._.
,- .
:
-.
THE ATTORNEY GENERAL
0F TEXAS
Amrn~.TscxAn 76711
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 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 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. 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 lan-
gurge 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, sur-
plur 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 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 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 repre-
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 reserve account 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
aaaumea this reserve account is the only deprecia-
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
p. 267
;‘. . :‘-
b Honorable Robert S. Calvert, page 5 (H-62)
APPROVED:
Opinion Committee
p. 268