Legislative Messages of Hon. James V. Allred, Governor of Texas 1935-1939 Page: 48 of 263
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corporations) the argument was made that such corporations should
only pay the one-fifth tax because it had been subjected to a new tax,
to-wit, the intangible tax. This argument and this reason were based
upon a false premise because, as pointed out above, the intangible tax law
did not levy a new tax, but only provided a method for ascertaining and
levying a tax to which such corporations were already subject.
If the railroad companies of Texas had not been able to take advantage
of this section they would have paid into the State $207,568.00 in franchise
taxes. Actually the railroads paid in franchise taxes $41,641.00. The
intangible valuation of railroads as certified by the State Tax Board as
of January 1, 1934, was $39,329,295.00, which at the State tax rate of 77
per $100.00, will yield an ad valorem tax of $302,835.00. As a result of
Article 7084-B of the franchise tax law, the State sustained a loss in
franchise taxes on railroad companies in the amount of $165,927.00. When
this loss in franchise taxes is deducted from the amount collected in ad
valorem taxes on intangible valuations, the net revenue to be collected by
the State is only $136,908.00.
Oil pipe line companies actually paid to the State only $11,525.00,
whereas if Article 7084-B had been repealed, those same oil pipe lines
companies would have paid a franchise tax of $49,088.00. Bridge companies
paid in franchise taxes $245.00, whereas if it had not been for
Article 7084-B, bridge companies would have paid to the State $1,064.00.
The total loss, therefore, in franchise taxes to the State of Texas is equal
to $204,309.00 per year.
I recommend a law requiring all notes and bonds, regardless of their
maturity dates, to be included in the taxable capital of private corporations
upon which a franchise tax must be paid, but such notes and bonds to be
included, in computing the taxable capital, upon the basis of the average
monthly balance. By this I mean that the notes, bonds and debentures
outstanding at the end of each month should be ascertained, and the
average amount so outstanding over a period of a year will be the average
monthly balance. Under our present law a corporation can borrow on
February 1st and use it ten months without paying a tax.
When the present franchise tax law was passed, it was feared that if
notes and bonds of a maturity date of less than one year were included
in the taxable capital, the courts would hold the law invalid on the ground
that the franchise tax was payable on an annual basis. It is my opinion
that by the use of the average monthly balance, this objection may be
eliminated, and all notes and bonds could be included in computing the
taxable capital. Numerous cases in the past reflect that corporations have
converted notes of maturity dates longer than one year into notes with a
maturity date of less than one year, or into demand notes, and in other
cases have converted their long term bonds into non-taxable securities.
In most instances these notes are payable to affiliated or holding companies.
These manipulations are for the sole purpose of decreasing taxable
capital of corporations, thereby reducing the franchise tax. I recommend,
therefore, that you consider methods of making such tax evasions
Without making specific recommendation at this time, I want to call the
attention of this Legislature to the question of shifting the basis of
franchise taxes from the capital stock to the gross assets of incorporated
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Allred, James V. Legislative Messages of Hon. James V. Allred, Governor of Texas 1935-1939, book, 1939; (texashistory.unt.edu/ark:/67531/metapth3899/m1/48/: accessed August 18, 2017), University of North Texas Libraries, The Portal to Texas History, texashistory.unt.edu; .