Summary
In Natl. Tube Co., we rejected the commissioner's argument that he should disregard book value and reappraise every corporation's property according to its market value.
Summary of this case from Bush Cook Leasing, Inc. v. TracyOpinion
No. 33231
Decided March 4, 1953.
Taxation — Corporation annual franchise tax report — Section 5495-2 et seq., General Code — Taxpayer's general ledger accounts used — Recognized method of accounting adopted — Tax Commissioner to find amounts and valuations "correct," when — Section 5498, General Code — Commissioner not authorized to increase amount reported, when — Book value of assets — Bookkeeping methods permitted — "Book value" determined, how — Equal protection uniformity in tax burdens — Constitutional law.
1. Where the values stated in the annual corporation report of a taxpayer, made pursuant to Sections 5495-2, 5496 and 5497, General Code, for the amounts of its capital, surplus, undivided profits and reserves are those recorded in the general ledger accounts of the taxpayer in the ordinary course of its business and are accepted and used by the taxpayer as the basis for all its financial and earnings reports to its stockholders, to banks for credit purposes, to government regulatory bodies, and to the federal and state governments for tax purposes, and where no evidence is offered tending to prove that the taxpayer has in any way falsified the amounts recorded in those accounts or that the asset values shown therein are not in fact what they purport to be, and where the valuations shown for inventories on those accounts of the taxpayer and in such report are accurately determined by following a recognized method of inventory accounting known as the last-in first-out or Lifo method and that method of accounting has been adopted by the taxpayer and consistently and accurately followed and used by the taxpayer in the ordinary course of its business for several years, the Tax Commissioner is required by Section 5498, General Code, to find such report, so far as it relates to such values, amounts and valuations, "to be correct"; and thereupon the statute requires the Tax Commissioner to determine "the value of the issued and outstanding shares of stock" of the taxpayer to be an amount equal to "the total value of its capital, surplus * * * undivided profits and reserves," as stated in such report, exclusive of any of the items specified in subdivisions (a) to (d), inclusive, of the statute, which may be properly claimed and established as deductions from such value.
2. In such an instance, the Tax Commissioner is not authorized to increase the amount reported by the taxpayer in such annual corporation report as the book value of its inventories.
3. The book value of an asset at any given time may be more or less than its value. (Paragraph nine of the syllabus in Opdyke v. Security Savings Loan Co., 157 Ohio St. 121, approved and followed.)
4. In the absence of statute, the books of account and bookkeeping records of a business may legally be kept and maintained in accordance with any sound and generally recognized and approved accounting system.
5. Under Sections 5497 and 5498, General Code, "book value" should be determined from the books of a corporation which are generally regarded as the accounting records of such corporation and are kept in the ordinary course of the business of the corporation in accordance with any sound and generally recognized and approved accounting system, even though other records of the corporation may disclose that the market value of some of the assets of the corporation differs from the value thereof recorded in such books. (Paragraphs one, two and three of the syllabus in Wheeling Steel Corp. v. Evatt, Tax Commr., 143 Ohio St. 71, approved and followed.)
6. The equal-protection provisions of the Constitutions do not require the state to maintain a rigid rule of taxation, to resort to close distinctions, or to maintain a precise scientific uniformity; and possible differences in tax burdens not shown to be substantial or which are based on discrimination not shown to be arbitrary or capricious do not fall within constitutional prohibitions.
APPEAL from the Board of Tax Appeals.
In the years 1944 to 1947, inclusive, the taxpayer, National Tube Company, filed its franchise tax report with the Department of Taxation pursuant to Sections 5495-2, 5496 and 5497, General Code. The latter section reads so far as material:
"The annual corporation report shall include statements of the following facts * * *:
"* * *
"7. The amount of its capital, surplus, whether earned or unearned, undivided profits and reserves, as shown by the books of the corporation. A complete schedule shall be filed with the report showing the object and amount of each such reserve; also there shall be filed with said report a schedule of the annual rates of depreciation and depletion;
"8. The location and value of the property owned or used by the corporation as shown on its books * * *;
"9. The value of the goodwill of the corporation as shown on its books if carried thereon as an asset." (Emphasis added.)
Section 5498, General Code, reads so far as material:
"After the filing of the annual corporation report the Tax Commission [Commissioner], if it [ he] shall find such report to be correct, shall * * * determine the value of the issued and outstanding shares of stock of every corporation required to file such report. Such determination shall be made as of the date shown by the report to have been the beginning of the then current annual accounting period of such corporation. 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 (a) proper and reasonable reserves for depreciation, and depletion as determined by the Tax Commission [Commissioner], (b) taxes due and payable during the year for which such report was made, (c) the item of goodwill as set up in the annual report of the corporation when said annual report is accompanied by certified balance sheet showing such item of goodwill carried as an asset on the books of the company * * * and (d) such further amount as upon satisfactory proof furnished by the corporation, the Tax Commission [Commissioner] may find to represent the amount, if any, by which the value of the assets (other than goodwill) 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 * * *." (Emphasis added.)
The Tax Commissioner, assuming to act pursuant to Section 5498, General Code, and claiming that the fair value of the taxpayer's inventories was in excess of the value at which they were recorded in the general ledger accounts of the taxpayer and reported by the taxpayer, increased the value of the shares of stock of the taxpayer for franchise tax purposes (beyond the amount reported by the taxpayer as its capital, surplus, undivided profits and reserves) by the difference between such recorded and reported values of such inventories and an amount determined by the commissioner to be the fair value of such inventories.
The Board of Tax Appeals held that the Tax Commissioner was without authority to so increase the value of the shares of stock of the taxpayer.
The cause is now before this court on an appeal by the Tax Commissioner from the decision of the Board of Tax Appeals, pursuant to Section 5611-2, General Code, which requires this court to determine whether the decision of the Board of Tax Appeals is reasonable and lawful.
Messrs. Squire, Sanders Dempsey and Mr. Paul L. Holden, for appellee.
Mr. C. William O'Neill, attorney general, Mr. Thomas R. Lloyd and Mr. Hugh A. Sherer, for appellant.
In the instant case, the values shown in the taxpayer's annual corporation reports for the years 1944 to 1947, inclusive, for the amounts of its capital, surplus, undivided profits and reserves were those recorded in the general ledger accounts of the taxpayer in the ordinary course of its business and were accepted and used by the taxpayer as the basis for all its financial and earnings reports to its stockholders, to banks for credit purposes, to government regulatory bodies, and to the federal and state governments for tax purposes. No evidence was offered tending to prove the taxpayer had in any way falsified the amounts recorded in those accounts or that the asset values shown therein were not in fact what they purport to be.
Furthermore, it is conceded that the valuations shown for inventories on the taxpayer's books were accurately determined by following a recognized method of inventory accounting known as the last-in first-out or Lifo method; and that this method of accounting had been adopted by the taxpayer and consistently and accurately followed and used by the taxpayer in the ordinary course of its business for several years. In such an instance, the Tax Commissioner must find these annual corporation reports of the taxpayer, so far as they require statements of amounts and values as shown by its books, "to be correct." Then, under Section 5498, General Code, the Tax Commissioner must determine that "the value of the issued and outstanding shares of stock" of the taxpayer is an amount equal to what the statute says it "shall be deemed to be," — that is, "the total value of its capital, surplus * * * undivided profits and reserves" as stated in those reports, exclusive of any of the items specified in subdivisions (a) to (d) of the statute, which are properly claimed and established as deductions from such value. See Jacob B. Perkins Co. v. Glander, Tax Commr., 153 Ohio St. 501, 92 N.E.2d 690.
None of the provisions of Section 5498, General Code, which expressly authorize adjustments with respect to certain balance-sheet items, purport to authorize the commissioner to increase the amount of any balance-sheet asset items, as reported by a corporation in its annual corporation report, in the event that the Tax Commissioner shall "find such [annual corporation] report to be correct," i. e., a report in accordance with the requirements of Sections 5495-2, 5496 and 5497, General Code, as the report of taxpayer was in the instant case. To imply such a power would be to construe a taxing statute against the taxpayer instead of in favor of the taxpayer.
Furthermore, the General Assembly having expressly conferred authority on the Tax Commissioner to decrease the book value of assets in certain instances, where such book value exceeds fair value, the rule of expressio unius est exclusio alterius requires a conclusion against any implication of a power to increase the book value of assets in other instances.
The Tax Commissioner recognizes that the statute (Section 5498, General Code) provides for "book value" but cites several authorities which curiously seem to regard "book value" as always synonymous with "market value," such as Townsend v. LaCrosse Trailer Corp., 254 Wis. 31, 35 N.W.2d 325; Steeg v. Leopold Weil Bldg. Improvement Co., 126 La. 101, 52 S., 232; Southwestern Light Power Co. v. Oklahoma Tax Comm., 178 Okla. 277, 62 P.2d 637; Wineinger v. Kay (Tex.Civ.App.), 58 S.W.2d 876; and 9 Corpus Juris, 138.
However, paragraph nine of the syllabus in Opdyke v. Security Savings Loan Co., 157 Ohio St. 121, 105 N.E.2d 9, reads:
"The book value of an asset at any given time may be more or less than its value; and the book value of shares of stock may therefore be more or less than the value of such shares."
The reasons why book value and market value are not necessarily or even ordinarily the same are set forth in the opinion in that case at pages 148, 149 and 150.
If the Tax Commissioner's contention in this respect were sustained, he would, in determining the amount of corporate franchise taxes, be authorized to reappraise each year all the assets of every corporation filing an annual corporation report. Such a contention might have had some merit before 1927 when Section 5498 (111 Ohio Laws, 471, 473) read in part:
"* * * The Tax Commission * * * shall * * * determine the amount of the fair value on an asset basis of the capital stock of every domestic corporation * * * and the proportionate amount of the fair value on an asset basis of the capital stock of every foreign corportion * * *."
It was undoubtedly to do away with the tremendous amount of work, which would be involved in reappraising each year all the assets of every corporation, that the General Assembly amended Section 5498 to provide that book value, except as it might in certain specified instances be shown to be excessive, should be the basis for assessment of the corporation franchise tax.
It is also significant that the statutes with regard to listing personal property for taxation do expressly provide, unlike Section 5498, General Code, for authority in the tax assessor to increase as well as decrease the book value of property.
Thus, Section 5388, General Code, reads in part:
"Personal property of the following kinds, used in business, shall be listed and assessed at fifty per centum of the true value thereof, in money * * *."
Section 5389, General Code, reads in part:
"In the case of personal property used in business, the book value thereof, if any, less book depreciation, at such time or times, shall be listed and such depreciated book value shall be taken to be the true value of such property, unless the assessor shall find that such depreciated book value is greater or less than the then true value of such property in money * * *."
Because of the foregoing provisions with regard to personal property taxes, it is necessary for this taxpayer to keep some records which will reflect the actual value of its inventory at a given time. However, these records are not used as a basis of making up financial and earnings reports to stockholders or others to whom such reports must or may be submitted; although, of course, they may be useful in determining costs for the purpose of fixing prices to be charged to customers. It is the contention of the Tax Commissioner that, since such records do exist, they are a part of the books of the corporation and should be used in determining book value. In our opinion, the unsoundness of this contention is clearly demonstrated by the syllabus in Wheeling Steel Corp. v. Evatt, Tax Commr., 143 Ohio St. 71, 54 N.E.2d 132, which reads in part:
"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."
It may be further observed that there is no statutory provision specifying the manner in which the books of a corporation must be kept. In the absence of any such statute, book value should be determined under Sections 5497 and 5498, General Code, from books which were generally regarded as the accounting records of such corporation and were kept in the ordinary course of business in accordance with any sound and generally recognized and approved accounting system, as the taxpayer's books in the instant case admittedly were. See Kloepfer's, Inc., v. Peck, Tax Commr., 158 Ohio St. 577, 581.
The Tax Commissioner further contends in effect that if, as a result of the accounting system followed by a taxpayer, the book value of the taxpayer's shares is less than their fair value and the commissioner is denied authority to raise such book value to fair value, then other taxpayers within the same class, whose book values are equal to the fair value of their shares, are denied equal protection of the laws.
In our opinion there is no merit to this contention. As stated in the opinion by Mr. Justice Stone in Lawrence v. State Tax Comm. of Mississippi, 286 U.S. 276, 284, 76 L. Ed., 1102, 52 S. Ct., 556, 87 A.L.R., 374: "The equal protection clause does not require the state to maintain a rigid rule of equal taxation, to resort to close distinctions, or to maintain a precise scientific uniformity; and possible differences in tax burdens not shown to be substantial or which are based on discriminations not shown to be arbitrary or capricious, do not fall within constitutional prohibitions."
The decision of the Board of Tax Appeals, being both reasonable and lawful, is affirmed.
Decision affirmed.
MIDDLETON, MATTHIAS, HART and STEWART, JJ., concur.
WEYGANDT, C.J., and ZIMMERMAN, J., dissent.
on the ground expressed by the dissenting member of the Board of Tax Appeals that the majority view requires the Tax Commissioner to accept as final whatever figure the taxpayer may choose to offer. This constitutes "a circuitous subterfuge to emasculate and circumvent the statutes' purpose and intent, and does away with the requirement of setting up reserves and dispenses with the filing of claims for reduction from book value which the statutes clearly contemplate."
ZIMMERMAN, J., concurs in the foregoing dissenting opinion.