Honorable Tom Reavley 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 a factual situation, the nature of which, 

we think, requires an official ruling from your office. 

“Corporation A, a Texas 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 B attempted 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 B with a guaranty by corporation A, 

if necessary. The lending institutions declined to make any 

loan to B alone 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 a period of several months, and longterm written evidences were executed by A. 

“The funds received by A were deposited to its 

bank account and on the same or next day advanced or loaned 

the money to B. Corporation B executed long-term notes payable to corporation A at the same rate of interest as corporation Acs notes to the lenders. The maturity of B’s notes 

is the same as AIs notes to one of the lenders, to which 

said A’s note was pledged. 
Honorable Tom Reav ‘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 made necessary entir$ly by the~requirements of the lenders. 

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

provisions of’ Article 708l$“please give us your opinion 

covering the following questionsz 

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

“(2) Or, is only corpo,ration B liable for the 

franchise tax’on its note or notes to corporation 

A, and would corporat~.ion A then be permitted to 

exclude fr~om taxable 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 a franchise tax against corpo’rat&ons bas.ed upon thit ‘proportion of the 

outstanding capital stock,; surplus and undivided 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 1 and 

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 atom Reavley, page 3 (S-204) 

Both corporations A and,,,B owe~.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 B which 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, 145 Tex. ad;, 193 S.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 Fe Railroad 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 then stock had been 

purchased by the corporatipn and wa IS in effect retired. In 

Riveroaks Dkvelooment’ Co&. et al. v. Shepperd the notes 

were held to be outstanding etien though, t: he corooration had 

contracted to sell tk 

Fe Ry. Co. v. Fulghan 

sidered as surnlus fc 

Le proper&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,,e notes, and the. surplus were not 

being used in the resp&cive corporationsr businesses to gain 

revenue was inrmaterial. 

were held to be a part of 

The,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 

a conduit 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 Tom Reavley, 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 a corporation, 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, 

JOHN BEN SHEPPERD 

W. V. Geppert 

Taxat ion Division 

Attorney General of Texas 

Mert Starnes “. 

Revi ewe r 

3. C. Davis, Jr. 

Reviewer 

Asai &ant 

i. W. Gray 

Special Reviewer 

Davis Grant 

First Assistant 

John Ben Shepperd 

Attorney General 

.