Did cumulative preferred securities tied to 49-year debentures qualify as debt under the former Texas surplus rules?

Plain-English summary

The preferred securities did not qualify as debt under the former surplus definition.

The securities were subject to mandatory redemption when related junior subordinated debentures matured after 49 years or were redeemed earlier, including an issuer option beginning five years after issuance.

Texas said those terms did not satisfy Section 171.109(a)(3)'s “ascertainable period of time or on demand” debt criterion. The securities therefore failed to meet all three statutory debt requirements.

What this means for you

Issuers reviewing historical hybrid securities

Calling an instrument preferred stock or tying redemption to a debenture did not establish debt treatment under the former franchise-tax rules.

Tax professionals

Review each statutory debt criterion against the operative registration and redemption terms; this letter identifies only the failed timing criterion.

Common questions

Q: Did the securities qualify as debt?
A: No.

Q: What criterion failed?
A: The ascertainable-period-or-on-demand requirement.

Q: What triggered redemption?
A: Maturity or earlier redemption of the related debentures.

Citations and references

• Texas Tax Code Sec. 171.109(a)(3)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9701099L

Original ruling text

January 27, 1997

RE: CORP A and **

Dear **:

Thank you for your letter concerning the issuance of Cumulative Quarterly
Income Preferred Securities. I apologize for the delay in responding to your
inquiry.

Based on the information in the Registration Statement and the information in
your letter, we have determined that the securities do not meet all three of
the debt criteria discussed in the Texas Tax Code (TTC) Sec. 171.109 (a)(3).

The redemption of the preferred securities in question is tied to the maturity
of Debentures that have also been issued. In your letter you state, "the
Debentures will have a fixed maturity date of forty-nine years from the date of
issuance and, upon that date, the Preferred Securities will be subject to
mandatory redemption." You also state that "the Company also has the right to
redeem the Debentures five years from the date of issuance...and thereby cause
a redemption of the Preferred Securities."

The Registration statement (on page 3) states that "the Preferred Securities
are subject to mandatory redemption, in whole or in part, upon repayment of the
Junior Subordinated Debentures at maturity or their earlier redemption..."

Neither of these statements satisfy the "ascertainable period of time or on
demand" criteria of debt found in the statute.

This response is based on the facts presented. If there are different or
additional facts, the response may change.

If you have any questions about this or any other franchise tax matter, please
call me at
1-800-531-5441, extension 34612. My direct number is (512) 463-4612. You may
write me at Tax Policy Division, Comptroller of Public Accounts, Austin, Texas
78774.

Sincerely,
Janet Spies
Tax Policy Division