7 

OFFICE OF THE ATTORNEY GENERAL OF TEXAS 

AUSTIN 

aLC*LD c. MANN 

lvT.“la.. e.*r.ri .= 

Xonorabls Sidney Lathsm 

+3earstpry or“8tate 

AUtdn, Tarsa 

Dear 3lrr 

led 1 ts trenahisa tex 

, 1937, 1938, 1939, 19&Q 

d has paid the mount qP 

to be due by. asah of suah 

y the aorgotstion.~ 

aent hss .mds .asscsomnts of 

8 for uoah of t&a itbova aentionad 

upOn infOrasti@n Contsined in the 

rts end other f-sate lurnished to this 

Department by t&s ooetpsng, whiah additional assesssents the goqmxy aonE-Jide ere unsutbo~ized for 

cm880118 hereinafter shown. 

*At various tines~ tha co-:pany hns aold asrtalti 

of its theaters to vsrims purchns5?8, rmceisiag 

9 am811 dowd pagiatnt and prodseory notes reprssentlng the balmae of the purohsse somy. The notsa I 

5,” 
ilonorsbls Sidney La thsm, Fsgs 2 

ms sscurcrd by c&e property ~014, but suah 

ssocxity is zot mcl~lsivc, s-.4 th. notes ris 

3 jW3FSOAll Gbli~StiOA Of tb8 SHl!C5F. mphs 

aoapony :eprescnts, howevur, th3t the makers 

of the notes ars othervlae unable 8s ?RJ the 

notes and t!mtt, as ZY prsctlcal sisttrt, it will 

be ftZu8d to look aohly to the pwpartr sold to 

~KIOUF~ the gayseat of the dsfcrrrd purohssr 

prioe. The 00,3pny rurthrt rspras?atr that tb6’ 

talus of the paparty sold is rar 1m1 than the 

Sacs *aPa8 0S t&o puroharr 6oncy aotrs rsse~red 

tberaior, and that St never 8x.psat8 $0 rwlfse 

the faar r3lue of the notes sod the resulting 

large profita Ebst woald b* rarlized If tha 

notes war6 ~alil ia full; that ultlmtely it 

erpsats to ba roro4a to rspossasa the propsrty 

sold at thslr aotcul o&m which Is apqrnaiably 

leas thsn tbrl 9ur0hasa’aonq7 notas raaaired therefor, 

all of whloh 10 olslaad will result in a aubraantisl 

loss to the cornpay cmparad TV the prnsant book 

v’aln3 3f tbd AOt.CfS. 

'%a umpmay la& tolZowed the pmotico af i iUlna 

Its franahina tax r4~abr'o?~showln&~fhe ditf4ranocl:-: 

in the a~ou&t (Iotually ~&aid CICL the notea ~ond:.ths “, 

Sacs vslue of the lrotss 53 ‘tmkerlized pWflt#. ., 

In aoaputing its tax for the above motioned years, 

the conpany has never included them it%iae of ‘unraalitad proffts’ as tiroblr itsm md hes raid no 

taxrs thereon upoi~ tba tbrory that 11k~ %edrrrl 

Inoii~e tax, It vms not taxable until aotuelly 

rrccivzd. 

*This year t&s Franchise ‘lkx 3ivpiaion ot this 

3epartmmt aale a~ adsaa8ma~t on sll suah ltsas Of 

~uilrmlized profits* so shown xl tha cwrant rapart 

amI all prior raportr, for the rears 4bOQ8 mentioned, 

such additional 8sassRLnants %mXmSln~: to ,!S tatal fCW 

811 years fro&x 1936 to 1943, both inclusive, o? $7&00, 

These addlticmal aeaessamats were -de by this !Je~artmnt on the theory thnt ’ unrealized potits* reprasnnted by gra~~Lmory notst areated a surplus t3 the 

6xtmC of the fras valua 0C ths notes 3,s rep:crted 

by th* omqany, end thnt, this Ceporkwnt was snthorized, 

if not re~ulred, to aoaapt the valum of ths notes 

BS shown on ths rsport, VB being wltbout zwens 9r 

Qetsrglaltig anp nllqgid sctual m&at 9slt\a Of the 

no:. es, 
_- 

“,X’he tsxpsy+r has tender46 s check in the sum 

of $2GO,CO in full Fayzcnt of all suci sddltional 

8ss4sS%~~AtS :zade by this 3dg3rtAlnt, cmtwdfq 

that if the ltws of ‘unreallzad pro:lts* are 

taxable at all as surplus, then they are taxable 

only ou the actual rslue of the notes rather than 

the full la40 vslue, snd ttat ths .%YJO.OO tendered 

reprseents the tax for all prior yeare based upon 

each actual value. In oonneoticn with the tender 

OS t&h papasat, the taxpayer has ra-,uested the 

privllego of ammdi~g tha reports for all the reefs 

in ~uestloh in order to show an, estimted actual 

ValuJ of the notes tn ;UestiOA and to Bet Up as a 

*?6servr for losaas* the diffex6noe iri ths ast~4ted 

aatual value and tha it300 value rbiah 18 nmw3&xu~- 

on tea relport95. 

. *‘3y way Of fuXth6X sxplsnation, there 18 ettsched 

hereto the sifidsvit o?’ Gskar Kern, 7rasident of 

the oorporstion, with rsrerence to the traossotions 

above aentloned. i .~ 

,, -L 

*In the li&t of the abovs fact8, will yw pleasa~. 

advtss this Dsparbmt upon the following inquirlsa: 

'1. ?.re the items of iunrealiaed profit’ tsxsble 

under the fremhise tax 1~ at their face vslns 9% 

shown on.the franchise tax reports? 

"2. Is thl8 Depertment duthor lzed to perdft the 

amcndnent or rrea8hise tr,x reports after they are 

f’ilsd in this offioe upon sworn ststenwts th3t t&e 

report ss orl,=ln~lly if.lad dons not rspresent the 

true aondition of the taXp%yfAg co::yany? 

“3. Xf ws ar3 a,uthoFiztd to smept or rerait 

amecdsd reports, then IS there my 1l~zItstion as to 

the nuabbr of prior years for whioh such rLaandsente 

csn be accepted? 

“h. SotAd this 3epartaeut aaaeyt thp !2GG.G0 

check Wet hsa buea tenderad in full. astisfsotlon 

of ths .sdditionaZ ~~S’38?3~tmtS 00 %hJ themy, SK 

contaaded by the taxpayer, tbt only the aotuol 

valua rather than thtr lace volu% o,C the notes is 

taxaS197 

.-;. . 
“5. Is Chla Csp3rtnMlt suthorix~d to ecospt 

-‘tha tnrpzipcr’s cxiti:mte of t::a actual vslus of 

ths notes in r,uGstioi!‘;” 

In tha ce3c OS C'nited 30rtb & South D49el4gm3nt 

coi0pauy 9. Haath, st ml. 78 5. #. (26) 650 (error retuned) 

the Austh &art OS Cl& Appeals held Lhat an lteu v.sriouolp 

osmi44 04 the bwaic4 or 4 aorporatlon 84 'sppr4eiateB aurplua* 

mdkurealirea apgri!al.rtlonw as properly inoluded as ~surpl~~~ 

in the ooapatation of the franohlsa tax IlabLlity of the oarporatioa. Thia ltm rrpreean&ud the luoreaeud ralw of arrtaln 

011 leasrn 44 a result 02 the dleaoo~y of oil on lsad Oo+ered 

by suoh lteatm, with Chd~Soalue bofnu then aunraalissd* bsonuaa 

ths leases had nalthar baezi fully devslo ed nor sold at tbair 

inaruesed oalum. ?-sgmdlzse of ita psrt P cdlar dmmtiation, . 

this ltua was in nffaot u’Mraalitad profit * and wu’~aanttrua 

the declsida in this oass ds holdlz~g thst &a of ?uvealizaa 

pror.itP 'arm properly inoluded %s surplus' In ths ooqmtatim 

oi franehlae tar llabPllt~, Thus the ‘Court mid at psgn 652: 

* In the instant ease -4~ tsi& that any strict 

or tmohaloel aaridti0fi of tbu ~tarm ‘sozplw* as used 

in thm statuts sttoeld uot b.a .appltad, but 0116 which 

would oHeotuata ths laglslatira iatenti ~I&wa~lr~ 

carrleii 011 its booke, She 7XatagozUa oowty~lease, 

a ns~ly dfmoverad rlald, was a vary rqluabls asset 

of the corporati,on, estLs4&3d ,~d repreeentsd by 

appellant itself to h3V9 3 fP3t vsluo or rrw f2Q,32C,WO 

to JU,l2O,OGO. Obviously th% lsaoe afforded appellant 

both ?1 Fotsntlal snd, sotunl op 

sxtunslre rroportiona in ? 

rtunlty of vast and 

aerry ng oa lta buaicsss in 

th%a, s%aats. Ths 9dua of ita prIvSlag? or fmnohise 

was inereassd acosdinp;ly. nnd this value, fixed by 

appollsnt , was obviomly the bslais OLZ ~PZiob tha state’s 

tax -ass intsndad to ba acraputm& I!h4 iad that hilis full 

rstlirretcd OT dp$rJip-ed V-AM rsi& not svo~t~ally be 

folly raalized la rmt dftartinative OI the mount of 

tbhs tax. It la altar t@t appsllsnt satlalptsd A 

volnms or buaimsa reszltins l”ro~ luoh esmt, (9 

potaatial igxm~, irz baymid 8 aomaal uas of lta capital 

stock, sad enjoyed a’ ~rioilsga fer WYJF~ talmble then 

thst nasaursd by Its cs3ital ecook slone. Ra~ardlaes 

of the alassS.fioatLm of %uch l.teza a%de by .it upsn its 

booka) under ths deoialons ehoon ait%t?, ?md the 07vimn 

pirpoese of tha ta~lslatars 6s 0x~pr840866 In artiolse 

705& and 7C89 ??..?. a& wumdad (Ver~on~s Mn. Civ. 7:. 

qrts. 706&,?uBg) ne ,tk:nk the smrsh~?ry of rta4s 

prop,srlp to&$ th.: *sl\ls plscP?& thrreon by .>p+n3ni; 

In its reFor$ into 4nnslderatiOR irt CO:ap*lClRg th* :UCW2lt 

of the Crenohiae. tax dur: bhn state j-ay appellsnt.” 
IA your first queEtiOn you iA~;u~rs wbsthar ths whalitad prortt l:e;?ts sbouln brj taxed at th6J.r f4c.3 vrltio 

as shown on ths frsilobise tex reports; the alternative to 

. this laodo or traatxent itould bc to tax snc!l iLdm3 at their 

aatual *slue. thdar none1 acoowting pracailurs, the vslue 

sssi&.rred to an lteo cf urirGslizad profit is depadeht upon 

the Value a**lgn44 to 8a8bk. l.f the asset8 are oarried at 

(LIP 8?tif~Oi~i ValU~tiOA, th4 TalU4 rOil.eOtcd iOr UWaalla6d 

proilss uill also be artlfiolnl. In .tha instant rltczation, 

ii tb4 not68 ars oarma 05 t.h0 46ia *id6 0f th4 i6age 

at a velur above thalr trca wrth, bhr unrealized profit 

it+a till:ba magrlfl~ proportionately. zo foal that 

these itam should be tared et t&&r sotwl relw tether 

thaw qt thalr faca value. Art1018 7C89 requires a corporation to report “tha cash vaIus of roll gross JaaetzP rether 

than tbs ieua value of rush ass&r. St the 4aah valus of . 

asseta ia to be r#portsd, it would aaam that the ls&Jslaturr inteadod %hat ItaPu of uarsoWmi3 geotit b4 rcpnrted 

and tared at their satual ralua, sinae euah valuS is the 

only’on~ w5.1Jci.1 am be derived fpw the 04321 valus ?,t assets. 

3oreovcr, aa ms mid by ths Oour t ia t&e Haath ode*, a 

$rsn&las tax Is *but a oharge made by tbs state a@nst 

; Y. thr OOTJM?4tiO~ r4r the ~l'iVildg6 &?dcrsAtSd it to do bUsiIie8s 

ln. tile stata.' I .; The a~onat of ,Uae aharge ie drtsmined in 

‘. part by ths value of tbs QP@Q my 0wn4a by tn4~ co+pmitl0n, 

and suah amlm& h?rs bean aade to iluaturta width thr vaIuo 

of such property em the tbaory thet tbr ~a1t.s~~ Of tb,* 

y~itilcgc grpantad by the Stn:g ver-ies dlrsatly with the 

volu-ac of~aaacts of Ghs cwporstion whish enjoys Such 

p4vlle!gl. mvl~u~ly it could never hsva b44n the intention 

oi the lo.&slature to %llIow Y Eor~orsti.on t0 JlkwEb its 

~ranuhias tax48 by rssl#ping a low iace Valu4 t0 thO55 

profits wNch~al&t ba raallzsd Tro4 4 valuable W36t; 

convaraely t,&e. k&ShtUrd ootid never hsvs intaoded that 

the franobfae tar 1labiUty or a corymtim b.e laflated 

by ita ~oe$sssion of an asset whiah, thouah deprsoiatfrd in 

VS~IJ~, bears a hi& faoe vslas and is Feflaated iA h&h 

s2I%l!r?Rli~~ profits* 

$ . COn#es)ll4Atly, iA 4Aewcr t0 yOUI! fk3t tuest%oa, 

" YOU sxc p~~~potr~llp ait-risec! G%~E item of unraalizad ,>I:~ profit ape t-;rxlbls 85 pert of SUrphl3 3lld t!Y+% %h* tax 

sl~~uld be based upon the actusl vslud retScr than the 

fs~4 V~LUC 0r 15m1 lte;Ud). % 
: “To dster,Cfine tha zmolmt of the Clrst freoc:iisa . 

tax ~?0ptlaS ra.:.u:rcd by $hi3 Cha9ter of my dosbatie 

oorgoraCim e!%loh msy be hereafter ahapterwi, QF of 

any foreign ao?pratl-on ahlah zay heWat6er apply for 

a.parai6 to .do bualnesa within this Stats and also to 

dotamino the ~cerraatntse ot any report nhleh 1s provlded for in Ehls ohaptw, the Saaratrry of State say, 

whaaeter be dsema it n6asaaary oc pypar to prote& 

6h9 illt6?66tS Oi the st6tI3, TOqUiZ ~34 OQe OT MO&'6 

Of thb OfiieWs of mua& OWpOretioaa t&m&6 and fllr 

ia 6ha offloa et the Searatary of State an arfidnvlt 

satflag forth fully the faots oonocmi~ $he emuat 

of thr curplw aad uadivided proilte, raspaotlvsly, it 

any, of such doaeatla or iorel&~ corporstiong end until 

the Secratary of Stete shall br mi6fica .68 00 

the vmount ot. swh suxplua and per g&s-, 

ras9eetjite4, if anf, he shall not File the artlalas 

of iaaorpexatian of euch proposed dowestle oorporetlann, 

or lame suah permit, OP acospt such franohlrs km.* 

Our aaorta. !&me mma? ate&a& whether .thir As tiala 

%a epplioablr to r~.aorpo~tloaa r6qalred-to~~6qb‘git, m iraaahhe 

t&x r6flrt.O~ W!x6thP the p8weTa grSnt@d to th6 S6Ql'6t@trY Ot Stat+ 

by salt! .krtiole am acmiined In thdF operation to forslgn corporations uhlafi 9rd ~klng th6h lnltlal spyl.ication for s perxlt 

6a transact hu5lnes6; In the as5u of Southumi 3sslty Corporation, 

*t -ll., v. mcallura, et 41. 1 7. Su#p, 614, B fedaral district 

cowe tuok tits lmster ?osltion., saying! 

Ts1tth the axua9tiofI of ro**iFp 002.9os*t1o338 

rpplyi?rfl for inltic\L pavzit, t&s sot s*aRb to asntsia- 

$lsto that hha tax shell bs oasputad ;sq the sworn raFo?ts 

ade by thhs curgorwtlcn. . . Thrt portion of the sot 

&ii03 givsa t3e Searetary of 56ata authcelty to aWaia 

ud be gul&ar; by i~for?ae6.kn *fra, ather ~i1?3!06s~ rimi 

apqrently relstes only to corpomtions spplgifi.5 for’ 

efiartsr~ or pamit. . .* 
“It is true tb.3: the gYJ33 rac+i~to i~ amd alit, of 

TexG3 -m.¶ the v91ue of asa+ts wh:hcrq 3 surplus sxlsts iaVolre dit;utsbls faots, bu 2 -3ufhcrity lo ~lrerl to no Offi0s to aorract the iiqwea rsfx1rt8d, The ndditlodal lnforaQtlou mq2iraa in tkz rr;c‘313r .rqxt or obtalnsd by 

aifid~vit uadar irtlcla 7G67 or otherwisrl osy be ussf& 

to induoa a true rqort or to found s prossoutloa for fslse 

swear~A& iII 5skw ~UL uAtru6 3n.B. $8, do not asalde athathsr, 

ss 18 conterded, Artiola 7Qd7, which apuaks of deter&alag 

the ~~rra~%~sss of the report and satlsfyiag ths seomtery 

Of the &XOUAt Of t&8 +WT~klS, appliS8 OAlJ CO tha first 

year OS bimin8r8 in P3xan. Xr npplisd to ml1 rqports Ui 

all years r&em s surplus is involved, it oaly results ia 

the reorrtary aot soos?tin t‘ tha taadarsd ,framahise tax. 

!io oa~ot enioros his views by CIII aaeaeaia~ gad distralnlng. 

2f broaurre of 6 disputa over surplus ha rejsots the taz, 

the Attorney Gsa6nl sust rile suit for itr oolleotloa under 

Artlols 7095. Ireeusably in that suit a full httarina: OaAa 

be, had a6 to ths ssttars in disrute. Ia esaea where Artiolg 

?G3? is sot appllanble, diaputa sight arias as to the proportion of iatrestste business to all busiaess, or IS to 

the 3;aount of Long-t-tixe lndebtfiasaa or the like. fa such 

a oasa the searahry no doubt wuld rroaspt -hat wss offered 

OQ aocomt a: thr tax, having tb5 Attorney General to brim 

suit for, the dirisr~enm olaimsd. . .* 

FIsgsrdLeas of the sp~lioabllity of Artiale 7G87, ws reel 

that ths la ttsr ozse is suthority ,?r,r tb e Fro~osltlan th%C the only 

atstutory a&hod of colloatlng dnlia:uent framhlsa, tsxea is by actioa 

of ‘thhe Attorney Gciaeral. &liw8vnr, this in not tomy thet th6 33orntary 

of ,Ststs hat no powers with respcat to scoh oolloations, tar if he 

feals that paynmts sithar for aurrsat or iO? 3!3tt yaava sr% insufffaisnt, hs is pri9ileged to report this fact to the Attorney Gmersl 

wlta t’lz roou*at ths ths latter officZ4 Srlag s,;it for thn additions1 taxss. In this sitaa:i~oa, the .?eC?St3rg OX' .Zt?t9 doss aOt 

* "ur~~ort t.3 *corveutq tha reports sxbaltta,d by ths taxraper; neltbar 

do?s hc stter,pt to -wk.3 m asszss:zmt and de.taad ior any tsnea -~!!lioZ3 

he d$a.zs due--if he fsols tb%: th? tixpyer ha3 not disahareed his 

lisbillty, his sole act Is to glace thq taa tt ar in Ohs hands of the 

Attorney Cenaral 80 that th* courts ,xay esoertaia the proper mount 

Of the taXrt8. It 1% obpln~s that before the Gooretarp of 3tate tskrR 

this 3cfsp, 

t.%iee -nfiich ha fO318 exe do4 en.3 my 3USirU to nrs$Otiate aith tbS 

.le .gay desire t3 infor the tRXpSy6F Of th3 SSOL!A& Of th6 

tnqsysr is en etts:;pt to raach!an +3nicai%l.a stttlemnt of -my dlspuio 

Which h?s .mlscn, 38re rt;sln thir sctlc?na of ch* :aQv6tsry OP <. 

S&-I ta 

are neither in the rora of a carpaotion of ths taxpsyar's vsport aov 

la a.: for.2 of an ,qS$easa+.n~t and Gezwid ,.;’ --r,hay 3re ~n+r.ely stfort0 by 

thie offtolzll to errLv5 SC ? sglt.lt,i>p tisraby ?,s will b3 .z%Clzft-xd 

that &h;? propzr tax is yl?d sn5 Y&z.raby :,>; 

k,;t ynlll rice3 it sanac~ssary 

~Q< to refer the -,attor t,.o the &ttorney cehexsl. .:i:: 
121 t&8 insteat situstirm the SsOrbtRry ol Ststa has deolded 

that it-ma o? umsalfzad profit shculd be iacludad as a pevt of 

surplun in co~p.yu:In.e the smx~t of the rrsnohiae tar, snd c&et 

t!le feiLur6 to 1~1~lnCe such ltma in past yaws hs3 resulted in 

a QeZlol@nay with rbeprct to tti3 ~goe;ntd ior such y~-xsze. -:e 

ra&wd this drciadon as bela in award with the aasa of t?nitsd 

Sorth k South I)arelo~art Cm.paen~ v* E!s&h? et al., eupra, and 

with th3 fw4gr>laf, portiaa oi :hls o~lnlcu. Zn aoaordanoe with 

this op~nlou, th3 amount of t&o +dditianal tame due Is to bs 

besod ugoo the aatual islus of the item of unrealized profit. 

If the targayer :iefusss to 91y ea)r addlttanal taxer or if he 

b r a da l ddItlone1 s tar48 aosputed wcn II t~alue of unroallzsd 

proiits which the Seoretary 02 State feels is not in ~uoord 

with th% aotuel vnIua of aucb profits, the ?saretary or State 

Is privile(ged to report au& delb%uengp to the Attorney General 

2or a 

1 

proprlate satlm; 

addlt oml 

Co&txarlwlae, if tha ta%pgeyer tenders 

tares ooqwtsd upan s value of unrsallzsd proffts 

which the goaretary of State bellewas tx br in saoord with the 

satua3 value or suuh voflts, tht sacrxrtarp of State is prlrilsged to w~~,ulasos in the .psyuant of such taxes, 91;d la sh$e 

sltaatioa hs will QOt, of wursi?, rqort tha .Stter to the 

Attorney Oaneral. 

Year sea-nb question is sns-srerad lnfhe negative. Roith~r 

expreas3.y ROT by inrplioatl~n do JUT statutes authorize the 

aaendslsnt or fraac!lla3 tax: I b2crt.s aitar they have been filed 

4 th the Secretary of S5ts. ,Pha swam statsnants referred t 3 

In your quiutlbn sng ?iao% ap, t~gortanoo h,er*laafter indicatml, 

-but they afford no basis for *n xaan&wnt of the franchise tar 

reports, This snswer .artkes unnaoeaeary a reply to your third 

queatloa. _ 

IQ angyre? to your toaru1 question, you ass raspeottully adVl.%Cd qat yeu 3rd prlvllqp? $0 aoaept the cheak for ~326O.GQ. 

12 pou,dro satisfied ,thnt this figu~re repraaacts t.>s amunt oi 

the .adMtlonal taxes uhaa such suoUa6 .Is 000 uted 

actual ?alue of the itane of umsalizad 31-o?f ’

upon the 

be, y3?1 will, of 

course, take no iurthar aati:a \:?th rasrect to thlr pyzmt. 

3x1 the other hmd, if yzw 3re not ~ttleited that this fir;uro 

rbpreeents t&u pop6r a~ouflt Of the Adit4rjnal tk?.aa dU8, ynu 

we prlvflqpd ta reqasst the Attmnay COfidr-~l to bin& sul$ 

to recover any addltlmol zmn x2ich you feal t.2 be due.