Tax Type
Bank Franchise Tax
Description
Gross capital for leased property
Topic
Property Subject to Tax
Date Issued
10-08-2002
October 8, 2002
Re: Request for Ruling: Bank Franchise Tax
Dear *************:
This is in response to your letter in which you request a ruling regarding the deduction from gross capital for leased property and leasehold improvements allowed to banks under the Bank Franchise Tax (BFT).
FACTS
Certain deductions for leased property and leasehold improvements are provided in Code of Virginia § 58.1-1206. Your general question concerns the proper basis for the deduction for leasehold improvements. You also present several scenarios involving both leasehold improvements and real property and request guidance as to what would be the proper deduction permitted to the bank in each scenario.
RULING
Code of Virginia § 58.1-1202 imposes a state franchise tax on the net capital of banks and trust companies. The state tax rate is statutorily set at 1% of net capital. In addition, the law authorizes cities, counties and towns to impose a BFT at a rate of up to 80% of the state rate. Hence, the local BFT assessment is based upon a state tax. Unlike local taxes on tangible personal property, machinery and tools, merchants' capital, or business, professional or occupational license taxes, which are imposed and administered by local governments, the BFT is administered by the state.
In computing net capital, banks are permitted a deduction from gross capital for the assessed value of certain property. Code of Virginia § 58.1-1206(1) provides that real estate owned or leased by a bank or specified related parties "shall be deducted from the gross capital otherwise ascertainable under § 58.1-1205."
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- The assessed value of real estate if otherwise taxed in this Commonwealth which is owned by such bank, or is used or occupied by such bank, if held in the name of a majority-owned subsidiary of the bank or of a bank holding company which owns a majority of the capital stock of such bank or of any wholly-owned subsidiary of the bank holding company which owns the majority of the capital stock of such bank and the assessed value, up to the amount of the unencumbered equity, of real estate in the nature of improvements which are owned by the bank, or used or occupied by the bank and held by a majority-owned subsidiary or a bank holding company or a wholly-owned subsidiary of a bank holding company, even if assessed in the name of some other person because of the ownership of the underlying land by such person. [Emphasis added.]
For leasehold improvements, only the assessed value up to the unencumbered equity may be deducted. Title 23 of the Virginia Administrative Code (VAC) 10-330-30 states:
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- If real estate is in the nature of improvements to real estate owned by and assessed in the name of another person (the underlying land owner) and such improvements are (a) owned by the bank, or (b) used or occupied by the bank and owned by a majority-owned subsidiary or by a wholly owned subsidiary of a bank holding company, the assessed value up to the amount of unencumbered equity is deductible. The unencumbered equity shall be deemed to mean the assessed value of such improvements less the unpaid balance of all encumbrances thereto.
In answer to your general question, for leasehold improvements, only the assessed value up to the unencumbered equity may be deducted. Deductions in the form of original cost or book value generally would not be allowed.
In response to the hypothetical scenarios you present, the real estate deductions allowed for leasehold capital only apply to improvements of property, not to the underlying real property. A bank that is the lessee may not take the deduction for the entire value of the real property even when the bank's lease provides that the bank pay all real estate taxes. The applicable statute does not address the payment of real estate taxes. It only addresses those deductions allowed a bank for leasehold capital.
In scenario #1, a bank leases an entire building from an unrelated third party. The bank has no ownership in the real property. The lease requires the bank to pay the real estate taxes for the property. The bank is not entitled to a deduction for the assessed value of the building.
Under scenario #2, a bank leases a unit in a shopping center from an unrelated third party and the bank has added leasehold improvements to accommodate its business. The lease also calls for tenants to pay for their prorated share of the real estate tax based on the square footage of their leased property. As a leasehold interest with none of the qualifications pertaining to real property deductions, the bank may only deduct the leasehold improvements as measured by the assessed value up to the unencumbered equity.
Under scenario #3, a bank has a long-term land lease on which land it has erected a building to house one of its branches. The land lease calls for the bank to pay all real estate taxes associated with the property and improvements. In this situation, the bank may deduct the assessed value of the building up to the amount of its unencumbered equity.
Finally, in scenario #4, which is similar to scenario #3 with the exception that the bank only pays taxes on the improvements, the bank may take the deduction provided for the assessed value of the building up to the amount of its unencumbered equity.
In summary, a bank must meet the requirements set forth in Code of Virginia § 58.1-1206(1) in order to be entitled to a deduction from gross capital for the assessed value of the improvements.
This ruling has been made subject to the facts presented to the department as summarized above. Any change in these facts or the introduction of facts by another party may lead to a different result.
I hope this has been helpful. Copies of the Code of Virginia and the regulation sections cited are available online in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us. If you have any questions regarding this letter, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Kenneth W. Thorson
Tax Commissioner
AR/39557H
Rulings of the Tax Commissioner