,
h.UEl’lXN 91. =I!ZAS
December 13, 1962
Honarable Robert S. Calved Opinion No. Wd-1493
Comptroller of Public Accounts
Austin, Texas Re: Request for an opinion
pertaining to the de-
termination of "Out-
standing indebtedness
for 'one (1) year or
more" as that term is
used in Article 12.01,
H.B. 11, 56th Legisla-
ture, Third Called
Session under the
Dear Mr. Calvert: fact,ssiated.
Your letter requesting our opinion in reference to the
captioned matter describes a specific example of one corpora-
tion's indebtedness and then you ask the following questions:
Wur problem concerns the determination of
an amount representing outstanding indebtedness
for one (1) year or more under the provisions
of Article 12.01, House &ill No. 11, Fifty-Sixth
Legislature Third Called Session. Under Attor-
ney Generaljs Opinion No.,V-1114, dated October
10, 19.50 pertaining to a tax situation derived
from Article 7084, V.T.C.S., prior to its amend-
ment in 1949, it was concluded that all payments
should be applied to the oldest indebtedness
('first-in, first-out' rule). By applying this
rule to the subject indebtedness1 the separate
proceeds received during the sub ect corpora-
tion's fiscal year are retired w,3thin an eleven
(11) month period. Consequently, all such in-
debtedness would be classified as 'non-taxable.'
nSince this opinion was based on a different
wording of the law, we are wondering if a new
basis is applicable for determining an amount
which represents outstanding indebtedness for one
(1) year or more. The prior law was worded to
include such indebtedness 'wuch have &QQ re-
newed or extended, or refinanced.' However, the
current wording of the law includes-such indebt-
edness $ðer or not such indebtedness has been
-’ ’
Ron. Robert S. Calvert, page 2 (ww-1493)
renewed or extended."' (Emphasis ours)
In connection with the above statement of facts, you
request our opinion on the following question.
"Does the current law primarily aim at indebt-
edness that is perpetually refinanced by repayments
and additional proceeds, thereby retaining a low
level of indebtedness which represents an amount
that remained outstanding for one (1) year or more?"
The 56th Legislature repealed Article 7084 Vernon's
Civil Statutes, and enacted Article 12.01, Chapter 26? Title
122A, Taxation-General, Vernon's Civil Statutes, in lieu thereof.
The pertinent parts of old Article 7084 and new Article 12.01
are set forth in the Appendix to this opinion.
The only difference between the language used in Arti-
cle 7084 before its amendment in 1949 and at the time of its
repeal and the language used in Article 12.01 was the changing
of the phrase, "but which have been renewed or extended, or re-
financed'Ito the phrase, "whether or not said indebtedness has
been renewed or extended." The words "whether or not" were
added and the words "or refinanced" were deleted ,by the 56th
Legislature in the enactment of said Article 7084. The deletion
of the words "or refinanced," in our opinion, would not change
the meaning of the phrase in any way, as a note or other evidence
of indebtedness that has been "renewed or extended" has in fact
been refinanced.
Attorney General's Opinion No. V-1114 issued in 195ii
pertained to a tax situation derived under said Article 7084
prior to its amendment in 1949, and the then Attorney General
held therein that all payments should be applied to the oldest
indebtedness under the "first-in, first-out" rule. The addition
of the words "whether or not" oould in no way affect the holding
in Attorney General's Opinion No. V-1114.
Before the addition of the words "whether or not" as
first amended in 1949? the only bonds, notes and debentures that
constituted "outstanding bonds, notes and debentures" were those
that bore a "maturity date of one year or more from date of issue"
and those that bore a maturity date of less than one year from
date of issue, but which represented indebtedness which remained
outstandin& for a period of one year or more from date of incep-
tion and which were renewed, extended or refinanced. After the
addition of the words "whether or not" all bonds, notes and de-
bentures constituted "outstanding bonds, notes and debentures,"
which bear a maturity date of one year or more from date of issue
and those which bear a maturity date of less than one year from
date of issue but which represent indebtedness which remains
Hon. Robert S. Calvert, page 3 (W-1493)
outstanding for a period of one year or more from date of incep-
tion, irrespective of,whether the indebtedness has or has not
been renewed or extended,
However, we are of the opinion that under the provi-
sions of Article 12.01 and under the submitted facts, that the
"first-in, first-out" rule is not applicable. The Courts have
applied the "first-in, first-out" rule only when the indebted-
ness was represented by two or more separate and distinct evi-
dences of indebtedness. The "first-in, first-out" rule is not
a rule of law nor of logic, but a rule of thumb. Ninth Rank 4
Trust Co. v. U.S., 15 F.Supp. 951.
Attorney General's Opinion No. V-1114 dealt with in-
debtedness evidenced by four notes bearing maturity dates in
excess of one year from the date incurred and the problem of
which of the four indebtednesses to apply future payments made
under a refinancing arrangement. The transaction and the notes
there involved are in no way similar to the transaction and
notes presented by your request.
The unquestionable purpose of the Legislature, as
evidenced by Article 7084 as amended in 1949 and present Arti-
cle 12.01 was to include within the corporate capital subject
to the levy of a franchise tax that borrowed capital accessible
to the corporation as the resultof any indebtedness which re-
mains outstanding for one year or more.
The amount of taxes owing is determined by applying
a tax rate to a taxable base. The taxable base is determined
at a particular time, either one year from date of incorpora-
tion or at the annual closing of the corporation's books.
Therefore we must look at the indebtedness owing by a corpora-
tion at a particular moment to determine the taxable base.
The statute defined taxable indebtedness in two cate-
gories:
(1) Indebtedness which has a maturity of one year
or more, and
(2) Indebtedness which does not have a maturity
date of one year or more, whether or not such
indebtedness has been renewed or extended to
the same or other parties but which indebted-
ness has been outstanding for one year or more.
Hon. Robert S. Calvert, page 4 (WW-1493)
There can be only one other type of indebtedness,
which we call type 3:
(3) Indebtedness which has a maturity date of
less than one y,earand whether or not such
indebtedness has been renewed or extended
to the same or other parties, and which
indebtedness has not been outstanding for
one year or more.
Type (3) represents non-taxable indebtedness.
Examination of a corporation’s franchies tax report
to determine into which of the three categories a particular
indebtedness may fall requires a lllookingback” through the
records of the corporation to determine which is the true and
correct category. If, in truth a& fact, indebtedness which
on its face falls in category (3) is actually indebtedness
which falls in category (2) then it should be taxed accordingly.
The tracing back of indebtedness to determine the application
of the proceeds thereof is the only way to arrive at the proper
classification or category of any indebtedness.
SUMMARY
The Legislature in amending Article 7084a,
Vernon’s Civil Statutes, (the franchise tax) in 1949,
and enacting Article 12.01, Title 122A, Taxation-
General, merely broadened the meaning of the term
“outstanding bonds, notes and debenturesl’so as to
include those that bear a maturity date of less than
one year from date of issue but which represents in-
debtedness which remained outstanding for a period
of one year or more, even though the indebtedness has
not been renewed or extended.
Under the submitted facts,the "first-in, first-
out" rule is not applicable, as there was only one
Hon. Robert S. Calvert, page 5 (W'd-1493)
note in existence upon which the payments made
could be credited.
Yours very truly,
WILL WILSON
Attorney General of Texas
By
Scranton Jones
SJ:mkh:wb Assistant
APPROVED:
OPINION COMMITTEE
W. V. Geppert, Chairman
Iola Wilxox
John Reeves
Robert Rowland
Bob Shannon
REVIEWEDFOR THEATTORNEYGENERAL
BY: Leonard Passmore
- ’
APPENDIX
Opinion No. WW-1493
Article 12.01--Taxation-General, Vernon’s Civil Statutes:
” . . . For the purpose of this subsection
outstanding bonds, notes and debentures shall
include all written evidences of indebtedness
which bear a maturity date of one (1) year or
more from date of issue, snd all such instruments
which bear a naturity date of less than one (1)
bceotion whether or not said md btedness has
been renewed or extended bv the iessv of ot&
e r
1 O
Article 7084, Vernon’s Civil Statutes :
“(1) Except as herein provided, every domes-
tic and foreign corporation heretofore or hereaf-
ter chartered or authorized to do business in
Texas, or doing business in Texas? shall, on or
before May 1st of each year, pay in advance to
the Secretary of State a franchise tax fazethe
year following, based upon that proportion of the
stated capital, surplus and undivided profits,
plus the amount of outstanding bonds, notes and
debentures (outstanding bonds, notes and deben-
tures shall include all written evidences of in-
debtedness which bear a maturity da: of,0111 (1)
year or more from date of issue,1 a a CQ
instruments which bear a maturity date of less
than one (1) year from date of issue which repre-
sent indebtedness which has remained continuouslv
outstandins for a veriod of one (1) vear or more
from date of incevtion whether or not said in-
debtedness has been renewed or extended by the
issuance of other evidences of the same indebted-
pess to the same or other Dart-, . . .11 (Empha-
sis added)