Xon. C. Ii6Cavness State Auditar Austin, Texas
Attention,:

Hem* Chas. C, Collum,Assistant State Auditor,

bear 31~:

**YOU** meat upm the

“It Ren The franchisetax liability of a corporationon notes glvea to fimace real property improvements, after these notes have been assigned by the originalholderS the real propertyhas

the purchasbeka sold, ana er ha0 assumed of. paymkt therethFs Departhave requested the opinion of following factual si%uatiea*

is requested that you render to this office en opinion as to the coastructioa of a corporation’sliability@der Sec. 7084 R. C. 3# In our examinationof franchisetax returns ne find c@rperatioas which have borroued timpy on their own notes, Um pavents of whMh &ater have been assume3 **by** indlviauel purc&@e@d un6Ter

the circumstrtaoes

imilar to th& &ascribed$pzreinafter P
“pktflty Defeese Housing Company, a carporatliwb,

the owner of unlmpreved$eal. estate, finanaes improvements thereonby borrowing from W. Ko Ewkg and Company,giving Fidelitgss notes+ snah ea lkhiblt *Ap attsahea. These n,ete,a by theb terms are psyable over e period of: byes&y-fiveyears atpa are sedured by mortgagesa&in& the real es%3te~ A8 long
as these netea are direct 

### l b3tigatlow of Fiaelitg, there appears to be rim qussU.oai but,
Hon. C, Ii. Cavness,Page 2 (V- 500)

that each such note should be included in tsxable capital for franchisetax purposesas providedby Article 7084 (A) R. C. 3. Rowever, two changes operate to effect circumstances;the first Is that Ewing sells the notes, without recourse,to different lnsurenae companies;the second is that Fidelity sells the reel estate and the purchasersassume the respectiveobligationsof paying the twenty-five

year notes as shown In deeds of trust, such as Rxhlblts 'B-1'end 'B-2'attached. (You will observe that in EZhibit 'B-2'E. JT.

Burke is shown es vendor; the form Is the same, and Rxhiblt Q-ils shouldbe consideredas if Flaelltg were shown es the vendor.)

"In the first change mentioned above, Ewing, another corporation,in turn sells the notes to an insurancecompany, still another corporation,

which receives the notes under
a couveyanceform such as Rxhlblt sCQ attached.

"AfterFidelityhas sold the real estate and the purchaserthereofhas assumed Flaelltyss obligationto pay the installment note, is the amount of the note properly lncludlbleas taxable capital of Fidelity under Sec. 7084 (A)?"

Article 7084, R. C. 3. 19259 as amended,provides In part es follows:

"(a)Except es herein prsvided,every domestic end foreign corporation heretofore or hereafter charteredor authorizedto do business in Texas, or doing business la Texan, shall, on or before May 1st of each year, pay in advance to the Secretaryof State a franchisetax for the year following,

based upon that proportionof the outstanding

capital stock, surplus and undivided profits,plus the emount'of outstanding bonds, notes and debentures, (outstanding bonds, notes, and debentures shall includeall written evidencesof indebtedness which bear
a maturitydate of one (1) year or more from date of issue D y *It (Emphasis supplied)

Your questlonhes never been passed upon by our Courts, and its answer must aaeceaserily depend solely **upon**Bon. C. H. Cavness,Page 3 (V- 500)

the constructionto be placed upon Article 70849 quoted above, If the notes in question constitute "outstanding notes" of the corporationthen the amounts thereof must be includedas taxable capital of the corporation. If, on the other hand, they do not constitute 'outstanding notes" as that term is used in Article 7084, V. C. 3+, them the amounts thereof shouldrptbe includedas taxable capital of the corporation.

It is well settled in this State, when one gives his note securedby a deed of trust on real estate and then subsequentlysells the reel estate, the purchaserthereof assuming the obligationof paying off the note, the purchaser Is deemed prlmarFlg 1Fable on the notes and the mortgagorbecomes liable as surety.

Prior to the sale of the real estate securing one of the notes and the assumptionby the purchaser thereof of the payment of the note, it is clear that the amount of the note should be Included in the amount of the t,axable

capital of Fidelity* However, when Fidelity sells the real estate togetherwith the improvements made theresn with the funds obtainedby executing one of the notes la question, and the purchaser thereof assumes the payment of the note, Fidelity becomss only secondar%ly liable on the note as surety. From and after the date of the sale, Fidelity is relieved from all liability on the note unless two contingencies occur: First, that the purchaser fails and refuses to pay the note, and secondly,that sale of the realty will not bring enough to satisfy the note, We do not believe under such circumstances such notes constitute "outstanding notes",
as that term is used in Article 7084,V. C, S., as amended.

In a letter opinion, dated August 20, 1934, to Ron. W, W, Heath, then Secretaryof State, this department had before it a factual situationwhere a corporation purchased land and in part payment thereof gave two vendorDs lien notes, The corporationsold said iand to
a purchaserwho assumed payment of the two notes previously executedby the corporation. It was held that after the corporation sold the land to the purchaser,who assumed payment of the vendorvs lien notes thereon9 the corporationshouldnot include the ameunt of these notes in its taxable capital under the provisionsof Article 7084, v, c. s. While Article 7Q84, V, CQ So, has been emended since the date of that letter opinion, the portion of the Article pertinent to this opinionwas not changed.Hon. C. H. Cavness,Page 4 (V-500)

In accordance

with the letter oplalon dated August 20, 1934, the Secretaryof State has consletentlg eon- &rued the applicable provlalonsof Article 7084, supra, in situations

arlslng In similar cases that upon the assumptionof a written evidenceof inclebtednesa secured by a lien on real or personalpropertyby the purchaser thereof the b,orrowecl c8pltal evldenoedby the execution of the orlglnalweltten. evidenceof indebtedness ceased to be used by the corporetton as a part of its taxable vorklng capital. This construction has been uniformly adhered~

to for’s per&id of over thirteenyears, and under the well-establlsh4d rule of law In Texas such departmeat constructlon is entitled to great weight.

peyoe of tit ties without

It is our opinion the amount of the notes exeIs Umnaterielthat Ewing and Company,the notes, aubssquently sold them to third parcecourso.

cuted by the FidelityDef’onse liourlng

Company tb W. K. Ewing aad Company shouldnot bs included for the purpose of taxationunder the E ”ovirions of Article 7084, V.&S.,
as ameaded,after Fide ItJ has sold th8 real estate securlug the notes and the purchaserthereof has assumed pagneat sf the notes.

more meat upoa Notes executedby a corporation, maturing than one year from date of issue, la payof money borrowed to erec’t improvements propertywhich It subaequehtlysold to pnrcaasers

who as8ume payment of such notes, a4 not constitute “outstanding notes” of such corporation taxable under the provisionsof Article 7084, V. C. sDO as amended.

Yours very truly,

ATTORNEY CiERRRAL

OF TEXAS

ATTORNEY@NNERAL