Untitled Texas Attorney General Opinion

Xon. C. Ii6Cavness State Auditar Austin, Texas Attention,: Hem* Chas. C, Collum, Assistant State Auditor, Ren The franchisetax liability of a corporationon notes glvea to fimace real prop- erty improvements,after these notes have been as- signed by the original hold- erS the real property has beka sold, ana the purchas- er ha0 assumed paymkt there- bear 31~: of. YOU have requested the opinion of thFs Depart- meat upm the following factual si%uatiea* “It is requested that you render to this office en opinion as to the coastructioa of a corporation’sliability@der Sec. 7084 R. C. 3# In our examinationof franchisetax re- turns ne find c@rperatioaswhich have borrou- ed timpy on their own notes, Um pavents of whMh &ater have been assume3 by indlviauel purc&@e@d un6Terthe circumstrtaoes similar to th& &ascribed $pzreinafter P “pktflty Defeese Housing Company, a car- poratliwb, the owner of unlmpreved$eal.estate, finanaes improvementsthereon by borrowing from W. Ko Ewkg and Company, giving Fidelitgss notes+ snah ea lkhiblt *Ap attsahea. These n,ete,a by theb terms are psyable over e per- iod of:byes&y-fiveyears atpaare sedured by mortgages a&in& the real es%3te~ A8 long as these netea are direct l b3tigatlow of Fia- elitg, there appears to be rim qussU.oai but , Hon. C, Ii.Cavness, Page 2 (V- 500) that each such note should be included in tsx- able capital for franchisetax purposes as provided by Article 7084 (A) R. C. 3. Row- ever, two changes operate to effect circum- stances;the first Is that Ewing sells the notes, without recourse, to different lnsur- enae companies;the second is that Fidelity sells the reel estate and the purchasersas- sume the respectiveobligationsof paying the twenty-fiveyear notes as shown In deeds of trust, such as Rxhlblts 'B-1' end 'B-2'at- tached. (You will observe that in EZhibit 'B-2' E. JT.Burke is shown es vendor; the form Is the same, and Rxhiblt Q-ils should be con- sidered as if Flaelltg were shown es the ven- dor.) "In the first change mentioned above, Ewing, another corporation,in turn sells the notes to an insurancecompany, still another corporation,which receives the notes under a couveyanceform such as Rxhlblt sCQ attached. "AfterFidelity has sold the real estate and the purchaser thereof has assumed Flaelltyss obligationto pay the installmentnote, is the amount of the note properly lncludlbleas tax- able capital of Fidelity under Sec. 7084 (A)?" Article 7084, R. C. 3. 19259 as amended, pro- vides In part es follows: "(a) Except es herein prsvided, every dom- estic end foreign corporationheretofore or here- after charteredor authorizedto do business in Texas, or doing business la Texan, shall, on or before May 1st of each year, pay in advance to the Secretary of State a franchise tax for the year following,based upon that proportion of the outstandingcapital stock, surplus and un- divided profits, plus the emount'of outstand- ing bonds, notes and debentures, (outstanding bonds, notes, and debentures shall include all written evidences of indebtednesswhich bear a maturity date of one (1) year or more from date of issue D y *It (Emphasis supplied) Yourquestlon hes never been passed upon by our depend solely upon Courts, and its answer must aaeceaserily Bon. C. H. Cavness, Page 3 (V- 500) the constructionto be placed upon Article 70849 quoted above, If the notes in question constitute "outstand- ing notes" of the corporationthen the amounts thereof must be included as taxable capital of the corporation. If, on the other hand, they do not constitute 'outstand- ing notes" as that term is used in Article 7084, V. C. 3 +, them the amounts thereof shouldrptbe included as taxable capital of the corporation. It is well settled in this State, when one gives his note secured by a deed of trust on real es- tate and then subsequentlysells the reel estate, the purchaser thereof assuming the obligation of paying off the note, the purchaser Is deemed prlmarFlg 1Fable on the notes and the mortgagor becomes liable as surety. Prior to the sale of the real estate secur- ing one of the notes and the assumption by the purchaser thereof of the payment of the note, it is clear that the amount of the note should be Included in the amount of the t,axablecapital of Fidelity* However, when Fidelity sells the real estate together with the improvementsmade theresn with the funds obtained by executing one of the notes la question, and the purchaser thereof assumes the payment of the note, Fidelity becomss only secondar%ly liable on the note as surety. From and after the date of the sale, Fidelity is relieved from all liability on the note unless two contingenciesoccur: First, that the purchaser fails and refuses to pay the note, and secondly, that sale of the realty will not bring enough to satisfy the note, We do not believe under such cir- cumstances such notes constitute "outstandingnotes", as that term is used in Article 7084, V. C, S., as a- mended. In a letter opinion, dated August 20, 1934, to Ron. W, W, Heath, then Secretary of State, this depart- ment had before it a factual situation where a corpora- tion purchased land and in part payment thereof gave two vendorDs lien notes, The corporation sold said iand to a purchaser who assumed payment of the two notes previous- ly executed by the corporation. It was held that after the corporation sold the land to the purchaser, who as- sumed payment of the vendorvs lien notes thereon9 the corporation should not include the ameunt of these notes in its taxable capital under the provisions of Article 7084, v, c. s. While Article 7Q84, V, CQ So, has been emended since the date of that letter opinion, the por- tion of the Article pertinent to this opinion was not changed. Hon. C. H. Cavness, Page 4 (V-500) In accordancewith the letter oplalon dated Aug- ust 20, 1934, the Secretary of State has consletentlgeon- &rued the applicableprovlalons of Article 7084, supra, in situationsarlslng In similar cases that upon the as- sumption of a written evidence of inclebtednesa secured by a lien on real or personal property by the purchaser thereof the b,orrowecl c8pltal evldenoed by the execution of the orlglnal weltten.evidence of indebtednessceased to be used by the corporettonas a part of its taxable vorklng capital. This constructionhas been uniformly adhered~to for’s per&id of over thirteen years, and un- der the well-establlsh4drule of law In Texas such de- partmeat constructlonis entitled to great weight. Is Umnaterielthat Ewing and Company, the peyoe of tit notes, aubssquentlysold them to third par- ties without cecourso. It is our opinion the amount of the notes exe- cuted by the Fidelity Def’onseliourlngCompany tb W. K. Ewing aad Company should not bs included for the purpose of taxation under the ovirions of Article 7084, V.&S., as ameaded, after FideE” ItJ has sold th8 real estate se- curlug the notes and the purchaser thereof has assumed pagneat sf the notes. Notes executed by a corporation,maturing more than one year from date of issue, la pay- meat of money borrowed to erec’timprovements upoa property which It subaequehtlysold to pnrcaaserswho as8ume payment of such notes, a4 not constitute “outstandingnotes” of such corporation taxable under the provisionsof Article 7084, V. C. sDO as amended. Yours very truly, ATTORNEY CiERRRALOF TEXAS ATTORNEY @NNERAL