                    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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