Information Release

PP 2005-01 - Valuation of Personal Property in a Lump-Sum Transaction Involving a Complete Business, Division, or Entire Plant - Issued January 2005.

The purpose of this information release is to provide the valuation method to use for determining the true value of taxable personal property in the years after the establishment of a revised cost basis due to an arm’s length transaction. This valuation method only applies to transactions that revise the cost basis of an entire business or a major component thereof, such as a division, a plant, or a separate facility. This valuation approach applies to transactions occurring January 1, 2004 and thereafter. The Department of Taxation will determine on a case-by-case basis the applicability of this valuation methodology to transactions occurring prior to that date. Transactions valued pursuant to earlier memoranda will maintain such valuation, pending review on audit by the Department as to whether such valuation reflects true value.

Any prior memoranda on this subject, including the memorandum Valuation of Tangible Personal Property Acquired in a Lump-Sum Acquisition of a Complete Business, Division or Entire Plant dated December 31, 1998, are hereby rescinded.

The term “seller” in this release refers to the entity that sold the business or component thereof. The term “buyer” refers to the entity that is acquiring the business or business component.

The Ohio Supreme Court in Grabler Manufacturing Co. v. Kosydar (1975), 43 Ohio St. 2d 75, syllabus, determined that “[f]or personal property tax purposes, the best method of determining value is the actual sale of such property on the open market and at arms length, between one who is willing to sell, but not compelled to do so, and one who is willing to buy, but not compelled to do so. (In re Estate of Sears, 172 Ohio St. 443, approved and followed,).” Such circumstances, “without question, will usually determine the monetary value of the property.” (Emphasis added.) Grabler at 77, citing State ex rel. Park Investment Co. v. Bd. of Tax Appeals (1964), 175 Ohio St. 410, 412.

Thus, the Department’s working definition of an “arm’s length transaction” is one between unrelated entities where a willing seller (the seller is not compelled to sell) transacts with a willing buyer (the buyer is not compelled to buy).

The Department will require this alternate method when an arm’s length transaction results in a revaluation of a business or business component.

In instances where an arm’s length transaction has occurred during the accounting period in question, or that accounting period immediately preceding such accounting period, the taxpayer filing the current return must disclose that arm’s length transaction.

While the arm’s length transaction establishes the value of the entire business or business component, the value of the taxable tangible assets will be determined by applying the provisions of Accounting Principles Board Opinion # 16 – Business Combinations – August 1970, as superseded by Financial Accounting Standards Board Statements No. 96 and No. 109, for acquisitions prior to and including June 30, 2001. For acquisitions subsequent to June 30, 2001, Financial Accounting Standards Board Statement No. 141 will guide the mechanics of the allocation.

In order to ensure compliance with the Ohio Supreme Court’s decision in Boothe Financial Corp. v. Lindley (1983), 6 Ohio St.3d 247, absent special circumstances, the Department will not allow the true value of any asset that continues to be used in business to be less than the true value as determined using the minimum valuation percentage for the original class life as applied to the original cost of the asset, in conjunction with the Department’s “302” computation. In the rare case when the sale price is less than the minimum value determined by the “302” computation, the sale price will be considered as the appropriate valuation, with no subsequent depreciation. Situations where original cost is not available or where extenuating circumstances dictate that the original cost is not applicable will be handled on a case-by-case basis.

The Department will calculate the remaining useful life of the assets involved in the transaction that revises the cost of those assets. This calculation will be based on the cost and years of acquisition exhibited on the books of the seller of the assets immediately preceding the transaction. If the Department concludes that those costs are not proper, the Department will apply what it determines to be the proper costs and years of acquisition. The methodology to perform these calculations is included in this release.

If a revised cost value is established and that revised cost value has not been pushed down to the individual assets, the Department will require a proportionate calculation to determine the revised cost of those assets on hand and for determining the cost of disposals.

If the Tax Commissioner determines that as a result of the transaction revised costs have not been established, then other available information will be used as the basis for determining the true value of the assets in question including, but not limited to, using the prior historical cost of the property and maintaining the same historical composite annual allowances for the property.

This release revises the cost basis of only those assets involved in the lump sum transaction. All assets acquired subsequent to the transaction are to be valued according to the Tax Commissioner’s prescribed directive and pursuant to Ohio Admin. Code 5703-3-10 and 5703-3-11.

Other situations can occur that may potentially result in a revised cost basis and the application of this memo; however, the Department will not accept the valuations resulting from these situations as a prima facie correct reflection of true value. In these situations, the burden of proving that the value established does reflect true value remains with the taxpayer. The subject valuations that may or may not be reflective of true value can be the result of situations that involve, but are not limited to, the following:

  • Impairment, using FASB 121 or FASB 144.
  • “Fresh start accounting” if the Department determines that the provisions of Statement of Position 90-7 issued by the American Institute Certified Public Accountants have not been strictly followed.
  • An independent appraisal that does not comport with the Uniform Standard of Professional Appraisal Practice issued by the Appraisal Standards Board of The Appraisal Foundation.
  • An in-house appraisal.
  • A transaction between related entities.

In these situations, the taxpayer shall be required to provide all necessary supporting documentation. Such documentation includes, but is not limited to, all notations, memoranda, calculations, authorities, work papers, etc., that led to the transaction or otherwise support the taxpayer’s opinion of true value.

In cases where the Department determines that the true value of assets is established as a result of these situations, the revised cost basis provisions of this release will be applied.

CALCULATIONS

Note: In order to properly determine the value of personal property under the provisions of this information release, it is imperative that the taxpayer be in possession of the following:

  • The cost basis and years of acquisition of the personal property to the seller immediately prior to the transaction.
  • The cost basis and years of acquisition of the personal property to the original owner of that personal property. This cost basis may or may not be the same as the cost basis to the seller immediately prior to the transaction in question.

To determine the proper class life percentages used in calculating the true value of the newly valued property in subsequent tax return years, make the following calculations:

1. Select the table, from the “Aging of Assets on Hand Tables”, for the prescribed class life of the property. This is the prescribed class life for the property, not an average remaining composite life as determined by a previous transaction.

2. List the previously booked acquisition costs by year of acquisition in column 2.

3. Multiply column 2 by column 3 and enter the result in column 4. (Column 3 is the mid-point of the group class life less the number of years held, considering that the asset was held for 1/2 year the first year.)

4. Total the results in column 4. (This represents the aggregate dollar-years of remaining useful life.)

5. To compute the remaining useful life, divide the total in column 4 (factored cost) by the total in column 2 (cost). This represents the average remaining composite life of those assets on hand at the time of the acquisition of the entire business, division, plant or business component.

6. In the Composite Group – Life Ranges Chart (below), find the class life range applicable to the average remaining composite life calculated above. This will be the class life used to determine the true value of the property acquired in the transaction at issue.

Composite Group – Life Ranges

Class At Least Less Than
1   6.0 years
2 6.0 yeras 8.4 years
3 8.4 years 11.6 years
4 11.6 years 14.8 years
5 14.8 years 17.2 years
6 17.2 years  

7. When the personal property being valued at an alternate class life reaches the minimum percentage of that alternate class life, convert to the prescribed class life until the minimum percentage of the prescribed class life is reached. The conversion tables (pages 8 to 10) specify those percentages and when to convert to them.

MINIMUM VALUE

As indicated, the true value of personal property involved in a transaction to which this information release applies, absent special circumstances, can not be lower than the minimum (or floor) value as determined by the original prescribed class and original cost to the original owner for the assets at issue. In instances where the original costs are not available or appropriate, the Department will determine appropriate costs.

The minimum (floor) value will be calculated as follows:

  • The original cost new of the acquired property is multiplied by the minimum true value percentage for the prima facie correct (prescribed) class life.

The minimum percentage will be calculated as follows:

  • The minimum value as computed above is divided by the transaction cost. This resulting percentage is the minimum percentage for the assets involved in the lump sum transaction.

EXAMPLE

Below is an example of a transaction in which property was exchanged at fair market value in July 2003, to be reported by the buyer in its 2004 return. The purchase price for the personal property as indicated in the sales agreement was $6,000,000. The seller computed true value for the previous return using Class Life V percentages. The remaining useful life computed using the seller’s costs and years of acquisition is 7.62 years, which is in the Class Life II range. For the 2004 tax return, the true value of the acquired property is calculated to be $6,000,000 due to the proximity to the listing date. A full year’s depreciation will be taken in the second year when property true value is 100% of restated value in year one. The minimum percentage used to compute true value in this example is 38.63%.

CLASS V ASSETS SOLD FOR $6,000,000

Year Acquired Cost New Factor Factored Cost
Column 1 Column 2 Column 3 Column 4
2003 $ 700,000 15.5 $ 10,850,000
2002 650,000 14.5 9,425,000
2001 950,000 13.5 12,825,000
2000 854,000 12.5 10,675,000
1999 1,789,230 11.5 20,576,145
1998 258,000 10.5 2,709,000
1997 489,520 9.5 4,650,440
1996 487,900 8.5 4,147,150
1995 1,658,700 7.5 12,440,250
1994 450,960 6.5 2,931,240
1993 268,790 5.5 1,478,345
1992 487,520 4.5 2,193,840
1991 487,630 3.5 1,706,705 Avg Remaining
1990 & Prior 4,685,980 2.5 11,714,950 Useful Life
Total $14,218,230   $108,323,065 7.62
Class V Minimum 16.30%  
Minimum Value 2,317,571
Cost of Trans 6,000,000
Minimum % * 38.63%
*True Value can never go below the minimum percentage

Aging on Assets on Hand Tables and Conversation Tables (XLS)