Case Information
*1 THE ATFORNEY GENERAL OF-TEXAS
The Honorable Robert S. Calvert Opinion No. H- 65 Comptroller of Public Accounts
State Finance Building Re: Whether certain notes Austin, Texas 78711 of the Harlingen National
Bank, which have a de- finite maturity date and a fixed interest rate, should be considered a part of the bank’s capi- tal and as such, be sub- ject to an ad valorem Dear Mr. Calvert: tax levy?
Your request
for our opinion states that on October 10, 1972, the Harlingen National Bank issued 7 and 172 ‘% Subordinated Capital Notes to mature on October 10, 1982, with interest payable semi-annually. Your letter states that the U.S. Comptroller of the Currency considers the issue to be part of the capital structure of the bank. You ask our opinion as to whether these notes should be considered a part of the bank’s capital and as such to be subject to an ad vdorem levy.
Articles 7165 and 7166 govern the taxation of banks and the shares of stockho1der.s. Neither calls for the bank to render its capital for taxa- tion. However, shareholders of banks are required to render, at actual value, all shares of stock in the bank owned by them. “Each share in such bank shall be taxed only for the difference between its actual cash value and the proportionate amount per share in which its real estate is assessed. ” (Article 7166)
In Rosenburg v. Weekes, 4 S. W. 899 (1887), the Texas Supreme Court stated: “The value of a bank share depends upon the value of its franchise, capital, and property of all kinds less the amount of its debts. ”
p. 280
The Honorable Robert S. Calvert, page 2 (H-65)
Despite its name, a subordinated capital note of a bank clearly is It is evidence of an indebtedness. not a part of its capital. The desig- nation as capital notes, in all probability, arose from a long-standing tendency in the financial community to refer to concentrations of money as capital whether owned or not. Debt generally is recognized to be a less expensive method of funding a bank or business than is capital or equity. Capital notes are evidence of a debt, and not of capital itself.
In arriving at a determination of the fair cash market value of a bank’s shares for the purpose of rendition by the shareholders, the note described should be treated as an indebtedness and not as part of capital.
SUMMARY Subordinated Capital Notes of banks issued for a loan to the bank are not to be considered as part of the bank’s capital for the purpose of determining the value of its shares. Instead they should be treated as an indebtedness of the bank.
Very truly yours, JOHN L. HILL Attorney General of Texas APPROkED: _~
&z _
DAVID M. KENDALL, Chairman
Opinion Committee
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