Focus on Property Tax Valuation Practices and Procedures
Editors for This Issue: Jasna Karamehmedovic and John C. Ramirez
Fair Value Valuation Insights
Best Practices Article:
The Relevance of Fair Value Measurements for Property Tax Valuation Purposes
Aaron M. Rotkowski, Richard G. Smith, Esq., and John C. Ramirez
There have been a large number of merger and acquisition (M&A) transactions completed during the last decade. The required financial accounting treatment of these M&A transactions is to allocate the total purchase price paid for the target company to the fair value of the target company individual assets acquired and liabilities assumed. This so-called “purchase price allocation” process is based on the total price the acquirer paid to acquire the target company. That price may include expected post-merger synergies, the present value of growth opportunities, and identifiable intangible assets and goodwill. The standard of value for the financial accounting purchase price allocation is fair value. The fair value standard of value is not the same as the fair market value standard of value that is most commonly used for property tax purposes. There are important differences between fair value and fair market value. These differences may or may not cause the fair value of an acquired company’s asset(s) to be different than the fair market value of these same asset(s). Taxpayers should not accept on faith alone the taxing authority’s claim that fair value is equal to fair market value. This discussion explains situations where (1) fair value analyses are not relevant to a fair market value valuation and (2) fair value analyses may be relevant to a fair market value valuation.
The Role of the FASB and the IASB in Establishing Fair Value Measurements
Lisa H. Tran
Familiarity with the accounting standards regarding fair value measurements will help taxpayers, valuation analysts, and tax attorneys understand some of the differences between the fair value standard of value and other standards of value (e.g., fair market value). This discussion provides a historical overview (1) of the Financial Accounting Standards Board and the International Accounting Standards Board and (2) of the progress that they have made towards establishing common guidance on fair value measurements.
Property Tax Implications of Lease Accounting GAAP Changes
John C. Ramirez
Lease obligations in the United States total in the trillions of dollars. The majority of these lease obligations are classified as operating leases for financial accounting purposes. Under current U.S. GAAP, the assets and the liabilities of operating leases are not recorded on the lessee’s balance sheet. The IASB and the FASB are proposing significant changes to the current lease accounting standards. As a result, virtually all leases, including operating leases, will be reported on a lessee’s balance sheet. The effect of the proposed lease accounting change could have a significant impact on the property tax valuations of many industrial and commercial taxpayers. Taxpayer companies with substantial leasing activity should be prepared (1) to assess how the proposed GAAP changes will affect their financial statements and operations and (2) to analyze the impact of the proposed GAAP changes on future lease transactions. This discussion summarizes the proposed lease accounting changes and considers the property tax implications of the proposed GAAP changes.
Thought Leadership Article:
Do M&A Transaction Prices Reflect Fair Market Value for Ad Valorem Property Tax Purposes?
Travis R. Lance
One market approach valuation method that is sometimes used in a unit principle valuation analysis is the guideline merged and acquired company method. The guideline merged and acquired company method values the taxpayer property by applying valuation pricing multiples extracted from actual purchases of guideline (or comparative) operating businesses. The analytical issue associated with the use of the guideline merged and acquired company method is that it may overstate the fair market value of the subject property. This value overstatement may occur because the prices paid in merger and acquisition (M&A) transactions are often greater than fair market value prices. This discussion explains some of the reasons why corporate acquirers sometimes pay more than fair market value prices in M&A transactions. And, this discussion explores empirical data to support the conclusion that market-based transaction prices often represent a value other than (and greater than) fair market value.
Valuation of Taxpayer Intellectual Property Assets for Ad Valorem Taxation
Robert F. Reilly, CPA
Industrial and commercial taxpayers that are subject to state and local property taxation should consider the value of the corporation’s intangible assets. This is because such intangible assets are either (1) subject to property tax in the subject jurisdiction or (2) exempt from property tax in the subject jurisdiction. Particularly if the taxpayer is subject to the unit principle (or business enterprise level) of property assessment, taxpayer management should identify and value any exempt intangible assets. In jurisdictions that exempt such assets, intangible asset values should be excluded from the overall taxpayer unit value in order to conclude the residual value of the taxpayer real estate and tangible personal property subject to taxation. Intellectual property (patents, copyrights, trademarks, and trade secrets) are a legally defined subset of commercial intangible assets. This discussion focuses on the valuation of intellectual property for ad valorem tax purposes.
Functional Obsolescence Considerations in the Property Tax Valuation
Scott R. Miller
The identification and consideration of functional obsolescence is a consideration in any ad valorem property tax valuation. Functional obsolescence is considered explicitly in the cost approach methods. And, functional obsolescence is considered implicitly in the income approach and market approach methods. This discussion addresses how to define and identify the occurrence of functional obsolescence. Additionally, this discussion presents the procedures used in quantifying functional obsolescence in the application of the cost approach. Finally, this discussion presents illustrative examples of a cost approach functional obsolescence analysis. And, this discussion addresses some of the issues the valuation analyst may encounter in the quantification process.
Understanding the Postulates of the Capital Asset Pricing Model
The capital asset pricing model (CAPM) is a widely accepted model for estimating the cost of equity capital. The simplicity of the model and the relative availability of model inputs make CAPM an attractive tool for estimating the cost of equity capital. However, it is important for the valuation analyst (1) to understand the many postulates that are essential presuppositions to the CAPM and (2) to apply the necessary adjustments when valuing taxpayer properties for property tax purposes. This discussion summarizes the relevant premises in the CAPM and the adjustments that the valuation analyst should consider when using CAPM in the valuation of taxpayer properties for property tax purposes.
Avoiding Procedural Quagmires in Property Tax Appeals—Kentucky Case Studies
Jennifer S. Smart, Esq.
Property tax appeal procedures are often complex, and they may involve traps for the unwary taxpayer/property owner or for the taxpayer’s legal counsel. Some states, such as Kentucky, have more complicated procedural requirements in place for real property taxes than for tangible personal property taxes. Experience and expertise regarding these specific procedural steps are necessary in order to perfect all types of property tax appeals. Such experience and expertise are important in order to avoid missteps that may prove fatal to the successful property tax appeal.
The Battle Over Taxation of Oil and Gas Moving in Interstate Commerce
John Brusniak Jr., Esq.
Three recent judicial decisions have resulted in a significant conflict in the taxation of oil and gas moving through the stream of interstate commerce in the United States. The conflict involves oil and gas products moving though Texas and Oklahoma. Natural gas (and potentially oil) producers that move products through interstate pipeline facilities are not required to pay ad valorem taxes on their products, while those products are located in Texas. Other oil and gas producers that opt to move their products through Oklahoma are required to pay this ad valorem tax. This discussion summarizes the three recent judicial decisions and describes the resulting irregular taxation of property traveling in the stream of interstate commerce.
Property Tax Valuation Analyst Attributes
Ashley L. Reilly
Property tax valuation practices are often constrained by their ability to recruit and retain successful valuation analysts. Accordingly, each valuation practice should develop a finite (e.g., four or five items) list of analyst attributes that are common to that firm’s most successful property tax valuation analysts. Then, the firm management can use that list to recruit and hire valuation analysts. This interview with our firm managing directors describes the five analyst attributes that Willamette Management Associates seeks in its new hires (including valuation analysts at any level from staff to partner). Of course, each valuation practice should develop its own list of analyst attributes that is appropriate to that firm’s needs and philosophies.