Opinion
No. 31978
Decided May 17, 1950.
Taxation — Franchise tax — Value of issued and outstanding shares of stock deemed book value — Section 5498, General Code — Tax Commissioner — Required to accept book value in determining tax — Authorized to reduce book value, when — Claim for reduction — Statutory time for making, mandatory.
1. By the provision of Section 5498, General Code, that the "value of the issued and outstanding shares of stock of any such corporation shall be deemed to be the total value, as shown by the books of the company of its capital, surplus, whether earned or unearned, undivided profits, and reserves," the Tax Commissioner is required to accept the book value as shown by the company's records, in computing the value of the stock for the determination of the franchise tax.
2. Section 5498, General Code, authorizes the Tax Commissioner, upon proper claim being made and satisfactory proof furnished by the corporation that its assets as carried on the books exceed the fair value thereof, to reduce the valuation of the stock by the excess so shown and compute the franchise tax on the reduced valuation.
3. The language of Section 5498, General Code, that "claim for the deduction of such difference [excess of book value over fair value] must be made by the corporation at the time of filing its report" is mandatory, and the reduction to the claimed fair value may be allowed by the Tax Commissioner only upon the timely filing of claim therefor.
APPEAL from the Board of Tax Appeals.
The appellant, The Jacob B. Perkins Company, an Ohio corporation, filed with the Tax Commissioner an application for review and correction of a corporation franchise tax arrearage certificate for the years 1943 to 1946, inclusive. An audit of the books and records of the appellant by an examiner of the Department of Taxation disclosed that in the franchise tax returns for the years 1943, 1944 and 1945 the appellant had reported net figures for its lands and buildings, which figures were the results of deductions from book values of these lands and buildings of reserves which the appellant referred to as a "reserve for reduction of real estate to market" or "reserve for loss of real estate."
The examiner corrected the franchise tax returns for the years 1943 to 1946, inclusive, by re-entering into the land and buildings account the amount of the "reserve for reduction of real estate to market" and issued additional assessment certificates for each of those years, based on the corrected valuations.
The Tax Commissioner decided that the use of this special reserve by the appellant resulted in the reporting of its land and buildings in the franchise tax returns for the years in question at values which constituted the "fair value" thereof, without filing a fair value claim and permitting the Tax Commissioner to pass upon it as provided in Section 5498, General Code. The commissioner held, however, that he was bound under Section 5498, General Code, to accept the book value of the appellant's lands and buildings as shown by its records, and that the disallowance by the examiner of this special reserve was proper.
An appeal was perfected to the Board of Tax Appeals which affirmed the order of the Tax Commissioner.
The case is before this court upon appeal from the decision of the Board of Tax Appeals.
Mr. John W. Scott, for appellant.
Mr. Herbert S. Duffy, attorney general, and Mr. Donald B. Leach, for appellee.
The appellant offered evidence explaining the reason why the book value of the land and buildings was originally established at the larger figure, and stated that the reserve, created at the time of the purchase of the property from its former owner, operated to establish the fair value of these assets since they were acquired by the issue of stock of the appellant as payment therefor. Furthermore, these original valuations were those established March 1, 1913, in compliance with the federal income tax laws.
The question presented by the record in this case involves the definition of the term, "book value." The appellant claims that, when it returned its property at a valuation computed by deducting the reserve, the result constituted the book value of the assets; that the use of this reserve was merely a bookkeeping entry and "had no relative bearing upon its [land and buildings] fair market value. Yet, the accountants that incorporated the company, after setting up the books, found it necessary, under the statute, to establish the fair market value of the stock, and this was done by setting up a reserve of approximately $750,000 as against the three-one-13 value depreciated to that point."
Section 5498, General Code, provides in part as follows:
"For the purpose of this act, the value of the issued and outstanding shares of stock of any such corporation shall be deemed to be the total value, as shown by the books of the company of its capital, surplus, whether earned or unearned, undivided profits, and reserves, but exclusive of * * * (d) such further amount as upon satisfactory proof furnished by the corporation, the Tax Commission[er] may find to represent the amount, if any, by which the value of the assets (other than good will) of the corporation as carried on its books exceeds the fair value thereof. Claim for the deduction of such difference must be made by the corporation at the time of filing its report. * * *"
If the deduction of this reserve effected a reduction of assets from the book value to the fair value thereof, the last sentence in Section 5498, General Code, supra, is clearly applicable. Since it is conceded that no such claim for deduction was made in any of these years, and no opportunity afforded the Tax Commissioner to pass upon the correctness of the reserve, the decision of that question is controlling in this case.
This court heretofore has considered the meaning of the term, "book value." In the case of Wheeling Steel Corp. v. Evatt, Tax Commr., 143 Ohio St. 71, 54 N.E.2d 132, the following rules were established:
"1. Where a taxpayer made an appraisal of its machinery and other factory equipment but did not change its bookkeeping records in accordance with such appraisal, a tax return based upon such appraisal does not reflect `book value' or `book depreciation' or `depreciated book value' of such personal property, within the meaning of those terms as used in Section 5389, General Code.
"2. Book value of personal property, as used in Section 5389, General Code, is to be obtained from a capital account set up on the books of the taxpayer in the ordinary course of business wherein are recorded the costs of such personal property.
"3. Book depreciation as used in Section 5389, General Code, is to be obtained from the taxpayer's depreciation account set up in the ordinary course of business upon the books of the taxpayer and which account is regularly and consistently credited with depreciation under some generally recognized method of reflecting depreciation of the taxpayer's personal property."
The provisions of Section 5498, General Code, do not require that claims for deductions be filed where reserves for depreciation are involved if those reserves are established regularly in the course of the business of the company. But a different situation exists where it is claimed that assets carried at book value are in fact overvalued and a claim for deduction is made so that the tax will be assessed on the basis of the fair value thereof. The reserve in the instant case is not an annual reserve for depreciation, because regular annual depreciation has been taken on the value of these assets; instead, the claim is that the book value as shown exceeded the fair value of these assets by the amount of the reserve. The statute authorizes the Tax Commissioner, upon proper claim being made and satisfactory proof furnished by the corporation, to pass upon the validity of the claim for reduction. However, since the record shows no timely application for the allowance of such reduction, the Tax Commissioner was without authority to compute the franchise tax on any value other than the book value.
The decision of the Board of Tax Appeals is affirmed.
Decision affirmed.
WEYGANDT, C.J., HART, ZIMMERMAN, STEWART, TURNER and TAFT, JJ., concur.