Citations
- 246 S.W.2d 644
Full opinion text
HUGHES, Justice.
This suit was by appellee, Huey and Philp Hardware Company, against the Secretary of State, State Treasurer and Attorney General of Texas, in their official capacities, appellants, to recover franchise taxes and penalties paid under protest.
A nonjury trial resulted in appellee recovering judgment for the amount in controversy plus earned interest thereon.
Payment of the taxes sued for came as a result of a recomputation and recalculation by the Secretary of State of appellee’s taxable capital for each of the years 1932 to 1948, inclusive. For each of the first seven of such years $10,000 was added to the taxable capital and for each of the last ten of such years $30,000 was added to such capital.
Each of the amounts so added by the Secretary of State is in the exact amount of a reserve for bad debts which appellee created by a bookkeeping entry and deducted each year in determining and reporting the amount of its taxable capital.
Art. 7084, V.A.C.S., levies a franchise tax against corporations based upon that proportion of the outstanding capital stock, surplus and undivided profits, plus the amount of outstanding bonds, notes and debentures as the gross receipts from business done in Texas bear to the total gross receipts of the corporation.
Art. 7089, V.A.C.S., provides that all corporations required to pay a franchise tax shall between January first and March fifteenth of each year make a report to the Secretary of State, on forms furnished by that officer, showing the condition of such corporations on the last day of the preceding fiscal year. “Said report shall give the cash value of all gross assets of the corporation,” the amount of its surplus and undivided profits or deficit, etc.
The assets involved here are notes and accounts receivable and it is appellee’s contention that the reserve for bad debts which it deducts from the surplus account merely reflects a fair appraisal of the cash value of its notes and accounts receivable.
The following summary of the facts is taken from appellee’s briéf:
“At all times here in question, plaintiff Huey & Philp Hardware Company has carried on its books of account a substantial volume of accounts and notes receivable. At the close of each year, plaintiff’s management, with the assistance of its independent certified public accountant, has analyzed the receivables individually and ‘charged off’ those determined to be worthless. Each such ‘charge off’ was accomplished by means of a book entry which reduced the total accounts receivable and the net profit of the current year, as shown by the books of account, by the amount of the individual receivable actually determined to be worthless. The 'Profit and Loss’ account was then closed into the ‘Surplus’ accoxnt at the end of each year.
“Beginning in 1932 and throughout the years in question, plaintiff has also maintained on its books of account a ‘Reserve for Bad Debts.’ Such reserve was established by a book entry ‘debiting’ (reducing) the Surplus account and ‘crediting’ (increasing) the Reserve for Bad Debts in the amount of $10,000.00. In 1939 the account was increased to $30,000.00 by a similar entry.
“The purpose of the Reserve for Bad Debts as of any particular date is not to duplicate the allowance for receivables previously determined to be worthless arid charged off, but to discount the aggregate face value of all remaining accounts receivable (which have not been charged off) for future losses not yet specifically identifiable. In the words of defendants’ expert, Mr. Neal, the purpose of the Reserve for Bad Debts is ‘to act as a- — -you might say a valuation reserve, reducing the face value of the receivables to what would be the estimated amount to be actually realized through subsequent collections of those outstanding accounts.’
“The Reserve for Bad Debts is not a fund of money set aside, but a book account carrying a ‘credit’ balance. Since accounts receivable carry ‘debit’ balances, the credit balance of the Reserve offsets the debit balances representing the face amounts of the accounts receivable, the difference being the ‘estimated amount to :be actually realized through subsequent collections of those outstanding accounts.’
“Each year plaintiff’s Reserve for Bad Debts was reviewed to determine its adequacy in the light of then existing conditions. As a result of such annual reviews the reserve was increased as above stated, from $10,000 to $30,000 in 1939.”
We adopt this statement as our own but we reject as immaterial the fact that it was not the purpose of the reserve for bad debts to duplicate the charge off for worthless debts.
Appellants do not contest the reasonableness of the amount of the reserve for bad debts but contend, regardless of amount, the reserve cannot, under the facts of this case, be deducted, from the taxable capital.
All parties agree that the “cash value” of the notes and accounts is the controlling and primary fact to be determined. It is only concerning the methods employed and results reached that there are disagreements.
Appellee cites Section 472, Vol. 2, Hildebrand’s Law of Texas Corporations, where the Dean in discussing how the amount of surplus and undivided profits should be computed for the purpose of paying dividends said:
■“ * * * the old notion that only notes actually determined to ¡be worthless should be charged off is obsolete. A reserve must now .be set up for bad debts, or else the inventory of bills receivable must be properly discounted. * * * ”
This observation, however, should be considered along with-Article 1083a, Vernon’s Penal Code of Texas, making the payment of cash dividends unlawful except from the “actual earnings” of the -company or in its lawful liquidation. See also XXVI, Texas Law Review,