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