“It is requested that you render to this office en opinion as to the coastructioa of a corporation’s liability @der Sec. 7084 R. C. 3# In our examination of franchise tax re- turns ne find c@rperatioas which have borrou- ed timpy on their own notes, Um pavents of whMh &ater have been assume3 by indlviauel purc&@e@d un6Ter the circumstrtaoes similar to th& &ascribed $pzreinafter P “pktflty Defeese Housing Company, a car- poratliwb, the owner of unlmpreved $eal. estate, finanaes improvements thereon by borrowing from W. Ko Ewkg and Company, giving Fidelitgss notes+ snah ea lkhiblt *Ap attsahea. These terms are psyable over e per- n,ete,a by theb iod of: byes&y-five years atpa are sedured by mortgages a&in& the real es%3te~ A8 long as these netea are direct l b3tigatlow of Fia- elitg, there appears to be rim qussU.oai but *2 ,

Hon. C, Ii. Cavness, Page 2 (V- 500)

that each such note should be included in tsx- able capital for franchise tax purposes as provided by Article 7084 (A) R. C. 3. Row- ever, two changes operate to effect circum- stances; the first Is that Ewing sells the notes, without recourse, to different lnsur- enae companies; the second is that Fidelity sells the reel estate and the purchasers as- sume the respective obligations of paying the twenty-five year notes as shown In deeds of trust, such as Rxhlblts 'B-1' end 'B-2' at- tached. (You will observe that in EZhibit 'B-2' E. JT. Burke is shown es vendor; the form Is the same, and Rxhiblt Q-ils should be con- sidered as if Flaelltg were shown es the ven- dor.)

"In the first change mentioned above, Ewing, another corporation, in turn sells the notes to an insurance company, still another corporation, which receives the notes under a couveyance form such as Rxhlblt sCQ attached. "After Fidelity has sold the real estate and the purchaser thereof has assumed Flaelltyss obligation to pay the installment note, is the amount of the note properly lncludlble as tax- able capital of Fidelity under Sec. 7084 (A)?" Article 7084, R. C. 3. 19259 as amended, pro- vides In part es follows:

"(a) Except es herein prsvided, every dom- estic end foreign corporation heretofore or here- after chartered or authorized to do business in Texas, or doing business la Texan, shall, on or before May 1st of each year, pay in advance to the Secretary of State a franchise tax for the year following, based upon that proportion of the outstanding capital stock, surplus and un- divided profits, plus the emount'of outstand- ing bonds, notes and debentures, (outstanding bonds, notes, and debentures shall include all written evidences of indebtedness which bear a maturity date of one (1) year or more from date of issue D y *It (Emphasis supplied) Your questlon hes never been passed upon by our Courts, and its answer must aaeceaserily depend solely upon *3 Bon. C. H. Cavness, Page 3 (V- 500)

the construction to be placed upon Article 70849 quoted above, If the notes in question constitute "outstand- ing notes" of the corporation then the amounts thereof must be included as taxable capital of the corporation. If, on the other hand, they do not constitute 'outstand- ing notes" as that term is in Article V. C. 3 +, them the amounts thereof shouldrpt be included as taxable capital of the corporation.

It is well settled in this State, when one gives his note secured by a deed of trust on real es- tate and then subsequently sells the reel estate, the purchaser thereof assuming the obligation of paying off the note, the purchaser Is deemed prlmarFlg 1Fable on the notes and the mortgagor becomes liable as surety.

Prior to the sale of the real estate secur-

ing one of the notes and the assumption by the purchaser thereof of the payment of the note, it is clear that the amount of the note should be Included in the amount of the t,axable capital of Fidelity* However, when Fidelity sells the real estate together with the improvements made theresn with the funds obtained by executing one of the notes la question, and the purchaser thereof assumes the payment of the note, Fidelity becomss only secondar%ly liable on the note as surety. From and after the date of the sale, Fidelity is relieved from all liability on the note unless two contingencies occur: First, that the purchaser fails and refuses to pay the note, and secondly, that sale of the realty will not bring enough to satisfy the note, We do not believe under such cir- cumstances such notes constitute "outstanding notes", as that term is used 7084, V. C, S., as a- in Article mended.

In a letter opinion, dated August 20, 1934, to Ron. W, W, Heath, then Secretary of State, this depart- ment had before it a factual situation where a corpora- tion purchased land and in part payment thereof gave two vendorDs lien notes, The corporation sold said iand to a purchaser who assumed payment of the two notes previous- ly executed by the corporation. It was held that after the corporation sold the land to the purchaser, who as- sumed payment of the vendorvs lien notes thereon9 the corporation should not include the ameunt of these notes in its taxable capital under the provisions of Article 7084, v, c. s. While Article 7Q84, V, CQ So, has been emended since the date of that letter opinion, the por- tion of the Article pertinent to this opinion was not changed.

Hon. C. H. Cavness, Page 4 (V-500)

In accordance with the letter oplalon dated Aug- ust 20, 1934, the Secretary of State has consletentlg eon- &rued the applicable provlalons of Article 7084, supra, in situations arlslng In similar cases that upon the as- sumption of a written evidence of inclebtednesa secured by a lien on real or personal property by the purchaser thereof the b,orrowecl c8pltal evldenoed by the execution of the orlglnal weltten. evidence of indebtedness ceased to be by the corporetton as a part of its taxable vorklng capital. This construction has been uniformly adhered~ to for’s per&id of over thirteen years, and un- der the well-establlsh4d rule of law In Texas such de- partmeat constructlon is entitled to great weight.

Is Umnateriel that Ewing and Company, the peyoe of tit notes, aubssquently sold them to third par- ties without cecourso.

It is our opinion the amount of the notes exe- cuted by the Fidelity Def’onse liourlng Company tb W. K. Ewing aad Company should not bs included for the purpose of taxation under the ovirions of Article 7084, V.&S., as ameaded, after Fide ItJ has sold th8 real estate se- E”

curlug the notes and the purchaser thereof has assumed pagneat sf the notes.

Notes executed by a corporation, maturing more meat than one year from date of issue, la pay- of money borrowed to erec’t improvements property which It subaequehtly sold to upoa pnrcaasers who as8ume payment of such notes, a4 not constitute “outstanding notes” of such corporation taxable under the provisions of Article V. C. sDO as amended.

Yours very truly, ATTORNEY CiERRRAL OF TEXAS ATTORNEY @NNERAL