Honorable Y. 0. Flowers
Seoretary of state
Austin, Texas

Dear Sir:                        Attention;   Franchise Tax Division

                                 Opinion No. O-1543
                                 Re: Franchise taxes of corporations--
                                      Corporations in prooess of a&ml
                                      liquidation-R. C. S., Artiole
                                      7097.

        Your letter of October 3, 1939, requesting this department for
a legal opinion has been referred to the writer for attention.

       Your letter and the aooompanying inquiries are as follors~

       "He have several hundred corporationa in Texas paying
   franahise taxes into this department and perhaps we have
   at this time approximately one hundred who claim to bs in
   process of liquidation. Quite a number of these.nho olaim
   to be in liquidation filed their affidavit with this de-
   partment and contended that this faot exempted them from
   the payment of any franchise tax under the terms and pro:
   visions of Article 7097 R.C.S., of Texas.

        "Some of these corporations rho claim to be in prooess
   of liquidation have several thousand dollars in surplus and
   undivided profits and merely take this surplus and undivided
   profit and purohase a portion or all of the outstanding
   aapital stook. This is done without regard to their notes,
   bonds and debentures outstanding, whether due and unpaid
   or not, and,in soxe instanoes without regard to their
   areditors., Of course. this procedure eliminate8 their oap-
   ital   &oak,  surplus and undivided profits, thereby de-
   priving the State of Texas of franchise taxes.

        "It is also true that a.number of these corporations
    claiming to bs in a process of liquidation caloulated
    their franohise taxes upon the difference between the
    amount of stock actually issued and the amount of liqui-
    dating dividends actually paid, therebyavoiding any
    consideration by this department of their notes, bonds and
    debentures maturing one year or more from the date of issue.
Hon. Id.0. Flo=re, Page 2               o-1345



         "There seems to be no oases in Texas construing the
    terms and provision8 of Article 7097, R. C, S, of Texas,
    and it also seems that heretofore the franchise tax de-
    partment  has been somewhat oonfused in attempting to
    construe thir statute and has had no definite or fixed
    poliay under such statute, therefore, me solioit your
    interpretation and oonstruotion of this statute in answer
    to the following questions:

        "(1) Does the phrase 'actually in process of liqui-
    dation' as used in Artiole 7097 mean, for franohise tax
    purposes, the actual return to the stockholders of their
    original investment?

        "(2) 18 It not true that a corporation oannot be in
    an actual prooess of liquidation under Artiole 7097 until
    all oreditors claims are satisfied, and until all remaining
    undivided profits or surplus is distributed in the form
    of ordinary divideada?

        "(3) 18 not a liquidating dividend an actual return
    of the stookholders original investment rhioh is the last
    possible transaction in connection with the windj.ngup of
    the affairs of a corporation?

        '(4) Is a corporation rho has paid liquidating dividends
    equal to the amount of its outstanding capital stock exempted
   'thereafter from the payment of franchise tax?

        "15) Does Article 1389, R.C.S. of Texas limit the
    existence of the aorporation to three years from the
    beginning date of bona fide liquidation?

        "(6) Can a corporation hold its exiatenae while in
    a bona fide liquidation without the payment of any
    franchise tax for the period of time set forth in its
    charter?"

        You do not state a conarete case for an opinion but rather you
ask for a general aonstruation of Article 7097 of the statutes, espe-
cially in view of the accompanying above-quoted questions; 80 that, our
answer must, in the nature of things, be correspondingly general. It
may or it may not, therefore, answer the inquiries in suoh a way a8 to
aid you in handling the specific cases you may have in mind.

        You will see from the statutes it refers to corporations actual1
                                                                 --i+ a-
in process of liquidation. It therefore contemplates a faatual liqu.1
tion, whether the same be a statutory liquidation or not. In other words,
the actual liquidation, contemplated by the statutes, may be a voluntary
liquidation. Every corporation has a right, unless precluded by some
Hon. M. 0. Flowers, Page 3               O-1645



rule of law, to quit business and wind up its affairs., In SOme instanaes,
for illustration, banks and building and loan assooiations organized under
our laws, the statutes specifically authorize a voluntery liquidation,
and provide for suitable supervision.

        The franchise tax being a oreature of statute, the imposition,
the amount, the enforcement, the remission, the control or regulation
whatsoever must be determined from the provisions of the statute imposing
the levy.

        With these general ObSerVatiOn8 In mind, we beg to answer your
questions in the order above listed as follows, to-witg

        1. No. A corporation may be, and is, in aotual process of liqui-
dation within the meaning of Article 7097, when it has in good faith
begun such liquidation for the purpose of winding up its affairs and
surrendering or having cancelled it8 charter franchise. SUoh process of
liquidation oontinues until the debts of the corporation are paid and
its affairs are liquidated and its corporate existenoe legally terminated.

        2. No. A8 shorn in our answer to question No. 1, the process of
liquidation does not begin, but ends upon the contingency named by you -
there is nothing more~ing~b           final legal termination of the cor-
porate existence.

        3. No. bhsther the return of the original investment of the
stockholders be in full or in part only, it is yet the last corporate aot
of liquidation, for such distribution to stockholders cannot be made
until creditor8 have been paid in full.

        4, Yes.   The Statute contemplates that a oorporation in the actual
process of liquidation is liable for a franohi8e tax during the time it
is thub liquidating, only for the tan computed on the balli.therein Stated-
"the difference between the amount of the stock actually issued and the
amount of liquidating dividends actually paid upon such &oak."   If the
result in a given case is unjust, the fault is with the Legislature and
not the exeoutive department of the State. The Franchi    tax is the
government prioe for doing business -- not for quitting business.

        5. No. The three years extension permitted by Article 1369 of
the Statute8 begins with the corporation's dissolution - not with it8
process of liquidation. This Article is aomplementary to Article 1366,
and is a matter of statutory grace to permit a just and complete liqui-
dation of the corporation's affairs and distribution of its assets.

        6. Ye*. Neither insolvency nor actual liquidation of a cor-
poration di88OlveS the COrpOratiOn. It oontinues to exist as a legal
entity until a legal di8SOlUtiOn and forfeiture of the corporate charter,
This does not necessarily mean a judicial forfeiture, but it doe8 mean a
forfeiture authorized by law. Of course, the corporate existence cease8
Hon. M. 0. Flonsrs, Page 4             O-1645



at the end of the   period for which it was organizedt   It expires by
its owl teI-I!LS.

        There is no period of time prescribed by law within whloh 8
corporate liquidation must be completed. [mder Article 7097, there-
fore, a corporation might possibly maintain its oorporate existanoa
indeftiitely -- to the end of its charter life -- without the payment
of e franchise tax.

        It is possibld that some of the aorporations certifying their
being in aotual liquidation have taken advantage of this statute to
seek an exemption they would not otherwise be entitled to. If any
such case arises, we suggest that the individual case be related to
this department for suoh action 88 might be appropriate.

                                          Yours very truly

                                     ATTORNEY GL'XXZALOF TEXAS



                                     By    s/Ocie Spew
                                                  Ocie Spew
                                                   ASSiStant




APPROVED DEC. 19, 19Y9
s/Gerald C. Mann
ATTORNEY GENKRAI,OF TEXAS


Approved Opinion Committee By 833 Cbairmm
