Untitled Texas Attorney General Opinion ( 1971 )

A~-~ORNEY GENERAL
OF TEXAS
Honorable Truman Ratliff Opinion No. M- 1028
County Attorney
Delta County, Re: Taxation of Rational
Cooper, Texas Bank’s reserve for
unearned interest and
Dear Mr. Ratliff: contingencies.
You have requested from this office an official opinion
in answer to the following three questions (set out here as
numbers (2), (3) and (4) because your question No. (1) contained
in your original request for an opinion was answered to your
satisfaction by prior opinions furnished you by this office):
“(2) Are funds set aside and designated as Reserve
for unearned interest (being interest collected but
not earned) in a national bank’s financial statement
assessable and taxable for ad valorem taxes by the
state, county and other taxing units?
“(3) Are funds set aside and designated as reserve
for contingencies in national bank’s fi.nancial.statement
reserve for loans classified by bank examiner
&?%t yet charged off, as “over due ’ “substandard”
and “doubtful”) assessable and taxable’for ad valorem
taxes by the state, county and other taxing units?
“(4) If national bank’s reserve for contingencies is
assessable and taxable for ad valorem taxes, can
the bank exclude from taxation the portion of the reserve
for loans charged off by the bank examiner in the
preceding year or in the current year by the Comptroller
of Currency?”
Article 7165, Section 2,* in providing for the ad valorem
tax assessmentof the personal property of national banks
requires such banks to render certain of their properties as
follows:
aAl1 Articles referred to are Vernon’s Civil Statutes.
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Honorable Truman Ratliff, Page 2 (M-1028)
"2 ~ National banks shall render all other bonds and
stocks of every kind, except United States bonds, and
all shares of Capital stocks or joint stock or stocks
of other companies or corporations held as an investment
or in any way representing assets, together with all
other personal property belonging or pertaining to
said banks, except such personal property as is specially
exempted from taxation by laws of the United States."
Section 3 of said Article requires national banks to render
all of their real estate as other real estate is rendered, and
further provides that "all the personal property of said national
banks herein taxed shall be valued as other personal property
is valued."
Attorney General Opinion No. V-315 (1947), in construing
the effect of Article 7166 (unchanged in form since its enactment
in 1885), held as follows:
"You will note that said Article 7166 provides that the
shares in a bank shall be taxed on the basis of the value
m personal property owned by the bank and that the
personal property itself is not taxed. In other words,
the capital, surplus, and undivided profits are not taxed.
' But the shares in the bank are taxed; and the value of
the capital, surplus and undivided profits (being personal
property) is used as a basis for determining the value of
the shares for taxation purposes. ..."
Since the enactment of this legislation in 1885 (now Art.
' 7166) the real estate of a bank is to be taxed under this
statute in its own name, while its personal property is taxed
in the names of its shareholders. Engelke v. Schlenker, 75
Tex. 55~S.W.999, (logo).
Thus, in view of the foregoing, we conclude that your
questions are directed to whether the reserves designated by
the bank for unearned interest and contingencies, may be
considered for tax purposes as part of the personal property of
the bank to be taken into account and evaluated by the taxing
authorities in fixing the value of the shares of stock in the
bank owned by its shareholdersand assesssa6le agm them
individually.
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Honorable Truman Ratliff, Page 3 (M-1028)
Your question No. (2) is, in essence, whether a reserve
composed of interest collected by the bank but not as yet earned
is to be deemed an asset of the bank to be taken into con-
sideration in asses-the actual value of the shares of stock
in the bank. The reserve is in the nature of a suspense account
under the control of the bank and from which its various components
are transferred from time to time as they become earned to the
other accounts of the bank. When so transferred this money
unquestionably would be assets of the bank to be taken into
consideration as augmenting the value of the stock in the hands
of the stockholder.
Until this interest is earned it may be considered as a
factor to be taken into consideration in fixing the value of
theares of stock which are taxed to the shareholders.
Your question No. 3) is substantially answered by Attorney
General Opinion No. O-4L75 (1942) a copy of which you now have,
but you have requested clarification of the statement therein
to the effect that although neither assessable nor taxable to the
bank the
... reserve for contingencies" ... as personal property,
... is a part of the assets of the bank and is one of
the factors to be taken into consideration by the board
of equalitation in fixing the value of the stock for’tax
purposes.
This means that in assessing the shares of stock in the
bank to the stockholders the tax assessor should accord the
reserve funds consideration as elements tending to campose or
augment the value of the stock in the hands of the stockholders.
The degree to which they might enhance the value of the bank
stock in any given instance is solely within the reasonable
judgment of the tax assessor.
We answer your question No. (4) as follows. The overall
worth or value of the bank’s monetary assets is diminished
by a bad debt charged off. The amount of the charged off loss
for any taxable period will not be available as a bank asset
for consideration by the taxing authority in determining the
taxable value of the bank stock held by shareholders. The
method of accounting used by any part.lcularbank in its tranfers
of charges or credits from one segregated portion of its earned
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Honorable Truman Ratliff, Page 4 (M-1028)
surplus to another would not alter the total worth of its
monetary assets, and this worth is what is taken into
account by the taxing authority in assessing the shareholders
stock. Also the classification on the bank's ledgers or
financial statements of any fund does not operate to change
the true taxable character of the fund as an asset or a
liability. Attorney General Opinion No. WW-935 (1960),
previously furnished you, is in accord with our answer to
Question No. (4).
We are forwarding with this opinion a copy of Attorney
General Opinion No. V-315 referred to herein.
-SUMMARY-
A national bank's reserve for interest collected
but not earned, and its reserve for loans classified as
"over due", '!substandard"and "doubtful", but not yet
charged off, may be considered as a factor for ad valorem
tax purposes as part of the personal property of the bank
to be taken into account and evaluated by the several
State taxing authorities in fixing the value of the shares
of stock in the bank owned by its shareholders and
assessable to them individually.
The value of a bank's monetary assets is diminished
by a charged off bad debt.
The ledger or financial statement classification of
a fund by the bank does not change the fund's true taxable
character as an asset or liability in determining the
taxable value of its shares.
; , s very truly,
Prepared by R. L. Lattimore
Assistant Attorney General
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Honorable Truman Ratliff, Page 5 (M-1028)
APPROVED:
OPINION COMMITTEE
Kerns Taylor, Chairman
W. E. Allen, Co-Chairman
Marietta Payne
Ralph Rash
Arthur Sandlin
James Maxwell
SAM MCDANIEL
Staff Legal Assistant
ALFREDWALKER
Executive Assistant
NOLA WHITE
First Assistant
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