182 La. 414

#### STATE v. XETER REALTY, LIMITED.

No. 33239.

Supreme Court of Louisiana.

April 29, 1935.

Walter F. Marcus, Bert Flanders, Jr., and Fred A. Kullman, all of New Orleans, for appellant.

D. M. Ellison and Charles J. Rivet, Sp. Assts. to Atty. Gen., for appellee Secretary of State.

ROGERS, Justice.

The Xeter Realty, Limited, is the appellant .from a judgment condemning it to pay to- the secretary of state a franchise tax for the year 1932. The tax for which the judgment was rendered was levied under Act No. 8 of 1932.

Appellant concedes its liability for the tax, but disputes its legality as it is sought to be enforced by the secretary of state.

It is admitted that the appellant failed to make a report as required by section 1 of Act No. 8 of 1932, and that its books were examined by the authority of the secretary of state. The statement prepared by the auditor, which is attached to the rule filed by the appellee, shows total assets of approximately $37,000, capital stock amounting to $3,200, and a past-due and accrued indebtedness of $110,000. The past-due and accrued indebtedness of the corporation is classified and reported in the statement as “borrowed capital.”

Paragraph (4) of section 1 of Act No. 8 of 1932' directs that “the amount of the issued and outstanding capital stock, surplus and undivided profits” of domestic corporations be determined, and contains a proviso “that if the capital used or invested in the business or enterprise * * * in-*30eludes borrowed capital in excess of the capital stock, surplus and undivided profits, * * * such excess or borrowed capital shall be added to the capital stock, surplus and undivided profits as part thereof as the basis for computing the franchise tax under this act and determining the extent of the use of its franchise in this State.”

Appellant admits that the classification by plaintiffs auditor of its past-due indebtedness as borrowed capital is correct from an accountant’s standpoint, but contends that its inclusion in the assessment for the tax is illegal, because the result is to impose a tax on the corporation’s indebtedness rather than on its capital stock. That having ascertained that the capital stock of the corporation had no actual value, the secretary of state arbitrarily assessed a franchise tax on the total amount of its outstanding indebtedness or book borrowed capital.

Appellant’s contention is untenable. The legislative fiat is that not only must the capital stock, surplus, and undivided profits of a corporation serve as the basis for computing the tax levied under the statute, but also the borrowed capital used and invested in the business in excess of the capital stock, surplus, and undivided profits. Borrowed capital is as much a part of a corporation’s capital as are the funds raised by the sale of its stock, its surplus, and undivided profits. Such capital tends to increase a corporation’s business and make it profitable. It requires the protection of the state as much as the capital resulting from the sale of a corporation’s stock, the accumulation of its surplus and its undivided profits. And it is plain that the Legislature had those facts in mind when it provided that borrowed capital should be added to the capital stock, surplus, and undivided profits as part thereof as the basis for computing the franchise tax under the statute and determining the extent of the use of the franchise in this state.

In answer to appellant’s complaint that its capital stock is without any actual value and that the secretary of state acted arbitrarily in assessing it with a franchise tax based on its' book borrowed capital, we think if is sufficient to say that the law allows no deduction for a deficit, and requires that appellant’s tax be measured as if no loss has occurred. If appellant’s losses have been so great as to reduce the value of its assets below the amount of its outstanding indebtedness, appellant is insolvent and should probably liquidate its affairs. Notwithstanding the deficit, appellant is liable for the tax as long as it remains unliquidated and continues to hold its charter within the state.

The uncontradicted evidence in the record shows that appellant’s past indebtedness is, in effect, borrowed capital. To the extent that it exceeds the capital stock, there being no surplus or undivided profits, it must be included in measuring appellant’s franchise tax.

For the reasons assigned, the. judgment appealed from is affirmed.

O’NIELL, Chief Justice.

I concur in the decree rendered in this case, because of the admission of the defendant with regard to the classification of the indebtedness of $110,000, as being or representing “borrowed capital” used or invested in the business of the corporation. I doubt very much, however, that it was the intention of the Legislature that the borrowed capital “used or invested in the business” of a corporation should ever be deemed to exceed the value of all of the assets of the corporation. With regard to “the issued and outstanding capital stock,” if it has a nominal or par value, the computation of the tax must be made upon the nominal or par value, without regard for the actual value. But, with regard to borrowed capital, only that which is being used or remains invested in the business ought to be added to the capital stock, surplus, and undivided profits, in order to arrive at the total amount of the capital that is used or invested in the business; otherwise, all of the bills payable of a corporation might be considered as borrowed capital. But my interpretation of paragraph (4) of section 1 of Act No. 8 of 1932, pp. 51, 52, is that all of the borrowed capital that is being used or remains invested in the business of a corporation ought to be added to the capital stock, surplus, and undivided profits, in order to ascertain the total of invested capital, on which the tax should be computed. The proviso in this section of the statute declares that, if the capital used or invested in the business includes borrowed capital, in excess of the capital stock and surplus and undivided profits, such excess or borrowed capital shall be added to the capital stock and surplus and ’undivided profits, as part thereof, as the basis for computing the franchise tax. An investigation in the office of the secretary of state has informed me that this proviso in the statute *31appears in the original act which was signed by the Governor, thus, “such excess or borrowed capital,” exactly as it appears in print. Hence, the word “or” was not a misprint, or intended for the word “of.” To substitute the word “of” for the word “or,” in the expression “such excess or borrowed capital,” gives the proviso the meaning that, if the borrowed capital exceeds in amount the capital stock and surplus and undivided profits, the tax shall be computed upon the amount of the borrowed capital, instead of being computed upon the total capital used or .invested in the business —which total capital consists of the capital stock, the surplus, the undivided profits, and the borrowed capital used or invested in the business. I concede that the expression “in excess of” is not an accurate way of saying “in addition to” or “besides”; but, when I consider the context and the obvious purpose of the language, I doubt that the using of the word “or,” instead of the word “of,” in the expression “such excess or borrowed capital,” was an accident. The Legislature has used the two terms, “excess” and “borrowed capital” as synonymous or convertible terms. Hence, the statute says that this “excess or borrowed capital” shall be added to the capital stock, etc., “as a part thereof” — meaning as a part of the total “capital” used or invested in the business — “as the basis for computing the franchise tax.” There is no good reason why, if the borrowed- capital is to be considered at all as a factor in determining the total capital used or invested in a business, it should not be considered as well when it is less as when it is more than the capital stock and surplus and undivided profits. Accordingly, a corporation organized with a capital stock of $10,000, and having a borrowed capital of $10,000, represented by a long-time note or bond issue, ought to pay the franchise tax based not upon the $10,000 only but upon the whole $20,000 of capital, as long as the borrowed capital remains as a part of the “capital used or invested in the business.”

It appears that Act No. 8 of 1932 originated as House Bill 593, in which, as well as in the substitute bill in the Senate Finance Committee, the language was: “Such excess of borrowed capital.” There is no explanation as to why or how the change was made to “such excess or borrowed capital,” in the original act which was signed by the Governor. There is no erasure or interlineation in the act which was signed by the Governor.- By Act No. 10 of the First Extra Session of 1935, this proviso in the act of 1932 has been amended and re-enacted, and in the re-enactment the word “or” is changed to the word “of,” so as to make the proviso read: “Such excess of borrowed capital,” etc. This amendment may compel another interpretation on my part, but is not applicable to the present case.