._. 

,- . 

: 

-. 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 to be included l e part of the 

“aurplua” of the 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 to the 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 80 ured is not defined. 

“The Legislature did~not undertake to define 

what is meant by the term ‘surplus. ’ In a generally 

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. 264 
Honorable 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 the following langurge in Edward6 v. Douglar, 269 U.S. 205, 46 S. 

Ct. 85, 88, 70 L. Ed. 235; ‘The word “rurplur” ia 

a term commonly employed in corporate finance 

and accounting to designate an account on corporate 

bookr. But thir is not true of the 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 

a price 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 a revaluation of the company’r fixed 

property. ‘I. United North and South Development 

Co. v. Heath, 78 S. W. 2d 650 (Tex. Civ.App., 

Auetin, 1934, error ref.) (emphasis added) 

Section (12) of Article 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. 9 of 1961, amended 

June 1965, and filed with the Secretary of State in June, 1965, states: 

“Surplus, ae defined in Article 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. 265 
Honorable Robert S. Cdvert. page 3 (H-621 

created by or arising out of a reduction of etated 

capital by any of the methoda authorized by the 

above Act. It will aleo include all rurplur rererver 

no actual accrued liabilities. . , . ” (emphrrir added) 

Thie reprerentr the administrative conrtruction of the term “rurplur” 

aa ured in Article 12.01. 

Net arretr are defined as the amount by which the total assets of a 

corporation exceed the .total debts of the corporation. Art. 1.02 (10). 

Burineie Corporation Act. 

In Huey & Philp Hardware Co. v. Sheppcrd, 251 S. W. 2d 515 (Tcx. 

1952), a reserve for bad debts wae allowed as a deduction to reflect the 

decrease in net rraet value. On the 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,nd see Fulghrm v. Gulf, C. &S. F. Ry.Co., 

288 S. W. 2d 811 (Ter. Civ,App., Austin, 1956, error ref., n. r. e.). 

In order to arrive 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 of the 

furnacer deteriorate0 through its use over a five 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 of the 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 81~0 s.ssume that the amount in the reserve account is a 

true reflection of the depreciated value of the firebrick lining. 

p. 266 
Honorable 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 a fund ir 

built up from annual contributionr, a~ an item of 

expeme of operation, over a period of time 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 of the 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 of the firebrick lining is 

a~depreciation account that may be deducted from 

“surplus, ‘I as that term is used in Article 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. 268