CHAPTER VI.

ASSESSMENT OF BANK STOCK.

One of the problems that is constantly recurring to vex assessors as well as county and state boards of equalization, is the problem of how properly to assess bank stock. There is a widespread dissatisfaction with the present method of assessment, if, indeed, it can be said that the assessment of bank stock is made in pursuance of a method. This dissatisfaction is shared by both the taxing officers and the banks, and when one surveys the practice under our laws there is little wonder that dissatisfaction exists. In order that an understanding may be had, it will be well to consider first the provisions of the law, and then the practice. It will then be possible to ascertain whether the law and practice accomplish the desired ends, and if not whether the defects are attributable to a law based on wrong principle, to improper administration, or to both.

The statute governing the matter is as follows:

"Bank stock, where and at what valuation to be listed. The stockholders of every bank located in this state, whether such bank has been organized under the banking laws of this state, or of the United States, shall be assessed and taxed on the value of their shares of stock, in the county, town, district, city or village where such bank or banking associations is located, and not elsewhere, whether such stockholders reside in such places or not; such shares shall be listed and assessed annually, with regard to the ownership and value thereof on the first day of April of each year. To aid the assessor in determining the value of such shares of stock, the accounting officer of every bank shall furnish a statement to the assessor, verified by oath, showing the amount and number of such shares of capital stock of such bank, the amount of its surplus or reserve fund and undivided profits in excess of an amount equal to five per cent of the loans and discounts of such bank; the amount of its net investment in real estate, which real estate shall be returned in the name of the bank and shall be assessed and taxed as other real estate is under this article. To determine the real value of such real estate investments the assessors shall strike from his lists all real estate which said bank has sold to any party or parties under any contract whereby the party or parties making and signing such contract agrees to pay all taxes levied against

said property. The assessor shall deduct the net amount of said investment in real estate from the aggregate amount of such capital and surplus, and the remainder shall be taken as a basis for the valuation of such shares of stock in the hands of the stockholders subject to the provisions of law requiring all property to be assessed at its true and full value. The shares of capital stock in national banks not located in this state, held in this state, shall not be required to be listed under this article.".

It is the avowed aim of the statute "to aid the assessor in determining the value of such shares of stock." In order to accomplish this purpose the statute requires the accounting officer of every bank to "furnish a statement to the assessor, verified by oath, showing the amount and number of such shares of capital stock of the assessed bank, the amount of its surplus or reserve fund and undivided profits in excess of an amount equal to five per cent of the loans and discounts of such bank; the amount of its net investment in real estate.' In prescribing the rule for valuing the stock under the statement above referred to, the statute provides that the assessor "shall deduct the net amount of said investment in real estate from the aggregate amount of such capital and surplus and the remainder shall be taken as a basis for the valuation of such shares of stock in the hands of the stockholders, subject to the provisions of the law requiring all property to be assessed at its true and full value." It will be readily seen that the primary aim of the statute is to fix a rule for the valuation of the bank stock for assessment purposes, and, through the operation of this rule, a secondary object is to be accomplished, namely; to avoid taking both bank stock and real estate in which the capital of a bank may be invested. The statute very properly recognizes that the value of the bank stock is enhanced by the amount of surplus, reserve and undivided profits, and it is provided that the amount of this fund, in excess of five per cent of the loans and discounts, shall be added to the capital and that the sum shall form the basis of the valuation for assessment purposes. In order, however, to avoid double taxation, so much of the capital as is invested in real estate, which is assessed in the name of the bank is required to be subtracted. This rule for determining the value of bank stock for assessment purposes is one that has, with slight variations, been adopted in many of the states. There are two features of this rule that give rise to difficulty in assessment, and which are therefore worthy of attention. 1st. The provision permitting the subtraction of five per cent of the loans and discounts from the surplus or reserve fund and undivided profits. 2d. The provision authorizing the subtraction of the net investment in real estate. After commenting on the chief objects of the rule laid

down in this statute two provisions will be considered in the order named.

In all the discussion relating to the assessment of bank stock under the provisions of the statute it must be borne in mind that it is the aim to assess bank stock at its book value as distinguished from its market value. No attempt is made to assess the bank stock upon the basis of an added value which might be called excess due to good will; thus, in instances where bank stock might readily be transferable at a price greater than the proportion of capital, surplus, reserve and undivided profits apportioned to such share, this is not taken into account in making the assessment. On the other hand, if perchance, the actual value of a share of stock should be less than the proportionate share of capital, surplus, reserve and undivided profits, this circumstance is not taken into consideration in making the assessment. The statute would undoubtedly warrant the changing of the assessed value to correspond with actual value, inasmuch as the provisions above referred to operate "subject to the provisions of law requiring all property to be assessed at its true and full value." But in practice the book value alone is relied upon. However, it is believed that the instances where stock in banks is salable at a premium are much more frequent then those where they are salable below the book value.

THE PROVISION PERMITTING THE SUBTRACTION OF · FIVE PER CENT OF THE LOANS AND DISCOUNTS FROM THE SURPLUS OR RESERVE FUND AND UNDIVIDED PROFITS.

At the outset we find that North Dakota is the only state in the Union which permits the basis of the valuation of bank stock for assessment purposes to be reduced by an amount equal to five per cent of the loans and discounts. It is difficult to conceive of any condition peculiar to North Dakota justifying this rule upon the basis of banking economy. The provision is apparently designed to encourage conservative banking. This it does by creating an exemption in favor of surplus, reserve and undivided profits. However desirable this measure of encouragement might seem, the fact remains that the policy of encouraging in this manner the development of particular business enterprises is one that is not sanctioned by the constitution of the state, which requires uniformity of valuation for assessment purposes.

Furthermore, when we consider this provision merely as an exemption, either to the bank or the individual stockholder, the constitutionality of the statute authorizing it, may well be questioned. The constitution of North Dakota provides that the "legislative assembly shall by a general law exempt from taxation

personal property to any amount not exceeding in value two hundred dollars for each individual liable to taxation.” The legislature in pursuance of this constitutional authority passed a general statute. Section 1484, Sub-division 8: "exempting personal property of each individual subject to taxation to the amount of ten dollars." It seems clear that the statute exempting an amount of surplus, reserve and undivided profits equivalent to five per cent of loans and discounts cannot be legally defended as a valid exemption law, first, because the exemption may or may not amount to more than the constitutional limit, second, the statute is only applicable to owners of bank stock and is not an exemption to “each individual liable to taxation," provided by general law.

It is not likely, however, that this provision was inserted in the statute with a view of creating an exemption. Whether or not it operates as an exemption is another matter. The reduction has probably been allowed on the theory that since the surplus, reserve and undivided profits are created with a view of protecting depositors against consequences of mistaken judgment in the matter of loans and discounts, and, since experience demonstrates that there will be occasional losses due to inadequacy or shrinkage of security, it is only just in estimating the value for taxation to subtract such a sum as will care for the burden directly chargable against these funds. So considered the law is on a par with laws that have been passed in other states, authorizing debts to be subtracted from credits. These laws have universally proved unsatisfactory. Furthermore, there is not another provision to be found in our statutes authorizing a reduction in the taxable value of property on account of the liabilities of the owner of the property. Even in assessing real estate, we assess the mortgaged land to the owner, presumably, though not actually, at full value, and the assessment is not reduced by the amount of the mortgage that there may be against the land. If the propriety of subtracting a percentage of loans and discounts for taxation purposes be conceded then justice should require that the percentage subtracted be only that necessary to care for the bad loans. All the information that this Commission has been able to obtain points to the conclusion that in practice the percentage of bad loans is much less than five per cent of the entire loans. This is the testimony, not merely of officials, but of many of the bankers. After all it must be remembered that the statute aims primarily to arrive at the value of bank stock and it cannot be said that the saleable value of bank stock generally is under the book value to an extent equal to five per cent of the loans and discounts.

In practice this provision of the statute has been productive of inequality of tax burden between the banks. In a number of