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 1ts 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 8for 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 am811dowdpagiatnt and prodseory notes reprssentlng the balmae of the purohsse somy. Thenotsa I

5,”ilonorsbls Sidney Lathsm, **Fsgs 2** 

ms sscurcrd by c&e property ~014, but suah ssocxity is zot mcl~lsivc, s-.4th. notes ris 3jW3FSOAllGbli~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 rurthrtrspras?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

### thatSt 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 roro4ato rspossasa thepropsrty sold at thslr aotcul o&m which Is apqrnaiably leas thsn tbrl **9ur0hasa ’** **aonq7 notas**  raaaired therefor, all of whloh 10olslaad will result in a aubraantisl loss to the cornpay cmparad TVthe prnsant book
v’aln3 **3f tbd**  **AOt.CfS.**

'%a **umpmay** la& tolZowed the pmotico afiiUlna **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%iaeof ‘unraalitad proffts’ as tiroblr itsm md hes raid no taxrs thereon upoi~tba **tbrory** that 11k~ %edrrrl Inoii~e tax, It vmsnot 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 amIall prior raportr, for the rears 4bOQ8 mentioned, such additional 8sassRLnants %mXmSln~:to ,!S tatal fCW 811years fro&x1936 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~~Lmorynotst areated a surplus t3 the 6xtmC of the fras valua 0Cths notes 3,srep:crted by th* omqany, end thnt, this Ceporkwnt was snthorized, if not re~ulred, to aoaapt the valumof ths notes **BS shown**  on ths rsport, VBbeing wltbout zwens 

### 9r Qetsrglaltig anp nllqgid sctual m&at 9slt\aOf the
**no:.**es,_-
“,X’hetsxpsy+r has tender46 s check in the sum of $2GO,COin 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 OSt&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 it300value rbiah 18 nmw3&xu~- on tea relport95.

. *‘3yway **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% shownon.the franchise tax reports?
"2. Is thl8 Depertment duthorlzed 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 thtrlace volu% o,Cthe 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 OSCl& 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~Soaluebofnu then aunraalissd* bsonuaa ths leases hadnalthar baezi fully devslo ed nor sold at tbair inaruesed oalum. ?-sgmdlzse of ita psrt cdlar dmmtiation, P

. 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 'armproperly inoluded %ssurplus' 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 aaridti0fioftbu ~tarm ‘sozplw* as used in thmstatuts sttoeld uot b.a.appltad, but 0116 which would oHeotuata ths laglslatira iatenti ~I&wa~lr~ **carrleii 011** **its booke,**  She7XatagozUaoowty~lease, ans~ly **dfmoverad** rlald, was a vary rqluabls asset of the corporati,on, estLs4&3d ,~d repreeentsd by appellant itself to h3V93fP3tvsluo or rrw f2Q,32C,WO
to JU,l2O,OGO. Obviously th%lsaoe afforded appellant both ?1Fotsntlal 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 ~PZiobtha state’s tax -ass intsndad to ba acraputm& I!h4iad that hilisfull rstlirretcdOT dp$rJip-ed V-AM rsi& not svo~t~ally be folly raalized la rmt dftartinative OI the mount of tbhstax. It la altar t@t appsllsnt satlalptsd A volnms or buaimsa reszltins l”ro~ luoh esmt, (9 potaatial igxm~, irz baymid 8aomaal uas of lta capital stock, sad enjoyed a’~rioilsga fer WYJF~ talmble then thst nasaursd by Its cs3ital ecook slone. Ra~ardlaes of the alassS.fioatLm of %uchl.tezaa%deby.it upsn its booka) under ths deoialons ehoon ait%t?,?mdthe 07vimn pirpoese of tha ta~lslatars 6s 0x~pr840866 In artiolse 705& and 7C89 ??..?. a&wumdad (Ver~on~s Mn. Civ. 7:. qrts. 706&,?uBg) ne ,tk:nk the smrsh~?ry of rta4s prop,srlpto&$ th.:*sl\lsplscP?&thrreon by .>p+n3ni; In its reFor$ into 4nnslderatiOR irtCO: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.3vrltio
as shown on ths frsilobise tex reports; the alternative to

. this laodoor traatxent itould bc to 

## taxsnc!l iLdm3at their aatual *slue. thdar none1 acoowting pracailurs, the vslue sssi&.rredto 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 

### thalrtrcawrth, bhrunrealized profit 

### it+atill:ba magrlfl~ proportionately. zo foal that these itam should be tared et t&&r sotwl relw tether thawqt thalr faca value. Art1018 7C89requires 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 04321valus ?,t assets. **3oreovcr,** aams mid by ths Oourt ia t&e Haath ode*, a $rsn&las tax Is *but a oharge madeby 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?rsbean **aade** to iluaturta width thr vaIuo of such **property** emthe tbaory thet tbr ~a1t.s~~ Oftb,* y~itilcgc grpantad**by** the Stn:g ver-ies dlrsatly with the volu-ac of~aaacts of Ghscwporstion whish **enjoys Such**  p4vlle!gl. mvl~u~ly it could never hsva b44n the intention oi the lo.&slature to %llIowYEor~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 iAh&h s2I%l!r?Rli~~

profits*
$

. COn#es)ll4Atly, iA 4Aewcr t0yOUI!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~4V~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 anyreport 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 6haoffloa 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 .6800 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, OPacospt such franohlrs km.*
Our aaorta. !&memma? ate&a&whether .thir Astiala %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@trYOt 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!

Ts1tththe axua9tiofI of ro**iFp 002.9os*t1o338 rpplyi?rfl for inltic\L pavzit, t&s sot s*aRb to asntsia- $lsto that hhatax shell bs oasputad ;sqthe sworn raFo?ts ade by thhscurgorwtlcn.

. . 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.

. .*

## “Itis **true tb.3:**  **the** gYJ33rac+i~to i~ amdalit, of

TexG3-m.¶the v91ue of asa+ts wh:hcrq 3 surplus sxlsts iaVolre **dit;utsbls** faots, **bu 2**  **-3ufhcrity lo**  **~lrerl to**  **no Offi**  **0s to**  **aorract the**  **iiqwea rsfx1rt8d,**  **The** ndditlodal **ln foraQtlou**  **mq2iraa in**  **tkz** rr;c‘313r .rqxt or obtalnsd by aifid~vit uadar irtlcla 7G67or otherwisrl osy be ussf& to induoa a

## truerqort 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 

### toths 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 lattsr ozse is suthority ,?r,rtbe 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.3m asszss:zmt and de.taad ior any tsnea -~!!lioZ3 he d$a.zs due--if he fsols tb%: **th? tixpyer**  **ha3** not disahareed his lisbillty, his sole act Is to glace thq taa ttar in Ohshands of the Attorney Cenaral 80 that th* courts ,xayesoertaia the proper mount Ofthe taXrt8. It 1%obpln~s that before the Gooretarp of 3tate tskrR this **3cfsp,** t.%iee -nfiich ha **fO318 exe**  do4 en.3my 3USirU to nrs$Otiate aith tbS

.le.gaydesire 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 thirsctlc?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.elystfort0 by thie offtolzll to errLv5 SC? sglt.lt,i>p tisraby ?,swill b3 .z%Clzft-xd that &h;?propzr tax is yl?d sn5 Y&z.raby :,>; k,;tynlll rice3 it sanac~ssary ~Q<to refer the -,attor t,.othe &ttorney cehexsl. .:i::121t&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.ethe smx~t of the **rrsnohiae** tar, snd c&et t!le feiLur6 to 1~1~lnCesuch 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)raddlttanal taxer or if he b rada s

l ddItlone1 tar48 **aosputed** wcn IIt~alueof 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 a1proprlate satlm; addlt oml Co&txarlwlae, if tha ta%pgeyer tenders

tares ooqwtsd upans value of unrsallzsd proffts which thegoaretary of **State bellewas**  **tx br**  **in** saoord **with the**  satua3 value or suuh voflts, tht **sacrxrtarp** of State is prlri**lsged to**  **w~~,ulasos in**  the .psyuantof such taxes, 91;dla sh$e sltaatioa hs will QOt, of wursi?, rqort tha .Stter to the AttorneyOaneral.

Year sea-nb question is sns-sreradlnfhe negative. Roith~r expreas3.y ROTby inrplioatl~n do JUTstatutes authorize the aaendslsntor fraac!lla3 tax:Ib2crt.saitar they have been filed 4 th the Secretary of S5ts. ,Phaswam statsnants referred t3
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 .artkesunnaoeaeary a reply to your third queatloa.

_ IQ angyre?to your toaru1 question, you ass raspeottully adVl.%Cdqat yeu 3rd prlvllqp? $0aoaept the cheak for ~326O.GQ. 12 pou,dro satisfied ,thnt this figu~re repraaacts t.>s amunt oi the .adMtlonal **taxes** uhaa such suoUa6.Is 000 uted actual ?alue of the itane of umsalizad 31-o?’ f upon the be, y3?1will, of
course, **take** no **iurthar** aati:a \:?th rasrect to thlr **pyzmt.** 3x1the other hmd, if yzw 3re not ~ttleited that this fir;uro rbpreeents t&upop6r a~ouflt Of the Adit4rjnal tk?.aadU8, ynu we prlvflqpd ta reqasst the Attmnay COfidr-~lto bin& sul$ to recover any addltlmol zmnx2ich you feal t.2be due.