Case Information
*1 ._. ,- .
: THE ATTORNEY GENERAL
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0F TEXAS 76711 Amrn~.TscxAn JOHN L ElI.L A-aIN- o-
July 11, 1973 Honorable Robert S. Calvcrt Opinion No. H-62 Comptroller of Public Accountr
State of Texas Rc: Whether reserve for Auetin. Texrr relining furnace ir to
be included as part of rurplur of corporate taxpayer in computing Dear Mr. Calvert: franchire tax.
The quertion here prerented ir whether a for relining account furnacer ured in the steel production procerr ir to be included l e part of the of the corporate taxpayer in computing the Texan Franchise Tax “aurplua” V. T. C. S. The firebrick under Article 12.01, Title 122A, TaxationzGenerrl, used to line the furnaces progrernively deteriorates with uee necessitating a relining of the furnacea approximately every five years and the reserve The cost ir ured to provide the fundr necessary for thir purpose. of thefirebrickliningof the furnace is reflected on the corporate books value 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, and undivided surplus, 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 commercial sense, it usually applies to accepted funds remaining on hand after fixed charges or lia- bilitiee have been deducted. As applied to corpora- tione, it has been held to be the value of all the cor- poration’s assets after its liabilities, including its capital stock, have been deducted. Willcutr v. Milton p.
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 lan- in Edward6 v. Douglar, 269 U.S. 205, 46 S. gurge 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 such as earned surplus, sur- carried on the books, plur from appreciation of assets, contributed surplus, capital or paid in surplus and ‘reduction surplus’ *3 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 account performr the same function as a depre- ciation account and, in our opinion, it likewine should be allowed as a deduc- tion from “8urpIur. ” Such a deduction r.eflectr the lore in value of the fire- brick 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 performs this function. We 81~0 s.ssume that the amount in the reserve account is a reflection of the depreciated value of the firebrick lining. true
Honorable Robert S. Culvert, page 4 (H-62)
In City of Columbur v. Public Utilitier Commirrion, 93 N. E. 2d (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 of operation, over a period of time repre- expeme oenting 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 for firebrick relining of furnaces used in steel production that must be per- formed 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 com- puting the Texas Franchise Tax. This conclurion this reserve account is the only deprecia- aaaumea tion 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 *5 ;‘. :‘- . page 5 (H-62)
b Honorable Robert S. Calvert,
APPROVED:
Opinion Committee
p.