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FEDERAL RESERVE BOARD WASHINGTON November SUBJECT: 6, 1922. St. 3146. Closing of Books on December 31, 1922. Dear Sir: On. June 29, 1922, the .Joard advised you in ~ ts letter X-}462 of an opinion of Counsel wherein it was held that the practice of the Federal reserve banks of setting up two surplus accounts wa.s not authorized by the Federal Reserve Act, and that when the total surplus of a. bank equals or exceeds its eu.bacribed capital, 90 per cent of net earnings, after the payment of dividends, JW.st be pa.~d to the United States as a franchise tax. In accordance with this opinion, you were advised in the Board's letter X-3492 of ~u~t l, 1922, a. 'COPY of which is enclosed .herewith, that those banks Which transf~rred ~unts to ·super-surplus account on December 31, 1920, should recalculate the amount of franchise taxes payable to the Government and the amount transferrable to surplus account. In this same letter the Board also stated the general principles by which it would be boverned in the future in autb:::>rizin~ depreciation charc;;es on bank premises. . In order that the Board m9if have ample time to pass upon all proposed charges against curre:'lt earnings in connection with deprecia.t~n allowances or reserves to take care of probable losses, it is' requested that the di:vidend. resolution of your Board of Directors, together with your l;'equest for authority to close the books on December 31, 1922, and to make certain chare;es a.;:;a.inst current earnine;s on account of depreciation and for other extraordinary purposes, be mailed in time to reach the Board'a offices not later than December l, 1922. The dividend resolution should be accompanied with statements showing 'the following information: ~ Estimated gross 2. Unpaid indebtedness of closed banks to Fe,deral reserve bank, · givil'lg the ~es of banks, inde'btedness;.ef each, character of security, if any, and estUnated losses. 3. Indebtedness to Federal reserve bank of membdr banks which are co~nsidered. to be in a.n unsafe condition, giving the names of the banks, indebtedness of each. character of securi cy, if a:rq, and probable lo s.se s. net earni~s 1. for the calendar year lSI22. • l ..'·· . ; - 2 . St.3146. The following rules have been approved by the Federal Reserve Board for the guidance of the Federal reserve banks in submitting requests for permission to make special charges ~ainst current ne.t earnings and in closing their bocks on December 31, 1922: 1. Land~buildin.;s (including VruJlts and vault equipmerri2.,.,_~ fixed machinery and equipment. Requests for permission to charge current earnings with depreciation allowances on lar:d or buildings (including vaults and vault equipment). s:b.ould be submitted in the form outlined in the Board's letter X-3492 of .Au6ust 1, 19-2, ani should be accorq;>anied with a complete stat·ement of the facts and conditions considered by the Board of Directors in arriving at its recom>1endations. With regard to fixed machinery and equipment, it is requested that each class of machinery and equipment be listed separately, and that the rate of depreciation and the amount of reserve which t}le bank proposes to set up be shown separately for each class. 2. . Furniture and equiJ2L1cnt. The balance remaln~ng in this account on December 31st .should be charged to profit and loss •. J. ~ent depreciation on United States securities ... Full provision should be made for apparent depreciation (based on mar·ket value) on United States securities before any amount i& transferred to surplus acr~unt. In case the present reserve for apparent depreciation is· in excess of :the actual depreciation as determined by market quotations as of December .29, which the Joard will tel~ 6 raph to your bank on the mornirJb of December )0, such excess should be credited to profit and loss~ 4. Surplus and franchise taxes. After the surplus account has been charged with franchise taxes pcyable to the Government for prior years, in accordance with the Board 1 s letter X-3492 of Au6 ust l, 1~22, and after ·all. current expenses, dividends, depreciation allowances and other extraordinary charge-offs authorized by the Federal Reserve Boct'd. have been provided for out of earnings the remaining net earnin....,s shall be dis.;. tributed as follows: · (a) Transfer to surplus account all availabl0 net earni%S providin6 t:1e to:tal surplus will not as a result exceed the .. bank's subscribed capital, in which case only such ~~unt should be transferred as is necessary to increase the surplus account to an arr.ount equal to t::te bank 1 s subscribed capital. \ j'l\ ' , j - 3- St.}l4o. (b) Of the balance of net earnin6s, if a~, 10 per cent should be tr~sferred to surplus account, and 90 per cent paid to the U. S. Governme~t as a francnise tax. FUrther instructions as to the time and method of payment of the franchise tax. due for former years, whic:l will be charged to surplus account, and for the current y;:;ar will 'Je issued at a later date. Very truly yours, Vice Governor. ' Enclosure. \ (Letter to all L Chairrr~n) r - .
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