
same rights as Hibernia to bring and maintain this suit. Hibernia’s actions in relation to the suit
10
are thus imputed to Ryan, and Ryan was properly added as an additional plaintiff through
Hibernia’s November 2020 filing of its First Amended Petition. See Detering Co. v. Green,
989 S.W.2d 479, 480 n.1 (Tex. App.—Houston [1st Dist.] 1999, pet. denied) (determining that
although original petition was filed by assignor, amended petition listed assignee as plaintiff, and
notice of appeal listed only assignor, there was no procedural defect because “assignee may
maintain the suit in the assignor’s name”); Thweatt, 838 S.W.2d at 727–28; see also Bullock v.
Mel Powers Inv. Builder, 682 S.W.2d 400, 403 (Tex. App.—Austin 1984, no writ) (holding
that amendments to pleadings are permissible if jurisdiction has attached to original petition).
Furthermore, after the 2017 assignment, Ryan was the real party in interest with the authority to
bring and maintain this suit, regardless of the name under which the suit was brought; in fact, the
original petition indicated that Ryan was the real party in interest, noting that it was “respectfully
submitted” by Ryan. See Southern Cnty. Mut. Ins. v. Ochoa, 19 S.W.3d 452, 465 (Tex. App.—
Corpus Christi–Edinburg 2000, no pet.) (noting that “whatever name he chooses to sue under,
when a cause of action is assigned or transferred, the assignee becomes the real party in interest
with the authority to prosecute the suit to judgment”).
We hold that the trial court properly denied the Comptroller’s plea to the
jurisdiction, and we overrule the Comptroller’s issues on cross-appeal.
Whether Hibernia Is Entitled to a Refund
Having overruled the Comptroller’s issues on cross-appeal, we turn to appellants’
sole issue: Was Hibernia required by federal tax law to include on line 11, Schedule K of its
Form 1065 its net gains from the sale of the leasehold interests? As explained below, we
conclude that (1) the gains were “reportable as income” under federal tax law and that Hibernia
11
thus failed to comply with such law by not reporting them on its Form 1065; (2) Hibernia
was required to include the gains in the computation of its total revenue to determine its
franchise-tax liability; and (3) the trial court properly rendered judgment denying appellants’
claim for a refund.
On its required partnership informational return—Form 1065—a partnership must
“specifically” state the “items of [the partnership’s] gross income and the deductions allowable”
as well as “such other information . . . as the Secretary may by forms and regulations prescribe.”
See I.R.C. § 6031(a) (emphasis added); Treas. Reg. § 1.6031(a)–1(a)(1) (“every domestic
partnership must file a return of partnership income under section 6031”). “The partnership
return must contain the information required by the prescribed form and the accompanying
instructions.” Treas. Reg. § 1.6031(a)–1(a)(2) (emphasis added).
Form 1065, readily available from the IRS’s website, includes a section entitled
Schedule K: Partners’ Distributive Share Items. See Department of the Treasury, IRS, Form
1065: U.S. Return of Partnership Income, available at https://www.irs.gov/pub/irs-pdf/1065.pdf.
Schedule K is divided into sections including “Income (Loss),” “Deductions,” and “Credits.”
Within the “Income (Loss)” section is line 11—the line at issue in this case. See Tex. Tax Code
§ 171.1011(c)(2)(iii). Line 11 is the ultimate line in the section, following lines for the separate
entry of other types of income (e.g., ordinary business income, net rental-real-estate income,
interest income, and dividends). The instructions for Form 1065, Schedule K, line 11, dictate the
partnership to “[e]nter any other item of income or loss not included on lines 1 through 10.” See
2014 Instructions for Form 1065, at 29 (emphasis added).
12
The instructions further prescribe the partnership to “identify the type of income”
in the space next to line 11 and describe the type of income using one of several listed “codes.”
See id. at 29–31. The final code in the list is a catch-all:
Other income (loss) (code F). Include any other type of income, such as the
following.
• The partner’s distributive share of the partnership’s gain or loss attributable to the
sale or exchange of qualified preferred stock of the Federal National Mortgage
Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation
(Freddie Mac). On an attached statement, show (a) the gain or loss attributable to
the sale or exchange of the qualified preferred stock, (b) the date the stock was
acquired by the partnership, and (c) the date the stock was sold or exchanged by
the partnership. . . .
• Recoveries of tax benefit items (section 111).
• Gambling gains and losses subject to the limitations in section 165(d). Indicate
on an attached statement whether or not the partnership is in the trade or business
of gambling.
• Disposition of an interest in oil, gas, geothermal, or other mineral properties.
Report the following information on an attached statement to Schedule K-1:
(a) Description of the property; (b) The partner’s share of the amount realized on
the sale, exchange, or involuntary conversion of each property (fair market value
of the property for any other disposition, such as a distribution); (c) The partner’s
share of the partnership’s adjusted basis in the property (except for oil and gas
properties); and (d) Total intangible drilling costs, development costs, and mining
exploration costs (section 59(e) expenditures) passed through to the partner for
the property. See Regulations section 1.1254–5 for more information.
• Gains from the disposition of farm recapture property . . . .
• Any income, gain, or loss to the partnership under section 751(b).
• Specially allocated ordinary gain (loss).
• Any gain or loss from lines 7 or 15 of Schedule D that is not portfolio income . . . .
• Any cancellation of debt income previously deferred as a result of a section 108(i)
election that is includible in the current year. . . .
• [And other described gains.]
13
Id. at 30 (emphases added). Notably, these instructions twice mandate the partnership to list on
Schedule K “any other” item or type of income not otherwise disclosed on Form 1065. And the
instructions explain the “purpose” of Schedules K and K-1 and twice indicate that Schedule K is
used to report partnership income, even though the partnership itself does not pay tax:
Although the partnership is not subject to income tax, the partners are liable for
tax on their shares of the partnership income, whether or not distributed, and must
include their shares on their tax returns.
Schedule K. Schedule K is a summary schedule of all the partners’ shares of
the partnership’s income, credits, deductions, etc. All partnerships must complete
Schedule K. Rental activity income (loss) and portfolio income are not reported
on page 1 of Form 1065. These amounts are not combined with trade or business
activity income (loss). Schedule K is used to report the totals of these and other
amounts.
Schedule K-1. Schedule K-1 shows each partner’s separate share. Attach a copy
of each Schedule K-1 to the Form 1065 filed with the IRS. . . .
Id. at 24 (emphases added).
I.R.C. Section 6031’s requirement that a partnership “specifically” state the items
of its “gross income” aligns with the wide net the I.R.C. casts in defining “gross income”—the
term broadly means “all income from whatever source derived, including . . . [g]ains derived
from dealings in property . . . .” See I.R.C. § 61(a). A gain from the sale or disposition of
property is “the excess of the amount realized therefrom over the adjusted basis . . . .” Id.
§ 1001(a). The “amount realized” from a property sale is the “sum of any money received plus
the fair market value of the property (other than money) received.” Id. § 1001(b). The I.R.C.
further specifies that gains from the disposition of an interest in oil, gas, geothermal, or other
mineral properties constitute income. See id. § 1254 (“[I]n the case of . . . a sale [of such
14
property],” “the excess of . . . the amount realized . . . over the adjusted basis . . . shall be treated
as gain which is ordinary income.”).
The “adjusted basis” with respect to computing gains from the sale of property is
the cost of such property, adjusted to the extent allowable by law. See id. §§ 1011, 1012(a),
1016, 1254. Common adjustments to basis include expenditures “properly chargeable” to a
capital account and allowable deductions for wear and tear, amortization, and depletion of an
asset. See id. § 1016(a)(1), (2). However, a partnership is not allowed to take a depletion
deduction with respect to oil and gas wells and thus may not adjust its basis therefor. See id.
§§ 703(a)(2)(F), 1016(a)(2)(A).
In contrast, with respect to oil and gas wells a partnership may deduct what are
known as intangible drilling and development costs (IDCs). See id. § 263(c); Treas. Reg.
§ 1.612–4(a) (explaining that IDCs include “wages, fuel, repairs, hauling, supplies, etc., incident
to and necessary for the drilling of wells and the preparation of wells for the production of oil or
gas”). The general rule applying to capital improvements to property is that they may not be
fully deducted in the year incurred but must be amortized over time, resulting in authorized
adjustments (additions) to the owner’s basis in the property. See I.R.C. § 1016(a)(1); Treas. Reg.
§ 1.263(a)–(1)(a)(1). For IDCs, however, Congress has given partnerships the option to fully
deduct them in the year they are incurred, see I.R.C. § 263(c); Treas. Reg. § 1.612–4, and the
exercise of such option precludes any corresponding basis adjustment as to the partnership,
see I.R.C. § 1016(a)(1); Treas. Reg. § 1.263(a)–(1)(a)(1); see also I.R.C. §§ 614 (defining type
of property constituting mines, wells, and natural deposits), 1254(a)(1), (3) (referencing
expenditures that have been deducted under Section 263 (i.e., for IDCs) and “which, but for such
deduction, would have been included in the adjusted basis of such property” in defining Section
15
1254 property (which references Section 614 in its definition)). The evidence establishes that
Hibernia elected to take the full deduction for its IDCs in the year they were incurred and thus
was not entitled to adjust its basis therefor.7
Hibernia advances two main arguments for why its gains on the leasehold sales
were not “reportable as income” on line 11: (1) the Form 1065 instructions expressly exclude the
gains on the disposition of an interest in oil or gas properties because the applicable bullet point
states merely “disposition of an interest” rather than “gains (loss) from the disposition of an
interest,” and (2) a partnership cannot determine its “gain” from the disposition of an interest in
oil or gas properties because adjustments to basis are only tracked and made at the partner level,
which depends on varying characteristics and elections made by the partners that are unknown to
the partnership.
As to Hibernia’s first argument, we simply cannot agree with Hibernia that—in
the midst of a non-exhaustive list of “any other type of income”—the Treasury Department (in
drafting its statutorily mandated forms and instructions) intended to convey that gains (or losses)
from the disposition of an interest in oil-and-gas properties need not be reported simply because
the relevant bullet point states “disposition of an interest” rather than “gains (losses) from the
disposition of an interest.” Hibernia’s proposed construction of the instructions runs counter
to (1) the I.R.C.’s express requirement that a partnership report all items of its gross income,
see I.R.C. § 6031(a); (2) the I.R.C.’s expansive definition of gross income, see id. § 61(a); and
7
Nonetheless, the individual partners on their tax returns may either (a) fully deduct their share
of the partnership’s IDCs in the year incurred, as did the partnership; or (b) disregard the
partnership’s election and instead amortize their share of the partnership’s IDCs over time
pursuant to the default rule for capital expenditures. See I.R.C. § 59(e). If a partner chooses the
latter, it must correspondingly adjust its share of basis in the property by the portion of its share
of IDCs that it did not deduct in the year incurred. See id. § 1016(a)(1).
16
(3) the instructions’ twice mandating a partnership to include on line 11 “any other” item or type
of income, see 2014 Instructions for Form 1065 at 24, 29. We must construe the instructions
here in their context, see Tex. Gov’t Code § 311.011(a), and we must avoid hyper-technical
readings of isolated words or phrases, see Texas Dep’t of Transp. v. City of Sunset Valley,
146 S.W.3d 637, 642 (Tex. 2004), or a construction that would render a law or provision
meaningless or absurd, see Chevron Corp. v. Redmon, 745 S.W.2d 314, 316 (Tex. 1987); see
also Southwest Airlines Co. v. Bullock, 784 S.W.2d 563, 570–71 (Tex. App.—Austin 1990, no
writ) (noting that courts are to construe administrative rules and regulations in same manner as
statutes). If the Treasury Department intended to exclude a type of gross income from the
reporting requirement—assuming the Treasury Department has the authority to do so, despite the
I.R.C.’s mandate that partnerships report all “gross income”—it would constrain logic and
common sense for it do so in the middle of a list of types of income that must be reported. And,
as explained above, there can be no reasonable contention that the gains from the disposition of
oil-and-gas properties do not constitute income under the I.R.C.
Hibernia’s second argument—that it could not calculate its gains because basis
is tracked at only the partner level—is belied by the undisputed evidence that Hibernia did
calculate its gains on its original franchise-tax reports and the above discussion clarifying that a
partnership may not make adjustments to its basis for depletion or for IDCs if it has elected to
fully deduct the IDCs in the year incurred (as Hibernia did). Because those basis adjustments
17
were unavailable to Hibernia, its gains on the leasehold sales were simply its cost to purchase
them less the amount realized on the sale.8 See I.R.C. § 1001.
We overrule appellants’ sole issue and hold that Hibernia was required to report
its gains from the sale of the at-issue leasehold interests on line 11, Schedule K, of its Form 1065
and thus include those gains in its determination of total revenue for Texas franchise-tax
purposes. Accordingly, appellants were not entitled to a refund of the franchise taxes Hibernia
paid, and the trial court did not err in denying appellants’ refund claim.
CONCLUSION
Having overruled appellants’ and appellees’ issues, we affirm the trial court’s
final judgment.
__________________________________________
Thomas J. Baker, Justice
Before Justices Baker, Triana, and Theofanis
Affirmed
Filed: April 21, 2023
8
Hibernia did make a few allowable adjustments to its reported gains—for instance, it
subtracted from the sales proceeds the selling costs it incurred—but those adjustments are not
relevant to the issues on appeal, and neither party takes issue with them.
18