Untitled Texas Attorney General Opinion ( 1964 )

October 5, 1964
Honorable J. N. Nutt Opinion No. C-325
Commissioner of Insurance
State Bard of Insurance He: Whether premium
Austin, Texas notes executed by
Texas residents
constitute "Texas
Securities" within
the meaning of Art.
7064, V.C.S.
Dear Mrr Nutt:
We have your letter requesting our opinion concerning the
interpretation of Article 7064, Vernon's Clvll Statutes. You state:
"A roperty-casualty company has filed a tax return under Article
706[, V.A.T.S and among Its 'Texas Securities' shown on the tax
return the coibany has listed premium notes made by Texas residents."
You request our opinion as to,"whether or not premium notes executed
by Texas residents constitute Texas securities within the meaning
of Article 7064, V.A.T.S." You enclosed with your letter Commls-
sioner's Order No. 15333 and a copy of two prior 1etter.s from the
Attorney General addressed to your department which deal with
premium notes.
Your Order No. 15333, dated January 15, 1964, rules that
premium notes which meet certain standards shall be admitted
assets of fire and casualty companies. The letter dated October
11,1'337, from the Attorney General to the Casualty Insurance
Commissioner advised you that an Insurance company may not lend
money for the purpose of financing premiums on automobile Insurance
with such company since the lending of money, for such purpose would
not be a proper Investment of the funds of such company. The
Attorney General's letter of August 6, 1938, addressed to the
Chairman of the Board of Insurance Commissioners, advised:
"In arriving at the judgment herein concerned, It
was conceded by this Department that reciprocal
exchanges may count premiums In course of collection,
Including prem$um notes, In computing and fii$%ax
reducing investments."
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Honorable J. N. Nutt, page 2 (c-325 )
This letter and the judeent referred to therein will be given
more attention below,
The first paragraph of Article 7064, subjects certain
Insurance corporations, Including casualty companies, to a tax on
the “total gross amount of premiums received on every kind of
Insurance or risk written, except premiums received from other
, llcenaed companle 8 for relnsurance. , ,‘I The second paragraph
of Article 7064, provides for a graduated reduction of the tax
rate on gross premium receipts. Under this 9rovlalo~ the tax rate’
of the Insurance organization Is tied to”th@ amount that It had
Invested on the 31st of December, preceding, In Texas Securities
as defined herein, and the amount that It had Invested on said
date In slmll,ar securltles In the State In which It had Its highest
percentage of admitted assets Invested. . , .’ The third para-
graph of said Article reads as follows:
“For the purposes of this Act, Texas securities
are defined as real. estate In this State; bonds of the
State of Texas; bonds.or interest bearing warrants of any
county, city, town, school district or any munlclpallt~
or subdivision thereof which Is now or may hereafter
be constituted or organized and authorized to issues
. bonds or warrants underthe Conetitutlon and laws of
this State; notes or bonds secured by mortgage or trust
deed on property In this State Insured by the Federal
Housing Administrator; the cash deposits In regularly
established national or state banks or trust companies
In this State on the basis of average monthly balances
throughout the calendar year; that percentage of such
Insurance company’s Investments in the bonds of the
United States of America, that Its Texas reserves for
the unearned premiums and loss reserves as may be
requlred by the Board of Insurance Conznissloners,
are of its total reserves; but’thls provision shall
apply only to United States Qovernment bonds purchased
between December 8, 1941, and the termination of the
war In which the United States Is now engaged; In any
other property In thla State In which by 1st~ such
Insurance. carriers may Invest their funds.
It Is clear that premium notes do not come within any of
the.types of property enumerated by this statute except, poss,lbly,
the last type. Hence, the question Is reduced to whether premium
notes executed by Texas residents constitute “other property in this
state In which by law such Insurance carriers may,lnvest their funds.”
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Honorable J. N. Nutt, page 3 (C-325 )
Our search for a complete list of such legal Investments produces
the following results:
Article 2.10 of the Texas Insurance Code reads, In part,
as follows:
'NO company except any writing life, health,
and accident Insurance, organized under the laws
of this state, shall Invest Its funds over and
above Its minimum capital and Its minimum surplus,
as provided In Article 2.02, except as otherwise
provided In this Code, In any other manner than as
follows:
"1 . As provided for the Investment of Its
minimum capital and Its minimum surplus In Article
2.08;
"2 . In bonds or other evidences of debt which ,
at the time of purchase are Interest-bearing and are
Issued by authority of law and are not In default as
to principal or Interest, of any of the States of the
United States or In the stock of any National Bank,
In stock of any State Bank of Texas whose deposits
are Insured b the Federal beposlt Insurance Corpora-
tion; . . . PIetc.
“3. In bonds or first liens or first mortgages upon
unencumbered real estate . . . &&CL7
"4 . In bonds or other Interest-bearing evidences
or debt of any county, municipality, road district,
. . . @cJ
“5. In the stocks, bonds, debentures, bills of
exchange or other commercial notes or bills and
securities of any solvent dividend paying corporation
. . . @tcJ
“6. In loans upon the pledge of any mortgage,
stock, bonds or other evidence of Indebtedness
acceptable as Investments under the terms of this
Article, If the current value of such mortgage,
stock, bonds or other evidence of indebtedness Is
. .
Honorable J. N. Nutt, page 4 (C-325)
at least twenty-flve per cent (25s) more than the
amount loaned thereo?;
"7. In Interest-bearing notes or bonds of The
Unlverslty.6f Texas Issued under and by virtue of
Chapter 40, Acts of the 43rd Legislature, Second
Called Session;
"8. In real estate to the extent only as else-
where authorized by this Code;
“9 . In Insured accounts and evidences of lndebt-
edness as deflned and limited by Section 1, Chapter
618, page 13.56, Acts of the 57th Legislature; In
shares or share accounts as authorized In Section 1,
page 76, Acts 1939, 46th Legislature; In Insured or
guaranteed obligations as authorized In Chapter 230,
page 315, Acts 1945, 49th Legislature; In bonds
Issued under the .provlslons authorized by Section 9,
Chapter 231 page 774, Acts 1933, 43rd Legislature;
- * -- Et@
Article 2.08, referred to above in Article 2.10, reads as
follows:
“The minimum capital stock and minimum surplus
of any such Insurance company, except any writing
life, health and accident Insurance shall, following
Incorporation and granting of certlflc,ate of’ Wthorlty;’ )
consist only of the following:
“1 , Lawful money of the United States; or
“2. Bonds of this state; or
"3. %nds or other evidences of Indebtedness
of the United States of America or any of Its
agencies when such obligations are guaranteed as
to principal and Interest by the United States of
America; or
"4. Notes secured by first mortgages upon
unencumbered real estate In this state, the title
to which Is valid, and the payment of which notes Is
Insured, In whole or In part, by the United States
of America o,r any of Its agencies, provided that
..i
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Honorable J. N. Nutt, Page 5 (C-325 )
such Investments In such notes shall not
exceed one-half (l/2) of the minimum capital stock
and minimum surplus of lnvestlng'company; or
“5. Bonds or other Interest-bearing evidences
of Indebtedness of any counties, cities or other
munlclpalltles of this state. . . .'
By the following statutes the respective types of property
are declared to be authorized Investments for Insurance companies.
1. Article 842a, V.C.S., securities Issued by Federal
agencies;
2. Article 842a-1, V.C.S., obligations wholly or partially
Insured by United States or state;
3. Article 1187a, V.C.S., bonds on bridges over navigable
waters;
4. Article 1269k-1, V.C.S., housing authority bonds
and obligation;
5. Article 2603d, V.C.S., bonds and notes on University
of Texas admlnlstratlon and library buildings;
6. Article 6795b-1, V.C.S., bonds on causeway bridges and
tunnels In Ciulf Coast countries;
Article
7. 7880-lga,'V.C.S., bonds Issued by Water Control
and Improvement Districts and municipal districts;
8. Article 8280-133, V.C.S., bonds Issued by Sablne River
authority;
9. Article 8280-134, V.C.S., bonds Issued by Lower Nueces
River Water Supply District;
10. Article 8280-137, V.C.S., bonds Issued by Colorado
River Municipal Water District;
11. Article 8280-138, V.C.S., bonds lssukd by Jim Wells-
Duval Counties Conservation and Reclamation District;
12. Article 8280-139, V.C.S., bonds Issued by Eastland
County Water Supply pistrict.
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Honorable J. N. Nutt, page 6 (C-325 )
We find no other statutes which deal with Investments by
casualty Insurance companies. There are other statutes which deal
specially with Investments by other types of Insurance companies,
such as life, mutual and fraternal Insurance companies, but they
are not pertinent to your lnqulry.
From these statutes It Is obvious that the basic purpose
of the Legislature In providing for Investments by Insurance
companies was to provide a high degree of liquidity and safety.
A premium note signed by a policyholder may or may not be collec-
tible and, in our opinion, would not be an Investment of the type
contemplated by these statutes.
Article 7064, which established a tax rate and provides
for tax-reducing Investments, Is a tax statute, and we are not
authorized to resort to liberal con= u-in extending Its
exceptions. All doubts are resolved against the exemption.
of Longview v. Markham-McNee Memorial Hospital 137 Tex
.w.2
S.. 5 i W 2d 13;)%%i .
94, the S&em: Cobt said:
"Exemptions from taxation are regarded not only
as In derogation of sovereign authority, but of
common rl ht as well. They must be strictly construed,
&id?i?it?%nded beyond the express requirements of
the language used, . . .' (Emphasis theirs)
A further argument In favor of our conclusion Is found
In the language used in Article 7064. The "other property"
provision of this article Is strictly limited by its own terms
to "property In this state In which by law insurance carriers may
Invest their funds." It Is noteworthy that the Legislature dld
not say "other property which may be legally owned by Insurance
carriers." We think the presence of the word "Invest" Is slgnlfl-
cant. A closely related question was answered by the Attorney
General In Opinion No. O-6539, approved June 4, 1945. In that
opinion, It was held that furniture and fixtures belonging to a
fire Insurance company did not come within the definition of a
tax reducing Investments set out In Article 7064. That opinion
concerned the construction of the meaning of the word "lnvest-
merit." Numerous definitions of the term were there quoted. A
typical definition Is that which the opinion quotes from In Re
Pennocks Will, 35 N.E.2d 177, 285 N.Y. 475, as follows: -
"An 'Investment' is generally deflned as the
conversion of money or circulating capital into
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Honorable J. N. Nutt, Page 7 (C-325 )
some species of property from which an Income or
profit Is expected to be derived In the ordinary
course of trade or business."
The opinion holds that the terms "Invest" and "Investments"
are used In Article 7064 In their ordinary connotation. We see
nothing In the statutes above quoted that would justify any other
construction of the terms. The fact that an Insurance company may
legally purchase and own typewriters or office supplies does not
mean that these are tax reducing Investments. Similarly, the fact
that the company, as an Incident to doing business, may extend
credit upon an open account or open note does not mean that It
has made a tax reducing Investment within the meaning of the
statute. Under the above mentioned statutes the only kind of a
note In whlqh an Insurance company may Invest Its funds Is a secured
note. Indeed, It may be said that If pm notes were construed
to be Investments at all, It would put the company In a posltlon
of having Invested Its funds In a manner violative of Article 2.10
of the Insurance Code.
In Lumberman's Insurance Company v. State of Texas, 364
S.W.2d 429 (Tex.Clv.App. 1963, error ref. n.r.e.), the company
Invested funds In the stock of a corporation which had been In
exlstance less than five years prior to the investment as required
by Subdivision 5 of Article 2.10. The trial court held the
Investment to be unlawful, thus rendering the company Insolvent
and subject to the receivership. 'This decision demonstrates the
reluctance of the courts to liberalize this particular tax
statute.
The case of Board of Insurance Commissioners v. Hlghwan
Insurance Underwriters, lb9 S.W.2d 541 (Tex.Clv.App. 1943) may appear
20 tave lmpllcatlons contrary to the conclusion we have reacneo,
but we believe there Is no conflict. As the opinion there
specifically points out, the trial court had entered a consent
judgment holding, among other things, that premium notes were tax-
reducing Investments of reciprocal and Inter-insurance exchanges.
The trial court also ,held In favor nf lntervenors, Insurance carriers
other than those in whose favor the agreed judgment had been entered.
On appeal from the judgment In favor of the lntervenors the question
'was raised as to whether this was a,class action judgment which
Inured to the benefit of other Insurance carriers, Including the
appellees. The Court of Civil Appeals held that It was a class
action, afflrmlng the trial court judgment on this point, but
reversing It on other grounds. The Court was not called upon to
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Honorable J. N. Nutt, page 8 (c-325 )
pass upon the correctness
. . of the terms of the agreed a.judgment.
- .
The Court quoted In its entlrety the Attorney tieneral's letter
dated August 6, 1938, referred to above, which had been written
after the trial court had entered the agreed judgment. Whatever
dignity that letter was intended to be given by the court and what-
ever else may be said about It In connection with our question,
we think that It carefully limits the terms of the agreed judgment
in question to reciprocal exchanges, which, the letter says, were
not rest&ted by any then existing statutes defining the prcperty
in which reciprocal exchanges might invest their funds. The letter
then says:
"As a general proposition, premiums In course
of collection are valuable credits and therefore
constitute property in the broadest sense of that
term. In a broad sense, investments include credits
or property other than cash; therefore In the pre-
sent state of the laws, It Is believed that premiums
in the course of collection are to be regarded
as tax reducing investments Insofar as reciprocal
exchanges are concerned, ”
We believe that this part of the letter Is unsound. The
views expressed by the above mentioned Attorney General’s Opinion
No. O-6539, approved June 4, 1945, (after the above mentioned
case was decided) are sound and are In line with the accepted
definitions of the terms “Invest” and “investment.” We find no
support of the “broad” definition of these terms, and, as pointed
out above, In dealing with a tax statute we are not authorized to
resort to liberal or broad construction In favor of the person
or property subject to the tax statute.
The purpose of the gross receipts tax statute (Art. 7064)
is to encourage, by offering a lower tax rate, those insurance
carriers subject to the Act to make investments in Texas securl-
ties and property. Kansas City Title Insurance Co. v. Butler,
253 S.W.2d 318 (Tex.Clv.App. 1952, error ref. n.r.e.); Eo d of
Insurance Commissioners v. Prudential Fire Insurance Comply 167
rW.2d
e 578 (Tex.Civ.App. 1942, error ref. n.r.e.). It Is cl;ar that
this Legislative intent would not be enhanced by Including premium
notes among the tax reducing investments, and we do not believe
that they were intended by the Legislature to be included in any
of the carefully defined types of property listed in the above
mentioned statutes.
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Honorable J. N. Nutt, page 9 (C-325 )
For all of the reasons set out above we have concluded
that premium notes executed by Texas residents do not constitute
"Texas Securities" within the meaning of Article 7064, Vernon's
Civil Statutes.
SUMMARY
--M-w--
Premium notes executed by Texas residents
do not constitute "Texas Securities" within the
meaning of Article 7064, V.C.S.
Yours very truly,
WAGGONER CARR
Attorney General of Texas
RER:ss
APPROVEDBY OPINION COMMITTEE:
W. V. Geppert, Chairman
Joe R. Long
James Strock
Pat Bailey
Jack Goodman
APPROVEDFOR THE ATTORNEY
GENERAL
BY ROGERTYLER