              THE       ATFORNEY              GENERAL
                            OF-TEXAS




The Honorable Robert S. Calvert                   Opinion   No.   H- 65
Comptroller   of Public Accounts
State Finance Building                            Re:       Whether certain notes
Austin,  Texas 78711                                        of the Harlingen  National
                                                            Bank, which have a de-
                                                            finite maturity date and
                                                            a fixed interest rate,
                                                            should be considered   a
                                                            part of the bank’s capi-
                                                            tal and as such, be sub-
                                                            ject to an ad valorem
Dear   Mr.   Calvert:                                       tax levy?

       Your request for our opinion states that on October 10, 1972, the
Harlingen   National Bank issued 7 and 172 ‘% Subordinated    Capital Notes to
mature on October 10, 1982, with interest payable semi-annually.         Your
letter states that the U.S.  Comptroller  of the Currency    considers  the
issue to be part of the capital structure of the bank.     You ask our opinion
as to whether these notes should be considered      a part of the bank’s capital
and as such to be subject to an ad vdorem     levy.

       Articles   7165 and 7166 govern the taxation of banks and the shares
of stockho1der.s.    Neither   calls for the bank to render its capital for taxa-
tion.   However,    shareholders    of banks are required to render,   at actual
value, all shares of stock in the bank owned by them.        “Each share in
such bank shall be taxed only for the difference      between its actual cash
value and the proportionate      amount per share in which its real estate is
assessed.   ” (Article   7166)

        In Rosenburg   v. Weekes,  4 S. W. 899 (1887), the Texas Supreme Court
stated:    “The value of a bank share depends upon the value of its franchise,
capital,   and property of all kinds less the amount of its debts. ”




                                     p. 280
The Honorable   Robert   S.   Calvert,    page 2 (H-65)




        Despite its name, a subordinated capital note of a bank clearly is
not a part of its capital.  It is evidence of an indebtedness.     The desig-
nation as capital notes, in all probability,  arose from a long-standing
tendency in the financial community to refer to concentrations       of money
as capital whether owned or not.      Debt generally  is recognized   to be a
less expensive    method of funding a bank or business    than is capital or
equity.    Capital notes are evidence of a debt, and not of capital itself.

       In arriving at a determination of the fair cash market value of a
bank’s shares for the purpose of rendition by the shareholders,    the note
described   should be treated as an indebtedness  and not as part of capital.

                                         SUMMARY

                   Subordinated    Capital Notes of banks issued for
             a loan to the bank are not to be considered   as part of
             the bank’s capital for the purpose of determining     the
             value of its shares.    Instead they should be treated as
             an indebtedness   of the bank.

                                                   Very   truly yours,




                                                   JOHN L. HILL
                                                   Attorney General      of Texas




   _~
APPROkED:




&z    _
DAVID M. KENDALL,         Chairman
Opinion Committee




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