A corporation's only asset is a natural-gas liquefaction and storage facility that was severely damaged by fire years ago and, due to an inability to obtain rebuilding permits, may never be usable again -- even though its book (depreciated-cost) value doesn't reflect that damage or uncertainty. For computing the Article 9-A business-capital tax base under section 210.1(a)(2), should the asset be valued at its book depreciated cost, or at its actual fair market value?

Plain-English summary

Texas Eastern Cryogenics, Inc.'s principal asset before 1973 was a Staten Island facility that liquefied and stored natural gas from an interstate pipeline, then vaporized it and returned it to the pipeline. The facility was shut down for repairs in 1972, and on February 10, 1973 a fire during those repairs virtually destroyed the storage tank. Because the equipment was single-purpose -- usable only for liquefying, storing, and vaporizing natural gas -- destroying the tank effectively made the entire facility unusable. Petitioner had wanted to rebuild ever since, but couldn't get the necessary government permits, and New York City's own Tax Commission had already reduced the facility's assessed value for city real property tax purposes because rebuilding approval looked speculative.

The question was how to value this damaged, possibly-permanently-unusable facility for New York's Article 9-A business-capital tax, which under § 210.1(a)(2) taxes 1.78 mills on each dollar of business and investment capital allocated to New York. Under § 210.2, business capital is measured at the average FAIR MARKET VALUE of the taxpayer's gross assets, and 20 NYCRR § 3-4.5 defines fair market value as the price a willing, uncompelled seller and a willing, uncompelled buyer would agree to.

The Department held that fair market value -- not the depreciated cost carried on Petitioner's books -- governs. Book depreciated cost may only be used as a stand-in for fair market value where it happens to accurately reflect it. Here, the Department flagged (without making a formal factual finding, which is outside an Advisory Opinion's scope) that depreciated book cost failing to account for either the fire damage or the speculative prospects of ever rebuilding would NOT be an accurate measure of fair market value. New York City's reduced assessment isn't binding on the State, but if that land valuation could be shown accurate, it could be combined with a determination of the remaining structures' scrap/salvage value to compute the correct business-capital figure.

What this means for you

A casualty loss or asset impairment isn't automatically reflected on your tax books -- but it should be reflected in your business-capital valuation

If an asset has been damaged, destroyed, or rendered practically unusable (e.g., by fire, regulatory roadblocks, or other casualty), don't assume its depreciated book value is an acceptable stand-in for fair market value on your Article 9-A return -- the Department expects fair market value to actually reflect the asset's real, current condition and prospects.

A local property-tax assessment can be useful evidence, but isn't binding on the state

A reduced New York City real property tax assessment (or similar local valuation) isn't automatically controlling for state franchise tax purposes, but it can be used as supporting evidence for the land component of fair market value if you can substantiate its accuracy.

Advisory Opinions won't hand you a specific dollar valuation

Don't expect an Advisory Opinion to resolve a genuine valuation dispute with a specific number -- that's a factual determination outside what an Advisory Opinion can decide; it can only confirm the legal standard (fair market value) that governs.

Common questions

Q: Can I just use my asset's depreciated book cost for business-capital purposes to keep things simple?
A: Only if that book cost happens to accurately reflect the asset's actual fair market value -- if a casualty or other event has impaired the asset's real value below (or otherwise changed it from) book cost, book cost is not an acceptable substitute.

Q: Will the Department tell me exactly what my damaged asset is worth?
A: No -- specific fair-market-value determinations are factual findings outside the scope of an Advisory Opinion; you'll need your own valuation support (appraisals, comparable local assessments, etc.).

Citations and references

Statutes and guidance:

• Tax Law § 210.1(a)(2)
• Tax Law § 210.2
• 20 NYCRR § 3-4.5

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a81_4c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-81 (4) C
Corporation Tax
July 23, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C810213A

On February 13, 1981, a Petition for Advisory Opinion was received from Texas Eastern
Cryogenics, Inc., P.O. Box 2521, Houston, Texas 77001.
The issue is whether, for the purpose of the franchise tax on business corporations measured
by business capital and investment capital, imposed under section 210.1(a)(2) of the Tax Law,
contained in Article 9-A, the fair market value of an asset or the depreciated cost of such asset, as
indicated on the books of the taxpayer, is to be used in computing the value of business capital.
Prior to 1973, Petitioner's principal asset consisted of certain property and equipment, located
in Staten Island, New York, used for liquifying and storing natural gas received from an interstate
gas pipeline system. The facility also included equipment which vaporized and returned the gas to
the pipeline system. In 1972 the facility was shut down for repairs. On February 10, 1973, during
the course of the repairs, a fire broke out in the storage tank and virtually destroyed it, rendering the
tank wholly unusable. Because the property is of a single purpose design in that it can only be used
in liquidation, storage and vaporization of natural gas, the destruction of the tank made the entire
facility unusable.
Since 1973 Petitioner has planned to rebuild the facility and return it to service, but has not
been able to obtain the necessary governmental permits for reconstruction. Petitioner states that its
inability to obtain such permits has caused the New York City Tax Commission to recognize that
the likelihood of obtaining such approval is speculative and, accordingly, to reduce substantially the
assessed value of the facility for New York City real property tax purposes.
Section 210.1(a) of the Tax Law provides for the various methods of computing the
corporation franchise tax. Section 210.1(a)(2) provides, in pertinent part, for a tax computed at 1.78
mills on each dollar of the taxpayer's total business and investment capital or the portion thereof
allocated within New York State.
Section 210.2 of the Tax Law provides, in pertinent part, that the amount of business capital
shall be determined by taking the average fair market value of the gross assets included therein, less
certain liablities.
Section 3-4.5 of the Corporation Franchise Tax Regulations describes the fair market value
of any asset owned by a taxpayer as "the price at which a willing seller, not compelled to sell, will
sell and a willing purchaser, not compelled to buy, will buy."
Pursuant to Section 210.1(a)(2) of the Tax Law, the fair market value of the facility in
question herein must be used in computing the value of Petitioner's business capital. The depreciated
cost of the facility, as indicated on the books of the taxpayer, may be used only if such depreciated
cost accurately represents the fair market value of the facility.
JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-81 (4) C
Corporation Tax
July 23, 1981

No specific finding as to the fair market value of the asset in question is made in this
Advisory Opinion, inasmuch as such a finding of fact is beyond the purview of Advisory Opinions.
However, it is to be noted that the depreciated cost of the facility, as indicated on the books of the
taxpayer, to the extent that it reflects neither the damage to the facility caused by the fire nor the fact
that the likelihood of the necessary permits' being obtained and of the facility's being rebuilt is at best
speculative, does not appear to represent an accurate measure of the fair market value of the facility.
It is also to be noted that the assessment of the New York City Tax Commission is in no manner
binding upon the New York State Tax Commission in this matter. However, if such valuation of the
land can be shown to be accurate, it may be utilized, in conjunction with a determination as to the
scrap or salvage value of the remaining structures of the facility, in order to arrive at the proper
amount to be used in computing business capital.

DATED: July 21, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau