Mr. E/P. Slater           OQlnlo~ No. c-519
County Attorney
Caldwell Countv            RI?: ProDrlets of lncltiion of %eserve
Luling, Texas-                  for-Bad i)ebts"and deserve for
                                Bond Depletion" In determlning
                                the value of shares of bank stock
Dear Mr. Slater:                for ad valorem tax purpoees.
       You have requested that we advise you as to how the shares
of stock in the First Iockhart National Bank of.Lockhart, Texas-
should be valued for ad valorem tax purposes. The Bank has sub-
mitted to the Tax Assessor-Collector of Caldwell County a state-
ment of the condition of thenBank. !l!he’copyof thlsfstatement
which you have furnished us shows as liablllt~es a Reserve for
Bad Debts" In the amount of   3:z.s    and a Reserve for Bond
Depletion" in the amount of t%      . .
       As stated in your letter, Attorney General Opinion No.
O-4675 (1942).held that a "Reserve for Contingencies" must be
taken into consideration by the board of equalization In fixing
the value of the stock for tax purposes. We quote the following
excerpt from page 4 of this opinion:
              "The phrase' reserve for contlngencies~
         Indicated that the bank hea set apart and
         segregated a part of its earned surplus for
         the purpose of meeting whatever contingency
         that may arise. That fund, by whatever name
         It may be called, Is a part of the bank's
         personal property. As such It is neither
         assessable nor taxable to the bank. Article
         7166, supra; City of Marshall vs. State Bank
         of Marshall, 60 C. A. 508, 127 S.W. 1083. On
         the other hand, as personal property, it Is a
         part of the assets of the bank and Is one of
         the factors to be taken into consideration by
         the board of equalization in ffixlngthe Value
         of the stoak for tax purposes.
      You then make the following statement:



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                              Mr. E. P. Slate* - Page .2 (C-519)        '~

                                                 “Following ‘your opinion    No. O-~&O,    MS,
                                           are unable~to determine If these reserves
                                           represent definite accrued llabllltles rather ,.
                                           than capital furids,surplus or undivided
                                           Q??ofitS.':.~                             .
..:
        :.                               We quote 'the following eX&e&ts f m     pigee'   2 and 3,of                   ..'
                              Attorney     Oenersl Opinion No. 0-686~ (1943:         ..   .       ‘~,

                                                    "We therefore advise you ttit &.?ognlsed
                                           acqounting practice d~stlngulshes sur~lus.re-
                                           serves such a8 for.addltions, anticipated
                                           losses,~ bond sinking funds, end the like from
                                           so-called treservesR set 'up for contra asset
  ..,
                                           acoo'unts,such as accrued llabilit%es. While
                                           accrued llablllty 'tieeerveti'   represent funds                  .
             ;.
                                           held by the bank not imsnedlatelypayable, by
                                           their vely'nature as accrued liabilities or'
                                           debts,~little, If any, .conslderation could
                                           be accorded such funds as elements tdnding                   :,
                                           to compose or~augment the ,valUe of the stook :
                  ‘..,                     In ,the hands'of the stoakholder. Therefore,
                                           if 'the facts ,arefound to,be as'titated.by
             .’          ‘,
                                           the bank, the assessor and counjiyaommis810nersr
                                           court should give a Qroprlate conslderatlon to                         ‘.   .

                                           the facts that the 8 265,376.23    Qortlon.of the
                                           so-called ~'reserve'fund represents definite.
                                           accrued~llabllltles rattierthan capital'funds,;
                                           surplus or undivided profits. The assessor
                                           or ,the~board of equalization may, of~course,
                                           In exercising their expert 'adminlstratfve
                                           Judgment, conclude that an amount In excess~
                                           of' that    necessary to meet these liabllltles
                                           has b&en set eside. Any such excess should,
                                           of course, be treated as surplus or undivided ,~
                                           QlVfltS.
                                                "It Is believed that the ratlonallsatlon -
                                           suggested in this opinion will serve to dlstin-
                                           gulsh It from Opinion No. O-4675 to which you
                                           Invited the attent.ionof this department. That
                                           opinion involved a fund set up for contingen-
                                           cies rather than accrued 1iabllSties and ~the
                                           holding was that such fund was 'one of the
                                           factors to be taken into, consideration by the
                                           board of equalization in fixing the value of
                                           the stock for tax purposes. I”




                                                              -2440~,
Mr. E. P. Slater, Page 3   (C-&9)

We .think the "Reserve for Bond Depletion" constitutes a~"Reserve
for Contingencies" within the scope of the holding of Attorney
General Opinion No. O-4675.                                    4
       Attorney General Opinion No. Ww-935 (1960) speclflcally'
held that the “Reserve for & Id Debts" set up 'by a National
Bank pursuant to Federal rulings may not be deducted In arrlv-
ing at the value of the shareh61deris shares for State and
County ad valorem tax purposes. A copy of Opinion No. WW-935
Is attached hereto.
        You are, therefore, advised that these two Reserves are
neither assessable nor taxable to the Bank, but that as personal
property they constitute a part of the assets of the Bsnk and
would be one of the factors to be taken Into consideration by
the assessor  or the board of equallsatlon in fixing the value
of the shares o? bank stock for ad valorem tsx purposes.

                       SUMMARY

                The "Reserve for Bad Debts" and the "Reserve
          for Bond Depletion" are neither assessable nbr
          taxable to the First Lockhart National Bank of -
          ‘Lockhart,Texas. As personal property they COQ-
          stltute part of the assets of the bank and should
          be taken into consideration by the Tax.Assessor-
          Colleotor In determining the value of the shsres~
          o? bank stock for ad valorem tax purposes.
                                 Your0 .very truly,
                                 WAOOONER CARR
                                 Attorney General of Texas



MMP/fb
AP&NED:
OPINION COMMITTEg
W. V. Oeppert, Chairman
$;sp$    Taylor                                                ;
                                                               l

Brandon Bickett
John Pettlt       .
APPROVED FOR TRE ATIy)RNRYQERERAL
BY: T. B. Wright



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