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| ## Comptroller of the Currency                                        |
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| > Administrator of National Banks                                     |
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Washington, DC 20219

##### Interpretive Letter #963

April 14, 2003 **May 2003**

##### 12 U.S.C. 548

##### 12 U.S.C. 52

Subject: Arkansas Franchise Tax and Par Value of National Bank Shares

Dear **\[ \]**:

This is in response to your letter inquiring whether 12 U.S.C. § 52
prohibits a national bank from decreasing the par value of its shares to
\$0.01 per share with an offsetting increase to the bank's "capital in
excess of par" account. For the reasons discussed below, we conclude
that section 52 does not prohibit a national bank from decreasing the
par value of its shares and increasing the bank's capital surplus. To
the extent that a national bank avails itself of these options, it may
affect its State tax obligations pursuant to the operation of 12 U.S.C.
§ 548.

#### 

#### I. Background

#### 

#### You have indicated that banks located in Arkansas are required to pay an annual franchise tax pursuant to the Arkansas Corporation Franchise Tax Act of 1979[^1] (the "Arkansas Franchise Tax Act"). For a bank with all its property located in Arkansas, the amount of the franchise tax is computed by multiplying the number of the bank's shares outstanding times the par value per share times 0.27%.[^2] The par value of a bank's shares thus significantly affects the amount of franchise tax payable. 

#### II. Discussion

The National Bank Act does not prohibit a national bank from having
shares with a par value of \$0.01.[^3] Section 52 provides that "\[t\]he
capital stock of each association shall be divided into shares of \$100
each, or into shares of such less amount as may be provided in the
articles of association." That provision thus establishes a maximum par
value per share for a national bank's shares, but does not establish any
minimum par value. Prior to December 27, 2000, 12 U.S.C. § 51 imposed on
national banks a minimum aggregate par value requirement ranging from
\$50,000 to \$200,000. Section 51 was repealed in the Financial
Regulatory Relief and Economic Efficiency Act of 2000 (the "2000
Act").[^4] The legislative history of the 2000 Act indicates that
Congress considered the section 51 minimum capital requirement obsolete
since Congress had granted the Federal banking agencies the regulatory
authority to establish minimum capital requirements in 1983.[^5] The
minimum capital requirements currently applicable to national banks
under this authority are set forth in Part 3 of the OCC's rules.[^6]

The OCC has previously determined that a national bank could decrease
the par value of its shares to \$0.01 per share, provided that the bank
continued to meet applicable capital requirements.[^7] Because the
National Bank Act no longer contains a minimum aggregate par value
requirement and because section 52 provides only for a maximum par value
of \$100 per share, a national bank may decrease the par value of its
shares to \$0.01 and transfer the amount resulting from that decrease to
capital surplus.[^8] In effecting the decrease in par value and increase
in capital surplus, a national bank would of course need to comply with
all other applicable legal requirements, including requirements for
procedures to amend its articles of association[^9] as well as
requirements for notifying the OCC.[^10] In this connection, the bank
must, of course, continue to comply with all applicable capital
requirements set forth in the OCC's Part 3. National banks also should
be cognizant that a reduction in par value may affect future directors'
qualifying share requirements under 12 U.S.C. § 72.[^11]

#### 

When a national bank decreases the par value of its shares, it may have
an effect on the bank's State tax liability if the relevant State taxes
its State banks, to any degree, based on the par value of those banks'
shares. This occurs because 12 U.S.C. § 548 provides that:

> For the purposes of any tax law enacted under authority of the United
> States or any State, a national bank shall be treated as a bank
> organized and existing under the laws of the State or other
> jurisdiction within which its principal office is located.

Without reaching the question of whether the Arkansas Franchise Tax is
the type of tax authorized by section 548,[^12] were such to be the
case, a national bank nevertheless may still take advantage of corporate
options available to it under federal law with regard to its corporate
or business configuration, such as setting the par value of its shares.
In certain States, that look to the par value of a bank's shares in
calculating a bank's tax obligations, taking advantage of such corporate
options may, pursuant to section 548, affect the national bank's tax
obligations.

I hope the foregoing is responsive to your inquiry.

Sincerely,

/s/ Julie L. Williams

Julie L. Williams

First Senior Deputy Comptroller and Chief Counsel

[^1]: Ark. Code Ann. §§ 26-54-101 *et seq.* (Michie 2001).

[^2]: The product of shares outstanding times par value per share may be
    considered the "tax base." The 0.27 percent may be considered the
    "tax rate."

[^3]: You have represented that it is legally permissible under Arkansas
    law for a State bank organized in Arkansas to have shares with a par
    value per share of \$0.01.

[^4]: Pub. L. No. 106-569, Title XII, § 1233(c), 114 Stat. 3037.

[^5]: 146 Cong. Rec. H11991 (daily ed. Dec. 5, 2000)(section-by-section
    analysis inserted into record by House bill sponsor, Rep. Leach);
    146 Cong. Rec. S11607 (daily ed. Dec. 5, 2000)(section-by-section
    analysis inserted into record by Senate bill sponsor, Sen. Allard).

[^6]: 12 C.F.R. § 3.1 *et seq*.

[^7]: *See* Interpretive Letter No. 275 ("IL 275"), *reprinted in*
    \[1983-1984 Transfer Binder\] Fed. Banking Law. Rep. (CCH) ¶ 85,439
    (October 21, 1983)(national bank could meet aggregate par value
    requirement with a combination of common and preferred shares).
    Subsequent to IL 275, the aggregate par value requirement was
    eliminated by the repeal of section 51. *See also* Letter from
    Anthony DosSantos, Licensing Manager, Northeastern District Office,
    OCC, to John H. Smith, Associate Counsel, Mellon Financial Corp.
    (March 3, 2003)(to be published)(bank converting from State to
    national bank charter may issue zero or no par common shares).

[^8]: The national bank would not be reducing its capital, but merely
    transferring amounts between two permanent capital accounts. Thus,
    12 U.S.C. § 59, which establishes procedures for a national bank to
    reduce its capital, would not apply. Except as provided in section
    59 and 12 C.F.R. § 5.46, a national bank may not withdraw, or permit
    to be withdrawn, by dividend or otherwise any portion of its
    permanent capital. Transferring amounts between the two permanent
    capital accounts will not affect the bank's obligations under
    12 U.S.C. § 56 (prohibition on withdrawal of capital) or 12 U.S.C. §
    60 (restrictions on dividends). *See* 12 C.F.R. § 5.63(a).

[^9]: The shareholders of a national bank must approve any amendment to
    the bank's articles of association to change the par value of the
    bank's capital stock. A certified copy of the amendment to the
    articles of association also must be forwarded to the OCC. *See* 12
    U.S.C. § 21a. A national bank with shares that are registered under
    section 12 of the Securities Exchange Act of 1934 must file proxy
    materials with the OCC pursuant to 12 C.F.R. Part 11.

[^10]: Changing the par value of a national bank's capital stock when
    the change is offset by an equal change in the bank's capital
    surplus does not require prior approval of the OCC. The change,
    however, does require notice to the OCC and does not become
    effective until the OCC certifies the change. *See* *Comptroller's
    Corporate Manual, Other Changes and Activities, Capital and
    Dividends* (April 1998).

[^11]: Under section 72, a national bank director must own a qualifying
    equity interest of \$1,000 in the stock of a national bank or its
    holding company. In an interpretive ruling, the OCC has stated that
    the qualifying equity interest may include common or preferred stock
    that has an aggregate par value of \$1,000, an aggregate
    shareholders' equity of \$1,000, or an aggregate fair market value
    of \$1,000. The value of the qualifying interest is determined as of
    the date purchased or the date on which an individual became a
    director, whichever value is greater. *See* 12 C.F.R. § 7.2005.

[^12]: *First Agricultural National Bank v. State Tax Comm'n*, 392 U.S.
    339, 341-46 (1968) (States may only tax national banks as
    specifically permitted by Congress). *See also, U.S. v. State Board
    of Equalization*, 639 F. 2d 458 (9^th^ Cir. 1980), *cert. denied*
    451 U.S. 1028 (1981) and *Michie on Banks and Banking*, Ch. 19, Sec.
    1 (1998).