OFPlCE OF THE ATTORNEY GENERAL STATE OF TEXAS

JOHN CORNYN

June 3.1999

The Honorable Carl E. Lewis County Attorney Nueces County Courthouse 901 Leopard, Room 206 Corpus Christi, Texas 78401-3680 Opinion No. JC-0063

Re: Method of calculating “gross income” of local public official’s child under chapter 171 of the Local Government Code 014-1186)

Dear Mr. Lewis:

You ask how to determine aperson’s interest in abusiness entity under chapter 171 ofthe Local Government Code, the statute regulating conflicts of interest of local public officers. Specifically, you ask whether certain Family Code provisions deem the gross income of a local public official’s minor child or dependent child to be part of the official’s income for purposes of chapter 171. We conclude that they do not. You also ask about the duration of an official’s interest under chapter 171. The duration of a public official’s interest in a business entity depends upon whether the interest isbased on ownership or receipt of income. We begin our analysis by looking at the statute in question.
Section 171.004 of the Local Government Code provides that a local public official with a substantial interest in abusiness entity or in real property shall tile, before avote or decision on any matter involving the business entity or the real property, an afftdavit stating the nature and extent of the interest and shall abstain from further participation in the matter if: (1) in the case of a substantial interest in abusiness entity the action on the matter will have a special economic effect on the business entity that is distinguishable from the effect on the public; or (2) in the case of a substantial interest in real property, it is reasonably foreseeable that an action on the matter will have a special economic effect on the value of the property, distinguishable from its effect on the public. (b) The affidavit must be filed with the official record keeper of the governmental entity.

TEX.LOCALGOV’TCODEANN. 5 171.004 (Vernon Supp. 1999).The Honorable Carl E. Lewis - Page 2 (X-0063)

Chapter 171 defines a “substantial interest” aafollows:

(a) For purposes ofthis chapter, aperson has asubstantial interest in abusiness entity if: (1) the person owns 10percent ormore ofthe voting stock or shares ofthe business entity or owns either 10percent or more or $15,000 ormore ofthe fair market value ofthe business entity; or (2) funds received by the person from the business entity exceed 10 percent of the person’s gross income for the previous year. (b) [substantial interest in real property] (c) A local public official is considered to have a substantial interest under this section ifaperson related to the official in the first degree by consanguinity oraffinity, asdetermined under Chapter 573, Government Code, has a substantial interest under this section.
Id. 5 171.002.

Your request concerns Local Government Code subsection 171.002(c), which treats a substantial interest of anear relative in abusiness entity orreal property asthe official’s substantial interest. The relatives of a public official within the first degree by consanguinity are his or her parents and children, while his or her spouse is a relative within the first degree by affinity. TEX. GOV’T CODEANN. $5 573.023(c)(l), .024(a), .025(a) (Vernon 1994). A relationship in the first degree by affinity also exists when the spouse ofone ofthe individuals is related in the first degree by consanguinity to the other, that is, between a person and his or her parents-in-law, son- or daughter-in-law, and the children ofhis spouse. See id. 5573.024(a)(2). Thus, chapter 171 imputes any “substantial interest” of apublic official’s spouse, parents, children, step-children, father- and mother-in-law, or son- and daughter-in-law to the officer. See Tex. Att’y Gen. Op. No. DM-267 (1993) at 2; Tex. Att’y Gen. LO-95-080, at 3.

You ask how to determine the gross income of apublic official’s child in connection with the following assumed facts:

(1) [A] 20-year-old daughter ofalocal public official (2) lives inher parents’ home, (3) relies upon her parents completely forher support and (4) attends the local junior college. (5) This summer she worked for a local business entity for six weeks and earned $1200, and (6) she had no earnings for the previous year. (7) Her parents’The Honorable Carl E. Lewis - Page 3 (X-0063)

combined income is $90,000. (8) A proposal to award acontract to the local business entity is before the governing body of the governmental entity. Does the local public official have a “substantial interest” in the business entity which requires filing an affidavit and abstention from the vote as no other member of the governing body is required to file an affidavit?

Letter from Honorable Carl E. Lewis, Nueces County Attorney, to Honorable Dan Morales, Texas Attorney General, at 5 (Aug. 21, 1998) (on tile with Opinion Committee).

Your last sentence refers to aprocedure under Local Government Code section 171.004(c) that allows public offtcials to participate in amatter despite having asubstantial interest in it. When
amajority ofthe members are required to tile and do tile affidavits of similar interests, they are not required to abstain from further participation in the matter. TEX. Lot. GOV’T CODE ANN. 5 171.004(c) (Vernon Supp. 1999). You exclude the possibility that the local officer in question might be allowed to participate pursuant to section 171.004(c) of the Local Government Code.

In connection with the assumed facts you provide, you ask whether the earnings of aminor child should be characterized as his or her parents’ earnings pursuant to Family Code provisions. Section 3.103 of the Family Code provides that “[d]uring the marriage of the parents of an unemancipated minor. the earnings ofthe minor are subject to thejoint management, control, and disposition ofthe parents ofthe minor, unless otherwise provided by agreement ofthe parents orby judicial order.” TEX. FAM. CODEANN. 43.103 (Vernon 1998). A parent of the child has “the right to the services and earnings of the child.” Id. 5 151.003(a)(5) (Vernon 1996). A “child” for purposes of these provisions is aperson younger than 18 years, who has not been married or who has not had the disabilities of minority removed for general purposes. Id. 9 101.003(a).

You rely on Dallas County Flood Control District No. I Y.Cross, 815 S.W.2d 271 (Tex. App.-Dallas 1991, writ denied), for guidance in calculating the gross income of a child who is largely dependent upon his orher parents for support. The court in Cross held that apublic official’s gross income for purposes of.chapter 171 included his community property interest in his spouse’s salary and in the interest on bank accounts. See TEX. FAM. CODE.ANN. 5 3.002 (Vernon 1998) (defining community property). You ask whether Cross requires a similar treatment with respect to the earnings of a local public officer’s child, that is, should a minor child’s gross income be treated for purposes of chapter 171 as his or her parents’ earnings pursuant to the Family Code provisions you have cited.
Cross does not state a general rule for calculating a public offrcer’s gross income for purposes of chapter 171. The court reviewed ajury finding that two members of the flood control district who voted to approve the district’s acquisition ofaneasement over land owned by the district president had substantial interests in the board president’s business undertakings. In one case, the board member’s federal income tax return showed that his “largest items of income were his community property interest in his wife’s salary and his community property right in $4700.16The Honorable Carl E. Lewis - Page 4 (X-0063)

in interest on bank deposits.” Cross, 815 S.W.2d at 280. The jury found that this individual had received gross income from the district president in an amount in excess often percent ofhis annual gross income. Id. at278-79; seeTEX.LOC.GOV’TCODEhN. $ 171.002(a)(2) (Vernon Supp. 1999). After reviewing the evidence presented to thejury, the court concluded that “thejury had enough evidence to estimate, with reasonable certainty, that [the offtcer’s] gross income between November 13, 1984, and November 12, 1985, totaled about $25,000.” Cross, 815 S.W.2d at 280. The jury also found that the board president gave the board member $12,000, enough to constitute
a substantial interest in the transaction. Id. at 28 1.

In reviewing and upholding the jury finding, the Cross court accepted that community property was part of gross income in the case before it, but it did not expressly consider the role of community property law in computing substantial interests ofpublic officials and their spouses for purposes of Local Government Code chapter 171. Moreover, Cross would have reached the same conclusion on the conflict ofinterest question even ifthe officer’s community interests inhis wife’s earnings and in bank accounts had been excluded from his gross income under chapter 171. In that case, the $12,000 received from the board president would have constituted an even larger percentage ofhis gross income than itdid according to thejury findings in Cross. Accordingly, we conclude that Cross does not hold that the gross income of amarried public official must always be determined for purposes of chapter 171 according to community property law, nor does it deal atall with the earnings of aminor child. We conclude that Cross does not require the earnings of aminor child to be characterized as parents’ earnings for the purpose ofdetermining “gross income” under chapter 171 of the Local Government Code.
While section 3.103 of the Family Code provides that the earnings of an unemancipated minor are subject to the control and disposition ofthe parents, “itdoes not attribute income from the hands of child into the hands of the parent.” Reyna v. Vowell, 470 F.2d 494,496 (5th Cir. 1972). Atmost, this provision gives the parent the right to sue the wage-earning child in an effort to control his or her earnings. Id. We conclude that sections 151.003(a)(S) and 3.103 ofthe Family Code do not convert the earnings of aminor child to his orher parents’ gross income for purposes of chapter 171.

You also ask us to consider how the earnings of a “dependent child” should be treated for purposes of chapter 171. By “dependent child” you refer to an individual who is not achild under section 101.003 of the Family Code, but is a “dependent” under the following provision of the Internal Revenue Code:

(a) For purposes ofthis subtitle, the term “dependent”means any of the following individuals over half of whose support, for the calendar year in which the taxable year of the taxpayer begins, wasThe Honorable Carl E. Lewis - Page 5 (X-0063)

received from the taxpayer (or is treated under subsection (c) or (e)’
as received from the taxpayer): (1) A son or daughter ofthe taxpayer
26 U.S.C. 9 152(a) (1994) (footnote added). Federal income tax law allows taxpayers a deduction horn taxable income for each dependent child, as defined above, see id. 5 151, but it does not attribute adependent child’s gross income tohis orher parents. The status ofapublic official’s child
as a“dependent” child within section 152 ofthe Internal Revenue Code has no effect on calculating the child’s gross income for purposes of chapter 171. Applying our conclusions to the assumed facts you stated, we conclude that the public official’s twenty-year old daughter has a substantial interest in the business entity from which she earned $1200, an amount that exceeded ten percent ofher gross income for the previous year. See TEX. Lot. GOV’T CODEANN. 5 171.002(a)(2),(c) (Vemon Supp. 1999). Because she is related to the public official in the first degree by consanguinity, see TEX. GOV’TCODEANN. 5 573.023(c)(l) (Vernon 1994), chapter 171 of the Local Government Code deems her substantial interest in the business entity to be the official’s substantial interest. See TEX. LOCAL GOV’T CODE ANN. 5 171.002(c) (Vernon Supp. 1999). Accordingly, the local public official has a substantial interest in the business entity that employed his daughter, and he must tile the affidavit and abstain from further participation in the proposal to award a contract to the business entity, if “the action on the matter will have a special economic effect on the business entity that is distinguishable from the effect on the public.” Id. 5 171.004.

You suggest that it is illogical for the sum of $1200 to be a substantial interest as to the public officer’s daughter, when the same amount would not be a substantial interest as to his wife because ofher larger income. The purpose of the ten percent amount is to establish athreshold for determining that aconflict ofinterest exists, thus providing adegree of certainty not found in prior conflict of interest provisions. Tex. Att’y Gen. Op. No. EM-424 (1986) at 6 (reciting legislative history). We do not believe it is necessarily illogical for the legislature to use apercentage figure, rather than exclusively adollar figure, to establish the threshold for conflict ofinterest. The amount of $120 may be a significant amount to a person who earns $1200 in a year, and a parent may be interested in his child’s employment, even for earnings that are minimal in comparison to the parent’s,Finally, you ask how long a“substantial interest” exists so as to require filing the affidavit and abstention from the vote. Inother words, does the “substantial interest” continue for aparticular period oftime after the employment ends or after the owner dispossesses himself ofthe property that defines the substantial interest.

‘Section 152(c) oftheInternal Revenue Coderelatestomultiple support agreements

andsection152(e)sets cutthesupport

testforthechildofdivorcedparents.The Honorable Carl E. Lewis - Page 6 (X-0063)

Section 171.004 requires alocal public official who “has a substantial interest in abusiness entity or in real property” to tile an affidavit stating the nature and extent of the interest and to abstain from further participation in certain governmental decisions affecting the business entity or real property. TEX. LOC. GOV’TCODEANN. 5 171.004 (Vernon Supp. 1999). This provision uses the present tense in referring to the public official’s possession of a“substantial interest”; thus, the official’s interest in the business entity or real property is one that exists when the governmental body addresses a matter affecting the interest. Section 171.002 defines a “substantial interest” in terms of ownership and of receipt of income. A person has a “substantial interest” in abusiness entity or in real property when he or she owns acertain percentage or market value of the business
or the property. No time period is provided within which the individual must have acquired the ownership interest. See id. 3 171.002.

As a general rule, we believe aperson no longer has a“substantial interest” in real property orin abusiness entity based on ownership after that person has fhlly divested himself orherself from any ownership interest in the business or the property. The time at which an individual divests himself or herself from any such ownership interest involves questions of fact which must be investigated and resolved on a case-by-case basis. We cannot conclude as amatter of law that a formal divestiture is always sufficient. If a public officer has not received full payment for transferring real property or an interest in abusiness, he or she may continue to have an interest in the use ofthe property or the economic health ofthe business. Finally, even ifapublic official has relinquished all ownership interest in abusiness entity, he or she may have a substantial interest in the entity based on receipt of income, as described by subsection 171.002(a)(2).

A substantial interest based on receipt of income from a business entity is defined by subsection 171.002(a)(2) in relation to a specific time period. A person may have a “substantial interest” in a business entity if “funds received by the person t?om the business entity exceed 10 percent ofthe person’s gross income for theprevious year.” Id. 5 171.002(a)(2) (emphasis added). “Previous year,” asused in section 171.002(a)(2) ofthe Local Government Code, means the twelvemonth period before the date when the governmental body takes up the matter involving the business entity. Cross, 815 S.W.2d at 278-79; see TEX. GOV’TCODEANN. 5 312.01 l(18) (Vernon 1998) (a “year” means 12 consecutive months); Cify ofSan Antonio v. Kuykendall, 749 S.W.2d 169, 171 (Tex. Civ. App.-San Antonio 1988, writ denied). An affidavit disclosing a substantial interest in
abusiness entity or real property must be tiled before avote or decision on the matter involving the business entity; thus, the existence of a substantial interest is determined as of the date when the governmental entity begins deliberations leading to adecision ofthis matter. Accordingly, the time period for determining whether aperson has a substantial interest in abusiness entity based on the receipt of income is the twelve-month period before the deliberations begin. If during that time period, the funds received from the business entity exceed ten percent ofthe person’s gross income, he or she will have a substantial interest in the business entity pursuant to subsection 171.002(a)(2) of the Local Government Code.The Honorable Carl E. Lewis - Page 7 (JC-0063)

SUMMARY

Under chapter 171 of the Local Government Code, a local public official isconsidered tohave asubstantial interest in abusiness entity if a person related to the official within the first degree by consanguinity or affinity has asubstantial interest inabusiness entity. In calculating the “gross income” of a public official’s child under chapter 171of the Local Government Code, the earnings of aminor child or adependent child form part ofthe child’s gross income, not the public official’s gross income.

A “substantial interest” in abusiness entity orinreal property for purposes of chapter 171 is an interest in existence when the governmental body takes up the matter that will affect the business entity or real property. When a person’s substantial interest in a business entity is based solely on ownership, that person no longer has a substantial interest in the business after he or she has fully divested himself from that ownership interest. When a person’s interest in abusiness entity isbased on receipt of income, that person has a substantial interest in the business if he or she has received funds in excess of ten percent of his or her gross income during the twelve-month period prior to the time that the governmental body takes up the matter that will affect the business entity orreal property.

Yo ve truly, 

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CTL

JOAN CORhYN Attorney General of Texas

ANDY TAYLOR First Assistant Attorney General
CLARK RENT ERVIN Deputy Attorney General - General Counsel

ELIZABETH ROBINSON Chair, Opinion Committee Prepared by Susan L. Garrison Assistant Attorney General