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FEDERAL RESERVE BOARD WASHINGTON X-3462 June 29, 19224 SUBJECT} Calculation of Franchise Taxes as Affected "by Surplus and Super-surplus. Dear Sir: At the end of the year 1921 each of the Federal Reserve Banks except the Federal Reserve Bank of Dallas had accumulated a normal surplus fund equal to 100$ of subscribed capital, and in addition had established a super-surplus fund representing the amount of surplus in excess of 100$ of subscribed capital* The question has been raised as to the effect of maintaining these two separate surplus funds/known as normal surplus and slipersurplus respectively, in calculating the annual franchise taxes to be paid by the Federal Reserve Banks to the United States. For your information there is enclosed, herewith a copy of an opinion of the Board's Counsel, dated June 5,1922, with reference to this question. This opinion has been approved by the Federal Reserve Board and the Board will require the Federal Reserve Banks to calculate their annual franchise taxes in the manner therein indicated. If, therefore, the aggregate amount of the normal surplus and super-surplus of a Federal Reserve Bank is not less than 100$ of the subscribed capital of the bank at the end of the year 1922, the Bank will be required to pay to the United States as a franchise tax for the year 1922 , 90$ of the current earnings for the yaar after the deduction of expenses, dividends and proper charges for reserves, depreciation and losses This method of calculating franchise taxes is not entirely in accord with the practice in former years, as will be seen by reference to the Board's circular letter of December 8, 1921, (St. 2467) with regard to the closing of the books of the Federal Reserve Banks on December )1, 1921. She practice in former years has been for Federal Reserve Banks, in calculating franchise taxes, to deduct from their net earnings whatever ^ amount was necessary to bring their normal surplus up to 100$ of subscribed capital, without reference to the amount of their super-surplus fund. After giving the matter careful consideration the Board has concluded that this past practice is not - 2 - X-3462 authorized, u n d e r the terms of the l a w , and the F e d e r a l R e s e r v e B a n k s w i l l , t h e r e f o r e , at t h e t i m e t h e y p a y t h e i r f r a n c h i s e t a x e s f o r t h e y e a r 1 9 2 2 b e r e q u i r e d to m a k e p r o p e r a d j u s t m e n t w i t h the T r e a s u r y o n a c c o u n t o f f r a n c h i s e t a x e s f o r f o r m e r y e a r s . Detailed instructions will "be forwarded in due course. Yours very truly, G o v e r n o r . (Enclosure) TO GOVERNORS OF AIL F. R. BANKS COPIES TO CHAIRMEN. COPY X-3462a Federal Reserve Board. June 5, 1922', Walter S. L o g a n , General Counsel Surplus of Federal Reserve Banks. The second paragraph of Governor Strong1s letter of M a y 26th r a i s e s the q u e s t i o n w h e t h e r , w h e n the subscribed capital of a Fede r a l R e s e r v e B a n k i s i n c r e a s e d d u r i n g t h e y e a r , 'the Bank1s n o r m a l s u r p l u s s h o u l d b e i n c r e a s e d to lOOfo o f t h e i n c r e a s e d s u b s c r i b e d c a p i t a l b y a transfer f r o m the super-surplus fund or b y setting a s i d e a p a r t o f c u r r e n t e a r n i n g s . At t h e e n d o f 1 9 2 1 t h e F e d e r a l R e s e r v e B a n k of N e w Y o r k h a d , out of its past e a r n i n g s , a c c u m u l a t e d a n o r m a l s u r p l u s f u n d e q u a l t o 100/o o f s u b s c r i b e d c a p i t a l a n d h a d a l s o created a super-surplus fund. D u r i n g the year 1 9 2 2 the subs c r i b e d c a p i t a l o f the B a n k w i l l b e i n c r e a s e d b y i n c r e a s e s in the c a p i t a l of m e m b e r b a n k s and b y additional b a n k s b e c o m i n g m e m b e r s . T h e q u e s t i o n w h i c h G o v e r n o r S t r o n g r a i s e s is w h e t h e r t h e n o r m a l s u r p l u s o f t h e F e d e r a l R e s e r v e B a n k s h o u l d b e i n c r e a s e d to 1 0 0 ^ o f the s u b s c r i b e d c a p i t a l a t the e n d o f 1 9 2 2 , b y a t r a n s f e r f r o m s u p e r - s u r p l u s t o s u r p l u s o r b y c a r r y i n g a part, o f the e a r n i n g s f o r the y e a r 1 9 2 2 to n o r m a l s u r p l u s b e f o r e a n y f r a n c h i s e t a x is p a i d to t h e U n i t e d S t a t e s . S e c t i o n 7 of the F e d e r a l R e s e r v e A c t r e f e r s t o " a s u r p l u s fund" and "the surplus". The l a w contemplates that there will b e but a single surplus fund for each F e d e r a l R e s e r v e B a n k , a n d the d i v i s i o n of the s u r p l u s into two s e p a r a t e f u n d s k n o w n as "normal s u r p l u s " a n d " s u p e r - s u r p l u s " r e s p e c t i v e l y is a m e r e b o o k k e e p i n g o p e r a t i o n w h i c h s h o u l d n o t e f f e c t t h e a m o u n t o f the f r a n c h i s e t a x to b e p a i d to the G o v e r n m e n t . W h e n , t h e r e f o r e , n o r m a l surplus plus super surplus equals or exceeds subscribed capital, S O o f current e a r n i n g s , a f t e r t h e p a y m e n t o f e x p e n s e s a n d d i v i d e n d s , mast b e p a i d to t h e U n i t e d S t a t e s a s f r a n c h i s e t a x , a n d o n l y 10 c p o f s u c h c u r r e n t e a r n i n g s c a n b e c a r r i e d to s u r p l r s . I a m of the o p i n i o n , t h e r e f o r e , that a t t h e e n d o f the y e a r 1 9 2 2 a t r a n s f e r s h o u l d b a aude from t h e s u p e r - s u r p l u s t o n o r m a l s u r p l u s o f a n a m o u n t e q u a l to the a m o u n t b y w h i c h t h e s u b s c r i b e d c a p i t a l o f t h e F e d e r a l R e s e r v e Bank h a s b e e n i n c r e a s e d d u r i n g t h e y e a r , and that i f t h e s u m o f t h e n o r m a l s u r p l u s a n d t h e s u p e r - s u r p l u s is n o t l e s s t h a n t h e s u b s c r i b e d c a p i t a l at that time n o n e o f the c u r r e n t e a r n i n g s of the b a n k s h o u l d b e c a r r i e d to n o r m a l s u r p l u s and o n l y 1 0 $ o f t h e c u r r e n t e a r n i n g s a f t e r t h e p a y m e n t o f e x p e n s e s and d i v i d e n d s s h o u l d b e c a r r i e d to s u p e r - s u r p l u s . Respectfully, (Signed) W a l t e r S. L o g a n , General Counsel WSL 0>MC
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