                      The Attorney              General of Texas
                                      January     9,   1980
MARK WHITE
Attorney General


                   Honorable Ram L. Longoria                  Opinion No. m-12     5
                   Special Senate Committee on Gasohd
                   P. 0. Box 12068                            Re: Issuance of industrial alcohol
                   Austin, Texas 78711                        manufacturer’s      permits    and
                                                              distillerjs permits

                   Dear Senator Longoria:

                         You have asked several questions relative to the local industrial
                   alcohol manufacturer’s permit (“Gasohol” Permit) and the distiller’s permit.
                   The provisions in Chapter 47 (“Gasohd” Permit) and Chapter 14 (Distiller’s
                   Permit) of the Alcoholic Beverage Code, V.T.C.S., can only be interpreted in
                   light of a specific fact situation.

                          We are informed that an out-of-state corporation proposes to acquire
                   and own 100% of certain Texas realty and improvements located thereon,
                   including a high performance still capable of producing alcohol equivalent to
                   the degree of 190 proof or above that level; and the out-of-state corporation
                   proposes to grant a leasehold interest in such realty and improvements to a
                   Texas corporation, which could in turn apply, qualify for, and receive both a
                   “Gasohol” Permit and simultaneously for the same premises, a Distiller’s
                   Permit. The out-of-state corporation would incidentally own a minimum of
                   49% of the authorized and issued shares of the stock of the Texas
                   corporation.     The Texas corporation would then enter into a proposed
                   management contract with the out-of-state          corporation authorizing the
                   latter to conduct, operate, and control the realty and related improvements
                   thereby distilling alcohol under authority of the “Gasohol” Permit, and
                   transferring the same product to the authority of the Distiller’s Permit for
                   transport from the Texas premises to the premises of a corporate affiliate
                   of the out-of-state     corporation for the purposes of producing alcoholic
                   beverages to be made available for wholesale throughout the United States
                   of America.       Furthermore,    the corporate affiliate    of the out-of-state
                   corporation   is itself an out-ofstate     corporation    and the holder of a
                   nonresident seller’s permit in Texas. (Chapter 37, Texas Alcoholic Beverage
                   Code). This corporate affiliate does not actually manufacture alcohol.

                         The first two questions relate only to Chapter 47 (Gasohol Permit) of
                   the Alcohdic Beverage Code. The first question assumes that a company
                   holds a gasohol permit and asks “can an out of state corporation own
                   property andlesse to a Texas entity?”




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Honorable Raul L. Longoria     -   Page Two      (MW-1251



       The new provisions in Chapter 47 contain no requirement or qualification    with
regard to property ownership.   Thus, there is no prohibition against an out-of-state
company’s obtaining a gasohd permit. There is no general provision in the Code which
requires that a permittee own the property which will constitute the licensed premises
under the permit.

     Your second question is

           How can it be determined if alcohd,      which has not been denatured,
           is unfit for human consumption?

      We note initially that it has been suggested that alcohol of an extremely high proof
can be considered to be unfit for human consumption.          Federal courts have had an
opportunity to consider this contention.   In Alksne v. United States, 39 F.2d 62 (lst Cir.
19301, the court noted that:

           Alcohd scientifically     may be classified as a poison, but that does
           not interfere with its bei% an intoxicating liquor. It is the basic
           element of all intcwicanta      Indeed it is its poisonous effects which
           renders it intoxicating, as that word itself implies. It is common
           knowledge, and the act so declares, that alcohd, whisky, rum, etc.,
            are intoxicating. To be intoxicating, however, they must be used as
           a beverage.      The act itself, therefore, assumes that these liquors
           are fit for beverage purposes; and the courts have frequently held
           that it is not necessary to allege or prove that alcohol, whisky, gin,
            etc., are either intoxicating or fit for beverage purposes. Strada v.
           United States (C.C.A.) 281 F. 143; Hen&erg v. United States
            (C.C.A.) 288 F. 370; Weinstein v. United States (C.C.A.) 11 F.(2d)
           505, 509; United States v. McGuire (D.C.) 300 F. 98,100. That only
           the most hardened toper would use 95 per cent proof alcohol
            without dilution, or that in terms of science it is classified as a
           poison, does not render it unfit for beverage purposes within the
            meaning of the Prohibition Act.

           . . . [IIt is the common understanang,      and was the intent of
           Congress so to declare, that alcohol, whisky, rum, etc., are all
           intoxicating   liquors, and therefore are to be considered fit for
           beverage purposes within the meaning of the act, unless rendered
           unfit by the addition of some other ingredient for that purpose. If
           it should be held that pure alcohol of high proof is not an
           intoxicating    liquor by reason of its being unfit for beverage
           purposes without dilution, the fraternity known as bootleggers’ can
           hereafter ply their trade with impunity.

Ia, at 69. Thus, high alcohdic content alone does not render the beverage unfit for human
consumption    Even if it is assumed high proof alcohol could not be consumed, the simple
expedient of dilution would make it fit for human conmmption.         Moreover, the Texas




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        Honorable Raul L. Longoria      -   Page Three         (Mw-12 5)




        Alcohdic Beverage Commission, under authority granted in section 5.38 of the Code to
        regulate labeling, has expressly approved labels of 190 proof alcohol commonly sold in
        package stores.

                The Texas Alcohdic     Beverage Code does not contain any specification          for
        denaturing alcohol, and there is no rule or regulation controlling the denaturing process.
        We believe it is within the reasonable discretion of the Commission to establish standards
         for denaturing alcohol. They would not necessarily be limited to the federal formula for
        denaturing alcohd,    see 27 C.F.R., sections 212.10, et seq. It is clear, however that the
        legislature apparently determined that mixture of alcohol with gasoline would make it
        unfit for human consumption. -See Alcohdic Beverage Code, ch 47.

               The second series of four questions is addressed to facts concerning a local industrial
        alcohol manufacturer’s permit and a distiller’s permit, collectively.      The first of those
        questions asks whether an enterprise,          holding both the local industrial       alcohol
        manufacturer’s permit and the distiller’s permit, can be operated if the plant and facilities
        are owned and built by an out-of-state company.

                Under the set of facts outlined above, the question must be answered in the
        negative.    A corporate affiliate of the out-of-state       corporation is the holder of a
        nonresident seller’s permit. The nonresident seller’s permit puts its holder at a different
        level of the industry than the holder of a manufacturer’s permit. Accordingly, the anti-
        tied hoarse provisions of chapter 102 of the Code would prohibit a corporation and its
        affiliate from holding a distiller’s and nonresident seller’s permit respectively. See Texas
        Liquor Control Board v. Continental Distilling Sales Co., 199 S.W.2d 1009 (Tex. m.App
        - Dallas 1947), appeal dismissed, 68 S. Ct. 26 (1947). In light of the fact situation it is
        unnecessary to determine if the tied house prohibitions would apply to a company holding
        only a local industrial alcohd manufacturer% permit.

                The next question asks whether the facilities     can be leased to an operating company
        by   an out-of-state company.

            . In light of our answer to the preceding question, this inquiry would not be relevant to
        a corporation fitting the factual situation outlined at the beginning of the opinion, since
        the tied house prohibition would prevent its hdding a distiller’s permit. If a corporation,
        which has no direct or indirect interest in any level of the alcoholic beverage industry,
        owned a plant and facilities in this state, the property could be leased to an operating
        company which held both a local industrial alcohol manufacturer’s permit and a distiller’s
        permit.

              Of course, questions of leases to operating companies are subject to examination on
        a case by case basis in making a factual determination     that no subterfuge of ownership
        exists as prohibited in section 109.53 of the Code, which provides:

                     . . . It is the intent of the legislature    to prevent subterfuge
                     owner&p of or unlawful use of a permit or the premises covered
                     by such a permit; and all provisions of this code shall be liberally




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Honorable Raul L. Longoria      -    Page Four          (~~-125)



           construed to carry out this Intent, and it shall be the duty of the
           commission or the administrator to provide strict adherence to the
           general policy of preventing subterfuge owner&tip and related
           practices . . . . Any device, scheme or plan which surrenders
           control of the employees, premises or business of the permittee to
           persons other than the permittee shall be unlawful. . . .

      Your next question is

           If the operating company complies with existing regulations
           pertaining to ownership, etc., could both the above mentioned
           permits be granted to the operating company?

      We know of no statutory       prohibition    against a single qualified     entity   holding both
permits

      Your final question asks whether the operating company can be owned “partially                (in
minority interest, i.e., 49%) by an out of state company?”

      A permit may be issued to a corporation so long as at least 51 per cent of the stock
is “owned at all times by citizens who have resided within the state for a period of three
years and who possess the qualifications    required of other applicants for permits. . . .”
Alcoholic Beverage Code! S 109.53. Of course, the facts of any specific situation would
have to be examined to msure that there is no violation of the tied house or subterfuge
ownership prohibitions, See Alcohdic Beverage Code, SS 102.01et,        109.53.

                                          SUMMARY

            There are no residency requirements        for a holder of a local
            Industrial alcohol manufacturer’s permit (gasohol). A corporation
            may not hdd a distiller’s permit if it has an affiliate which holds a
            nonresident seller’s permit. As much as 49 percent of a corporate
            permit hdder may be owned by a person residing out-of-state but                    .
            the facts of any specific situation must be examined to insure that
            there is no question of subterfuge ownership or violation of tied
            house prohibitions.




                                               &zjgg%&
                                                   Attorney    General of Texas
JOHN W. FAINTER, JR.
First Assistant Attorney General




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    Honorable RauI L. Loworia    -   Page Five        (MW-125)



    TED L. HARTLEY
    Executive Assistant Attorney General

    Prepared by Reed Lockhoof
    Assistant Attorney General

    APPROVED:
    OPINION COMMITTEE

    C. Robert Heath, Chairman
    Bob Gam mage
    Susan Garrison
    Rick Gilpin
    Reed Lockhoof




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