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## THE ATTORNEY 

# GENERAL 0F TEXAS

JOHN L ElI.L Amrn~.TscxAn 

### 76711 A-aIN- oJuly 11, 1973

Honorable Robert S. Calvcrt Comptroller of Public Accountr State of Texas Auetin. Texrr

Dear Mr. Calvert: Opinion No. H-62 Rc: Whether reserve for

relining furnace ir to be included as part of rurplur of corporate taxpayer in computing franchire tax. The quertion here prerented ir whether a reserve account for relining furnacer ured in the steel production procerr ir tobe included lepart ofthe

“aurplua” ofthe corporate taxpayer in computing the Texan Franchise Tax under Article 12.01, Title 122A, TaxationzGenerrl, V.T. C.S. The firebrick used to line the furnaces progrernively deteriorates with uee necessitating a relining of the furnacea approximately every five years and the reserve account ir ured to provide the fundr necessary for thir purpose. The cost value of thefirebrickliningof the furnace is reflected on the corporate books aa a fixed~aaaet which contribute6 tothe ourplum of the corporation. Article 12.01 definer “taxable capital” upon which the franchire tax may be computed, aa including the stated capital, surplus, and undivided profite.

“Surplur” aa 80ured is not defined.

“The Legislature did~not undertake to define what is meant by the term ‘surplus. ’ Inagenerally accepted commercial sense, it usually applies to funds remaining on hand after fixed charges or liabilitiee have been deducted. As applied to corporatione, it has been held to be the value of all the corporation’s assets after its liabilities, including its capital stock, have been deducted. Willcutr v. Milton

p. 264Honorable Robert S. Culvert, page 2 (H-62)
Dairy Co., 275 U.S. 215, 40 S. Ct. 71, 72 L.Ed., 247. Judge Brandeia. diecunning the term aa used in the Federal Revenue Act, ured thefollowing langurge in Edward6 v. Douglar, 269 U.S. 205, 46S. Ct. 85, 88, 70 L.Ed. 235; ‘The word “rurplur” ia aterm commonly employed in corporate finance and accounting to designate an account on corporate bookr. But thir is not true ofthe wordr “undivided profits. ‘I’ The surplus account repreeentr the net areete of a corporation in excese of all liabiiities including its capital stock. This surplus may be
‘paid in surplus, ’ as where the stock in irrued at aprice above par; it may be ‘earned surplus,’ as where it was derived wholly from undistributed profits; or it may, among other things, represent the increase in valuation of land or other aareta made upon arevaluation ofthe company’r fixed property. ‘I. United North and South Development Co. v. Heath, 78S.W. 2d 650 (Tex. Civ.App., Auetin, 1934, error ref.) (emphasis added) Section (12) ofArticle 1.02, Texas Business Corporation Act, V.T. C.S., defines “Surplus” as:

”
. . . the excess of the net assets of a corporation over its state’d capital. ” (emphasis added) The Comptroller of Public Accounts in Ruling No. 9of 1961, amended June 1965, and filed with the Secretary of State inJune, 1965, states:

“Surplus, ae defined inArticle 1.02, Business Corporation Act, V.A. T.S., is ‘the excess of the net assets of a corporation over its stated capital. ’ Surplus, therefore, will include all surplus accounts carried on the books, such as earned surplus, surplur from appreciation of assets, contributed surplus, capital or paid in surplus and ‘reduction surplus’

p. 265Honorable Robert S. Cdvert. page 3 (H-621

created by or arising out ofa reduction of etated capital by any ofthe methoda authorized by the above Act. Itwill aleo include all rurplur rererver no actual accrued liabilities.
. , .” (emphrrir added) Thie reprerentr the administrative conrtruction of the term “rurplur” aa ured inArticle 12.01. Net arretr are defined as the amount by which the total assets of a corporation exceed the.total debts ofthe corporation. Art. 1.02 (10). Burineie Corporation Act. InHuey &Philp Hardware Co. v. Sheppcrd, 251S.W. 2d 515(Tcx. 1952), a reserve for bad debts wae allowed as a deduction to reflect the decrease in net rraet value. Onthe other hand, the Court of Civil Appeals in United North and South Development Co. v. Heath, auprr, held that a revaluetion.of oil properties upward to reflect their true value war a proper part of the corporation’s surplus. A,ndsee Fulghrm v. Gulf, C. &S.F.Ry.Co., 288 S.W. 2d 811(Ter. Civ,App., Austin, 1956, error ref., n.r.e.). Inorder toarrive at this net asset value, depreciation accounts have long been rllowed by the Comptroller of Public Accounts ae a deduction. Such accounts theoretically are used to replace depreciable assets at the end of their useful service life. Thir also is the purpose of the Reserve Acount for Relining Furnaces here involved. The firebrick lining ofthe furnacer deteriorate0 through its use over afive year period and must then be replaced. The reserve account performr the same function as a depreciation account and, in our opinion, it likewine should be allowed as a deduction from “8urpIur. ” Such a deduction r.eflectr the lore in value ofthe firebrick lining shown otherwise on the corporate books at its coot value. Of course, if any other depreciation ~&count exists regarding the value of this same rreet, a double deduction would result which is not allowed. Huey &Philp Hardware Co. v. Shepperd, supra. It is our understanding that no such other account exists, but that the reserve account performs this function. We 81~0s.ssume that the amount inthe reserve account is a true reflection ofthe depreciated value of the firebrick lining.

p. 266Honorable Robert S. Culvert, page 4 (H-62)

In City of Columbur v. Public Utilitier Commirrion, 93 N.E. 2d 693 (Ohio ISSO), a “depreciation reserve” was described as:

81

. . . an accounting technique whereby afund ir built up from annual contributionr, a~ an item of expeme of operation, over aperiod oftime repreoenting the service life of.
. . [an rrset]
. , . to offset and to equal in value the ultimate lose through use of the
. . . [asset]
. . . so that at the end of such service life the depreciation renerve fund will replace the property so worn out by the various factorr of depreciation.
. . .” (at p. 701) Here the reserve account for relining ofthe furnaces performs the same function and should be treated as a depreciation type account that may be deducted from “rurplua” as that term is ueed in Article 12.01; eupra. SUMMARY A reserve account for firebrick relining of furnaces used in steel production that must be performed approximately every five years, and which reflects the reduced value ofthe firebrick lining is a~depreciation account that may be deducted from
“surplus, ‘Ias that term is used inArticle 12.01, Title 122A, Taxation-General, V.T. C.S., in computing the Texas Franchise Tax. This conclurion aaaumea this reserve account is the only depreciation deduction taken on the capitalized coot value of the firebrick lining and that it correctly reflecte the depreciated value of such property lost through and by virtue of its use in the steel production process. -Very truly yourn, 

# u Attorney General of Texas

p. 267;‘
. :‘-

. b Honorable Robert S. Calvert, page 5 

### (H-62)

APPROVED:

Opinion Committee

p. 

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