\.   ”




                 OFFICE   OF THE    ATTORNEY       GENERAL        OF TEXAS




         Hon. :':ldfmySathan
         ~~0~0tm-y or state
         AUl&lll( Tax88

         Dwr   31s   I             Attantloo:




                                                       t3430uftt
                                                               r0r the
                                              80 tax roporta riled r0r
                                               f000ftb 0r m6,935.94    88
                                    y rtoolc,but wea not rhown a8 tarablo

                                   .irios   auostionlag      the w~ilroe or tli0
                                   out   the    ra0t    that th    00rp0di09
                                  f its mm oapltal rtook at lers than
                               rglq, the oapltal #took aoaount 1~1ththe
               par ralu0 roprosontod     by' the numbor or 8bror ~urchaard
               end oradltl3g   'Resarve r0r Proat     on Trtamry  SOOk'
               with the dliirrrnoe     betwreo the mr Value and t3a atzount
               paid thercro?.    TLls rwwltsd In reduolng the aapltml
               8tOOk lo o o untto ?l,O2l,800.00    rOr belanoe rhret pu~pO801',
     3ldIlsy Lathaa, pago 2


     lndlaatlrrg   a parohaao Of $228,200.00par lal~r, atook,
     but    at a dtaoount 0r :106,935.9~, 08 the Qtserv~ r0r
     Profit    on Treasury 3took’ rweala. Siuao the oapltal
     #took oannot bo deoraaaedexorpt by oharter amndaent
     h o wo loth   r rlorporatloncomputedarid paid the franohiae
     taaen ke full UaoUnt Ofluthorlrod and paid in oapltal
             .
            “Thla depart&withas mlr amresmantr or rddltlonal
     tax08 for oath of the lboia a~ntlonulyoara      baaed upon
     the 4106,935.91 reaorve upon thm theory that thl6 ooa-
     rtltutro a danatoe rurplua aad hnblr fee irMOhlar tax
     pUtpOSM# Th oorporatlon ha8 protestedthe aaaa8ar-onta,
     ooatanding that thr rs-•oqulnd      rtoek rhould bo rooog-
     nlo o 8 l brlq    only or ths value ykld thorerorand set
     u&a     Oh6 bOOiC* lOOOtiiB&.    Thla roul4 allminato   the
     rwmve     loeount, but the amount sot up on the ass&
     rida as trt3a8urf atook uoula aot repneont the ralur or
     tb rtoak rroa a par Wuo lteadpolnt.
           *mx~ fbn aooouatloe etandpplnt, in order to rOri80t
     the lotual otidltlong   or olroumteaosa lnrolrsd la the
     pwohalo, the par TalUe Of the 8toOk re-aoquired   lhoUld
     bo 8bt up or,the saaet sldn, oash orsdltebwith the
     puroharoprior w4 the dlaoouafahown as a otadlt on
     the llablllty  aldo.
           *In the 11&t    0r   the   raota &On,   ~0~16    p4
     rdvira ua on the r0imii~          qusatloal
           *Is the 418oount at uhloh a oorporatlontrown
     oapltal rtook la re-aoqulnd throuigh  a oaah pruoheao
     rurplurfor sranrhiao%x pUrpoaer7
           "Your   anewer to the above as 80011 as the raOllltlO8
     or your orrloe    r&l1 pmmlt will bo lppreolatad.’
           Artlols 7084, Vernon18 AnnotatedCivil           Statutes,
as anended,imposes a rranohlaetax baaed upon a stated pro-
                       ding oapltrlatosk, rurplua end undlll4ad
                                 ty           bondr, notes and dobon-
        A Oolutlw of YOOr probl             a la aaoortalnlne    tha
0oeA    idhod or ooapotx      -the outdandlng        eapltal atook
rurplua and undltld84 proi3 to* of the oorpomtlon ln questfan.
     ,
._
                                                                                                              2s 1.




                               .\rtlo:o
                               1332, Veroon’a AnnotatedCivil r;tatuteb,
         orto forth tha statutory   romalltlrr for a droraaao or
         ~pltol otook b l lorporutlon, la ld    rO~fitalltlO8 inoltidlng
         lfrlrmtite  got ion b #l twa-third0 lot8 of outatradiag
         otOOk a04 the rilingwith the a* rotorf     or istate or oartala
         ~mmtlon     rumorted by lfrlea+ f $




                               And     It   is yell lttlad that the term ~~outotaad~x
         oa p& l
               a+ook;‘
                  i * aa                    woe      in    r~~ohi00       tar    rtatutoa,         lnorudoo
         atook, usually tortsod%rwoury       atook,” laauod aad tb.ossarter
         rtaoqulrod by oorporatlono,where the rtatutory       rormalltloa
         to ‘drorcaaa eapltal atook hare not bean oomplledw1t.h.
         ~nlokcrbookor~  ImportatloaCo. 1. Etato Board of Aooeaaora,
         65 A. 913, i.,!-.A. (r:.3.) 885 (!:ebJeraoy Court 0r Errors
         aad rppoed.83 8 I;ocg 1. re~ia&ger, 174 5. E. 820 PIa.) state 1.
         ~tWA?t        BI'OO. COttOA CO., 190 SO. 317 (La.)& GOidstein-
         firsberg        Co.  Board of Aaaraooro, 83 A. 773 (Kow
                                'I.    Sets
         Jrrroy       %QWSO    VlllOaAcOU?t)l
                                       :;hoola,1110. 1. %WtiA, State
         Tax Comlaaloaor 179 A. 620 (Now Joraoy 3u-roma Cou.rt)$
         &rg v* fntmmtloaal Sliver Co., il F. (2df.147(Sooond
         CirOUit cOU?t Of App~&o).

                               This rule hno boon hold to be lpplloablo                              oven
         ;fft&3       SOrpOSAtiOA           hAS~A0        ht6AtiOA       Of    OVSr    l’Si8SUi~      th0
                  .    State      1. Stewart          Bras.     Cottoa        Co.,    aupra.

                       It rollosra tscn    that,   ror oomputatlonof tho
         franohlartar, ths corporation*8balanor sheet should show
         loutataadlng oapltal otook~ la the auia0r $1,2S0,000.00,
         that  b&n&  tho ariount loaumd and outstanding rior to tha
         pureharm oi the treaaur~      stock     all4 Ml8   rem i?
                                                                 na trUa until
         thr oor;>oratlon  porronnothe aLtutory           foraalltlrafor l
         dooreaao oi its   oapltal atook, a8 grorldodin Artlol@ 1332,
         wra.
              thlifIg d.teTdWd        that tb. OOrpOl%tiOa'r
p ur o h a lwt pm0 of ita awn atoak dwa not dooreaao the
*outatandbg oapltal rtook* for franohlaa tax purposoa,
ii ~a. nott to a ooruldoratlo.          of tho oifoot of the
purohaao on the balaaoo ahma 1torJ of “aurplua.”              The
o r p lta l
          ltruoture     o f a o0rpor8tlOa, lno a a 4 lng o uta ta nQlng
oepitala to a l       r~lum,
                      k ,      undlvldod proilto,   lto.     on whloh
tho fnnohlw         tax lr bmod, appear. la tho llobfllty
portloo or tb Wanaro ahoet.            Thm pr4ptm aoooimting
uthod ior trqnahira tu ~oaoa              of hand&g this purohamo
of tho traaaury atorr tr the oorpontlon           bcooaor relatively
mimglowhen wo oonaidor that tho authorltlostnat auoh
ro-aoqulrodor.tredary          rtoak am an “araot”of the oorpora-
~~~:~~~:t,“~~~~~~~~.~~.~~~~:~l~k~-                                      ’
(2d) Gs    @alla. CQUZt of Civil Appeal.,       no l
                                                   t
                                               ;po.lod’ti*
Supromedourt)t  Rlldobraacl“Tax..Corporetlona,”Vol. 2
     ll0 Sorg t. IntornatLal Sliver Co., 11 I. (26) li3
 e.g.0
PDlat. C1 New York) afflrued ll F. (2d) 147118 C. J. 3,:
          l
page 645 &oo. 2111 Thoin~aon on Corporatlona, 3rd .xd.,
SW* 4dr                                             r. ~.
            Thoreforo,the purcham or the treasuryatook
rholfldbe raflootodon the balacoe shot   ilks the purahass
of any other aaaat. Rut the queatlonlmmdietely arlara:
Yhat raluatlonla to bo plaoed on thla asset? 18 It to bo
rat at par ~aluo of the stook, or at the prlos paid theraior
by the eorporatlon,  or at vme other i&are? The amount  oi
        ti11 bo dfeotod by the valuation plaoed on thla
8u.rplu.a
WOO&.
              Bery oorporatlgnla reqtirad to dko a morn
mpozt k tha Sroratary or 3tata iuinuallp oontaln*       a
balanooahoot, and maid report la rrqalrad to list tho
lo.ah value” oi all groaa aaa.ta  of (rho Oorporation. Art.
7089,R* 8. An4 the E;eerata~ of SW&o          nqdre the
oorporatien’a   0m00rs  to adnit adlltlo 3    lnr9raatlon
under oath, an,4 ant11 he 1s fully latlsiied  therofma a8 to
tho wnount or rurplua and undlrldod protltr,    ha naod not
looopt tha ixwioblae tax. Artlola 7087, 11. 5+
              It moat be borne la mind, bouw~z, that it 1s
not the Boorotary or S-to mso flxaa the “cm&h vtiuo* of
the aaaota of the oorporatlaa,   whioh go into the balahoo
shoot to old in dotarmining    Cho awant ol naurpluaand
Undivided prolit..’    *Tha rot nahora luthoria*atha
.

                                                                   253


    BW. sldnoy latham,   Pw* 3


                 y laaoo* Ibo tu.
    fb o r j~a rto                It reqUlre8 the taxpayer to
         18 on a ooroaan krla an4 to dlaoloaothr  taota~~oaatl-
     utbg tho baalo in a rrport to the Sooratary. St 18 true
    ey
    . . . thr taluo of la w#r   *bore a lurploa otiata lniolro
    diapufablofaotr, but authority la glran to no offloor to
    lo r r a o tth    o
                  fl6uror ragorted. Tho lddltlonal  lnformetlon
    rrqulred  in tha Ngulu raport or obtriard br aflldatlt
    under Art10107067 or ochorwlaoply bo aaoiul to indaoo a
    true nport or to r0u0d a proro6utlon ror falao awoarlng
    in nltlng aa uatruo one , . . . If booauaaof a dlaputo otar
    rurp1.u~ ho rrJoot8 tho .%a~, the Attorary Oeooral mot rllo
    rult Sor Its oollaotloaunaor Art1810 7095. Proaumbly In
    that rult a full boarlne rhould bo had am to the rnattwa
    la dlaputo. * Southom Realty Co. v* h%Callam,65 F. (2d)
    934, oertlorarl   donled, 4 S. Ct. Rap. 127. 90s aleo Unltsd
    Sorthand South Devalopcwnt CO. t, Keath, 76 S. >‘.(2d) 650,
    errorrof   use&

                  Aooordlng~y,tha 4orporatlonbalanoo ohoot sboula
    rsfloot tho purohaao OS tho treasuryatook as an rrohangr
    of aaaotar To lllurtratw      Ii tho lorpontlon  4atormlno4
    that tbo *oaah veJue* or the *took purohaaedwas tho prloa      -
    fur wkloh it us8 ra-eoqillred  trar?tl!n ltookholdrr,the ltelc
    %roaaury atook” should be listed as an aaart ln auoh amount;
    and tba Item“oaah,’aasualng     It was a oaah purahaao,should
    lm lyedlted for the sea amount.     This would loate the ltos
    “aurplua~ umhawvd.     On the other hand, ii the oorporatlon
    should dotemine that the “oath vdluon of sold StOOk was par
    or aqy other sum largerthan the amount aotuallypaid tkiorefor,
    the treasuryltook lhoul4 be listed as an asset or suoh value
    as ao doterinodt   oath u8uld be orrdltod for the prloo pold;
    oad thr dlffenaao,   roprraeatlngthe profit mar&a on the
    doal, would ba rbdod to rurplua or an4ltldod proittr.     Con-
    veraolr,ii tho oorporrtloa rboald value aald rt06k at loam
    ttnn   the p~ohaa~ prloo, ntl~oUng a loam uI *em*, troaury
    rtook would bu llatod as an wart at auoh tPluo( oarh would
    be orrdltrdfar the prloo paid1 and the dlfSrroeoo or 1088
    would bg applied es 4 rodwtlon oi lurplw.
                Our anuuor’,theroioro, to your quo8tion la that
    the ltieot of the treasury ato& pumhaao br the oomoratlon
    on thinltm of “aurplua*Oopondr lntlroly on tho %aab voluo”
 or auoh St&ok urllod   at as huelnabo+mret rorth.    ::o
:-ruggoat  t&at YOUlell on tho offloera of ma14 oorporatloo
 l# ruthorltodby Art. 7 087,  lupra, iox whatever addit&&
 l,nforratlon you MY need la ardor that the tax msr bo oom-
 puted in aocordanoowith thla opinion.

                                Tours rory truly
                            ATl'ORRI;Y
                                    G J&E!:.;;.
                                            Cr;T:.?.&
