Arizona Administrative Code › Title 15 - REVENUE › Chapter 2 - DEPARTMENT OF REVENUE - INCOME AND WITHHOLDING TAX SECTION › Subchapter D - CORPORATIONS › Article 6 - PROPERTY FACTOR › Section R15-2D-604 - Valuation of Owned Property

Current through Register Vol. 30, No. 28, July 12, 2024
A.
				  Property owned by a taxpayer is valued at its original cost. Generally,
				  "original cost" means 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 to the property and
				  partial disposition of the property, by reason of sale, exchange, abandonment,
				  or other similar event. However, capitalized intangible drilling and
				  development costs are included in the property factor whether or not they have
				  been expensed for either federal or state tax purposes.
Example 1: The taxpayer acquires a factory building in this
					 state at a cost of $500,000 and, 18 months later, expends $100,000 for major
					 remodeling of the building. The taxpayer files its return for the current
					 taxable year on the calendar-year basis. The taxpayer claims a depreciation
					 deduction in the amount of $22,000 with respect to the building on the return
					 for the current taxable year. The value of the building includable in the
					 numerator and the 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 property 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 that it
					 built five years earlier at a cost of $1,000,000. Corporation X has been
					 depreciating the factory at the rate of two percent per year, and its basis to
					 Corporation X, at the time of the merger is $900,000. Because the property is
					 acquired by Corporation Y in a transaction in which, under the Internal Revenue
					 Code, its basis to Corporation Y is the same as its basis to Corporation X,
					 Corporation Y includes the property in its property factor at Corporation X's
					 original cost, without adjustment for depreciation, $1,000,000.
Example 3: Corporation Y acquires the assets of Corporation
					 X in a liquidation by which Corporation Y is entitled to use its stock cost as
					 the basis of the Corporation X assets under Internal Revenue Code §
					 334(b)(2). Under these circumstances, Corporation Y's cost of the assets is the
					 purchased price of the Corporation X stock, prorated over the Corporation X
					 assets.
B. If the original
				  cost of property is unascertainable, the property is included in the property
				  factor at its fair market value as of the date of acquisition by the
				  taxpayer.
C. Inventory of stock of
				  goods is included in the property factor in accordance with the valuation
				  method used for federal income tax purposes.
D. Property acquired by gift or inheritance
				  is included in the property factor at its basis for determining depreciation
				  for federal income tax purposes.