Calvert v. Capital Southwest Corp.
| Decision Date | 30 April 1969 |
| Docket Number | No. 11649,11649 |
| Citation | 441 S.W.2d 247 |
| Parties | Robert S. CALVERT, Comptroller of Public Accounts, et al., Appellants, v. CAPITAL SOUTHWEST CORPORATION et al., Appellees. . Austin |
| Court | Texas Court of Appeals |
Crawford C. Martin, Atty. Gen., Nola White, 1st Asst. Atty. Gen., Hawthorne Phillips, Executive Asst. Atty. Gen., W. V. Geppert, Staff Legal Asst. Atty. Gen., John R. Grace and W. E. Allen, Asst. Attys. Gen., and William B. Hilgers, Sp . Asst. Atty. Gen., Austin, for appellants.
Akin, Vial, Hamilton, Koch & Tubb, Henry D. Akin, Jr., Charles McGuire, III, Johnson, Bromberg, Leeds & Riggs, Louis P. Bickel, J. Richard Gowan, Dallas, Clark, Thomas, Harris, Denius & Winters, Franklin W. Denius, Roderick Edens, Jr., Barry K. Bishop, Austin, for appellees.
This appeal is from a judgment rendered after consolidating Causes 128,252, Capital Southwest Corporation v. Robert S. Calvert, Comptroller et al, Cause No. 127,416, Electro-Science Investors, Inc . et al v. the same defendants, and Cause No. 127,415, Texas Capital Corporation v. the same defendants.
Each of the plaintiffs below, appellees here, sued Robert S. Calvert, Comptroller of Public Accounts, Jesse James, Treasurer and Crawford C. Martin, Attorney General, all officials of Texas, to recover franchise taxes paid by them under protest, Capital Southwest seeking recovery of $251,448.94 plus interest, Electro-Science et al seeking recovery of $97,820.86 plus interest, and Texas Capital seeking recovery of $146,704.05 plus interest. Trial to the Court without a jury resulted in judgment for appellees in accordance with their respective prayers.
There are no findings of facts or conclusions of law by the trial court and none was requested.
While appellants have five points and appellees five counterpoints, the parties agree that the sole issue presented is whether the three appellee corporations, severally, were 'mutual investment companies' within the purview of Art. 12.03, Title 122A, Taxation-General, V.A.C.S., 1 during the respective periods of time in controversy and therefore exempt from the franchise tax imposed by Ch. 12, Title 122A, Taxation-General.
Certain mutual investment companies were first granted exemption from the franchise tax by an amendment to Art. 7094 R.C.S. in 1951 when S.B., 6, Ch. 143, Acts 1951, 52nd Leg. p. 245 was enacted. There have been subsequent amendments to this statute, now Art. 12.03, supra, which are not relevant here and will not be noticed. We copy in full the 1951 amendment, including the emergency clause:
'Be it enacted by the Legislature of the State of Texas:
Section 1. That Article 7094, Revised Civil Statutes of Texas of 1925, as amended, be and the same is hereby amended so as to read hereinafter as follows:
'The franchise tax imposed by this Chapter shall not apply to any insurance company, surety, guaranty or fidelity company, or any transportation company, or to any corporation organized as a terminal corporation not organized for profit and having no income from the business done by it, or to any sleeping, palace car and dining car company now required to pay an annual tax measured by their gross receipts, or to corporations having no capital stock and organized for the exclusive purpose of promoting the public interest of any city or town, or to corporations organized for the purpose of religious worship or for providing places of burial not for private profit, or to corporations organized for the purpose of holding argicultural fairs and encouraging argicultural pursuits, or for strictly educational purposes, or for purely public charity, or to State-chartered building and loan associations, or to any mutual investment company registered under the Federal Investment Company Act of 1940, as from time to time amended, which holds stocks, bonds, or other securities of other companies solely for mutual investment purposes.'
Sec. 2. The fact that the sole source of income of such mutual investment companies is from receipt of dividends or interest on stocks, bonds, or other securities of other corporations (held solely for investment purposes by such mutual investment companies), and the fact that such other corporations already are subject to and pay a franchise tax; that the subjection of such mutual investment companies to a franchise tax in effect taxes the same source twice, as is recognized by the Federal Government is exempting from Federal Income Taxes the income of such mutual investment companies which is distributed to their shareholders; the fact that mutual investment companies doing business in many other States are granted exemptions from franchise taxes whereas mutual investment companies doing business in the State of Texas are not exempt from franchise taxes, thereby placing the latter companies at an unfair disadvantage with respect to selling its shares to Texas investors; that such mutual investment companies should be encouraged to do business in Texas; that the calendars of both Houses are likely to become crowded; and the further fact that the changes proposed herein need to become effective at the earliest possible time, create an emergency and an imperative public necessity, authorizing the Constitutional Rule requiring bills to be read on three several days in each House be suspended; and said Rule is hereby suspended, and this Act shall take effect and be in force from and after its passage, and it is so enacted.'
This statute contemplates that in order for a corporation to be exempt from payment of franchise taxes that it: (1) be a mutual investment company; (2) be registered under the Federal Investment Company Act of 1940, as from time to time amended; (3) hold stocks, bonds, or other securities of other companies solely for mutual investment purposes; (4) receive its sole source of income from dividends or interest on stocks, bonds, or other securities of other corporations (held solely for investment purposes); (5) hold stocks, bonds, or other securities of only those corporations which are subject to and pay a franchise tax; (6) distribute its income to its shareholders in such manner as recognized by the Federal Government in order to exempt its income from Federal Income Taxes.
Appellants discuss these statutory provisions as follows: (1) under Point One; (2) under Point Two; (3--6) under Point Four.
We observe that there is no material conflict or contradiction in the evidence.
Appellants' first Point is that the trial court erred in holding any of appellees to be a mutual investment company under Art. 12.03 because the charter and by-laws of each appellee preclude such classification.
Point Two is that the trial court erred in holding appellees mutual investment companies merely because they were registered under the Federal Investment Act of 1940.
We sustain these points.
Appellees were all small business investment companies registered under the Federal Investment Company Act of 1940 and licensed under the Small Business Investment Act of 1958.
The charters of each of these corporations and their amendments are in the record. A summary of these charters shows that each appellee had the authority 2 to operate as a Small Business Investment Company, to deal in stocks, bonds, debentures, obligations and evidences of indebtedness of foreign or domestic corporations, to consult and advise small business firms on a fee basis and to accumulate and lend money. In addition, Electro-Science had charter authority to invest in any manner not prohibited by law; to underwrite securities; to act as agent for underwriter; to engage in any mercantile, manufacturing or trading business; to enter into any kind of association; to engage in the oil business.
The management of each appellee is in its Board of Directors or Executive Committee, which Board or Committee appoints corporate officers whose duties and authority are stated in the by-laws.
An analysis of the by-laws, stock registration forms and prospectuses contained therein of appellees shows that all three will be governed by the Federal Small Business Administration and as a Small Business Investment Company; that the securities of each appellee are offered to the public as being 'A Speculation;' 3 that the portfolio holdings of each appellee are 'High Risk;' that all appellees contemplate control of and have exercised control of some of their portfolio companies; that each appellee proposes to furnish management, financial and advisory services for small business concerns, Texas Capital having executed contracts of advisement. All appellees may purchase or sell commodities or commodity contracts; all appellees may borrow money for the purposes of financing small business concerns; all appellees may be deemed underwriters of securities; all appellees may make long term loans; they may purchase warrants and options incident to stock of other companies; investment in appellees as Small Business Investment Companies are more significant to investors in the higher income tax brackets.
The term 'mutual investment company' is found in only one Texas statute, Art. 12.03, supra.
The term was used in the Federal Revenue Act of 1937 and the Revenue Act of 1938. 4 Both of these Revenue Acts provided that a 'mutual investment company' should meet certain requirements, one of which was:
'Its shareholders are, upon reasonable notice, entitled to redemption of their stock for their proportionate interests in the corporation's properties, or the cash equivalent thereof less a discount not in excess of 3 per centum thereof.'
These provisions were omitted from the revenue laws in 1942. The Act of 1942 granted certain favorable tax treatment to companies of a different type, having different qualifications and called a 'regulated investment company.' 5
The conclusion is compelled that a regulated investment company is a very different type of company...
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