Honorable George H. Sheppard 

Comptroller of Public Accounts 

Austin, Texas 

Dear Sir: Opinion No. o-3792 

Re: IS the Stock Transfer Tax, 

provided in Rouse Blll,8! 

Acts 47th Legislataei 

Regular Session, applicable as 

6 tax on a "transfer" where a 

holder of preferred atook 

converts the 881110 into common 

stock ln aooordande'with his 

oonversion privilege? 

We have received your written request for an opinion from this 

department. The question you submit for our consideration lsr 

"Is the Stock Transfer Tax levied under Article 15 of House 

Bill 8, of the Regular Session of the 47th Legislature applicable to the surrender of preferred stock or the issuance of 

the same amount of common stock to the same persons, and to 

the actual issuance of the common stock where the converting 

of the preferred into common does not increase the capital or 

surplus of the corporation?" 

In considering this opinion, we have not had the benefit of the 

charter provisions of the corporation inquired about, nor have 

we been favored with the by-laws of said corporation. However, 

it will be presumed that its charter and by-laws duly authorized 

the issuance of the preferred stock and provide that the owner 

of the certificates of such preferred stock shall have the option 

to convert the same into an equal amount of common stock, share 

for share, of said corporation and that the owner of said stock 

certificates has duly and lawfully exercised the option In the 

manner required. 

The ansiver to your question depends upon whether the conversion 

of preferred to common stock , under t,re circumstances submitted 

in your request, is a taxable "transfer" under the provisions of 

Section XV of H.B. 8, Acts 47thLegislature, Regular Session. 

The pertinent provisions of said act provide: ~ 
- . 

Honorable George R. Sheppard, page 2, O-3792 

"There is hereby imposed and levied a tax as hereinafter provided 

on all sales, agreements to sell, or memoranda of sales, and all 

deliveries or transfers of shares, or certificates of stock, or 

certificates for rights to stock, or certificates of deposit 

representing certificates made taxable under this Section in any 

domestic or foreign association, company, or corporation, or 

certificates of interest in any business conducted by trustees 

or trustees made after the effective date hereof, whether made 

upon or shown by the books of the association, company, corporation, or trustee, or by any assignment in blank or by any 

delivery of any papers or agreements or memorandum or other 

evidence of sale or transfer or order for or agreement to buy, 

whether intermediate or final, and whether investing the holder 

with the beneficial interest in or legal title to such stock or 

other certificate taxable hereunder, or with the possession or 

use thereof for any purpose, or to secure the future payment 

of money or the future transfer of any such stock or certificate, 

on each hundred dollars of face value or fraction thereof, 

three (3) cents, except in cases where the shares or cerfificates are issued without designated monetary value, in which 

case the tax shall be at the rate of three (3) cents for each 

and every share. It shall be the duty of the~person or persons 

making or effectuating the sale or transfer to procure, affix, 

and cancel the stamps and pay the tax provided by this 

Article. . . . Where the transaction is effected by the delivery or transfer of a certificate the stamp shall be 

placed upon the surrendered certificate and cancelled." 

While the statutes of this atate, neither expressly authorize 

nor expressly prohibit the issuance of preferred stock, yet 

such issuance is not prohibited b 

E 

implication nor is it against 

~LPJI'C policy. Tweedie Footwear orporation vs. Fonville, 

App.) 115 S.W. 421, error refused. 

In 18 Cor. Jur. Sec., Sec. 234, P. 665, it is said: 

"An option may be given to preferred stock holders-to exchange 

their stock for common stock within a certain time and on 

certain conditions; . . . To effect such an exchange, the 

option must be exercised; and it must be exercised in 

compliance with the provisions of the contract. . .' 

In this connection also see Fletcher Encyclopedia Corporations, 

Vol. 6, Sec. 3643. 

The Federal Govemment has enacted a Stock Tax Law, which is 

similar in many respects to the Texas Stock.Transfer Tax Law, 

especially with reference to the taxability of transfers., 

The United states Supreme Court in Re Raybestos-Manhattan, 

Inc. vs. United States, 8 L. Ed 44,296 U.S. 60, discussed and 
-. - 

Honorab'le George H. Sheppard, page 3, O-3792 

defined a "transfer" under said Federal Stock Transfer Tax 

Law (Sec. 1802-b, Title 26, U.S.C.A.). The court speaking 

through Justice Stone said: 

"The Stock Transfer Tax is a revenue measure exclusively. 

Its language discloses the general purpose to tax every 

transac,tion whereby right to be or become a shareholder of a 

corpora'zion or to receive any certificate .of any interest 

in its property is surrendered by one vested in another, See 

Provost vs. United States; 269 U.S. 443, 70 L. Ed. 35'2. 'ffhile 

the sta,tute speaks of transfers, it does not require that the 

transfer shall be directly from the hand of the transferror to 

that of the transferree. 

transferred is, 

It is enough if the right or interest 

by any form of procedure, relinquished by one 

and vested in another. . . .Transfer to the shares is effected 

by a form of novation by which the right of the shareholder 1s~ 

surrendsred to the corporation in return for its recognition 

of a ne.N shareholder designated by the transferror and ~ths 

issue to him of a new certificate of stock. It is relinquishment of the ownership for the benefit of another, and the 

resultant acquisition of it by him which calls the statute 

into operation." 

Pursuant to the Federal Stock Transfer Act, hereinabove 

referred to, the.United States Treasury Department has promulgated certain rules and regulations with reference to said 

law. Regulation 71, Revised July 1932, Article 30, Subsection 

c, under the heading "Sales or Transfers not subject to tax. 

(The following are examples of transaction not subje,ct to the 

tax)"; provides; 

"(c) The surrender of certificates in exchange for other 

certificates representing the same or new stock, provided they 

are issued to the same holders. 

. . . . 

"(f) The surrender of stock for extinguishment or in exchange,for a new certificate to be issued without charge of 

legal title." 

'JVhether the stated examples of non-.taxable tranSSCtiOnS SpeCificially cover the situation under consideration is not clear. 

If it could be said that the transaction before us is not 

taxable, under the Federal Stock Tax Law, for the reasons hereinafter discussed, we do not think such a rule is applicable to 

the Texas Stock Transfer Tax Law. 

The State of New York enacted a Stock Transfer Tax, which is very 

similar to the Texas jtatute and~which.we under.~stand the Texas 
Honorable George H. Sheppard, page 4, O-3792 

Statute follows, therefore the rulings and constructions 

upon such statute by the New York Tax Commission would be 

placed 

highly persuasive in construing the Texas Law. In Section 4, 

Article 16 of the Regulations of the New York Tax Commission, 

it has given, as an example of a nontaxable transaction, the 

following: 

"The surrender of preferred stock certificates in exchange 

for common stock certificates or visa versa when made neccesaary 

by change in capital structure." (UnderscorIng ours). 

The rule above referred to was amended on July 1, 1939, to include the words "when made necessary by change in ca 

R 

ital 

structure". As we construe the above ruling of the ew York 

Tax Commission, by im:>lication, it would seem that theTax 

Commisa:ion holds that when a holder of a pref'erre,d stock 

certificate voluntarily surrenders the same to the corporation, 

in compliance with the conversion privilege, for certificates 

of common stock, the same is a taxable transaction. Such a 

transfer is obviously not 

capital structure." 

"made necessary by change in 

We have checked the Stock Transfer Tax laws, rules and 

regulations ap.plicable thereto, of the titates of Pennsylvania 

and Massachusetts and have been unable to find where the 

kind of a transfer inquired about is exempt from the Stock 

Transfe:r Tax. 

It should be noticed that the Legislature, in the enactment 

of the ,Stock Transfer Tax Law, first laid down a broad scope 

of taxable transactions concerning the sale, gift and transfer 

of corporate stock. The Legislature then proceeded to make 

certain exceptions from the scope of said act as well as 

certain exceptions thereto, none of such exemptions or exceptions 

being applicable to the situation under consideration. In the 

absence of any ambiguity in the statute, it must be presumed 

that the Legislature intended to lay down a broad scope of 

taxable transactions and then proceeded to make the specific 

exemptions and exceptions from the operation of the act. This, 

by implication, would indicate that the Legislature intended 

to tax every transaction involving transfers of corporate 

stock unless the same were specifically exempted or excepted 

by the provisions of the act itself or by some other rule of 

law. 

After carefully considering the facts submitted by you and 

applying the Texas Stock Transfer Tax Law thereto, we believe 

that the transaction submitted involves a taxable transfer 

within the contemplation and meaning of House Bill No. 6, 

Article 15, Acts of the 47th Legislature, Regular session, 
Honorable George H. Sheppard, page 5, O-3792 

1941. The stamp, evidencing the tax, should be placed upon 

the surrendered preferred stock certificate. We trust that 

in this manner we have fully answered your inquiry. 

Yours very truly 

ATTORNEY ffENERhL OF TEXAS 

,,. I .., 

a? Harold Mc&%c.ken 

Harold McCracken 

Assistant 

APPROVEI) OCTOBER 31, 

a/ Grover Sellers 

1941 

FIRST ASSISTANT 

ATTORNEY GENERAL 

APPROVED: Opinion Committee 

By BWB, Chairman 

HM:eah/:.c