Did a manufacturer's stock sale restart local machinery-and-tools depreciation, and how should an accepted reappraisal affect value?

Plain-English summary

Virginia advised that the manufacturer's 1999 stock sale did not transfer its machinery assets or restart their depreciation ages. The company remained the same federal taxable entity, retained its FEIN, and made no change to its federal asset depreciation schedule.

The county had accepted a blanket appraisal valuing machinery at 50% of original cost, then proposed restarting depreciation at 100% of the new appraised value. The taxpayer proposed using the appraised value as new original cost but continuing the old age percentage. Virginia rejected both methods.

The opinion's method divided each asset's accepted appraised value by the depreciation percentage for the appraisal year to calculate an adjusted original cost. The county would then apply its normal depreciation schedule from the asset's actual acquisition year. Each asset had to be calculated separately.

The formula applied only where both taxpayer and locality accepted an outside revaluation. A stock sale alone did not require revaluation.

What this means for you

• A stock sale is different from an asset sale for local property valuation.
• Existing asset ages did not reset merely because shareholders changed.
• An accepted appraisal could require adjusted original cost rather than either party's proposed reset method.
• Machinery-and-tools tax remains locally administered, and asset-level records are essential.

Common questions

Did the stock buyer take title to the machinery?

No. The corporation retained the assets; only its stock changed hands.

What formula did Virginia recommend?

Adjusted original cost equaled appraised value divided by the depreciation rate for the appraisal year.

Did every stock sale require an appraisal?

No. The opinion said a stock sale alone did not automatically trigger revaluation.

Citations and references

• Va. Code § 58.1-3983.1(J)(2).
• Burruss Timber Company, Inc. v. Frith, 228 Va. 701, 324 S.E.2d 679 (1985).
• P.D. 94-106.

Subject

Proper valuation method for certain assets when a stock transfer has occurred

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-2

Original ruling text

January 10, 2007

Re: Request for Advisory Opinion

Machinery and Tools Tax

Dear *:

This is in response to your letter in which you request an advisory opinion regarding the proper valuation method for certain assets when a stock transfer has occurred. In this case, * (the "Taxpayer") is a manufacturer subject to the Machinery and Tools (M&T) tax.

The M&T tax is imposed and administered by local officials. Virginia Code § 58.1-3983.1 J 2 authorizes the Department to issue advisory opinions on local business tax matters. The following opinion has been issued subject to the facts presented to the Department summarized below. Any change in facts or the introduction of new facts may lead to a different result.

While addressing the questions raised in your letter, this response is intended to provide advisory guidance only, and does not constitute a formal or binding ruling. The Code of Virginia sections and public documents cited are available on-line in the Tax Policy Library section of the Department's web site, located at www.tax.virginia.gov.

FACTS

The Taxpayer is a manufacturer of carpet fibers. In 1999, shareholders of the Taxpayer sold their stock to an unrelated third party. At this time, the Taxpayer changed its business name, but remained as an entity engaged in the business of the manufacture of carpet fibers. The Taxpayer retained its FEIN number, indicating that for federal income tax purposes the taxable entity never changed. There was no change to the depreciation schedule for those assets as reported for federal income tax purposes change.

Prior to the sale of the stock, the Taxpayer had all of its assets, both real property and tangible personal property, appraised. The Taxpayer presented the County with a blanket revaluation of all machinery and tools, regardless of age, at 50% of original cost. The County accepted the revaluation and stated that the depreciation scale should begin anew, starting at 100% of the value of the revalued assets as of the date of the sale of the stock.

The Taxpayer contends that it should not be regarded as a first year business for purposes of the valuation of its tangible personal property. The Taxpayer asserts that while there was a transfer of intangible property in the form of the sale of the stock, the tangible property remained with the Taxpayer and should be assessed accordingly. At issue is the correct application of the County's depreciation schedule to the Taxpayer's assets.

In its request for an advisory opinion, the County asks whether a sale of stock, or a change of shareholders, triggers a change in corporate identity for purposes of local property taxation. The County also asks how a revaluation as a result of an appraisal affects the local depreciation scale.

OPINION

Corporate Identity and Sale of Stock

Generally, the sale of intangible property to an unrelated third party does not include the transfer of assets. Rather, the assets remain with the target company. In Public Document (P.D.) 94-106 (04/08/1994), the Department addressed the issue of the transfer of ownership through the sale of stock, finding that a transfer of ownership in property, whether it be real or tangible, does not immediately impact assessment values.

The Virginia Supreme Court (the "Court") differentiated between the sale of stock and the sale of assets in Burruss Timber Company, Inc. v. F. Earl Frith, t/a, etc . 228 Va. 701, 702, 324 S.E.2d, 679, 680 (1985). In that case, the Court found that the unrelated third party purchaser did not take title to the assets (land). For this reason, the Court found that the transaction was not a sale of assets, but rather it was a sale of stock.

Similarly, in the present case, the purchase of the stock by an unrelated third party does not constitute a transfer of assets. Because the assets remain with the company, they must be assessed based on the percentage of their original cost as calculated before the sale of the stock in 1999.

Original cost and revaluation

The Taxpayer and the County proposed different approaches to determine the proper valuation of machinery and tools after a revaluation has occurred. The County's depreciation rate schedule starts at 100% in the year of purchase, reduced by 10% per year until the sixth year. Thereinafter, machinery and tools are assessed at a rate of 50%. Table 1 shows the standard method used by the County to determine the taxable value of business tangible personal property based on the assumption that a business purchased an asset for $10,000.

TABLE 1

Year 1 2 3 4 5 6

Original Cost $10,000 $10,000 $10,000 $10,000 $10,000 $10,000

Percent Depreciation 100% 90% 80% 70% 60% 50%

Taxable Value $10,000 $9,000 $8,000 $7,000 $6,000 $5,000

In the present case, the County accepted the Taxpayer's appraisal of tangible personal property effective in 1999, necessitating an adjustment to the County's standard method of depreciation. For subsequent years, the Taxpayer and the County proposed different approaches to determine the proper valuation of machinery and tools after a revaluation has occurred.

Under the County's approach, the depreciation rate would return to 100% of the appraised value of assets, i.e. , the appraised value of the property becomes the original cost and the depreciation rate begins again at 100% for the year in which the appraisal is accepted. Assuming the same $10,000 item of property described in Table 1 is appraised for $6,000 in year 4, Table 2 shows how the County proposes to compute the taxable value for subsequent years.

TABLE 2

Year 1 2 3 4* 5 6

Original Cost $10,000 $10,000 $10,000 $6,000 $6,000 $6,000

Percent Depreciation 100% 90% 80% 100% 90% 80%

Taxable Value $10,000 $9,000 $8,000 $6,000 $5,400 $4,800

*Year of revaluation

It should be noted that this approach would be appropriate if the assets of Taxpayer had been sold, as opposed to the sale of the stock. Under the facts presented, however, the County was incorrect in restarting the depreciation scale as of the date of the stock sale. The normal depreciation schedule should be followed based on the original date of acquisition.

The Taxpayer has proposed an alternative method. Under the Taxpayer's method, the original cost would also be adjusted to the appraised value, but for the years succeeding the appraisal, the depreciation rate would be based on the original purchase year. Assuming the same facts as Table 2, Table 3 shows how the Taxpayer proposes to compute the taxable value for subsequent years.

TABLE 3

Year 1 2 3 4 5 6

Original Cost $10,000 $10,000 $10,000 $6,000 $6,000 $6,000

Percent Depreciation 100% 90% 80% - 60% 50%

Taxable Value $10,000 $9,000 $8,000 $6,000 $3,600 $3,000

• Year of revaluation

This method fails to consider that the appraised value was the actual taxable value for Year 4. Under the County's depreciation approach, the $6,000 could not have been the original cost for computing the taxable value of the property for year 4. Consequently, using the appraised value as the original cost for subsequent years could result in a taxable value that is significantly less that fair market value.

In my opinion neither approach is correct in this situation. Under the County's method, depreciation rates are used to convert the original cost of an asset to its fair market value for purposes of taxation. When a locality accepts an appraisal of an asset as its taxable value, the depreciation must take into account the revaluation, which involves adjusting the original cost of the asset. This is achieved by dividing the appraised value by the depreciation rate for the year in which the appraisal was accepted.

Appraised value / depreciation rate in year of appraisal = adjusted original cost

In our example: $6,000 / 0.70* = $8,571

*Depreciation rate in year 4

Table 4 demonstrates the application of this method to our example.

TABLE 4

Year 1
2
3 4*
5
6

Original

Cost $10,000
$10,000
$10,000
$8,571
$8,571
$8,571

Percent 100%
90%
80%
70%
60%
50%

Depreciation

Taxable

Value $10,000
$9,000
$8,000
$6,000
$5,143
$4,286

• Year of revaluation

The tables refer to the valuation of one single asset. Obviously, when individual assets are placed into service in different years, the revaluation and the depreciation rate would be different for each asset. As such, each asset's adjusted original cost would have to be determined separately.

The formula suggested above is a method of achieving FMV for purposes of tangible personal property taxation from the point of the accepted revaluation going forward. Furthermore, it should be emphasized that the sale of stock, by itself, does not automatically trigger the need to revalue assets for purposes of tangible personal property taxation. This method would apply only to cases where both a taxpayer and the locality have accepted the results of a revaluation made by an outside party.

If you have any questions regarding this opinion, you may contact * in the Department's Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-546886455H