Texas Utilities Elec. Co. v. Sharp

CourtCourt of Appeals of Texas
Citation962 S.W.2d 723
Docket NumberNo. 03-97-00146-CV,03-97-00146-CV
PartiesTEXAS UTILITIES ELECTRIC COMPANY, Appellant, v. John SHARP, Comptroller of Public Accounts of the State of Texas; and Dan Morales, Attorney General of the State of Texas, Appellees.
Decision Date26 February 1998

Page 723

962 S.W.2d 723
TEXAS UTILITIES ELECTRIC COMPANY, Appellant,
v.
John SHARP, Comptroller of Public Accounts of the State of
Texas; and Dan Morales, Attorney General of the
State of Texas, Appellees.
No. 03-97-00146-CV.
Court of Appeals of Texas,
Austin.
Feb. 26, 1998.
Rehearing Overruled March 26, 1998.

Page 724

David H. Gilliland, Clark, Thomas & Winters, P.C., Austin, for appellant.

Dan Morales, Atty. Gen., Christine Monzingo, Asst. Atty. Gen., Taxation Div., Austin, for appellees.

Before CARROLL, C.J., and JONES and KIDD, JJ.

JONES, Justice.

This is a dispute over franchise taxes the State Comptroller assessed against appellant, Texas Utilities Electric Company ("TUEC"). TUEC sued for a refund, and the trial court rendered summary judgment against TUEC. We will modify and affirm the judgment.

BACKGROUND

TUEC, an electric utility, leases gas combustion turbines in order to generate electricity. TUEC entered into certain operating lease agreements in 1987. The agreements obligate TUEC to pay semi-annual rentals for about twenty-seven years. TUEC does not have an ownership interest in the turbines; it simply has the right to use them pursuant to the long-term operating lease agreements.

In computing its franchise tax obligations for the years 1988, 1989, and 1990, TUEC sought to deduct the amount of its future rental expense under the operating leases. See generally Tex. Tax Code Ann. §§ 171.001-.687 (West 1992 & Supp.1998) ("Tax Code"). TUEC paid its franchise taxes without deducting the future rentals, but then filed suit for a refund in district court. See id. § 112.151. 1 Both TUEC and the

Page 725

Comptroller moved for summary judgment. In their motions for summary judgment, the parties disagreed over whether the relevant Tax Code provisions allow TUEC to deduct the amount of the future rental expense.

The Comptroller also filed a counterclaim. See Tax Code § 112.1512. In its counterclaim, the Comptroller argued that in the event TUEC is allowed to deduct the value of the future rentals, it should be required to offset the deduction by recognizing a gain in assets.

The district court granted the Comptroller's motion for summary judgment and also purported to grant its counterclaim. The court denied TUEC's motion and rendered judgment that TUEC take nothing. TUEC appeals by two points of error. First, TUEC argues that the district court erred by granting the Comptroller's motion for summary judgment and by denying TUEC's motion. Second, TUEC argues the district court erred in granting the Comptroller's counterclaim.

DISCUSSION

We first address the issue TUEC presents in point of error one: whether the Tax Code allows TUEC to deduct the value of future rentals under its long-term operating leases for purposes of calculating its current-year franchise tax obligation.

Texas corporations and limited liability companies 2 pay franchise tax in part on their "net taxable capital." See Tax Code §§ 171.001, .002. The determination of "net taxable capital" requires the application of a sequence of definitions in the Tax Code. For example, "net taxable capital" includes the corporation's "surplus." Id. § 171.101. "Surplus" includes the corporation's "net assets." Id. § 171.109(a)(1). "Net assets" means "the total assets of a corporation minus its total debts." Id. § 171.109(a)(2). In other words, "debts" are deductible from a corporation's taxable surplus under the Tax Code.

This case turns on whether TUEC's future rentals under its long-term operating leases are deductible "debt" under the Tax Code. The Tax Code defines a "debt" as "any legally enforceable obligation measured in a certain amount of money which must be performed or paid within an ascertainable period of time or on demand." Id. § 171.109(a)(3). Both parties agree that TUEC's future rentals fall within this definition. TUEC argues that this fact alone means the future rentals should be deducted from the "surplus" that ultimately comprises part of its "net taxable capital."

The Comptroller argues, however, that the rentals are not automatically deductible simply because they meet the section 171.109(a)(3) definition. The Comptroller asserts that future rentals are not deductible from "surplus" because of section 171.109(b), which reads:

Except as otherwise provided in this section, a corporation must compute its surplus, assets, and debts according to generally accepted accounting principles. If generally accepted accounting principles are unsettled or do not specify an accounting practice for a particular purpose related to the computation of surplus, assets, or debts, the comptroller by rule may establish rules to specify the applicable accounting practice for that purpose.

Tax Code § 171.109(b). The Comptroller interprets this provision as requiring a corporation first to determine its "debts" according to generally accepted accounting principles ("GAAP") before applying the definition of "debt" in section 171.109(a)(3) to see if they are deductible. Both parties agree that TUEC's future rentals under the operating leases are not "debt" according to GAAP. The Comptroller argues that because the future rentals do not meet the first part

Page 726

of the test, they are not deductible regardless of whether they fall within the section 171.109(a)(3) definition of "debt."

Confusion about the proper interpretation of this statute arises for two reasons: First, section 171.109(b) requires corporations to compute "debt" according to GAAP, while GAAP technically speaks in terms of "liabilities" rather than "debt." Second, section 171.109(b) contains a proviso at the beginning, but the proviso does not enumerate the exceptions to which it refers...

To continue reading

Request your trial
21 cases
  • Upjohn Co. v. Rylander
    • United States
    • Texas Court of Appeals
    • October 19, 2000
    ...tantamount to tax exemptions--strictly against the taxpayer and in favor of the taxing authority."6 Texas Utils. Elec. Co. v. Sharp, 962 S.W.2d 723, 726 (Tex. App.-Austin 1998, pet denied); accord National Bancshares Corp., 584 S.W.2d at 271-72. Because section 171.104 is part of an apporti......
  • Stable Energy v. Newberry
    • United States
    • Texas Court of Appeals
    • August 12, 1999
    ...and follow the legislature's intent. See Minton v. Frank, 545 S.W.2d 442, 445 (Tex. 1976); Texas Utils. Elec. Co. v. Sharp, 962 S.W.2d 723, 726 (Tex. App.-Austin 1998, pet. denied). In determining the meaning of a statute, the reviewing court should consider the entire act, its nature and o......
  • Sergeant Enterprises, Inc. v. Strayhorn
    • United States
    • Texas Court of Appeals
    • July 11, 2003
    ...v. Travis Cent. Appraisal Dist., 81 S.W.3d 869, 872 (Tex.App.-Austin 2002, pet. denied) (citing Texas Utils. Elec. Co. v. Sharp, 962 S.W.2d 723, 726 (Tex.App.-Austin 1998, pet. denied)). Therefore, it must be strictly construed in favor of the Comptroller. Deductions being matters of legisl......
  • Tex. Student Hous. Auth. v. Brazos Cnty. Appraisal Dist.
    • United States
    • Texas Court of Appeals
    • June 27, 2013
    ...v. Travis Cent. Appraisal Dist., 81 S.W.3d 869, 872 (Tex.App.-Austin 2002, pet. denied) (quoting Tex. Utils. Elec. Co. v. Sharp, 962 S.W.2d 723, 726 (Tex.App.-Austin 1998, pet. denied) ); see Hilltop Village, Inc. v. Kerrville Indep. Sch. Dist., 426 S.W.2d 943, 948 (Tex.1968). That is, when......
  • Request a trial to view additional results
1 firm's commentaries

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT