7
OFFICE OF THE ATTORNEY GENERAL OF TEXAS
AUSTIN
aLC*LD c. MANN
lvT.“la.. e.*r.ri .=
Xonorabls Sidney Lathsm
+3earstpry or“8tate
AUtdn, Tarsa
Dear 3lrr
led 1 ts trenahisa tex
, 1937, 1938, 1939, 19&Q
d has paid the mount qP
to be due by. asah of suah
y the aorgotstion.~
aent hss .mds .asscsomnts of
8 for uoah of t&a itbova aentionad
upOn infOrasti@n Contsined in the
rts end other f-sate lurnished to this
Department by t&s ooetpsng, whiah additional assess-
sents the goqmxy aonE-Jide ere unsutbo~ized for
cm880118hereinafter shown.
*At various tines~ tha co-:pany hns aold asrtalti
of its theaters to vsrims purchns5?8, rmceisiag
9 am811 dowd pagiatnt and prodseory notes reprssent-
lng the balmae of the purohsse somy. The notsa I
5,”
ilonorsbls Sidney La thsm, Fsgs 2
ms sscurcrd by c&e property ~014, but suah
ssocxity is zot mcl~lsivc, s-.4 th. notes ris
3 jW3FSOAll Gbli~StiOA Of tb8 SHl!C5F. mphs
aoapony :eprescnts, howevur, th3t the makers
of the notes ars othervlae unable 8s ?RJ the
notes and t!mtt, as ZYprsctlcal sisttrt, it will
be ftZu8d to look aohly to the pwpartr sold to
~KIOUF~ the gayseat of the dsfcrrrd purohssr
prioe. The 00,3pny rurthrt rspras?atr that tb6’
talus of the paparty sold is rar 1m1 than the
Sacs *aPa8 0S t&o puroharr 6oncy aotrs rsse~red
tberaior, and that St never 8x.psat8 $0 rwlfse
the faar r3lue of the notes sod the resulting
large profita Ebst woald b* rarlized If tha
notes war6 ~alil ia full; that ultlmtely it
erpsats to ba roro4a to rspossasa the propsrty
sold at thslr aotcul o&m which Is apqrnaiably
leas thsn tbrl 9ur0hasa’aonq7 notas raaaired therefor,
all of whloh 10 olslaad will result in a aubraantisl
loss to the cornpay cmparad TV the prnsant book
v’aln3 3f tbd AOt.CfS.
'%a umpmay la& tolZowed the pmotico af i iUlna
Its franahina tax r4~abr'o?~showln&~fhe ditf4ranocl:-:
in the a~ou&t (Iotually ~&aid CICLthe notea ~ond:.ths “,
Sacs vslue of the lrotss 53 ‘tmkerlized pWflt#. .,
In aoaputing its tax for the above motioned years,
the conpany has never included them it%iae of ‘un-
raalitad proffts’ as tiroblr itsm md hes raid no
taxrs thereon upoi~ tba tbrory that 11k~ %edrrrl
Inoii~e tax, It vms not taxable until aotuelly
rrccivzd.
*This year t&s Franchise ‘lkx 3ivpiaion ot this
3epartmmt aale a~ adsaa8ma~t on sll suah ltsas Of
~uilrmlized profits* so shown xl tha cwrant rapart
amI all prior raportr, for the rears 4bOQ8 mentioned,
such additional 8sassRLnants %mXmSln~: to ,!Statal fCW
811 years fro&x 1936 to 1943, both inclusive, o? $7&00,
These addlticmal aeaessamats were -de by this !Je~art-
mnt on the theory thnt ’ unrealized potits* repra-
snnted by gra~~Lmory notst areated a surplus t3 the
6xtmC of the fras valua 0C ths notes 3,s rep:crted
by th* omqany, end thnt, this Ceporkwnt was snthorized,
if not re~ulred, to aoaapt the valum of ths notes
BS shown on ths rsport, VB being wltbout zwens 9r
Qetsrglaltig anp nllqgid sctual m&at 9slt\a Of the
no:. es,
_-
“,X’he tsxpsy+r has tender46 s check in the sum
of $2GO,CO in full Fayzcnt of all suci sddltional
8ss4sS%~~AtS :zade by this 3dg3rtAlnt, cmtwdfq
that if the ltws of ‘unreallzad pro:lts* are
taxable at all as surplus, then they are taxable
only ou the actual rslue of the notes rather than
the full la40 vslue, snd ttat ths .%YJO.OOtendered
reprseents the tax for all prior yeare based upon
each actual value. In oonneoticn with the tender
OS t&h papasat, the taxpayer has ra-,uested the
privllego of ammdi~g tha reports for all the reefs
in ~uestloh in order to show an, estimted actual
ValuJ of the notes tn ;UestiOA and to Bet Up as a
*?6servr for losaas* the diffex6noe iri ths ast~4ted
aatual value and tha it300value rbiah 18 nmw3&xu~-
on tea relport95.
. *‘3y way Of fuXth6X sxplsnation, there 18 ettsched
hereto the sifidsvit o?’ Gskar Kern, 7rasident of
the oorporstion, with rsrerence to the traossotions
above aentloned. i .~
,, -L
*In the li&t of the abovs fact8, will yw pleasa~.
advtss this Dsparbmt upon the following inquirlsa:
'1. ?.re the items of iunrealiaed profit’ tsxsble
under the fremhise tax 1~ at their face vslns 9%
shown on.the franchise tax reports?
"2. Is thl8 Depertment duthor lzed to perdft the
amcndnent or rrea8hise tr,x reports after they are
f’ilsd in this offioe upon sworn ststenwts th3t t&e
report ss orl,=ln~lly if.lad dons not rspresent the
true aondition of the taXp%yfAg co::yany?
“3. Xf ws ar3 a,uthoFiztd to smept or rerait
amecdsd reports, then IS there my 1l~zItstion as to
the nuabbr of prior years for whioh such rLaandsente
csn be accepted?
“h. SotAd this 3epartaeut aaaeyt thp !2GG.G0
check Wet hsa buea tenderad in full. astisfsotlon
of ths .sdditionaZ ~~S’38?3~tmtS 00 %hJ themy, SK
contaaded by the taxpayer, tbt only the aotuol
valua rather than thtr lace volu% o,C the notes is
taxaS197
.-;..
“5. Is Chla Csp3rtnMlt suthorix~d to ecospt
-‘tha tnrpzipcr’s cxiti:mte of t::a actual vslus of
ths notes in r,uGstioi!‘;”
In tha ce3c OS C'nited 30rtb & South D49el4gm3nt
coi0pauy 9. Haath, st ml. 78 5. #. (26) 650 (error retuned)
the Austh &art OS Cl& Appeals held Lhat an lteu v.sriouolp
osmi44 04 the bwaic4 or 4 aorporatlon 84 'sppr4eiateB aurplua*
mdkurealirea apgri!al.rtlonw as properly inoluded as ~surpl~~~
in the ooapatation of the franohlsa tax IlabLlity of the oar-
poratioa. Thia ltm rrpreean&ud the luoreaeud ralw of arrtaln
011 leasrn 44 a result 02 the dleaoo~y of oil on lsad Oo+ered
by suoh lteatm, with Chd~Soalue bofnu then aunraalissd* bsonuaa
ths leases had nalthar baezi fully devslo ed nor sold at tbair
inaruesed oalum. ?-sgmdlzse of ita psrt Pcdlar dmmtiation, .
this ltua was in nffaot u’Mraalitad profit * and wu’~aanttrua
the declsida in this oass ds holdlz~g thst &a of ?uvealizaa
pror.itP 'arm properly inoluded %s surplus' In ths ooqmtatim
oi franehlae tar llabPllt~, Thus the ‘Court mid at psgn 652:
* In the instant ease -4~ tsi& that any strict
or tmohaloel aaridti0fi of tbu ~tarm ‘sozplw* as used
in thm statuts sttoeld uot b.a .appltad, but 0116which
would oHeotuata ths laglslatira iatenti ~I&wa~lr~
carrleii 011 its booke, She 7XatagozUa oowty~lease,
a ns~ly dfmoverad rlald, was a vary rqluabls asset
of the corporati,on, estLs4&3d ,~d repreeentsd by
appellant itself to h3V9 3 fP3t vsluo or rrw f2Q,32C,WO
to JU,l2O,OGO. Obviously th% lsaoe afforded appellant
both ?1 Fotsntlal snd, sotunl op rtunlty of vast and
sxtunslre rroportiona in aerry ? ng oa lta buaicsss in
th%a, s%aats. Ths 9dua of ita prIvSlag? or fmnohise
was inereassd acosdinp;ly. nnd this value, fixed by
appollsnt , was obviomly the bslais OLZ~PZiob tha state’s
tax -ass intsndad to ba acraputm& I!h4 iad that hilis full
rstlirretcd OT dp$rJip-ed V-AM rsi& not svo~t~ally be
folly raalized la rmt dftartinative OI the mount of
tbhs tax. It la altar t@t appsllsnt satlalptsd A
volnms or buaimsa reszltins l”ro~ luoh esmt, (9
potaatial igxm~, irz baymid 8 aomaal uas of lta capital
stock, sad enjoyed a’ ~rioilsga fer WYJF~ talmble then
thst nasaursd by Its cs3ital ecook slone. Ra~ardlaes
of the alassS.fioatLm of %uch l.teza a%de by .it upsn its
booka) under ths deoialons ehoon ait%t?, ?md the 07vimn
pirpoese of tha ta~lslatars 6s 0x~pr840866In artiolse
705& and 7C89 ??..?. a& wumdad (Ver~on~s Mn. Civ. 7:.
qrts. 706&,?uBg) ne ,tk:nk the smrsh~?ry of rta4s
prop,srlp to&$ th.: *sl\ls plscP?& thrreon by .>p+n3ni;
In its reFor$ into 4nnslderatiOR irt CO:ap*lClRgth* :UCW2lt
of the Crenohiae. tax dur: bhn state j-ay appellsnt.”
IA your first queEtiOn you iA~;u~rs wbsthar ths
whalitad prortt l:e;?ts sbouln brj taxed at th6J.r f4c.3 vrltio
as shown on ths frsilobise tex reports; the alternative to
. this laodo or traatxent itould bc to tax snc!l iLdm3 at their
aatual *slue. thdar none1 acoowting pracailurs, the vslue
sssi&.rred to an lteo cf urirGslizad profit is depadeht upon
the Value a**lgn44 to 8a8bk. l.f the asset8 are oarried at
(LIP 8?tif~Oi~i ValU~tiOA, th4 TalU4 rOil.eOtcd iOr UWaalla6d
proilss uill also be artlfiolnl. In .tha instant rltczation,
ii tb4 not68 ars oarma 05 t.h0 46ia *id6 0f th4 i6age
at a velur above thalr trca wrth, bhr unrealized profit
it+a till:ba magrlfl~ proportionately. zo foal that
these itam should be tared et t&&r sotwl relw tether
thaw qt thalr faca value. Art1018 7C89 requires a corpora-
tion to report “tha cash vaIus of roll gross JaaetzP rether
than tbs ieua value of rush ass&r. St the 4aah valus of .
asseta ia to be r#portsd, it would aaam that the ls&Jsla-
turr inteadod %hat ItaPu of uarsoWmi3 geotit b4 rcpnrted
and tared at their satual ralua, sinae euah valuS is the
only’on~ w5.1Jci.1 am be derived fpw the 04321 valus ?,t assets.
3oreovcr, aa ms mid by ths Oour t ia t&e Haath ode*, a
$rsn&las tax Is *but a oharge made by tbs state a@nst
; Y. thr OOTJM?4tiO~ r4r the ~l'iVildg6 &?dcrsAtSdit to do bUsiIie8s
I .; ln. tile stata.' The a~onat of ,Uae aharge ie drtsmined in
‘. part by ths value of tbs QP@Qmy 0wn4a by tn4~ co+pmitl0n,
and suah amlm& h?rs bean aade to iluaturta width thr vaIuo
of such property em the tbaory thet tbr ~a1t.s~~ Of tb,*
y~itilcgc grpantad by the Stn:g ver-ies dlrsatly with the
volu-ac of~aaacts of Ghs cwporstion whish enjoys Such
p4vlle!gl. mvl~u~ly it could never hsva b44n the intention
oi the lo.&slature to %llIow Y Eor~orsti.on t0 JlkwEb its
~ranuhias tax48 by rssl#ping a low iace Valu4 t0 thO55
profits wNch~al&t ba raallzsd Tro4 4 valuable W36t;
convaraely t,&e. k&ShtUrd ootid never hsvs intaoded that
the franobfae tar 1labiUty or a corymtim b.e laflated
by ita ~oe$sssion of an asset whiah, thouah deprsoiatfrd in
VS~IJ~, bears a hi& faoe vslas and is Feflaated iA h&h
s2I%l!r?Rli~~ profits*
$ . COn#es)ll4Atly,
iA 4Aewcr t0 yOUI!fk3t tuest%oa,
" G%~E item of unraalizad
YOU sxc p~~~potr~llp ait-risec!
,>I:~ profit ape t-;rxlbls 85 pert of SUrphl3 3lld t!Y+% %h* tax
sl~~uld be based upon the actusl vslud retScr than the
fs~4 V~LUC 0r 15m1 lte;Ud).
%
:
. “To dster,Cfine tha zmolmt of the Clrst freoc:iisa
tax ~?0ptlaS ra.:.u:rcd by $hi3 Cha9ter of my dosbatie
oorgoraCim e!%loh msy be hereafter ahapterwi, QF of
any foreign ao?pratl-on ahlah zay heWat6er apply for
a.parai6 to .do bualnesa within this Stats and also to
dotamino the ~cerraatntse ot any report nhleh 1s pro-
vlded for in Ehls ohaptw, the Saaratrry of State say,
whaaeter be dsema it n6asaaary oc pypar to prote&
6h9 illt6?66tS Oi the st6tI3, TOqUiZ ~34 OQe OT MO&'6
Of thb OfiieWs of mua& OWpOretioaa t&m&6 and fllr
ia 6ha offloa et the Searatary of State an arfidnvlt
satflag forth fully the faots oonocmi~ $he emuat
of thr curplw aad uadivided proilte, raspaotlvsly, it
any, of such doaeatla or iorel&~ corporstiong end until
the Secratary of Stete shall br mi6fica .68 00
the vmount ot. swh suxplua and per g&s-,
ras9eetjite4, if anf, he shall not File the artlalas
of iaaorpexatian of euch proposed dowestle oorporetlann,
or lame suah permit, OP acospt such franohlrs km.*
Our aaorta. !&me mma? ate&a& whether .thir As tiala
%a epplioablr to r~.aorpo~tloaar6qalred-to~~6qb‘git, m iraaahhe
t&x r6flrt.O~ W!x6thP the p8weTa grSnt@d to th6 S6Ql'6t@trY Ot Stat+
by salt! .krtiole am acmiined In thdF operation to forslgn cor-
porations uhlafi 9rd ~klng th6h lnltlal spyl.ication for s perxlt
6a transact hu5lnes6; In the as5u of Southumi 3sslty Corporation,
*t -ll., v. mcallura, et 41. 1 7. Su#p, 614, B fedaral district
cowe tuok tits lmster ?osltion., saying!
Ts1tth the axua9tiofI of ro**iFp 002.9os*t1o338
rpplyi?rfl for inltic\L pavzit, t&s sot s*aRb to asntsia-
$lsto that hha tax shell bs oasputad ;sq the sworn raFo?ts
ade by thhs curgorwtlcn. . . Thrt portion of the sot
&ii03 givsa t3e Searetary of 56ata authcelty to aWaia
ud be gul&ar; by i~for?ae6.kn *fra, ather ~i1?3!06s~rimi
apqrently relstes only to corpomtions spplgifi.5 for’
efiartsr~or pamit. . .*
“It is true tb.3: the gYJ33 rac+i~to i~ amd alit, of
TexG3 -m.¶ the v91ue of asa+ts wh:hcrq3 surplus sxlsts ia-
Volre dit;utsbls faots, bu 2 -3ufhcrity lo ~lrerl to no Offi-
0s to aorract the iiqwea rsfx1rt8d, The ndditlodal ln-
foraQtlou mq2iraa in tkz rr;c‘313r .rqxt or obtalnsd by
aifid~vit uadar irtlcla 7G67 or otherwisrl osy be ussf&
to induoa a true rqort or to found s prossoutloa for fslse
swear~A& iII 5skw ~UL uAtru6 3n.B. $8, do not asalde athathsr,
ss 18 conterded, Artiola 7Qd7, which apuaks of deter&alag
the ~~rra~%~sss of the report and satlsfyiag ths seomtery
Of the &XOUAt Of t&8 +WT~klS, appliS8 OAlJ CO tha first
year OS bimin8r8 in P3xan. Xr npplisd to ml1 rqports Ui
all years r&em s surplus is involved, it oaly results ia
the reorrtary aot soos?tin t‘ tha taadarsd ,framahise tax.
!io oa~ot enioros his
views by CIIIaaeaeaia~ gad distralnlng.
2f broaurre of 6 disputa over surplus ha rejsots the taz,
the Attorney Gsa6nl sust rile suit for itr oolleotloa under
Artlols 7095. Ireeusably in that suit a full httarina: OaAa
be, had a6 to ths ssttars in disrute. Ia esaea where Artiolg
?G3? is sot appllanble, diaputa sight arias as to the pro-
portion of iatrestste business to all busiaess, or IS to
the 3;aount of Long-t-tixe lndebtfiasaa or the like. fa such
a oasa the searahry no doubt wuld rroaspt -hat wss offered
OQ aocomt a: thr tax, having tb5 Attorney General to brim
suit for, the dirisr~enm olaimsd. . .*
FIsgsrdLeas of the sp~lioabllity of Artiale 7G87, ws reel
that ths la ttsr ozse is suthority ,?r,r tb e Fro~osltlan th%C the only
atstutory a&hod of colloatlng dnlia:uent framhlsa, tsxea is by actioa
of ‘thheAttorney Gciaeral. &liw8vnr, this in not tomy thet th6 33orntary
of ,Ststs hat no powers with respcat to scoh oolloations, tar if he
feals that paynmts sithar for aurrsat or iO? 3!3tt yaava sr% insufff-
aisnt, hs is pri9ileged to report this fact to the Attorney Gmersl
wlta t’lz roou*at ths ths latter officZ4 Srlag s,;it for thn addi-
tions1 taxss. In this sitaa:i~oa, the .?eC?St3rg OX' .Zt?t9 doss aOt
*"ur~~ort t.3 *corveutq tha reports sxbaltta,d by ths taxraper; neltbar
do?s hc stter,pt to -wk.3 m asszss:zmt and de.taad ior any tsnea -~!!lioZ3
he d$a.zs due--if he fsols tb%: th? tixpyer ha3 not disahareed his
lisbillty, his sole act Is to glace thq taatt ar in Ohs hands of the
Attorney Cenaral 80 that th* courts ,xay esoertaia the proper mount
Of the taXrt8. It 1% obpln~s that before the Gooretarp of 3tate tskrR
this 3cfsp, .le .gay desire t3 infor the tRXpSy6F Of th3 SSOL!A& Of th6
t.%iee -nfiich ha fO318 exe do4 en.3 my 3USirU to nrs$Otiate aith tbS
tnqsysr is en etts:;pt to raach!an +3nicai%l.a stttlemnt of -my dlspuio
<. Which h?s .mlscn, 38re rt;sln thir sctlc?na of ch* :aQv6tsry OP S&-Ita
are neither in the rora of a carpaotion of ths taxpsyar's vsport aov
,.;’ la a.: for.2 of an ,qS$easa+.n~t and Gezwid --r,hay 3re ~n+r.ely stfort0 by
thie offtolzll to errLv5 SC ? sglt.lt,i>p tisraby ?,s will b3 .z%Clzft-xd
k,;t ynlll rice3 it sanac~ssary
:,>; that &h;? propzr tax is yl?d sn5 Y&z.raby
~Q< to refer the -,attor t,.o the &ttorney cehexsl.
.:i::
121 t&8 insteat situstirm the SsOrbtRry deolded
ol Ststa has
that it-ma o? umsalfzad profit shculd be iacludad as a pevt of
surplun in co~p.yu:In.e the smx~t of the rrsnohiae tar, snd c&et
t!le feiLur6 to 1~1~lnCe such ltma in past yaws hs3 resulted in
a QeZlol@nay with rbeprct to tti3 ~goe;ntd ior such y~-xsze. -:e
ra&wd this drciadon as bela in award with the aasa of t?nitsd
Sorth k South I)arelo~art Cm.paen~v* E!s&h? et al., eupra, and
with th3 fw4gr>laf, portiaa oi :hls o~lnlcu. Zn aoaordanoe with
this op~nlou, th3 amount of t&o +dditianal tame due Is to bs
besod ugoo the aatual islus of the item of unrealized profit.
If the targayer :iefusss to 91y ea)r addlttanal taxer or if he
b r a da lddItlone1 tar48 aosputed wcn II t~alue of unroallzsd
’s
proiits which the Seoretary 02 State feels is not in ~uoord
with th% aotuel vnIua of aucb profits, the ?saretary or State
Is privile(ged to report au& delb%uengp to the Attorney General
2or a proprlate satlm; Co&txarlwlae, if tha ta%pgeyer tenders
addlt 1 oml tares ooqwtsd upan s value of unrsallzsd proffts
which the goaretary of State bellewas tx br in saoord with the
satua3 value or suuh voflts, tht sacrxrtarp of State is prlri-
lsged to w~~,ulasos in the .psyuant of such taxes, 91;d la sh$e
sltaatioa hs will QOt, of wursi?, rqort tha .Stter to the
Attorney Oaneral.
Year sea-nb question is sns-srerad lnfhe negative. Roith~r
expreas3.y ROT by inrplioatl~n do JUT statutes authorize the
aaendslsnt or fraac!lla3 tax: I b2crt.s aitar they have been filed
4 th the Secretary of S5ts. ,Pha swam statsnants referred t 3
In your quiutlbn sng ?iao% ap, t~gortanoo h,er*laafter indicatml,
-but they afford no basis for *n xaan&wnt of the franchise tar
reports, This snswer .artkes unnaoeaeary a reply to your third
queatloa. _
IQ angyre? to your toaru1 question, you ass raspeottully ad-
Vl.%Cd qat yeu 3rd prlvllqp? $0 aoaept the cheak for ~326O.GQ.
12 pou,dro satisfied ,thnt this figu~re repraaacts t.>s amunt oi
the .adMtlonal taxes uhaa such suoUa6 .Is 000 uted upon the
actual ?alue of the itane of umsalizad f be, y3?1 will,
31-o?’ of
course, take no iurthar aati:a \:?th rasrect to thlr pyzmt.
3x1 the other hmd, if yzw 3re not ~ttleited that this fir;uro
rbpreeents t&u pop6r a~ouflt Of the Adit4rjnal tk?.aa dU8, ynu
we prlvflqpd ta reqasst the Attmnay COfidr-~l to bin& sul$
to recover any addltlmol zmn x2ich you feal t.2 be due.