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X-7714 INTERPRETATION OF BANKING- ACT OF 1933 (Copies to be sent to a l l Federal Reserve Banks) December 9, 1933, Dear Mr. This i s i n reply to your l e t t e r of November 8, 1933, with enclosures, i n which you request' a ruling upon the question whether the absorption by member banks of the Federal Reserve System of the tax imposed upon bank deposits by the laws of Indiana i s i n v i o l a t i o n of the provision of Section 19 of the Federal Reserve Act which f o r bids a member bank to pay i n t e r e s t , d i r e c t l y or i n d i r e c t l y by any device whatsoever, on any deposit "hich i s payable on demand. Under the Indiana Intangibles Tax Acts, a copy of which was inclosed with your l e t t e r , i t appears that the deposits of every bank in Indiana are assessed to the respective owners thereof and taxed at the rate of 25^ per annuo* upon each $100 or f r a c t i o n a l part thereof and that such taxes are computed according to the amounts on deposit i n such banks on the l a s t day of each month i n each year. Each bank, at i t s e l e c t i o n , may pay the taxes assessed against i t s depositors or, i f i t e l e c t s not to pay such taxes, i s required to deduct the amount thereof from the deposits against which such taxes are assessed or from i n t e r e s t thereon and to pay the amount so deducted to the county treasurer. I t i s understood that such taxes represent a c e r t a i n per- X-7714 4.71 ____________________ — 2 centage of the funds on deposit on the l a s t day of each month and have no r e l a t i o n either to the average amount on deposit for any given period of time or to the length of time for which the "bank has the use of the money. After consideration of the matter, the Federal Reserve Board i s of the opinion that the absorption "by member banks bf the Indiana tax on deposits as an operating expense of each "bank does not, i n i t s e l f and i n the absence of special factors in particular cases which might indicate the contrary, c o n s t i t u t e a payment of i n t e r e s t "by such tanks and i s not i n c o n s i s t e n t with that provision of Section 19 of the Federal Reserve Act which forbids any member "bank, d i r e c t l y or i n d i r e c t l y "by any device whatsoever, to pay any i n t e r e s t on any deposit which ispayable on demand. The Board i s also of the opinion that the amount of such taxes so absorbed need not "be taken i n t o consideration i n determining whether member "banks are paying i n t e r e s t on time dep o s i t s at a rate i n excess of the limitations prescribed "by the Federal Reserve Board pursuant to that provision of Section 19 of the Federal Reserve Act which requires the Board from time to time to limit "by regulation the r a t e of i n t e r e s t which may "be paid "by member banks on time d e p o s i t s . Very truly yours, (Signed) Chester Morrill Chester Morrill, Secretary.