State v. Sun Refining & Marketing, Inc.

• Decision Date: 04 November 1987
• Docket Number: No. 3-87-064-CV,3-87-064-CV
• Citation: 740 S.W.2d 552
• Parties: STATE of Texas, et al., Appellants, v. SUN REFINING & MARKETING, INC., et al., Appellees.
• Court: Texas Court of Appeals

Page 552

740 S.W.2d 552

STATE of Texas, et al., Appellants, v. SUN REFINING & MARKETING, INC., et al., Appellees.

No. 3-87-064-CV.

Court of Appeals of Texas,

Austin.

Nov. 4, 1987.

Rehearing Denied Dec. 2, 1987.

Jim Mattox, Atty., Gen., Harriet D. Burke, Asst. Atty. Gen., Austin, for appellants.

Edward J. Hazzouri, Pro Hac Vice, Scranton, Pa., for Sun Refining and Marketing Co.

David A. Hampel, Dallas, for Sun Exploration and Production Co.

SHANNON, Chief Justice.

Sun Refining & Marketing, Inc., and Sun Pipe Line Co., appellees, filed suit in the district court of Travis County to recover $124,150.24 in franchise taxes paid under protest to the Comptroller of Public Accounts. After a bench trial, the district court rendered judgment that appellees recover such sum. This Court will affirm that judgment.

The franchise tax is one imposed on the value of the privilege to transact business in Texas. Bullock v. National Bancshares Corporation, 584 S.W.2d 268, 270 (Tex.1979). The amount of the franchise tax imposed on a corporation transacting business is based upon the corporation's taxable capital which consists of the sum of the corporation's "stated capital" and "surplus." Tex.Tax Code Ann. §§ 171.002, 171.101 (1982).

In this appeal, the Comptroller concluded, after audit, that appellee Sun Refining and Marketing had improperly characterized certain contingent accounts as liabilities thereby excluding them from surplus for franchise tax purposes. Accordingly, the Comptroller compelled Sun Refining and Marketing to include as assets in surplus its: (1) entitlement restatement account for 1980; (2) self-insurance account; and (3) deferred employee-pension account. The Comptroller further required Sun Refining and Marketing to include in surplus the undistributed earnings of a subsidiary corporation, Puerto Rico Sun Oil Company. In addition, the Comptroller determined that Sun Pipe must include in surplus its deferred employee-pension account.

In general, the district court concluded that the purpose of the franchise tax statute is to require a corporation to compute its taxable surplus based upon economic reality, that is, the statute contemplates that the tax be determined upon the true financial condition of the corporation. The district court reasoned that once it has been determined that the events upon which a liability is based have occurred and that the amount of the liability is subject to a reasonable estimate, the corporation may exclude that liability from surplus.

THE ENTITLEMENT RESTATEMENT ACCOUNT

The district court found that Sun Refining and Marketing was the subject of a federally mandated program for the year 1980 that required it to make payments to other oil companies. The amount of these payments was a function of the price Sun Refining and Marketing paid for crude oil it refined and the average prices paid by it and other oil companies for crude. The payments under the "Entitlement Program" were made monthly. There was a delay, however, between the close of business for which the obligation was incurred, on the one hand, and the collection of the necessary price information and completion of the calculations that formed the basis for computing the amount Sun Refining and Marketing was to pay for any particular month on the other. At the close of its fiscal and calendar year, December 31, 1980, the events that determined Sun Refining and Marketing's liability had occurred, but the information necessary to determine the prices it and others had paid for crude oil was not then available for the months of November and December 1980. As a result, Sun Refining and Marketing had to estimate the amount of its liability under the program for calculating its net assets at the end of the year. Sun Refining and Marketing estimated the amount of its Entitlement Program liability for the last two months of the year to be $48,841,000. The estimate was not overstated and, in fact, when the information was available and calculations complete, Sun Refining and Marketing was obligated to pay $58,883,534, rather than $48,841,000.

SELF-INSURANCE ACCOUNT

During the time in question, Sun Refining and Marketing participated in a self-insurance program to pay claims arising in the course of business. After an accident occurred and all the events upon which the liability of a participating company was based had transpired, an insurance adjusting firm estimated the amount for which the company would be liable. In the case of Sun Refining and Marketing, the company recorded an amount equal to the estimated liability on its books during the period between the date the events giving rise to the liability had occurred and the time the liability was paid. The parties stipulated that the amounts of these estimates were reasonable. Sun Refining and Marketing's method of recording these liabilities was in accordance with generally accepted accounting principles. Because the events giving rise to the liabilities had occurred and since the amount of the liabilities were subject to reasonable estimates, the company's failure to include these sums as debts in calculating taxable surplus would have given a distorted view of the company's financial condition.

With respect to the contingent liability reserve accounts, the State's position for reversal of the judgment may be summarized as follows: The term "surplus" is not defined in the franchise tax statute. By rule 3.405, the Comptroller defines surplus as the excess of the net assets of a corporation over its stated capital. The net assets are the "total assets minus total debts." The Comptroller's rule, however, does not define the debt or liability component of surplus. As established by the testimony of an employee, Teresa Van DeWolle, the Comptroller's administrative construction of the term "debt" in this context is that "[f]or franchise tax purposes, a debt is certain in time of payment and amount to be paid and it's contractual in nature." ¹ Under the Comptroller's view, a contingent liability reserve account, no matter how accurate or reasonable, can never be a debt or liability for purposes of determining surplus.

The Comptroller suggests that, in the absence of specific statutory directive as to the elements of surplus, his administrative policy and treatment of contingent liability accounts is binding. The Comptroller's argument, however, fails to account for contrary judicial treatment of analogous contingent liability accounts. In Huey & Philip Hardware Co. v. Sheppard, 151 Tex. 462, 251 S.W.2d 515 (1952), the Supreme Court concluded that a reserve for bad debts account could be excluded from the corporation's surplus for franchise tax purposes. Id. 251 S.W.2d at 516.

In Calvert v. Houston Lighting & Power Company, 369 S.W.2d 502 (Tex.Civ.App.1963, writ ref'd n.r.e.), the Court considered whether a corporation could exclude a deferred federal income tax account from surplus. The appellees, four public utilities, had established these accounts in...