Untitled Texas Attorney General Opinion

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The Attorney General of Texas
August 31 , 1981
MARK WHITE
Attorney General

Honorable Bob Bullock Opinion No.~MW-364
Comptroller of Public Accounts
L.B.J. Building lb?: Franchise tax reporting
Austin, Texas 78711 of corporation's investment in
a subsidiary
Dear Mr. Bullock:

You request .our opinion on the proper method to value a
corporation's investment in subsidiaries for franchise tax purposes.

Any corporation authorized to do business in Texas must pay
franchise tax. Tax.-Gen. art. 12.01(l). 'The three alternative
methods yields the greatest tax. Id. One method taxes at the
statutory rate, the portion of a orporation's stated capital,
surplus, and individual profits, which is allocable to Texas.
Tax.-Gen. arts. 12.01, 12.02. A corporation's surplus includes its
investment in its subsidiary corporations. Bullock v. Enserch
Corporation, 583 S.W.2d 950 (Tex. Civ. App. - Waco 1979, writ ref'd
n.r.e.1.

The value of a corporation's investment is usually determined
from the corporation's books, kept according to generally accepted
accounting principles. Franchise Tax Fule 026.02.12.015; Texas
Attorney General Opinion V-1037 (1950). The courts, however, have
departed from the values shown by a corporatibn’s general ledger,
prepared according to generally accepted accounting principles but
inconsistent with the franchise tax provisions. For example, a
'holding company may combine its capital and receipts with those of its
subsidiaries and make one consolidated report to its shareholders.
Bullock v. Enserch Corporation, m This method is not acceptable
for franchise tax reporting because the parent corporation and
Tax.-Gen. art. 12.02(l)(a); Texaco Inc. v. Calvert. 526 S.W.2d 630
(Tex. Civ. App. - Austin 1975, writ ref'd n.r.e.).

You ask:

For purposes of reporting franchise tax, which of
the following methods should be used for
determining the cost of investments in a
subsidiary when the acquisition qualifies as a

p. 1217
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Bob Bullock - Page 2 (&g.~-364)

pooling of interest and the acquired subsidiary is
not dissolved?

(1) the par value of the stock issued by the
parent corporation in exchange for the shares
of stock in the subsidiary or

(2) the net book value of the subsidiary acquired
as reflected on the books of the subsidiary
or

(3) the fair market value at the date of
acquisition of the stock issued by the parent
in the exchange for the shares of stock of
the subsidiary.

A "pooling of interest" is an accounting term for an acquisition
which meets a number of qualifications not relevant to the question of
franchise tax liability. For purposes of this opinion, we will
consider the fact that the holding company has acquired the stock of
subsidiaries which continue to operate as separate business entities.

A holding company's investment in its subsidiaries is to be
valued at cost. Bullock v. rp . Blacks Law
Dictionary (4th Ed.) defines ::z;srt::
,","Wz;;;;i,"e::
sthat which is
actually paid...." Websters Third International Dictionary defines
"cost" as "the amount or equivalent paid or given...for anything
bought" and as "whatever must be given, sacrificed, suffered or
forgone to secure a benefit."

The facts of any given acquisition will differ. The "cost" of
acquisitions vary as well. The detarmination of ucostu~ is a fact
question, which is not appropriate for an Attorney General's Opinion.

The Comptroller may promulgate rules and regulations defining
"cost" in accordance with a generally accepted definition of such
term.

SUMMARY

A holding company's investment in a
subsidiary should be valued for franchise tax
purposes at its cost. Cost is a fact question to
be determined on an individual basis by the
Comptroller of Public Accounts in fulfilling his
statutory duties.

p. 1218
.-

Very truly yours, /I

Attorney General of Texas

JOHN W. FAINTER, JR.
First Assistant Attorney General

RICHARD E. GRAY III
Executive Assistant Attorney General

Prepared by Susan Garrison
Assistant Attorney General

APPROVED:
OPINION COMMITTEE

Susan L. Garrison, Chairman
Jon Bible
Rick Gilpin

Mu-1219