Personal Property Tax

County Bulletin

TO ALL COUNTY AUDITORS - Bulletin No. 250

FROM: Edgar L Lindley, Tax Commissioner 

DATE: January 26, 1981

RE: Validity of book reserves and claims for reduced values

This Bulletin is a review of certain options and requirements of taxpayers when filing personal property tax returns and of necessary actions the assessor may then be required to take when auditing the tax returns under his jurisdiction.

The true value of tangible personal property for tax purposes is its depreciated book value unless the assessor determines otherwise. For fixed assets and for inventory, the depreciated book value is considered to be book cost less book reserves. A taxpayer may claim a lesser value to be the true value if he does so in writing at the time of making his return. The taxpayer must file such claims on prescribed tax Form 902: Claim For Deduction from Book Value.

Book reserves and claims for lesser values are not to be automatically accepted as valid without audit. They are to be investigated for their applicability to the taxpayer's circumstances as well as to the amount of reserve or deduction taken. They may be excessive or immaterial in determining true value.

Book reserves, claims for reduction below book value, and other deductions from true value must be substantiated by the taxpayer with factual data supporting both the reason for and the dollar amount of the reserve or deduction. Unsupported claims and arbitrary flat-percentage reductions from the true value of fixed assets or inventory are not acceptable.

A method for determining the true value of depreciable property has been prescribed for many years. This method is commonly known as the 302 Computation. Only when special or unusual circumstances warrant may the taxpayer deviate from this method. Valid occasions may be: the application of County Auditor Bulletin 239 for idle equipment; the use of fair market value when the recent sale of a plant or facility has occurred; or when the accounting records do not reflect the actual costs of assets on hand. While these may be acceptable reasons for lower values, there must be an auditor investigation before final acceptance can be made. Some deductions are taken for reasons which may not be acceptable. A few are temporary idleness; less than 100% use; and accelerated depreciation rates and methods.

Inventory valuation is also subject to certain rules. While we begin with book values generated through generally accepted accounting, some methods or, reserves are not acceptable. One such reserve is the LIFO reserve. Other acceptable methods, such as the Retail Inventory Method described in Rule 5703-3-17, may require the filing of a claim on Form 902. Reductions for shrinkage, obsolescence, or slow-moving items are not acceptable unless substantiated.