Honorable TomReavley Opinion No. 

### s-204

Secretary 

### of State Capitol Station Re: Whether to include outstandAustin; Texas accommodation nbtes~ inthe formula for computing franchise taxes due under Article 7084,V.C.S. Dear Mr. Reavley:

You have requested an opinion of this office as follows:
**“We**have afactual situation, the nature of which, we think, requires an official ruling from your office.

“Corporation A, aTexas corporation, owns all of the preferred stock and approximately 95%of the common’ stock of another Texas corporation which,.for convenience, we shall call corporation B. In the latter part of 1953 corporation Battempted to arrange for certain temporary financing to construct an office building. Proposals were made to lending institutions that a line of credit be established for corporation Bwith a guaranty by corporation A, if necessary. The lending institutions declined to makeany loan to Balone and insisted that any loan be made directly to A, because of doubt as to the validity of a guaranty arrangement. Loan agreements were concluded, and two lending institutions **made**loans directly to corporation A. These loans were made

### over aperiod of several months, and longterm written evidences were executed by A.

“The funds received byAwere deposited to its bank account and on the same or next day advanced 

### or loaned the money to B. Corporation Bexecuted long-term notes payable to corporation A at the same rate of interest as corporation Acs notes to the lenders. Thematurity of B’s notes is the same as AIs notes to one of the lenders, to which said A’s note was pledged.Honorable TomReav‘ley, page 2 

### (s-204)

,“Corporation A iscontending that it was merely a conduit of the borrowed funds, all of which were expressly traceable into and used by co$poration B. .A is urging that the arrangement was madenecessary entir$ly by the~requirements of the lenders.

“In’view of‘the -foregoing facts, aswell as the provisions of

’ Article 708l$“please give us your opinion 

### covering the following questionsz

“(1) Is corporation Aalone liable for the,franchise tax.on its notes to the lenders?

**“ (2)**  **Or,** is only corpo,ration Bliable for the franchise tax’on its note or notes to corporation A, and would corporat~.ion Athen be permitted to exclude fr~omtaxable capital the indebtedness represented by its notes ,to its lenders7

“(3) Or, **do** both corporations owe the franchise tax on the notes each corporation executed, regardless of the purpose for which said notes were executed? ’ / Article 708h,,V+znonrs Civil Statutes, levies afranchise tax against corpo ’rat&ons bas.ed upon **thit** ‘proportion of the outstanding capital stock,; surplus andundivided profits, plus the amount of outstanding,bonds, notes and debentures as the gross,receipts from the ,bus;iness done in,Texas bear to the total gross’receipts of the corporation. (Outstanding notes include all written evidences of indebtedness ,which bear a. 

### maturity date, of one (1) 

### year or more from date of 

### issue.).

Article 7089,,V.C.S., provides that all corporations required to pay a franchise tax shall, .between’January 1and March 15 of each year, make a report ,to the Secretary of State on forms ,furnished by that officer, showing the condition of the.corporation on the last. day of the preceding fiscal year. Said report shall give the cash value 

### of all gross assets of the corporation, the amount of its authorieed capital stock actually subscribed and the amount paid in, the surplus and undivided profits or deficit, if any, the amount of mortgage, bonds and.current indebtedness.

. .Honorable atomReavley, page 3 

### (S-204)

Both corporations Aand,,,Bowe~.the franchise tax based upon the notes each corporation executed, regardless .of the purpose for which said notes were executed,-becsuse there are no provi’sions for exempt,ion of such notes due by corporations in Title 122, Chaptw Three, V.C.S., or elsewhere in our statutes. The fact .th’at cor$oration A loaned the money to corooration Bwhich was.:obtained bv it.9 note. and did not use this money in its buoibess is imm&terial. A. B. .Frank d, Co. v. Latham, 

### 145Tex. ad;, 193S.W.2d 671 (1946) oaks Development Corp. et al. v. Shepperd, Secret& Riverof State, 46 S.W.2d 236 (Tex.Civ. App. 1952 error ref.) an: Gulf,’ Colorado and Sinta FeRailroad Compiny v. C. E. Fulgham, Secretary of State, et al. 288 S,W.2d 611 (Tex.Civ.App. 1956, error, 

### ref.) :

..’

In A. B. Frank &%o,~v.&atham thenstock had been purchased by the corporatipn and wa ISin effect retired. In Riveroaks Dkvelooment’ Co&. et al. v. Shepperd the notes hecorooration had were held to be outstanding etien though, t: contracted to sell tk FeRy. Co. v. Fulghan sidered as surnlus fcLeproper&y: In Gul.f., Colorado and Santa 1,.the $5,259,895.87 was properly con- )r”franchise tax purposes. even thouah it would not/increase the eorporationrs .revknue.y None of these corporations were receiving revenue from these items, yet the courts inall three cases held that these items were to be used.‘for the purpose of computing the franchise taxes. The fact that the stock, th,,enotes, and the. surplus were not being used in the resp&cive corporationsr businesses to gain revenue was inrmaterial. were held to be a part ofThe,stgCk, the notes, and the surplus the cash~,value of the respective

‘corporations under the provisions of Article 7089. : The contention 

### of ‘corporation ***d that**  it was merely aconduit of the borr~owed funds, all of which were expressly traceable into and used by corporation B, and that the arrangement was made necessary,entitely by the requirements of the lenders is immaterial. The only question necessary to be considered here 

### is whether the notes are outstanding obligations due by both corporations within the purview of the franchise tax statutes of this State. Both corporations are still liable, on these:: notes as they have not been paid, discharged 

### or released. ,They are sttll in existence and constitute a liability of both corporations. The notes are along-term notes within the purview of Article 7084, V.&S.Honorable TomReavley, page 

### 4 (S-204)

Riveroaks Develbpment Cord; v. Shepperd, Secretary of State, e a,1 2QbSW2d236 (T

. . ex.Civ.App. 1952, error ref.) It is unnecessary to answer questions (1) and (2) as question (3) is answered in the affirmative.

, SlJMMARY The outstanding.notes of acorporation, regardless of the purpose for which said notes were executed, should be included in the formula for computing the franchise tax due by the corporation under Article **7084,** V.C.S. That they were accommodation notes is immaterial.

APPROVED: Yours 

### very truly, JOHNBENSHEPPERD W.V. Geppert Taxation Division Attorney General 

### of Texas

Mert Starnes “

. Reviewer 3. C. Davis, Jr. Reviewer Asai &ant

i. W.Gray Special Reviewer Davis Grant First Assistant John Ben Shepperd Attorney General

.