HAR § 18-235-31-01 — Property factor; valuation of owned property

(a) Property owned by the taxpayer shall be valued at its original cost. As a general rule, original cost is deemed to be the basis of the property for federal income tax purposes (before any federal adjustments) at the time of acquisition by the taxpayer and adjusted by subsequent capital additions or improvements and partial dispositions. However, capitalized intangible drilling and development costs shall be included in the property factor whether or not they have been expensed for either federal or state tax purposes. Example 1: The taxpayer acquired a factory building in this State at a cost of $500,000 and, eighteen months later, expended $100,000 for major remodeling of the building. Taxpayer files its return for the current taxable year on the calendar-year basis. A depreciation deduction in the amount of $22,000 was claimed with respect to the building on the return for the current taxable year. The value of the building includable in the numerator and denominator of the property factor is $600,000; the depreciation deduction is not taken into account in determining the value of the building for purposes of the factor. Example 2: During the current taxable year, Corporation X merges into Corporation Y in a tax-free reorganization under the Internal Revenue Code. At the time of the merger, Corporation X owns a factory which X built five years earlier at a cost of $1,000,000. X has been depreciating the factory at the rate of two per cent per year, and its basis in X’s hands at the time of the merger is $900,000. Since the property is acquired by Y in a transaction in which, under the Internal Revenue Code, its basis in Y’s hands is the same as its basis in X’s hands, Y includes the property in Y’s property factor at X’s original cost, without adjustment for depreciation, i.e., $1,000,000. Example 3: Corporation Y acquires the stock of Corporation X and makes an election under section 338 of the Internal Revenue Code of 1986 (with respect to certain stock purchases treated as asset acquisitions). Under these circumstances, Y’s cost of the assets is the purchase price of the X stock, prorated over the X assets. If the original cost of property is unascertainable, the property is included in the factor at its fair market value as of the date of acquisition by the taxpayer. (b) Inventory of stock of goods shall be included in the factor in accordance with the valuation method used for federal income tax purposes. (c) Property acquired by gift or inheritance shall be included in the factor at its basis for determining depreciation for federal income tax purposes.