05-165 | Virginia Tax

Tax Type

Bank Franchise Tax

Description

"Total equity capital" as reported on the Call Report of a bank will adjusted

Topic

Assessment

Date Issued

12-05-2005

December 5, 2005

Re: § 58.1-1821 Application: Bank Franchise Tax

Dear *****:

This is in response to your letter in which you seek correction of the Bank Franchise Tax ("BFT") assessments issued to ***** (the "Taxpayer") for the 2001 through 2004 taxable years. I apologize for the delay in responding to your
appeal.

FACTS

The Department audited the BFT returns of the Taxpayer for the 2001 through 2003 taxable years. For the years at issue, including its 2004 assessment, the Department adjusted the Taxpayer's total equity capital as reported on Line 1 of its BFT return to match "total equity capital" as reflected on its Report of Condition and Income (the "Call Report"). Under current Department policy, pursuant to Tax Bulletin 95-1 (2/15/1995), "total equity capital" as reported on the Call Report is the starting point for calculating the BFT.

The Taxpayer contests the assessments, asserting "total equity capital" on the Call Report includes amounts that are not included in taxable "net capital" as defined in Va. Code § 58.1-1205. According to the Taxpayer, "total equity capital" on the Call Report during the years in question included "accumulated other comprehensive income" which, on the Taxpayer's Call Report, is primarily composed of unrealized gains on available-for-sale securities. Because such unrealized gains are not included in the definition of gross capital that serves as the starting point in determining net capital, the Taxpayer believes the Department's assessments are incorrect.

DETERMINATION

Definition of Net Capital

The BFT is imposed on the net capital of a bank. Pursuant to Va. Code § 58.1-1205:

- The net capital of any bank shall be ascertained by adding together its capital, surplus, undivided profits, and one half of any reserve for loan losses net of applicable deferred tax to obtain gross capital and deducting therefrom (i) the assessed value of real estate as provided in § 58.1-1206, (ii) the book value of tangible personal property under § 58.11206, (iii) the pro rata share of government obligations as set forth in § 58.1-1206, (iv) the capital accounts of any bank subsidiaries under § 58.1-1206, (v) the amount of any reserve for marketable securities valuation which is included in capital, surplus and undivided profits as defined herein above to the extent that such reserve reflects the difference between the book value and the market value of such marketable securities on December 31 next preceding the date for filing the bank's return under § 58.1-1207, and (vi) the value of goodwill described under subdivision A 5 of § 58.1-1206. [Emphasis added.]

Call Report

By regulation effective January 1, 1985, the Department officially adopted the use of the Call Report for reporting total equity capital (formerly referred to as "total capital accounts") on Line 1 of BFT Form 64. Title 23 of the Virginia Administrative Code ("VAC") 10-330-20, which was promulgated by the Department to interpret Va. Code § 58.1-1205, defines "gross capital" to mean "the total of capital stock, surplus, and undivided profits as regulated herein." Under the regulation, the gross capital of a bank is computed by adding the following accounts as reported on the Call Report: (1) preferred stock, (2) common stock, (3) surplus, (4) undivided profits and reserve for contingencies and other capital reserves.

Because Virginia relies on the Call Report for purposes of determining the basis of the BFT, changes to the rules governing the Call Report can affect Virginia BFT administration. In May 1993, the Financial Accounting Standards Board ("FASB") issued FASB Statement No. 115, ("Accounting for Certain Investments in Debt and Equity Securities"), which addressed accounting and reporting requirements for investments in marketable equity securities. Under the provisions of FASB Statement No. 115, the "total equity capital" reported on the Call Report now includes a separate item in its equity section for unrealized holding gains (losses) of marketable securities classified as "available for sale." Following the issuance of FASB Statement No. 115, "total equity capital" in the Call Report includes:

· Perpetual preferred stock and related surplus
· Common Stock
· Surplus (excluding all surplus related to preferred stock)
· Retained earnings
· Accumulated other comprehensive income (This includes net unrealized holding gains (losses) on available-for-sale securities.)¹
· Other equity capital components

Tax Bulletin 95-1 was issued in response to the issuance of FASB Statement No. 115 and corresponding changes to the rules governing the Call Report. Tax Bulletin 95-1 addressed both changes to the administration of the BFT necessitated by the rule changes and, more particularly, how the rule changes would affect the reporting of the valuation reserve for marketable securities and the valuation of obligations of the United States. Tax Bulletin 95-1 specifically states, "No adjustment is required or permitted on the Virginia return for unrealized gains and losses included pursuant to FAS13 Statement No. 115." The issue now before the Department is whether Tax Bulletin 95-1 accurately reflects the statutory definition of "net capital."

It is the Taxpayer's contention that unrealized gains on available-for-sale securities are not included in the statutory definition of "net capital" and, therefore, they cannot be included in the computation of a bank's capital subject to the BFT.

In Lawrence Carr, Jr. v. W.H. Forst, Tax Commissioner of the Commonwealth of Virginia, 249 Va. 66, 453 S.E.2d 274 (1995), the Virginia Supreme Court stated that if a statute is clear and unambiguous, a court must accept its plain meaning and not resort to extrinsic evidence or rules of construction. In this case, Va. Code § 58.1-1205 is clear and unambiguous in its definition of net capital, and that definition does not include unrealized gains or losses on available-for-sale securities.

CONCLUSION

After reviewing the history and the statute, it is my conclusion that Tax Bulletin 95-1 does not accurately interpret Va. Code § 58.1-1205 and Title 23 VAC 10-330-20 to the extent that it does not allow an adjustment for unrealized gain or loss on available for-sale securities. Hence, the "total equity capital" as reported on the Call Report of a bank will have to be adjusted for amounts reported as unrealized gains or losses on available-for-sale securities for purposes of reporting "total equity capital" on Line 1 of the BFT return.

Based on the foregoing, the adjustments to the Taxpayer's BFT returns for the 2001 through 2004 taxable years are erroneous. Accordingly, the assessments issued to the Taxpayer have been abated in full.

The Code of Virginia sections, regulations and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

^AR/51268H

¹ Available-for-sale securities are defined as those securities that a bank does not have a positive intent and ability to hold to maturity, but does not intend to trade as a part of its trading account. Under FASB Statement No. 115, any unrealized appreciation or depreciation of available securities will increase or decrease a bank's total equity capital although it will have not immediate affect on a bank's actual earnings.

Rulings of the Tax Commissioner