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
.