Untitled Texas Attorney General Opinion

Hon. Tom Reavley Opinion No, S-217
Secretary of State
Capitol Station Re: Proper treatment in a fran-
Austin, Texas chise tax return of an amount
shown as “reserve for ‘vaca-
tion pay ” for vacations earned
during the taxable year but
to be taken during the suc-
Dear Mr. Retivley: ceeding year;

You have requested. an.,opinion of this Office as
follows

“We have a fact situation involving the proper
classif ication of a certain reserire ‘item. Our tentative’
decision to classify the reserve as a part of the surplus or
net worth for franchise tax purposes has been challenged by
the taxpayer.

“The reserve is identified in the liability section
of the balance sheet presented in the corporationls franchise
tax return as qReserve for Vacation Payc. Upon our request-
ing information as to the exact nature of the use to be made
of the amount so set aside, the corporation subm~itt.ed t.he
following facts:

“‘This amount represents an estimate of the
liability to employees existing December 31. for
vacation pay earned on and prior to such date but
which will not be paid until th,e following y!ear.
Even though an employee completes his vacation for
one year in December; he may start his vacation
for the following year on January 1. An employee’s
right to a vacation beginning on January 1 is es-
tablished by virtue of his having performed ser~vices
during the preceding year. Thus, the Company has a
definite liability for vacations at the end of each
year. Since it is the general accounting policy
. . . . to charge against income “.he expense
Hon. Tom Reavley, page 2 (Opinion No. s-217)

attributable thereto, even though the expense
is not paid until the suhsequent year, it was
decided that this liability should also be accrued
on the corporate books. It is not considered
proper accounting to treat such a liability as a
surplus reserve. As further evidence of this
liability, the Fed,eral Government has allowed . . .
deductions for income tax purposes, on an accrual
basis for all years audited ,after 1941.’

“With the foregoing facts before you, please
advise this office if an amount designated in the
balance sheet as ‘Reserve for Vacation Pay* should
under the franchise tax law, be classified as a
surplus item for franchise tax purposes.”

It is immaterial what the Federal Government does
concerning deductions for income tax purposes. The Secre-
tary of State is not bound by Federal Income Tax Laws in the
administration of the franchise tax laws of this State,
This position is based on an analogous situation concerning
decisions of federal courts construina the income tax
statutes. In Houston, Belt 8 Terminal Ry. Co. v. Clark, 122
S.W.2d 356 (Tex.Civ.App., 1938 sustained in 135 Tex. 388,
143 S.W.2d 373, ‘1940) the Couri said:

“Appellant contends that the part of said
opinion relied upon by appellees is pure obiter
dictum; and that the decision is out of harmony
with later decisions of Federal Courts constru-
ing the income tax statutes. As to such alleged
conflicts we have made no search, because they
are not material. Such decisions are not binding
on this Court.”

The only question to be determined is, does the
“Reserve for Vacation Pay” constitute “surplus” within the
purview of the franchise taxing statute? A. B. Frank B Co.
v. Latham, 145 Tex. 30, 193 S.W.2d 671, 672 (1946).

Article 7084, Vernon’s Civii Statbes, levies a
franchise tax against corporaticr.5 based upon that proportion
of the outstanding capital stock, r-urp? ;J.:. and undividedprofi ts,
plus the amount of outstanding bonds, notes, and deben.tures,
Hon. Tom Reavley, page 3 (Opinion No. S-217)

as the gross receipts,from the business done in Texas bear
to the total gross receipts of the corporation.

Article 7089, V.C.S., provides that all corpora-
tions required to pay a franchise tax shall between January
First and March 15th of each year make a report’ to the
Secretary of State, on forms furnished by that officer, show-
ing the condition of such corporation on the last day of the
fiscal vear. It further requires, among other things, that
“Said report shall gi,ve the’cash ~value of all gross-assets of
the corporation.” (Emphasis ours.)

In United North & South Development Co. ‘v. Heath,
78 S.W.2d 650 (TexCi,v.App. 1935, error ref. ), the Court said in
defining the surplus account of a corporation:
11
. . . The surplus account represents the net
assets of a corporation in excess of all liabilities
including its capital stock.”

Article 1.02, Section A (12), of the Business,Corpora-
tion Act of Texas, states that “surplus” means excess of the
net assets of a corporation over its stated capital.

In our opinion, a liability, within the terms of our
franchise tax laws is not created by the fact that employees
may take their paid vacations in a.year subsequent to the year
in which thee paid vacations were earned. Employee A begins
his employment on the first of the corporation’s fiscal year and
ea’rns a vacation for that year but does not take same during
that year. The following year he also earns a paid vacation
and takes only one vacationthat year in that his second paid
vacation is taken the following year. It is thus seen that in
no one year does the employee take more than one vacation--
the same amount of paid vacations as he actually earns during
that particular year.

In our opinion a “Reserve for Vacation Pay” set-up
on the books of a corporation in any one year, to pay em-
ployees for th,at period of time in th,e future when the em-
ployees take their vacation, should be treated as’burplus”
for franchise tax purposes.
Hon. Tom Reavley, page 4 (Opinion No. S-217)

A “Reserve for Vacation Pay” set up on the
books of a corporation in any one year, to pay the
employees for that period of time in the future
when the employees take their vacation, should be
treated as “surplus ” for franchise tax purposes,
under Article 7084, V.C.S.

APPROVED: Yours Avery truly,

W. V. GEPPERT JOHN BEN SHEPPERD
Taxation Di.vision Attorney General of Texas

MERT STARNES
Reviewer

ROBERT E. ANDERSON
Reviewer

L. W. GRAY
Spec’ial Reviewer

DAVIS GRANT
First Assistant

JOHN BEN SHEPPERD
Attorney Genera.1