Honorable George H. Sheppard
Comptroller of Public Accounts
Austin, Texas

Dear Sir:                        Opinion No. o-3792
                                 Re: IS the Stock Transfer Tax,
                                      provided in Rouse Blll,8!
                                      Acts 47th Legislataei
                                      Regular Session, applicable as
                                      6 tax on a "transfer" where a
                                      holder of preferred atook
                                      converts the 881110into common
                                      stock ln aooordande'with his
                                      oonversion privilege?

We have received your written request for an opinion from this
department. The question you submit for our consideration lsr

"Is the Stock Transfer Tax levied under Article 15 of House
Bill 8, of the Regular Session of the 47th Legislature appli-
cable to the surrender of preferred stock or the issuance of
the same amount of common stock to the same persons, and to
the actual issuance of the common stock where the converting
of the preferred into common does not increase the capital or
surplus of the corporation?"

In considering this opinion, we have not had the benefit of the
charter provisions of the corporation inquired about, nor have
we been favored with the by-laws of said corporation.  However,
it will be presumed that its charter and by-laws duly authorized
the issuance of the preferred stock and provide that the owner
of the certificates of such preferred stock shall have the option
to convert the same into an equal amount of common stock, share
for share, of said corporation and that the owner of said stock
certificates has duly and lawfully exercised the option In the
manner required.
The ansiver to your question depends upon whether the conversion
of preferred to common stock , under t,re circumstances submitted
in your request, is a taxable "transfer" under the provisions of
Section XV of H.B. 8, Acts 47thLegislature,    Regular Session.
The pertinent provisions of said act provide: ~
                                                                -   .




Honorable George R. Sheppard, page 2, O-3792



"There is hereby imposed and levied a tax as hereinafter provided
on all sales, agreements to sell, or memoranda of sales, and all
deliveries or transfers of shares, or certificates  of stock, or
certificates for rights to stock, or certificates of deposit
representing certificates made taxable under this Section in any
domestic or foreign association, company, or corporation, or
certificates of interest in any business conducted by trustees
or trustees made after the effective date hereof, whether made
upon or shown by the books of the association, company, cor-
poration, or trustee, or by any assignment in blank or by any
delivery of any papers or agreements or memorandum or other
evidence of sale or transfer or order for or agreement to buy,
whether intermediate or final, and whether investing the holder
with the beneficial interest in or legal title to such stock or
other certificate taxable hereunder, or with the possession or
use thereof for any purpose, or to secure the future payment
of money or the future transfer of any such stock or certificate,
on each hundred dollars of face value or fraction thereof,
three (3) cents, except in cases where the shares or cerfifi-
cates are issued without designated monetary value, in which
case the tax shall be at the rate of three (3) cents for each
and every share. It shall be the duty of the~person or persons
making or effectuating the sale or transfer to procure, affix,
and cancel the stamps and pay the tax provided by this
Article. . . . Where the transaction is effected by the de-
livery or transfer of a certificate the stamp shall be
placed upon the surrendered certificate and cancelled."

While the statutes of this atate, neither expressly authorize
nor expressly prohibit the issuance of preferred stock, yet
such issuance is not prohibited b implication nor is it against
~LPJI'C policy. Tweedie Footwear E orporation vs. Fonville,
      App.)  115 S.W. 421, error refused.

In 18 Cor. Jur. Sec., Sec. 234, P. 665,   it is said:
"An option may be given to preferred stock holders-to exchange
their stock for common stock within a certain time and on
certain conditions; . . . To effect such an exchange, the
option must be exercised; and it must be exercised in
compliance with the provisions of the contract. . .'

In this connection also see Fletcher Encyclopedia   Corporations,
Vol. 6, Sec. 3643.
The Federal  Govemment  has enacted a Stock Tax Law, which is
similar in many respects to the Texas Stock.Transfer Tax Law,
especially  with reference to the taxability of transfers.,
The United states Supreme Court in Re Raybestos-Manhattan,
Inc. vs. United States, 8 L. Ed 44,296U.S. 60, discussed and
-.   -




         Honorab'le George H. Sheppard, page 3,   O-3792


         defined a "transfer" under said Federal Stock Transfer Tax
         Law (Sec. 1802-b, Title 26, U.S.C.A.).  The court speaking
         through Justice Stone said:

         "The Stock Transfer Tax is a revenue measure exclusively.
         Its language discloses the general purpose to tax every
         transac,tion whereby right to be or become a shareholder of a
         corpora'zion or to receive any certificate .of any interest
         in its property is surrendered by one vested in another, See
         Provost vs. United States; 269 U.S. 443, 70 L. Ed. 35'2. 'ffhile
         the sta,tute speaks of transfers, it does not require that the
         transfer shall be directly from the hand of the transferror to
         that of the transferree.   It is enough if the right or interest
         transferred is, by any form of procedure, relinquished by one
         and vested in another. . . .Transfer to the shares is effected
         by a form of novation by which the right of the shareholder 1s~
         surrendsred to the corporation in return for its recognition
         of a ne.N shareholder designated by the transferror and ~ths
         issue to him of a new certificate of stock. It is relinquish-
         ment of the ownership for the benefit of another, and the
         resultant acquisition of it by him which calls the statute
         into operation."
         Pursuant to the Federal Stock Transfer Act, hereinabove
         referred to, the.United States Treasury Department has pro-
         mulgated certain rules and regulations with reference to said
         law. Regulation 71, Revised July 1932, Article 30, Subsection
         c, under the heading "Sales or Transfers not subject to tax.
         (The following are examples of transaction not subje,ct to the
         tax)"; provides;

         "(c) The surrender of certificates in exchange for other
         certificates representing the same or new stock, provided they
         are issued to the same holders.

          . . . .

         "(f) The surrender of stock for extinguishment or in ex-
         change,for a new certificate to be issued without charge of
         legal title."
         'JVhetherthe stated examples of non-.taxable tranSSCtiOnS SpeCi-
         ficially cover the situation under consideration is not clear.
         If it could be said that the transaction before us is not
         taxable, under the Federal Stock Tax Law, for the reasons here-
         inafter discussed, we do not think such a rule is applicable to
         the Texas Stock Transfer Tax Law.
         The State of New York enacted a Stock Transfer Tax, which is very
         similar to the Texas jtatute and~which.we under.~stand the Texas
Honorable George H. Sheppard, page 4, O-3792



Statute follows, therefore the rulings and constructions placed
upon such statute by the New York Tax Commission would be
highly persuasive in construing the Texas Law. In Section 4,
Article 16 of the Regulations of the New York Tax Commission,
it has given, as an example of a nontaxable transaction, the
following:

"The surrender of preferred stock certificates in exchange
for common stock certificates or visa versa when made neccesaary
by change in capital structure."  (UnderscorIng ours).

The rule above referred to was amended on July 1, 1939, to in-
clude the words "when made necessary by change in ca ital
structure".   As we construe the above ruling of the R ew York
Tax Commission, by im:>lication, it would seem that theTax
Commisa:ion holds that when a holder of a pref'erre,dstock
certificate voluntarily surrenders the same to the corporation,
in compliance with the conversion privilege, for certificates
of common stock, the same is a taxable transaction. Such a
transfer is obviously not "made necessary by change in
capital structure."

We have checked the Stock Transfer Tax laws, rules and
regulations ap.plicable thereto, of the titates of Pennsylvania
and Massachusetts and have been unable to find where the
kind of a transfer inquired about is exempt from the Stock
Transfe:r Tax.

It should be noticed that the Legislature, in the enactment
of the ,Stock Transfer Tax Law, first laid down a broad scope
of taxable transactions concerning the sale, gift and transfer
of corporate stock. The Legislature then proceeded to make
certain exceptions from the scope of said act as well as
certain exceptions thereto, none of such exemptions or exceptions
being applicable to the situation under consideration.   In the
absence of any ambiguity in the statute, it must be presumed
that the Legislature intended to lay down a broad scope of
taxable transactions and then proceeded to make the specific
exemptions and exceptions from the operation of the act. This,
by implication, would indicate that the Legislature intended
to tax every transaction involving transfers of corporate
stock unless the same were specifically exempted or excepted
by the provisions of the act itself or by some other rule of
law.
After carefully considering the facts submitted by you and
applying the Texas Stock Transfer Tax Law thereto, we believe
that the transaction submitted involves a taxable transfer
within the contemplation and meaning of House Bill No. 6,
Article 15, Acts of the 47th Legislature, Regular session,
Honorable George H. Sheppard, page 5, O-3792



1941. The stamp, evidencing the tax, should be placed upon
the surrendered preferred stock certificate.  We trust that
in this manner we have fully answered your inquiry.

                                   Yours very truly

                               ATTORNEY ffENERhL OF TEXAS
                                                  ,,.
                                                    I   ..,
                               a? Harold Mc&%c.ken


                                        Harold McCracken
                                               Assistant

APPROVEI) OCTOBER 31,   1941
a/ Grover Sellers
FIRST ASSISTANT
ATTORNEY GENERAL

APPROVED: Opinion Committee
          By BWB, Chairman

HM:eah/:.c
