Untitled Texas Attorney General Opinion

Honorable Tom Reavley Opinion No. s-204 Secretary of State Capitol Station Re: Whether to include outstand- Austin; Texas accommodation nbtes~ inthe formula for computing fran- chise taxes due under Article 7084, V.C.S. Dear Mr. Reavley: You have requested an opinion of this office as follows: “We have a factual situation, the nature of which, we think, requires an official ruling from your office. “Corporation A, a Texas corporation, owns all of the preferred stock and approximately 95% of the common’ stock of another Texas corporation which,.for convenience, we shall call corporation B. In the latter part of 1953 corporation B attempted to arrange for certain temporary financing to construct an office building. Proposals were made to lending institutions that a line of credit be estab- lished for corporation B with a guaranty by corporation A, if necessary. The lending institutions declined to make any loan to B alone and insisted that any loan be made directly to A, because of doubt as to the validity of a guaranty ar- rangement. Loan agreements were concluded, and two lending institutions made loans directly to corporation A. These loans were made over a period of several months, and long- term written evidences were executed by A. “The funds received by A were deposited to its bank account and on the same or next day advanced or loaned the money to B. Corporation B executed long-term notes pay- able to corporation A at the same rate of interest as corpo- ration Acs notes to the lenders. The maturity of B’s notes is the same as AIs notes to one of the lenders, to which said A’s note was pledged. Honorable Tom Reav ‘ley, page 2 (s-204) ,“Corporation A iscontending that it was merely a conduit of the borrowed funds, all of which were expressly traceable into and used by co$poration B. .A is urging that the arrangement was made necessary entir$ly by the~require- ments of the lenders. “In’view of ‘the -foregoing facts, as well as the provisions of’ Article 708l$“please give us your opinion covering the following questionsz “(1) Is corporation A alone liable for the,fran- chise tax.on its notes to the lenders? “(2) Or, is only corpo,ration B liable for the franchise tax’on its note or notes to corporation A, and would corporat~.ion A then be permitted to exclude fr~om taxable capital the indebtedness represented by its notes ,to its lenders7 “(3) Or, do both corporations owe the franchise tax on the notes each corporation executed, re- gardless of the purpose for which said notes were executed? ’ / Article 708h,,V+znonrs Civil Statutes, levies a fran- chise tax against corpo’rat&ons bas.ed upon thit ‘proportion of the outstanding capital stock,; surplus and undivided profits, plus the amount of outstanding,bonds, notes and debentures as the gross,receipts from the ,bus;iness done in, Texas bear to the total gross’receipts of the corporation. (Outstanding notes include all written evidences of indebtedness ,which bear a. maturity date, of one (1) year or more from date of issue.). Article 7089,,V.C.S., provides that all corporations required to pay a franchise tax shall, .between’January 1 and March 15 of each year, make a report ,to the Secretary of State on forms ,furnished by that officer, showing the condition of the. corporation on the last. day of the preceding fiscal year. Said report shall give the cash value of all gross assets of the corporation, the amount of its authorieed capital stock actually subscribed and the amount paid in, the surplus and un- divided profits or deficit, if any, the amount of mortgage, bonds and. current indebtedness. . . Honorable atom Reavley, page 3 (S-204) Both corporations A and,,,B owe~.the franchise tax based upon the notes each corporation executed, regardless .of the purpose for which said notes were executed,-becsuse there are no provi’sions for exempt,ion of such notes due by corpora- tions in Title 122, Chaptw Three, V.C.S., or elsewhere in our statutes. The fact .th’at cor$oration A loaned the money to corooration B which was.:obtained bv it.9 note. and did not use this money in its buoibess is imm&terial. A. B. .Frank d, Co. v. Latham, 145 Tex. ad;, 193 S.W.2d 671 (1946) River- oaks Development Corp. et al. v. Shepperd, Secret& of State, 46 S.W.2d 236 (Tex.Civ. App. 1952 error ref.) an: Gulf,’ Colorado and Sinta Fe Railroad Compiny v. C. E. Fulgham, Secre- tary of State, et al. 288 S,W.2d 611 (Tex.Civ.App. 1956, error, ref.) : ..’ In A. B. Frank &%o,~ v.&atham then stock had been purchased by the corporatipn and waIS in effect retired. In Riveroaks Dkvelooment’ Co&. et al. v. Shepperd the notes were held to be outstanding etien though, t:he corooration had contracted to sell tkLe proper&y: In Gul.f., Colorado and Santa Fe Ry. Co. v. Fulghan 1, .the $5,259,895.87 was properly con- sidered as surnlus fc )r”franchise tax purposes. even thouah it would not/increase the eorporationrs .revknue.y None of these corporations were receiving revenue from these items, yet the courts inall three cases held that these items were to be used.‘for the purpose of computing the franchise taxes. The fact that the stock, th,,e notes, and the. surplus were not being used in the resp&cive corporationsr businesses to gain revenue was inrmaterial. The,stgCk, the notes, and the surplus were held to be a part of the cash~, value of the respective ‘corporations under the provisions of Article 7089. : The contention of ‘corporation *d that it was merely a conduit of the borr~owed funds, all of which were expressly traceable into and used by corporation B, and that the ar- rangement was made necessary,entitely by the requirements of the lenders is immaterial. The only question necessary to be considered here is whether the notes are outstanding obli- gations due by both corporations within the purview of the franchise tax statutes of this State. Both corporations are still liable, on these:: notes as they have not been paid, dis- charged or released. ,They are sttll in existence and con- stitute a liability of both corporations. The notes are along-term notes within the purview of Article 7084, V.&S. Honorable Tom Reavley, page 4 (S-204) Riveroaks Develbpment Cord; v. Shepperd, Secretary of State, e a, 1 2QbSW2d236 . . (T ex.Civ.App. 1952, error ref.) It is unnecessary to answer questions (1) and (2) as question (3) is answered in the affirmative. , SlJMMARY The outstanding.notes of a corporation, re- gardless of the purpose for which said notes were executed, should be included in the formula for computing the franchise tax due by the corpora- tion under Article 7084, V.C.S. That they were accommodation notes is immaterial. Yours very truly, APPROVED: JOHN BEN SHEPPERD W. V. Geppert Attorney General of Texas Taxat ion Division Mert Starnes “. Revi ewe r Asai &ant 3. C. Davis, Jr. Reviewer i. W. Gray Special Reviewer Davis Grant First Assistant John Ben Shepperd Attorney General .