Opinion ID: 1835354
Heading Depth: 1
Heading Rank: 3

Heading: to what extent may the earned surplus of the parent bank and all its branches be excluded from calculation of the valuation constant used in determining the branches' intangible value?

Text: It will be recalled from the foregoing discussion that the valuation constant is that figure to which the ratio or percentage is applied to determine the intangible value of the parent's branches. Under the State Tax Commission and Calhoun County formulas, the valuation constant is the assessed capital of the parent bank and all its branches as determined from Tax Commission Form 71-068. Under the adapted multistate corporation formula, the valuation constant is the stated capital and undivided profits of the parent and all its branches, excluding the value of all real and personal property owned by the parent and all its branches. The purpose of the valuation constant in each of these three formulas is to approximate, for purposes of the § 27-35-37 intangibles tax, the net worth of the parent and all its branches. That portion of the capital of the parent and its branches carried on the combined balance sheet as earned surplus is excluded from the valuation constant pursuant to Miss. Code Ann. § 27-35-35 (Supp. 1982), which provides in pertinent part: From the net worth of the bank thus determined, there shall be deducted the amount of capital invested in real estate owned by the bank, as shown by its books, the par value of preferred stock and debentures owned by the reconstruction finance corporation or other similar government agencies, and earned surplus to the extent authorized by section 81-3-11, Mississippi Code of 1972, and the remainder shall be the basis of the assessment of the intangibles of the bank or of the capital or the owner thereof in case the bank be not a corporation or joint stock company. (Emphasis added.) Miss. Code Ann. § 81-3-11 (1972) governs the amount of capital reserves required for banks. That section provides in pertinent part: (2) For the purpose of strengthening its capital structure, every banking corporation organized under the laws of this state shall, except as otherwise provided herein, at the close of business each year set aside to the credit of a separate surplus account, to be denominated on its books Earned Surplus, an amount not less than twenty-five per cent (25%) of its net earnings, after providing for the payment of dividends on its preferred stock, if any, until equal to three (3) times the total of its common and preferred stock. However, any bank having at the close of the business year a ratio of total deposits to total capital, surplus and earned surplus not in excess of a ratio of ten dollars ($10.00) of deposits to one dollar ($1.00) of total capital (such deposits to be the average of the deposits shown by all of the calls for the business year and such capital to include all stock, surplus and earned surplus) shall be required to set aside twenty-five per cent (25%) of its earnings only to the extent necessary to cause its Earned Surplus account to equal its total capital. When such ratio of total deposits to total capital of any bank at the close of business of any year does not exceed that specified above and the Earned Surplus account is equal to or more than the amount of its total capital, then such bank shall not be required to set aside twenty-five per cent (25%) of its earnings for that year to the credit of its Earned Surplus account, but may so set aside any part of its earnings until its Earned Surplus account is equal to three (3) times its total capital. The net earnings of every bank set aside to its Earned Surplus account shall be exempt from all state, county, municipal, levee district and other ad valorem taxes. (Emphasis added.) Because § 27-35-35 provides for deduction of earned surplus to the extent authorized by § 81-3-11, and because § 81-3-11 authorizes reservation of earned surplus until the reservation equals three times the total capital, appellant insists that reservation is limited to a maximum of three times the capital. In the case at bar, appellee's preferred and common stock capital was $6,702,980, and its earned surplus reserves totalled $35,897,020, i.e., nearly five and one-half times the capital. If appellant's construction of the statutes is accepted, then the maximum amount appellee could carry as earned surplus would be $20,108,940. Thus, an additional $15,788,080 in capital would be subject to taxation, and the amount of appellee's taxable capital would be increased by some 46%. Appellee counters that these statutory provisions do not prescribe a maximum amount attributable to earned surplus but instead that an amount three times the capital is the minimum which must be reserved under § 81-3-11. When the predecessor of § 81-3-11 was enacted in 1934, there was no question as to the amount of earned surplus which was exempt from taxes. The original statute provided that [t]he earnings of every bank required to be set aside to surplus under the provisions of this section shall be exempt from all state, county, municipal, levee district and other ad valorem taxes, up to an amount not exceeding one hundred per cent of its capital as herein defined. Miss. Laws 1934, ch. 146, § 7(b) (emphasis added). (The statute required a reservation of one hundred percent of capital as opposed to the three hundred percent requirement of § 81-3-11.) This clause limiting tax exemption was deleted from the statute in 1944, and each subsequent amendment, up to and including the present version of the statute, is silent regarding the limit of tax exemption for capital designated as earned surplus. Miss. Laws 1944, ch. 254; Miss. Laws 1948, ch. 204; Miss. Laws 1966, ch. 241; Miss. Laws 1968, ch. 256; Miss. Code Ann. § 81-3-11 (1972). Section 27-35-35 authorizes deduction from taxable capital that amount of earned surplus to the extent authorized by § 81-3-11. The first such to the extent cross-reference is found in Miss. Laws 1944, ch. 259, where exclusion is allowed to the extent authorized by section 7-b, chapter 146, laws of 1934, as amended... . But the same 1944 Legislature amended Miss. Laws 1934, ch. 146, § 7(b) so that the specific exclusion previously recited (an amount not exceeding one hundred per cent of its capital) was deleted. In accordance with the stated purpose of strengthening the capital structure of banking institutions, § 81-3-11 requires all banking corporations to maintain a fixed minimum amount in an earned surplus account. The section requires generally that every bank set aside an amount equal to 25% of its net earnings in this earned surplus account until the earned surplus account is equal to three times the total value of common and preferred stock. However, for banks which have a ratio of deposits to total capital, surplus and earned surplus which does not exceed $10.00 of deposits to $1.00 of total capital, the requirement is that the bank set aside 25% of its earnings only to the extent necessary to cause the earned surplus to equal its total capital. Where the ratio of deposits to capital does not exceed $10.00 deposits to $1.00 in capital and where the earned surplus is equal to or greater than the total capital, the bank is not required to set aside the 25% to the credit of earned surplus. In the latter instance the statute provides that the bank is not required to set aside any funds to earned surplus, but may so set aside any part of its earnings until its `Earned Surplus' account is equal to three (3) times its total capital. Miss. Code Ann. § 81-3-11(2) (1972). The legislative intent appears clear. Generally, a bank is required to build and carry an earned surplus account in an amount which is three times the value of its issued stock. (3:1) Under certain conditions, this requirement is reduced so that the bank only has to build and carry an earned surplus account which is equal to the value of its issued stock (1:1), but may build and carry an earned surplus of an amount three times the value of its issued stock (3:1). In the latter case, the 3 to 1 ratio appears to definitely create an upper limit on the amount which can be carried as earned surplus or at least to limit the amount of earned surplus which can be deducted from taxes due under Mississippi Code Annotated § 27-35-35 (1972). That section provides that when calculating its net worth for the purpose of paying ad valorem taxes, the bank may deduct from net worth the earned surplus to the extent authorized by section 81-3-11 (1972). Section 27-35-35 appears to be clear that earned surplus is not deductible in any amount which the bank may choose but is deductible only to an extent specified in § 81-3-11. Taken together with the language of § 27-35-35, the language of § 81-3-11 provides a clear upper limit on the amount of earned surplus which may be deducted from net worth for ad valorem tax purposes. We are of the opinion that from a policy standpoint, the legislature logically and reasonably, probably wished to provide a tax break only to the extent of the requirements it makes of banks for strong and safe operations.