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Ruling on Standard Valuation of Tangible Personal Property Results in Increased Tax Exposure for Tennessee Taxpayers

Legal Services
01.10.13

In re: Signal Mountain Cement Company – Assessment Appeals Commission Upholds Assessor’s Use of “Value in Use” Methodology for Standard Valuation of Tangible Personal Property in Tennessee but Affirms Taxpayer Use of “Fair Market Value in Exchange” Methodology in Nonstandard Valuations. 

Tennessee businesses – such as manufacturers, healthcare providers and others – with tangible personal property subject to ad valorem taxation in Tennessee should take note of the recent decision by the Assessment Appeals Commission (AAC) of the Tennessee Board of Equalization in In re: Signal Mountain Cement Company (Hamilton County, Tax Years 2008-2011). The AAC's holding likely results in greater tax liabilities for taxpayers relying on Tennessee standard valuation due to the AAC’s approval of the inclusion of shipping, engineering, installation, tax, and other intangible expenses in the original cost of such assets for valuation purposes. Taxpayers should consider reporting nonstandard values determined utilizing a fair market value in exchange valuation approach as an option to reduce their tax exposure.

The AAC upheld use of a “value in use” methodology by the Hamilton County Assessor’s (Assessor) to value tangible personal property utilizing Tennessee standard valuation. In so holding, the AAC specifically concluded that, for standard valuation purposes, the “taxable value of tangible personal property includes all costs originally incurred to place the property in service, particularly if such costs were capitalized by the owner for recovery through depreciation.” The AAC’s decision overturns a previously issued Initial Decision and Order wherein the administrative law judge rejected the Assessor’s use of the “value in use” approach, concluding instead that Tenn. Code Ann. § 67-5-601 prescribes a fair market value in exchange standard of valuation for all property subject to Tennessee ad valorem tax. Nevertheless, the AAC upheld Signal Mountain Cement’s proposed nonstandard values, all of which were determined utilizing a fair market value in exchange standard, thus affirming that taxpayers have the right to seek nonstandard valuations of tangible personal property based upon fair market value in exchange appraisals.

Signal Mountain manufactures cement at a facility located in Hamilton County, Tennessee. The Hamilton County Property Assessor back-assessed tangible personal property tax against Signal Mountain for the 2008 and 2009 tax years. Applying a “value in use” valuation methodology, the Assessor added intangible costs for items such as freight, installation, engineering and sales tax (intangible costs) attributable to Signal Mountain’s machinery and equipment to the “original cost” of such items. Original cost constitutes the starting point for standard valuation on Tennessee tangible personal property reports and is depreciated utilizing statutorily prescribed depreciation percentages to determine an item’s taxable value for a given tax year.  In imposing a “value in use” standard, the Assessor applied federal income tax capitalization principles utilized in the Internal Revenue Code for cost-recovery purposes. The use of this standard means that intangible costs associated with a tangible asset must be capitalized. The inclusion of intangible costs in the original cost of Signal Mountain’s taxable tangible personal property significantly increased the property’s value as well as Signal Mountain’s resulting tax liability.

Section 67-5-601 of the Tennessee Code prescribes a fair market value in exchange standard of valuation in Tennessee, specifically providing that “[t]he value of all property shall be ascertained from the evidence of its sound, intrinsic and immediate value, for purposes of sale between a willing seller and a willing buyer without consideration of speculative values.” However, the inclusion of intangible costs in the “original cost” of taxable assets for standard valuation purposes results in a value in use determination, as opposed to a determination of the fair market value intrinsic to an article of tangible personal property itself between a willing buyer and a willing seller. Specifically, as set forth by expert appraisal testimony in In re: Signal Mountain, a value in use standard of valuation does not look at the value an item would bring in an arms-length sale between a willing buyer and a willing seller, but instead focuses on the value of a purchased and installed asset to a party utilizing the asset in place or the value of an installed asset to a potential purchaser of an entire enterprise. In such a scenario, intangible costs to procure and install an asset are relevant in determining its value in use because these costs are incurred to place the asset in service. These costs, however, are not appropriately considered in determining fair market value in exchange because comparable sales in an open market do not reflect such costs originally incurred by a seller.  Specifically, expert appraisal testimony established that a fair market value sale of tangible personal property between a willing seller and willing buyer presupposes that the item sold will be used by the purchaser elsewhere and, thus, purchasers simply will not pay intangible costs previously incurred by sellers since the purchasers will themselves incur similar expenses with regard to the purchased asset.

Pursuant to the AAC’s ruling in In re: Signal Mountain, taxpayers utilizing Tennessee standard valuation will be taxed based upon the value in use of their tangible personal property. Taxpayers seeking to be taxed based upon the fair market value in exchange of their tangible personal property may report such values as nonstandard values on Part IV of their annual tangible personal property renditions, which are due by March 1. For additional information, please contact Charlie Trost, Chris Wilson, Michael Yopp or any member of the Waller Tax Practice at 800-487-6380.

 

WE ARE REQUIRED BY IRS CIRCULAR 230 TO INFORM YOU THAT THE PRECEDING DISCUSSION WAS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED, NOR RELIED UPON, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED UNDER FEDERAL TAX LAW. THE ADVICE WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTIONS OR MATTERS ADDRESSED IN THE DISCUSSION.  EACH TAXPAYER SHOULD SEEK ADVICE BASED ON ITS PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.

The opinions expressed in this bulletin are intended for general guidance only. They are not intended as recommendations for specific situations. As always, readers should consult a qualified attorney for specific legal guidance.

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