Honorable George H. Sheppard

Comptroller of Public Accounts Austin, Texas
Dear Sir: Opinion No. o-3792 Re: IS the Stock Transfer Tax, provided inRouse Blll,8! Acts 47th Legislataei Regular Session, applicable as 6 tax on a "transfer" where a holder ofpreferred atook converts the 881110 into common stock lnaooordande'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 ofHouse Bill 8, of the Regular Session of the 47th Legislature applicable tothe 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 stockwhere the converting of the preferred into common does not increase the capital or surplus of the corporation?"

Inconsidering this opinion, we have not had thebenefit of the charter provisions of the corporation inquired about, nor have we been favored with theby-laws of said corporation. However, itwill be presumed that its charter andby-laws duly authorized the issuance of thepreferred stock and provide that the owner of the certificates of suchpreferred stock shall have the option to convert the same into an equal amount of common stock, share for share, of 

### saidcorporation and that the owner of said stock certificates has duly and lawfully exercised the option In the manner required.
The ansivertoyour question depends upon whether the conversion ofpreferred to common stock,under t,recircumstances submitted inyour request, is a taxable "transfer" under the provisions of Section XV ofH.B. 8,Acts 47thLegislature, Regular Session. Thepertinent provisions of said actprovide:~- .

Honorable George R. Sheppard, page 2,

### O-3792

"There ishereby imposed and levied a tax ashereinafter provided on all sales, agreements to sell, ormemoranda ofsales, 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 inany domestic or foreign association, company, or corporation, or certificates of interest in anybusiness conducted by trustees or trustees made after the effective datehereof, whether made upon or shown by thebooks of the association, company, corporation, or trustee, orby any assignment inblank orby any delivery of any papers or agreements or memorandum or other evidence of sale or transfer or order for or agreement tobuy, whether intermediate or final, andwhether investing the holder with thebeneficial interest in or legal title to such stock or other certificate taxable hereunder, orwith the possession or use thereof for any purpose, or to secure the future payment ofmoney or the future transfer of any such stock or certificate, on eachhundred dollars of facevalue or fraction thereof, three 

### (3) cents, except in cases where the shares or cerfificates are issued without designated monetary value, inwhich case the tax shallbe at the rate of three 

### (3) cents for each and every share. It shall be theduty of the~person or persons making or effectuating the sale or transfer toprocure, affix, and cancel the stamps andpay the tax provided by this Article.

. . .Where the transaction is effected by the delivery or transfer ofa certificate the stamp shall be placed upon the surrendered certificate and cancelled."
While the statutes of thisatate, neither expressly authorize nor expressly prohibit the issuance ofpreferred stock, yet such issuance isnot prohibited bE implication nor is it against ~LPJI'Cpolicy. 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 stockwithin a certain time and on certain conditions;

. . .To effect such an exchange, the option mustbe exercised; and itmust be exercised in compliance with the provisions of the contract.

. .'

In this connection also seeFletcher Encyclopedia Corporations, Vol. 

### 6, Sec. 

### 3643.
The Federal Govemment has enacted a Stock Tax Law, which is similar inmany respects to the Texas Stock.Transfer Tax Law, especially with reference to the taxability of transfers., The United states Supreme Court inRe Raybestos-Manhattan, Inc. vs. United States, 

### 8L. Ed 

### 44,296 U.S. 60, discussed and-. -

Honorab'leGeorge H. Sheppard, 

### page 3, O-3792

defined a "transfer" under saidFederal 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 taxevery transac,tionwhereby right tobe or become a shareholder of a corpora'zionor toreceive any certificate .ofany interest in itsproperty is surrendered by one vested in another, See Provost vs. United States; 269 U.S. 443, 70L. Ed. 35'2. 'ffhile the sta,tutespeaks of transfers, it does not require that the transfer shallbe directly from thehand 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 bywhich the right of the shareholder 1s~ surrendsred to the corporation in return for its recognition of ane.Nshareholder designated by the transferror and~ths issue to him of anew certificate of stock. It isrelinquishment of the ownership for the benefit of another, and the resultant acquisition of itby 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,ctto the tax)"; provides; "(c) The surrender of certificates in exchange for other certificates representing the same ornew stock, provided they are issued to the sameholders.

. . . . "(f) The surrender of stock for extinguishment or in exchange,for anew certificate tobe issued without charge of legal title." 'JVhether

the stated examples of non-.taxabletranSSCtiOnS SpeCificially cover the situation under consideration isnot clear. If it couldbe said that the transaction before us isnot taxable, under the Federal Stock Tax Law, for the reasons hereinafter discussed, we donot think such a rule is applicable to theTexas Stock Transfer Tax Law.
The State ofNew York enacted a Stock Transfer Tax, which isvery similar to the Texas jtatute and~which.we under.~standthe TexasHonorable George H. Sheppard, page 4, O-3792

Statute follows, therefore the rulings and constructions upon such statute by the New York Tax Commission would beplaced highly persuasive in construing the Texas Law. In Section 

### 4, Article 16 of theRegulations of the New York Tax Commission, ithas given, as an example of anontaxable transaction, the following:
"The surrender ofpreferred stock certificates in exchange for common stock certificates orvisa versa when made neccesaary by change in capital structure." (UnderscorIng ours).
The rule above referred towas amended on July 1, 

### 1939, to include thewords "whenmade necessary by change in caRital structure". Aswe construe the above ruling of the ewYork Tax Commission, by im:>lication,itwould seem that theTax Commisa:ionholds thatwhen aholder of apref'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.plicablethereto, of the titatesof Pennsylvania and Massachusetts and have been unable to find where the kind of a transfer inquired about is exempt from the Stock Transfe:rTax.
It shouldbe noticed that the Legislature, in the enactment of the ,StockTransfer Tax Law, first laid down abroad scope of taxable transactions concerning the sale, gift and transfer of corporate stock. The Legislature then proceeded tomake certain exceptions from the scope of said act aswell as certain exceptions thereto, none of such exemptions or exceptions being applicable to the situation under consideration. Inthe absence of any ambiguity in the statute, itmust be presumed that the Legislature intended to lay down a broad scope of taxable transactions and then proceeded tomake 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 orby some other rule of law.
After carefully considering the facts submitted by you and applying theTexas Stock Transfer Tax Law thereto, webelieve that the transaction submitted involves a taxable transfer within the contemplation and meaning ofHouse 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 thismanner we have fully answered your inquiry.

Yours very truly
ATTORNEY ffENERhLOF TEXAS

,,. I .., a?Harold Mc&%c.ken

Harold McCracken

Assistant
APPROVEI)OCTOBER 

### 31, a/Grover Sellers 

### 1941

FIRST ASSISTANT 

### ATTORNEYGENERAL

APPROVED: Opinion Committee

By BWB, Chairman
HM:eah/:.c