Current through Register Vol. 48, No. 38, September 20, 2024
a) In general. The property factor of the
apportionment formula for each trade or business of a person shall include all
real and tangible personal property owned or rented by such person and used
during the tax period in the regular course of such trade or business. The term
"real and tangible personal property" includes land, building, machinery,
stocks of goods, equipment, and other real and tangible personal property but
does not include coin or currency. Property used in connection with the
production of nonbusiness income shall be excluded from the property factor.
Property used both in the regular course of a person's trade or business and in
the production of nonbusiness income shall be included in the factor only to
the extent the property is used in the regular course of the person's trade or
business. The method of determining that portion of the value to be included in
the factor will depend on the facts of each case. The property factor shall
include the average value of property includable in the factor. See subsection
(g), below.
b) Property used for
the production of business income. Property shall be included in the property
factor if it is actually used or is available for or capable of being used
during the tax period in the regular course of the trade or business of the
person. Property held as reserves or standby facilities or property held as a
reserve source of materials shall be included in the factor. For example, a
plant temporarily idle or raw material reserves not currently being processed
are includable in the factor. Property or equipment under construction during
the tax period (except inventoriable goods in process), shall be excluded from
the factor until such property is actually used in the regular course of the
trade or business of the person. If the property is partially used in the
regular course of the trade or business of the person while under construction,
the value of the property to the extent used shall be included in the property
factor. Property used in the regular course of the trade or business of the
person shall remain in the property factor until its permanent withdrawal is
established by an identifiable event such as its conversion to the production
of nonbusiness income, its sale, or the lapse of an extended period of time
(normally five years) during which the property is held for sale.
1) Example 1: Corporation A closed its
manufacturing plant in State X and held such property for sale. The property
remained vacant until its sale one year later. The value of the manufacturing
plant is included in the property factor until the plant is sold.
2) Example 2: Same as above except that the
property was rented until the plant was sold. The plant is included in the
property factor until the plant is sold.
3) Example 3: Corporation A operates a chain
of retail grocery stores. The corporation closed Store A, which was then
remodeled into three small retail stores, such as a dress shop, dry cleaning,
and barber shop, which were leased to unrelated parties. The property is
removed from the property factor on the date the remodeling of Store A
commenced.
c)
Consistency in reporting. In filing returns with this State, if a person
departs from or modifies the manner of valuing property, or of excluding or
including property in the property factor used in returns for prior years, the
person shall disclose in the return for the current year the nature and extent
of the modification. If the returns or reports filed by the person with all
states to which the person reports under Article IV of the Multistate Tax
Compact or the Uniform Division of Income for Tax Purposes Act are not uniform
in the valuation of property and in the exclusion or inclusion of property in
the property factor, the person shall disclose in its return to this State the
nature and extent of the variance.
d) Numerator. The numerator of the property
factor shall include the average value of the real and tangible personal
property owned or rented by the person and used in this State during the tax
period in the regular course of the trade or business of the person. Property
in transit between locations of the person to which it belongs shall be
considered to be at the destination for purposes of the property factor.
Property in transit between a buyer and seller which is included by a person in
the denominator of its property factor in accordance with its regular
accounting practices shall be included in the numerator according to the state
of destination. The value of mobile or movable property such as construction
equipment, trucks or leased electronic equipment which are located within and
without this State during the tax period, shall be determined for purposes of
the numerator of the factor on the basis of total time within the State during
the tax period. An automobile assigned to a traveling employee shall be
included in the numerator of the factor of the state to which the employee's
compensation is assigned under the payroll factor or in the numerator of the
state in which the automobile is licensed.
e) Valuation of owned property. Property
owned by the person shall be at its original cost. As a general rule "original
cost" is the basis of property for federal income tax purposes at the time of
acquisition and will not reflect any federal adjustments thereafter for
deductions for depreciation, depletion, amortization and the like.
1) In addition, however, the valuation will
include the original cost, at acquisition, of any capital improvement as well
as partial dispositions of any portion by reason of sale, exchange,
abandonment, etc.
2) 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. Intangible drilling and development costs include such
elements as wages, fuel, repairs, hauling, draining, roadbuilding, surveying,
geological works, construction of derricks, tanks, pipelines, and other
physical structures necessary for the drilling of wells and their preparation
for the production of oil and gas, and supplies incident to and necessary for
the drilling of wells and clearing of ground.
3) Example 1: Corporation W acquired a
factory building in this State at a cost of $500,000 and 18 months later
expended $100,000 for major remodeling of the building. The corporation files
its return for the current taxable year on the calendar-year basis.
Depreciation deduction in the amount of $22,000 was claimed on the building for
its return for the current taxable year. The value of the building includable
in the numerator and denominator of the property factor is $600,000 as the
depreciation deduction is not taken into account in determining the value of
the building for purposes of the factor.
4) Example 2: During the current taxable
year, X Corporation merges into Y Corporation in a tax-free reorganization
under the Internal Revenue Code. At the time of the merger, X Corporation 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 percent 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, Y includes the property in Y's
property factor at X's original cost, without adjustment for depreciation,
i.e., $1,000,000.
5) Example 3:
Corporation Y acquires the assets of Corporation X in a liquidation by which Y
is entitled to use its stock cost as the basis of the X assets under 26 U.S.C.
Section 334(b)(2) (i.e. stock possessing 80 percent control is purchased and
liquidated within two years). Under these circumstances, Y's cost of the assets
is the purchase price of the X stock, prorated over the X assets.
A) If 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 person.
B) Inventory or 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.
f) Valuation of rented
property.
1) Property rented by the person is
valued at eight times the net annual rental rate. The net annual rental rate
for any item of rented property is the annual rental rate paid by the person
for such property, less the aggregate annual subrental rates paid by subtenants
of the person. (See Section
100.3380(a)
for special rules where the use of such net annual rental rate produces a
negative or clearly inaccurate value or where property is used by the person at
no charge or rented at a nominal rental rate.) Subrents are not deducted when
the subrents constitute business income because the property which produces the
subrents is used in the regular course of a trade or business of the person
when it is producing such income. Accordingly there is no reduction in its
value.
A) Example A: Corporation A receives
subrents from a bakery concession in a food market operated by it. Since the
subrents are business income they are not deducted from the rent paid by
Corporation A for the food market.
B) Example B: Corporation B rents a 5-story
office building primarily for use in its multistate business, uses three floors
for its offices and subleases two floors to various other businesses and
persons such as professional people, shops and the like. The rental of the two
floors is attendant to the operation of the corporation's trade or business.
Since the subrents are business income they are not deducted from the rent paid
by the corporation.
C) Example C:
Corporation C rents a 20-story office building and uses the lower two stories
for its general corporation headquarters. The remaining 18 floors are subleased
to others. The rental of the eighteen floors is not attendant to but rather is
separate from the operation of the corporation's trade or business. Since the
subrents are nonbusiness income they are to be deducted from the rent paid by
the corporation.
2)
"Annual rental rate" is the amount paid as rental for property for a 12-month
period (i.e., the amount of the annual rent). Where property is rented for less
than a 12-month period, the rent paid for the actual period of rental shall
constitute the "annual rental rate" for the tax period. However, where a
corporation has rented property for a term of 12 or more months and the current
tax period covers a period of less than 12 months (due, for example, to a
reorganization or change of accounting period), the rent paid for the short tax
period shall be annualized. If the rental term is for less than 12 months, the
rent shall not be annualized beyond its term. Rent shall not be annualized
because of the uncertain duration when the rental term is on a month to month
basis.
A) Example A: Corporation A which
ordinarily files its returns based on a calendar year is merged into
Corporation B on April 30. The net rent paid under a lease with 5 years
remaining is $2,500 a month. The rent for the tax period January 1 to April 30
is $10,000. After the rent is annualized the net rent is $30,000 ($2,500 X
12).
B) Example B: Same facts as in
Example A except that the lease would have terminated August 31. In this case
the annualized net rent is $20,000 ($2,500 X 8).
3) "Annual rent" is the actual sum of money
or other consideration payable, directly or indirectly, by the person or for
its benefit for the use of the property and includes:
A) Any amount payable for the use of real or
tangible personal property, or any part thereof, whether designated as a fixed
sum of money or as a percentage of sales, profits or otherwise.
Example: A corporation pursuant to the terms of a lease, pays
a lessor $1,000 per month as a base rental and at the end of the year pays the
lessor one percent of its gross sales of $400,000. The annual rent is $16,000
($12,000 plus one percent of $400,000 or $4,000).
B) Any amount payable as additional rent or
in lieu of rents, such as interest, taxes, insurance, repairs or any other
items which are required to be paid by the terms of the lease or other
arrangement, not including amounts paid as service charges, such as utilities,
janitor services, etc. If a payment includes rent and other charges
unsegregated, the amount of rent shall be determined by consideration of the
relative values of the rent and the other items.
i) Example i: A corporation, pursuant to the
terms of a lease, pays the lessor $12,000 a year rent plus taxes in the amount
of $2,000 and interest on a mortgage in the amount of $1,000. The annual rent
is $15,000.
ii) Example ii: A
corporation stores part of its inventory in a public warehouse. The total
charge for the year was $1,000 of which $700 was for the use of storage space
and $300 for inventory insurance, handling and shipping charges, and C.O.D.
collections. The annual rent is $700.
C) "Annual rent" includes royalties based on
extraction of natural resources, whether represented by delivery or purchase.
For this purpose, a royalty includes any consideration conveyed or credited to
a holder of an interest in property that constitutes a sharing of current or
future production of natural resources from such property, irrespective of the
method of payment or how such consideration may be characterized, whether as a
royalty, advance royalty, rental or otherwise. "Annual rent" does not include
incidental day-to-day expenses such as hotel or motel accommodations, daily
rental of automobiles, etc.
4) Leasehold improvements shall, for the
purposes of the property factor, be treated as property owned by the person
regardless of whether the person is entitled to remove the improvements or the
improvements revert to the lessor upon expiration of the lease. Hence, the
original cost of leasehold improvements shall be included in the
factor.
g) Averaging
property values
1) As a general rule the
average value of property owned by the person shall be determined by averaging
the values at the beginning and ending of the tax period. However, the Director
may require or allow averaging by monthly values if such method of averaging is
required to properly reflect the average value of the person's property for the
tax period. Averaging by monthly values will generally be applied if
substantial fluctuations in the values of the property exist during the tax
period or where property is acquired after the beginning of the tax period or
disposed of before the end of the tax period.
2) Example: The monthly value of the person's
property was as follows:
|
January
|
$ 2,000
|
July
|
$ 15,000
|
|
February
|
2,000
|
August
|
17,000
|
|
March
|
3,000
|
September
|
23,000
|
|
April
|
3,500
|
October
|
25,000
|
|
May
|
4,500
|
November
|
13,000
|
|
June
|
10,000
|
December
|
2,000
|
|
TOTAL
|
$120,000
|
A) The average
value of the person's property includable in the property factor for the
taxable year is determined as follows: $120,000 divided by 12 =
$10,000
B) Averaging with respect
to rented property is achieved automatically by the method of determining the
net annual rental rate of such property as set forth in subsection(e)
above.
