Opinion
No. 29834
Decided April 19, 1944.
Taxation — Corporation franchise tax — Section 5498, General Code — Value of issued and outstanding shares of corporation for profit determined, how — Treasury shares not deductible from "capital," when — Stated capital reduced, how — Section 8623-39, General Code — Shares purchased by corporation not restored to status of unissued shares, when — "Treasury shares" defined — Section 8623-2, General Code — Statutes, and not accounting practices, considered in determining tax base.
1. For the purpose of determining (pursuant to Section 5498, General Code) the value of the issued and outstanding shares of stock of a domestic corporation for profit which has issued only par value stock, such corporation's "capital" is to be considered as an amount equal to the aggregate of the par value of the corporation's issued and outstanding shares.
2. Where such corporation acquires some of its own shares which are held as treasury shares, no part of the par value of such shares may be deducted from the "capital" to be determined under Section 5498, General Code. Section 8623-39 General Code, provides the method for reducing such corporation's stated capital.
3. The purchase by such corporation of its own shares which had been previously subscribed, issued and outstanding does not restore such shares to the status of unissued shares. Such shares continue to retain their character as subscribed, issued and outstanding shares.
4. The term "treasury shares" means shares issued and thereafter acquired by the corporation. (Section 8623-2, General Code.)
5. For the purpose of determining the base upon which to compute the franchise tax, consideration must be given to applicable statutes rather than to accounting practices not based upon such statutes.
6. The reference in Section 5498, General Code, to Section 5328-1, General Code, does not authorize the deduction from "capital" to be determined under Section 5498, General Code, of an amount equal to the par value, or any part thereof, of the corporation's treasury stock.
APPEAL from the Board of Tax Appeals.
Appellant, a domestic corporation for profit, transferred a portion of its assets and received in lieu thereof 325 shares of its outstanding 500 shares of capital stock. Later appellant reissued two of these shares. The 325 (323) shares were not cancelled but were carried as treasury shares. The par value of each of appellant's shares was $100. No claim is made in the record that the acquisition by appellant of its treasury shares contravened the provisions of Section 8623-41, General Code.
Section 5497, General Code, which prescribes the contents of the annual report to be made by a corporation requires the report to contain:
"7. The amount of its capital, surplus, whether earned or unearned, undivided profits and reserves, as shown by the books of the corporation. * * *"
Appellant made franchise tax reports for the years 1936 to 1941, inclusive, listing the value of its issued and outstanding shares of stock as follows:
1936 1937 1938 1939
Capital ..... $ 17,500.00 $ 17,700.00 $ 17,700.00 $ 17,700.00 Surplus ..... 117,162.91 116,520.78 Undivided Profits 111,809.57 117,177.63 ----------- ----------- ----------- ----------- $134,662.91 $129,509.57 $134,877.63 $134,220.78
1940 1941
Capital ..... $ 17,700.00 $ 17,700.00 Surplus ..... 115,768.92 110,657.60 Undivided Profits ----------- ----------- $133,468.92 $128,357.60
The Tax Commissioner upon audit determined the value of appellant's issued and outstanding shares of stock for those years, pursuant to Section 5498, General Code, as follows:
1936 1937 1938 1939 1940 1941
Capital .... $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000 Surplus .... 250,000 344,678 350,046 349,389 348,637 343,586 Undivided Profits .... 99,821 -------- -------- -------- -------- -------- -------- $399,821 $394,678 $400,046 $399,389 $398,637 $393,586
The difference between appellant's return and the Tax Commissioner's correction resulted from the fact that the Tax Commissioner considered the 325 (323) shares of treasury stock as still issued and outstanding.
As stated by appellant: "In the present case there are but two items to be considered, capital and surplus."
Section 5623, General Code, provides:
"The Tax Commission[er] of Ohio shall decide all questions that may arise with reference to the construction of any statute affecting the assessment, levy or collection of taxes, in accordance with the advice and opinion of the Attorney General. Such opinion and and the rules, regulations, orders, and instructions of the commission[er] prescribed and issued in conformity therewith shall be binding upon all officers, who shall observe such rules and regulations and obey such orders and instructions unless and until the same are reversed, annulled or modified by a court of competent jurisdiction."
Section 5500, General Code, provides in part as follows:
"Any corporation may be heard upon the question of the correctness of the determination of the value of its stock * * *."
A hearing was had and the following decision thereon was rendered by the Tax Commissioner:
"The application for review and correction of franchise tax assessment covering deficiency taxes for the years 1936 to 1941, inclusive, assessed against The North High Realty Company, Columbus, Ohio, came on to be considered pursuant to hearing upon application therefor having been duly filed.
"Upon consideration of such application and under authority of an Opinions of the Attorney General appearing in Opinions of the Attorney General for 1935, Vol. III, page 1548, such application is hereby denied."
Section 5611, General Code, provides in part:
"Appeals from final determinations by the Tax Commissioner of any * * * valuations * * * computations or orders made by him, may be taken to the Board of Tax Appeals by the taxpayer * * *."
Appellant appealed to the Board of Tax Appeals which affirmed the decision of the Tax Commissioner.
The appeal is here pursuant to Section 5611-2, General Code.
Messrs. Dunbar Dunbar, for appellant.
Mr. Thomas J. Herbert, attorney general, and Mr. Perry L. Graham, for appellee Tax Commissioner.
Appellant submits as its two main questions: (1) Do treasury shares of an Ohio corporation constitute an asset of — that is — property owned by the corporation? (2) If an Ohio corporation's own shares reacquired by it can constitute property owned by it, is the finding of the Board of Tax Appeals that the treasury shares of the appellant have a fair value of $100 per share sustained by the evidence?
We are of the opinion that a determination of neither of the foregoing questions would be decisive of the issue in this case. The question upon the record made, the answer to which would be determinative, is whether appellant's capital is, as originally claimed, $17,500 ($17,700), or as now admitted, $50,000. As no claim was made that the value of the assets as carried upon appellant's books exceeded the fair value thereof, that question is not before us. Section 5498, General Code, requires such claim for deduction to be made by the corporation at the time of filing its report. As appellant admits that its capital should be carried on its books at $50,000, that should end the matter. However, appellant still claims that it should be permitted to deduct the par value of the treasury shares from its surplus.
The position of appellant before the Board of Tax Appeals is made clear by the following testimony of its accountant:
"A. At April 30, 1930, the North High Realty Company had 500 shares outstanding. The outstanding shares were reduced as at April 30, 1930, by 323 shares of stock, of treasury stock reacquired when the $265,168.68 worth of assets were transferred to the new company. * * *
"Q. Now, what effect did that payment have on the net worth of the company, as of that date? * * *
"The witness: At April 30, 1930, the payment of the $265,168.68 was the amount paid for 323 shares of stock in the Ardmore-Broad Investment Corporation, and represented at April 30, 1930, a cost of $323,000 — of $265,168.68. In other words the net worth after — immediately after the formation of the new company, the net worth of The North High Realty Company remained identically the same. Then the 323 shares of Ardmore-Broad Investment Corporation now owned by the North High Realty Company were exchanged for 323 shares of the company's own stock, inasmuch as that represented the exact amount at book value of the assets, was transferred to the new company. Then the assets or net worth of the old North High Realty Company was the same less $265,168, which was the net worth of the new company, known as the Ardmore-Broad Investment Corporation."
The Board of Tax Appeals found:
"The board further finds that prior to 1930 the appellant had issued and outstanding, and fully paid, 500 shares of common stock of a par value of $100 each, or a total of $50,000; that in said year the appellant transferred $265,168.68 worth of assets to a new corporation known as the Ardmore-Broad Investment Company and received therefor 325 shares of stock in said new corporation; that thereafter the appellant exchanged said stock for 325 shares of its own stock and that at the times herein involved appellant held in its treasury in the year 1936 325 shares of its own stock and in the years 1937 to 1941 inclusive 323 shares of its own stock. The appellant in making its returns for the several years involved did not include its treasury stock in its issued and outstanding stock or in its assets. The Tax Commissioner in making the assessments herein for the respective years involved included said treasury stock as issued and outstanding stock. In determining the value of said issued and outstanding stock the Tax Commissioner included the treasury stock as an asset at par value and not at the cost of the [ sic] appellant of said stock."
We agree with the foregoing quotation except the last sentence. As we read the Tax Commissioner's correction sheets, what he did, and properly, was to consider the 500 shares of issued and outstanding stock as representing appellant's capital, to wit, $50,000. He then restored appellant's surplus to what it was immediately before the acquisition of the treasury shares. From this restored surplus he deducted the cost of the treasury shares less the par value thereof from the surplus and for the year ending December 31, 1935, arrived at a net value for appellant's issued and outstanding stock, of $167,163, which is the same value (except for an error of $1) reported by appellant but to which had been added an amount equal to the par value of the treasury shares. Similar treatment was given to the reports of the succeeding years. (We have not noted small discrepancies in figures given in the record, as they do not affect the result.)
Section 5498, General Code, provides in part: "For the purpose of this act, the value of the issued and outstanding shares of stock of any such corporation shall be deemed to be the total value, as shown by the books of the company of its capital, surplus, whether earned or unearned, undivided profits, and reserves, but exclusive of (a) proper and reasonable reserves for depreciation, and depletion as determined by the Tax Commission[er], (b) taxes due and payable during the year for which such report was made, (c) the item of good will as set up in the annual report of the corporation * * * and (d) such further amount as upon satisfactory proof furnished by the corporation, the Tax Commission[er] may find to represent the amount, if any, by which the value of the assets (other than good will) of the corporation as carried on its books exceeds the fair value thereof. Claim for the deduction of such difference must be made by the corporation at the time of filing its report."
As appellant filed no claim for deduction at the time of filing its reports, we may dismiss this feature Appellant agrees that there are but two items to be considered, capital and surplus.
Under Section 5498, General Code, it was the duty of the Tax Commissioner to determine appellant's capital and surplus. Under Section 5500, General Code, a corporation may have a review of such determination.
Section 8623-37, General Code (113 Ohio Laws, 432), effective until July 24, 1939, required a corporation for profit to carry upon its books a stated capital which in the case of a corporation having par value shares should be equal to "the aggregate par value of outstanding shares having par value, including therein treasury shares * * *."
When this section was amended, 118 Ohio Laws, 190, effective July 24, 1939, the foregoing quoted provision was changed to read:
"The stated capital of a corporation, all of whose outstanding shares are with par value, shall be the aggregate par value thereof."
It will be noticed that in the amendment the words "including therein treasury shares" were dropped. For the reasons hereinafter stated we do not think that this made any substantial change.
Until July 24, 1939, Section 8623-39, General Code (113 Ohio Laws, 434), provided the only method for reducing stated capital. After July 24, 1939, Section 8623-39, General Code, as amended (118 Ohio Laws, 192), provides, except as otherwise permitted by the General Corporation Act in the case of consolidation, merger or reorganization, the only method by which the, stated capital of a corporation might be reduced. The, record does not disclose that appellant attempted any reduction of its stated capital after the acquisition of its treasury shares.
Section 8623-41, General Code (113 Ohio Laws, 437), which is the section authorizing a corporation to acquire its own shares (as in effect prior to July 24, 1939) contained the following provision:
"Whenever a corporation shall acquire in any way any of its own shares, they shall be carried on its books as treasury shares until disposed of by sale or reduction of stated capital."
When this section was amended, 118 Ohio Laws, 195, the foregoing quoted paragraph was omitted but the amended act contains the following paragraph:
"In the determination of the excess of a corporation's assets over its liabilities plus stated capital for the purpose of declaring and paying a dividend, purchasing its own shares or making any other distribution to shareholders, treasury shares shall not be considered as an asset of the corporation." We do not think that this provision calls for the application of the doctrine of expressio unius est exclusio alterius.
In Vol. 1, Opinions of Attorney General (1916), 245, the writer said:
"* * * as I understand the term, 'treasury stock' of a corporation is subscribed and issued stock which has later become the property of the corporation."
In Vol. 2, Opinions of Attorney General (1916), 1322, the writer said:
"The purchase by a corporation of its own stock, which has been previously subscribed, issued and outstanding, does not restore such stock to the status of unissued stock. It continues to retain its character as subscribed, issued and outstanding stock."
In 1 Davies Ohio Corporation Law, 709, paragraph 9, it is said:
"Treasury shares are deemed to be outstanding for the purpose of computing a corporation's stated capital and for the purpose of determining franchise taxes under the provisions of G. C. § 5498; but, under § 8623-41, treasury shares may not be treated as assets for the purpose of computing the excess of assets available for dividends or the purchase of shares or the making of other distributions to shareholders."
In 2 Cooley on Taxation (4 Ed.), 1753, Section 868, it is said:
"Stock once issued is outstanding, within the meaning of a tax statute, although returned to and owned by the corporation issuing it, until retired and cancelled as provided by the statute relating to the reduction of capital stock."
When the General Corporation Act was enacted in 1927 (112 Ohio Laws, 9), the General Assembly defined treasury shares as follows:
"The term 'treasury shares' means shares issued and paid for and thereafter acquired by the corporation, if not required to be cancelled." Section 8623-2, General Code (112 Ohio Laws, 10).
This definition was amended in 1929, 113 Ohio Laws, 414, to read:
"The term 'treasury shares' means shares issued and thereafter acquired by the corporation." Section 8623-2, General Code.
In both argument and brief appellant devoted much time as to the proper method of accounting for treasury shares upon the books of a corporation. As to this feature we agree with the Attorney General that the proper accounting practice is not a matter with which we are here concerned. Under appellees' contention we are concerned in this case solely with the question of the amount of the capital and book surplus of the corporation for the purpose of determining the base upon which to compute the franchise tax and such determination is to be made according to applicable statutes rather than according to accounting practice not based upon such statutes.
Under Section 8623-63, General Code, it is provided:
"Every corporation shall keep and maintain adequate and correct accounts of its business transactions, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, stated capital and shares, together with such particular accounts as are required by this act. * * *" (Italics ours.)
In its reply brief appellant does make the following concession:
"As a bookkeeping proposition, because of paragraphs 1 and 8 of G. C. 8623-37, we believe that the treasury shares should be considered outstanding and that the capital should be stated as $50,000 instead of $17,500, and for 1936 the surplus correspondingly reduced from $117,162.91 to $84,662.91."
The only point of difference is that instead of reducing the surplus to $84,662.91 the surplus should have remained at $117,162.91 for the reason that the 325 (323) shares are still issued and outstanding shares, and the capital of the corporation, as conceded, has not been reduced from $50,000. If we were to accept the surplus figure contended for by appellant it would in substance represent a reduction in capital of $32,500, equal to the par value of the treasury shares which have not been retired or cancelled. In other words, appellant now wants to deduct the par value of its treasury stock from its surplus rather than from its stated capital, which is not in accordance with its books or with any timely filed claim for reduction of book value to fair value.
At first blush this interpretation may seem narrow and technical, but it must be considered that the tax levied here is an excise tax and not a property tax and is for the privilege of exercising a corporate franchise. In arriving at the base upon which the tax is to be computed, it naturally follows from the wording of the statute (Section 5498, General Code) that the larger the capital the greater the tax. The remedy for this should be obvious.
We are of the opinion that appellant's treasury shares are to be considered as issued and outstanding and that the amount of appellant's capital as determined by the Tax Commissioner is $50,000.
Appellant calls our attention to the fact that Section 5328-1, General Code, in the last sentence provides that a corporation shall not be required to list its own treasury shares for taxation. If this provision were standing alone it would not need to be noted here for the reason that Section 5328-1, General Code, is concerned with the taxation of property which is entered upon the classified tax list and duplicate of taxable property or on the intangible property list, while Section 5498, General Code, is concerned with ascertaining the base upon which to compute the corporate franchise tax. However, the following provision in Section 5498, General Code, does call for comment:
"In determining the amount or value of intangible property, including capital investments, owned or used in this state by either a domestic or foreign corporation the commission shall be guided by the provisions of Sections 5328-1 and 5328-2 of the General Code except that investments in the capital stock of subsidiary corporations at least fifty-one per centum of whose common stock is owned by the reporting corporation shall be allocated in and out of the state in accordance with the value of physical property in and out of the state representing such investments."
It will be noted that the foregoing provision is limited to determining the amount or value of intangible property including capital investments. If the provision were that Section 5328-1, General Code, was to be considered in determining the amount of the corporation's capital then clearly we would have a problem involving the reconciling of such a provision with the provisions already cited requiring a stated capital and providing the method of reduction thereof. Section 5328-2, General Code, has no application here.
We are, therefore, of the opinion that the decision of the Board of Tax Appeals affirming the assessments for franchise tax payable by appellant for the years 1936 to 1941, both inclusive, is reasonable and lawful and should be and hereby is affirmed.
Decision affirmed.
WEYGANDT, C.J., MATTHIAS, HART and BELL, JJ., concur.