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                        h.UEl’lXN   91.   =I!ZAS




                          December 13,             1962

    Honarable Robert S. Calved                      Opinion No. Wd-1493
    Comptroller of Public Accounts
    Austin, Texas                                  Re:    Request for an opinion
                                                          pertaining to the de-
                                                          termination of "Out-
                                                          standing indebtedness
                                                          for 'one (1) year or
                                                          more" as that term is
                                                          used in Article 12.01,
                                                          H.B. 11, 56th Legisla-
                                                          ture, Third Called
                                                          Session under the
    Dear Mr. Calvert:                                     fact,ssiated.
              Your letter requesting our opinion in reference to the
    captioned matter describes a specific example of one corpora-
    tion's indebtedness and then you ask the following questions:
             Wur problem concerns the determination of
        an amount representing outstanding indebtedness
        for one (1) year or more under the provisions
        of Article 12.01, House &ill No. 11, Fifty-Sixth
        Legislature Third Called Session. Under Attor-
        ney Generaljs Opinion No.,V-1114, dated October
        10, 19.50 pertaining to a tax situation derived
        from Article 7084, V.T.C.S., prior to its amend-
        ment in 1949, it was concluded that all payments
        should be applied to the oldest indebtedness
        ('first-in, first-out' rule). By applying this
        rule to the subject indebtedness1 the separate
        proceeds received during the sub ect corpora-
        tion's fiscal year are retired w,3thin an eleven
        (11) month period. Consequently, all such in-
        debtedness would be classified as 'non-taxable.'
             nSince this opinion was based on a different
        wording of the law, we are wondering if a new
        basis is applicable for determining an amount
        which represents outstanding indebtedness for one
        (1) year or more. The prior law was worded to
        include such indebtedness 'wuch have &QQ re-
        newed or extended, or refinanced.' However, the
        current wording of the law includes-such indebt-
        edness $&ether or not such indebtedness has been
                                                                 -’   ’




Ron. Robert S. Calvert, page 2   (ww-1493)


     renewed or extended."'   (Emphasis ours)
          In connection with the above statement of facts, you
request our opinion on the following question.
          "Does the current law primarily aim at indebt-
     edness that is perpetually refinanced by repayments
     and additional proceeds, thereby retaining a low
     level of indebtedness which represents an amount
     that remained outstanding for one (1) year or more?"
          The 56th Legislature repealed Article 7084 Vernon's
Civil Statutes, and enacted Article 12.01, Chapter 26? Title
122A, Taxation-General, Vernon's Civil Statutes, in lieu thereof.
The pertinent parts of old Article 7084 and new Article 12.01
are set forth in the Appendix to this opinion.
          The only difference between the language used in Arti-
cle 7084 before its amendment in 1949 and at the time of its
repeal and the language used in Article 12.01 was the changing
of the phrase, "but which have been renewed or extended, or re-
financed'Ito the phrase, "whether or not said indebtedness has
been renewed or extended." The words "whether or not" were
added and the words "or refinanced" were deleted ,by the 56th
Legislature in the enactment of said Article 7084. The deletion
of the words "or refinanced," in our opinion, would not change
the meaning of the phrase in any way, as a note or other evidence
of indebtedness that has been "renewed or extended" has in fact
been refinanced.
          Attorney General's Opinion No. V-1114 issued in 195ii
pertained to a tax situation derived under said Article 7084
prior to its amendment in 1949, and the then Attorney General
held therein that all payments should be applied to the oldest
indebtedness under the "first-in, first-out" rule. The addition
of the words "whether or not" oould in no way affect the holding
in Attorney General's Opinion No. V-1114.
          Before the addition of the words "whether or not" as
first amended in 1949? the only bonds, notes and debentures that
constituted "outstanding bonds, notes and debentures" were those
that bore a "maturity date of one year or more from date of issue"
and those that bore a maturity date of less than one year from
date of issue, but which represented indebtedness which remained
outstandin& for a period of one year or more from date of incep-
tion and which were renewed, extended or refinanced. After the
addition of the words "whether or not" all bonds, notes and de-
bentures constituted "outstanding bonds, notes and debentures,"
which bear a maturity date of one year or more from date of issue
and those which bear a maturity date of less than one year from
date of issue but which represent indebtedness which remains
Hon. Robert S. Calvert, page 3   (W-1493)

outstanding for a period of one year or more from date of incep-
tion, irrespective of,whether the indebtedness has or has not
been renewed or extended,

          However, we are of the opinion that under the provi-
sions of Article 12.01 and under the submitted facts, that the
"first-in, first-out" rule is not applicable. The Courts have
applied the "first-in, first-out" rule only when the indebted-
ness was represented by two or more separate and distinct evi-
dences of indebtedness. The "first-in, first-out" rule is not
a rule of law nor of logic, but a rule of thumb. Ninth Rank 4
Trust Co. v. U.S., 15 F.Supp. 951.

          Attorney General's Opinion No. V-1114 dealt with in-
debtedness evidenced by four notes bearing maturity dates in
excess of one year from the date incurred and the problem of
which of the four indebtednesses to apply future payments made
under a refinancing arrangement. The transaction and the notes
there involved are in no way similar to the transaction and
notes presented by your request.

          The unquestionable purpose of the Legislature, as
evidenced by Article 7084 as amended in 1949 and present Arti-
cle 12.01 was to include within the corporate capital subject
to the levy of a franchise tax that borrowed capital accessible
to the corporation as the resultof any indebtedness which re-
mains outstanding for one year or more.

          The amount of taxes owing is determined by applying
a tax rate to a taxable base. The taxable base is determined
at a particular time, either one year from date of incorpora-
tion or at the annual closing of the corporation's books.
Therefore we must look at the indebtedness owing by a corpora-
tion at a particular moment to determine the taxable base.

          The statute defined taxable indebtedness in two cate-
gories:

          (1) Indebtedness which has a maturity of one year
              or more, and
          (2)   Indebtedness which does not have a maturity
                date of one year or more, whether or not such
                indebtedness has been renewed or extended to
                the same or other parties but which indebted-
                ness has been outstanding for one year or more.
Hon. Robert S. Calvert, page 4   (WW-1493)


          There can be only one other type of indebtedness,
which we call type 3:
     (3)   Indebtedness which has a maturity date of
           less than one y,earand whether or not such
           indebtedness has been renewed or extended
           to the same or other parties, and which
           indebtedness has not been outstanding for
           one year or more.

Type (3) represents non-taxable indebtedness.
          Examination of a corporation’s franchies tax report
to determine into which of the three categories a particular
indebtedness may fall requires a lllookingback” through the
records of the corporation to determine which is the true and
correct category. If, in truth a& fact, indebtedness which
on its face falls in category (3) is actually indebtedness
which falls in category (2) then it should be taxed accordingly.
The tracing back of indebtedness to determine the application
of the proceeds thereof is the only way to arrive at the proper
classification or category of any indebtedness.


                            SUMMARY

          The Legislature in amending Article 7084a,
     Vernon’s Civil Statutes, (the franchise tax) in 1949,
     and enacting Article 12.01, Title 122A, Taxation-
     General, merely broadened the meaning of the term
     “outstanding bonds, notes and debenturesl’so as to
     include those that bear a maturity date of less than
     one year from date of issue but which represents in-
     debtedness which remained outstanding for a period
     of one year or more, even though the indebtedness has
     not been renewed or extended.
          Under the submitted facts,the "first-in, first-
     out" rule is not applicable, as there was only one
Hon. Robert S. Calvert, page 5     (W'd-1493)


      note in existence upon which the payments made
      could be credited.
                              Yours very truly,
                              WILL WILSON
                              Attorney General of Texas


                                 By
                                      Scranton Jones
SJ:mkh:wb                             Assistant

APPROVED:
OPINION COMMITTEE
W. V. Geppert, Chairman
Iola Wilxox
John Reeves
Robert Rowland
Bob Shannon
REVIEWEDFOR   THEATTORNEYGENERAL
BY:   Leonard Passmore
                                                            -   ’




                          APPENDIX
                    Opinion No. WW-1493

Article 12.01--Taxation-General, Vernon’s Civil Statutes:
          ” . . . For the purpose of this subsection
     outstanding bonds, notes and debentures shall
     include all written evidences of indebtedness
     which bear a maturity date of one (1) year or
     more from date of issue, snd all such instruments
     which bear a naturity date of less than one (1)


     bceotion whether or not said md btedness has
     been renewed or extended bv the iessv  of ot&
                                                e r
     1                                            O
Article 7084, Vernon’s Civil Statutes :
          “(1) Except as herein provided, every domes-
     tic and foreign corporation heretofore or hereaf-
     ter chartered or authorized to do business in
     Texas, or doing business in Texas? shall, on or
     before May 1st of each year, pay in advance to
     the Secretary of State a franchise tax fazethe
     year following, based upon that proportion of the
     stated capital, surplus and undivided profits,
     plus the amount of outstanding bonds, notes and
     debentures (outstanding bonds, notes and deben-
     tures shall include all written evidences of in-
     debtedness which bear a maturity da: of,0111 (1)
     year or more from date of issue,1 a    a     CQ
     instruments which bear a maturity date of less
     than one (1) year from date of issue which repre-
     sent indebtedness which has remained continuouslv
     outstandins for a veriod of one (1) vear or more
     from date of incevtion whether or not said in-
     debtedness has been renewed or extended by the
     issuance of other evidences of the same indebted-
     pess to the same or other Dart-,    . . .11 (Empha-
     sis added)
