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December 31, 1998, are hereby rescinded.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 years
|
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
|
Average 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)