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                      The Attorney           General of Texas
                                       August 31 , 1981
MARK WHITE
Attorney General


                   Honorable Bob Bullock                   Opinion No.~MW-364
                   Comptroller of Public Accounts
                   L.B.J. Building                         lb?: Franchise tax reporting
                   Austin, Texas 78711                     of corporation's investment in
                                                           a subsidiary
                   Dear Mr. Bullock:

                        You request .our   opinion on the proper method to value a
                   corporation's investment in subsidiaries for franchise tax purposes.

                        Any corporation authorized to do business in Texas must pay
                   franchise tax.   Tax.-Gen. art. 12.01(l). 'The three alternative
                   methods yields the greatest tax.     Id.  One method taxes at the
                   statutory rate, the portion of a orporation's       stated capital,
                   surplus, and individual profits, which is      allocable to Texas.
                   Tax.-Gen. arts. 12.01, 12.02. A corporation's surplus includes its
                   investment in its subsidiary corporations.      Bullock v. Enserch
                   Corporation, 583 S.W.2d 950 (Tex. Civ. App. - Waco 1979, writ ref'd
                   n.r.e.1.

                         The value of a corporation's investment is usually determined
                    from the corporation's books, kept according to generally accepted
                   accounting principles.     Franchise Tax Fule 026.02.12.015; Texas
                   Attorney General Opinion V-1037 (1950). The courts, however, have
                   departed from the values shown by a corporatibn’s       general ledger,
                   prepared according to generally accepted accounting principles but
                   inconsistent with the franchise tax provisions.         For example, a
                   'holding company may combine its capital and receipts with those of its
                   subsidiaries and make one consolidated report to its shareholders.
                   Bullock v. Enserch Corporation, m         This method is not acceptable
                   for franchise tax reporting because the parent corporation and
                   Tax.-Gen. art. 12.02(l)(a); Texaco Inc. v. Calvert. 526 S.W.2d 630
                    (Tex. Civ. App. - Austin 1975, writ ref'd n.r.e.).

                        You ask:

                             For purposes of reporting franchise tax, which of
                             the following methods should be        used   for
                             determining the cost of       investments in a
                             subsidiary when the acquisition qualifies as a




                                                p. 1217
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    Bob Bullock - Page 2   (&g.~-364)



              pooling of interest and the acquired subsidiary is
              not dissolved?

              (1)   the par value of the stock issued by the
                    parent corporation in exchange for the shares
                    of stock in the subsidiary or

              (2) the net book value of the subsidiary acquired
                  as reflected on the books of the subsidiary
                  or

              (3)   the fair market value at the date of
                    acquisition of the stock issued by the parent
                    in the exchange for the shares of stock of
                    the subsidiary.

         A "pooling of interest" is an accounting term for an acquisition
    which meets a number of qualifications not relevant to the question of
    franchise tax liability. For purposes of this opinion, we will
    consider the fact that the holding company has acquired the stock of
    subsidiaries which continue to operate as separate business entities.

         A holding company's investment in its subsidiaries is to be
    valued at cost. Bullock v.              rp               . Blacks Law
    Dictionary (4th Ed.) defines ::z;srt::
                                         ,","Wz;;;;i,"e::
                                                       sthat     which is
    actually paid...." Websters Third International Dictionary defines
    "cost" as "the amount or equivalent paid or given...for anything
    bought" and as "whatever must be given, sacrificed, suffered or
    forgone to secure a benefit."

         The facts of any given acquisition will differ. The "cost" of
    acquisitions vary as well. The detarmination of ucostu~ is a fact
    question, which is not appropriate for an Attorney General's Opinion.

         The Comptroller may promulgate rules and regulations defining
    "cost" in accordance with a generally accepted definition of such
    term.


                                 SUMMARY

                  A   holding   company's  investment  in   a
             subsidiary should be valued for franchise tax
             purposes at its cost. Cost is a fact question to
             be determined on an individual basis by the
             Comptroller of Public Accounts in fulfilling his
             statutory duties.




                                   p. 1218
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                                             Very truly yours,     /I




                                             Attorney General of Texas

     JOHN W. FAINTER, JR.
     First Assistant Attorney General

     RICHARD E. GRAY III
     Executive Assistant Attorney General

     Prepared by Susan Garrison
     Assistant Attorney General

     APPROVED:
     OPINION COMMITTEE

     Susan L. Garrison, Chairman
     Jon Bible
     Rick Gilpin




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