Honorable   Tom Reavley                 Opinion     No.    s-204
Secretary   of State
Capitol   Station                       Re: Whether to include   outstand-
Austin;   Texas                             accommodation  nbtes~ inthe
                                            formula for computing    fran-
                                            chise  taxes due under Article
                                            7084, V.C.S.

Dear Mr.    Reavley:

             You have    requested     an opinion     of    this   office     as
follows:

             “We have    a factual     situation,      the nature of which,
we think,    requires    an official      ruling    from your office.

              “Corporation      A, a Texas corporation,           owns all of
the preferred      stock and approximately           95% of the common’
stock of another Texas corporation              which,.for       convenience,
we shall call      corporation     B.     In the latter       part of 1953
corporation     B attempted      to arrange for certain           temporary
financing     to construct      an office     building.       Proposals    were
made to lending       institutions      that a line of credit          be estab-
lished    for corporation       B with a guaranty by corporation              A,
if necessary.        The lending     institutions       declined     to make any
loan to B alone and insisted            that any loan be made directly
to A, because      of doubt as to the validity             of a guaranty ar-
rangement.      Loan agreements were concluded,               and two lending
institutions      made loans directly         to corporation       A.    These
loans were made over a period of several                 months, and long-
term written      evidences     were executed      by A.

           “The funds received   by A were deposited                  to    its
bank account   and on the same or next day advanced                   or loaned
the money to B.     Corporation B executed  long-term                notes pay-
able to corporation    A at the same rate of interest                 as corpo-
ration Acs notes to the lenders.      The maturity   of              B’s notes
is the same as AIs notes to one of the lenders,        to             which
said A’s note was pledged.
Honorable     Tom Reav ‘ley,       page 2   (s-204)


            ,“Corporation A iscontending       that it was merely a
conduit   of the borrowed funds,    all of which were expressly
traceable    into and used by co$poration     B. .A is urging that
the arrangement was made necessary       entir$ly   by the~require-
ments of the lenders.

              “In’view     of ‘the -foregoing    facts, as well as the
provisions     of’ Article     708l$“please     give us your opinion
covering     the following       questionsz

       “(1)  Is corporation    A alone liable for           the,fran-
       chise  tax.on   its notes to the lenders?

      “(2) Or, is only corpo,ration    B liable   for the
      franchise    tax’on  its note or notes to corporation
      A, and would corporat~.ion A then be permitted      to
      exclude   fr~om taxable  capital  the indebtedness
      represented    by its notes ,to its lenders7

      “(3) Or, do both corporations    owe the franchise
      tax on the notes each corporation    executed,   re-
      gardless  of the purpose for which said notes
      were executed?  ’  /
              Article     708h,,V+znonrs       Civil  Statutes,     levies    a fran-
chise   tax against       corpo’rat&ons     bas.ed upon thit ‘proportion         of the
outstanding      capital     stock,;   surplus    and undivided     profits,     plus
the amount of outstanding,bonds,               notes and debentures         as the
gross,receipts        from the ,bus;iness done in, Texas bear to the
total   gross’receipts        of the corporation.         (Outstanding       notes
include    all written       evidences     of indebtedness      ,which bear a.
maturity date, of one (1) year or more from date of issue.).
             Article    7089,,V.C.S.,     provides      that all corporations
required    to pay a franchise        tax shall,    .between’January       1 and
March 15 of each year, make a report ,to the Secretary                   of State
on forms ,furnished      by that officer,        showing the condition         of
the. corporation      on the last. day of the preceding           fiscal    year.
Said report     shall   give the cash value of all gross assets                of
the corporation,       the amount of its authorieed           capital    stock
actually    subscribed     and the amount paid in, the surplus              and un-
divided   profits     or deficit,     if any, the amount of mortgage,
bonds and. current      indebtedness.

                      .        .
Honorable     atom Reavley,      page 3        (S-204)


             Both corporations     A and,,,B owe~.the franchise       tax
based upon the notes each corporation          executed,     regardless      .of
the purpose for which said notes were executed,-becsuse                  there
are no provi’sions     for exempt,ion of such notes due by corpora-
tions   in Title   122, Chaptw Three, V.C.S.,         or elsewhere       in
our statutes.      The fact .th’at cor$oration      A loaned the money
to corooration     B which was.:obtained     bv it.9 note.    and did not
use this money in its buoibess        is imm&terial.        A. B. .Frank d,
Co. v. Latham, 145 Tex. ad;, 193 S.W.2d 671 (1946)               River-
oaks Development Corp. et al. v. Shepperd,            Secret&       of State,
  46 S.W.2d 236      (Tex.Civ. App. 1952      error   ref.)   an: Gulf,’
Colorado   and Sinta Fe Railroad      Compiny v. C. E. Fulgham, Secre-
tary of State,     et al. 288 S,W.2d 611 (Tex.Civ.App.           1956, error,
ref.)                            :
                                                                 ..’

                In A. B. Frank &%o,~ v.&atham                 then stock had been
purchased       by the corporatipn           and waIS in effect       retired.        In
Riveroaks       Dkvelooment’ Co&.           et al. v. Shepperd the notes
were held to be outstanding                 etien though, t:he corooration         had
contracted        to sell     tkLe proper&y:         In Gul.f., Colorado     and Santa
Fe Ry. Co. v. Fulghan 1, .the $5,259,895.87                   was properly      con-
sidered      as surnlus       fc )r”franchise      tax purposes.      even thouah it
would not/increase            the eorporationrs         .revknue.y    None of these
corporations         were receiving         revenue from these items, yet the
courts      inall      three cases held that these items were to be
used.‘for     the purpose of computing the franchise                   taxes.      The
fact    that the stock,           th,,e notes,   and the. surplus      were not
being used in the resp&cive                  corporationsr      businesses      to gain
 revenue was inrmaterial.               The,stgCk,     the notes,     and the surplus
were held to be a part of the cash~, value of the respective
‘corporations         under the provisions          of Article     7089.
                            :
                The contention          of ‘corporation     *d that it was merely
a conduit       of the borr~owed funds,            all of which were expressly
 traceable      into and used by corporation               B, and that the ar-
rangement was made necessary,entitely                     by the requirements          of
 the lenders        is immaterial.          The only question       necessary       to be
considered        here is whether the notes are outstanding                    obli-
 gations     due by both corporations              within    the purview of the
franchise       tax statutes         of this State.        Both corporations         are
 still    liable,     on these:: notes as they have not been paid,                  dis-
charged or released.               ,They are sttll       in existence      and con-
stitute      a liability        of both corporations.            The notes are
along-term notes within              the purview of Article         7084, V.&S.
Honorable     Tom Reavley,            page 4   (S-204)



Riveroaks   Develbpment              Cord; v. Shepperd,  Secretary    of         State,
e a, 1   2QbSW2d236
              . .                    (T ex.Civ.App. 1952, error ref.)

               It    is        unnecessary to answer questions           (1)   and (2)    as
question     (3)     is        answered in the affirmative.
                                  ,
                                          SlJMMARY

              The outstanding.notes     of a corporation,    re-
        gardless  of the purpose for which said notes were
        executed,   should be included     in the formula for
        computing   the franchise    tax due by the corpora-
        tion under Article     7084, V.C.S.    That they were
        accommodation    notes is immaterial.

                                                  Yours     very     truly,
APPROVED:
                                                  JOHN BEN SHEPPERD
W. V. Geppert                                     Attorney General of Texas
Taxat ion Division

Mert Starnes              “.
Revi ewe r
                                                         Asai &ant
3. C. Davis,         Jr.
Reviewer

i. W. Gray
Special Reviewer

Davis    Grant
First    Assistant

John Ben Shepperd
Attorney General




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