Section 155.24. Valuation methods

(a) General. In general valuation will be made in accordance with the following:

(1) The Department recognizes that no arithmetical method is of itself adequate and complete in all instances in determining the capital stock value. In using an arithmetical method, further adjustments may be needed to take into consideration other influencing factors, in addition to those factors set forth in § 155.23 (relating to determination of valuation factors), such as the nature of the business of the taxpayer (industrial, manufacturing, investment, personal service, utility and so forth), the financial history of the taxpayer, the liquidity of the taxpayer’s balance sheet assets, extraordinary and nonrecurring transactions and other pertinent factors. The amount of weight given each factor may vary depending upon the facts and circumstances pertinent to each taxpayer.

(2) As a general rule, since the stockholder equity, as determined in subsection (b)(1), is representative of the taxpayer’s financial history, its balance sheet assets and liabilities, and the taxpayer’s present worth as represented by the taxpayer itself, stockholder equity will represent the minimum value the Department will employ to determine the capital stock value.

(i) Generally, the stockholder equity will adequately reflect the capital stock value of those taxpayers whose operations have produced a loss or low earnings in the current tax year or in the preceding tax years.

(ii) If, for those taxpayers whose operations have produced high earnings in the current tax year or in the preceding tax years the stockholder equity generally does not adequately reflect the capital stock value. Therefore, to account for the effect of the high earnings, those taxpayers will also employ the Three-way and Five-way Methods to determine the capital stock value.

(iii) What is determined to be high or low earnings shall depend upon the facts and circumstances pertinent to each individual case.

(3) When the taxpayer’s stock is involved in a substantial number of transactions or when a substantial number of the taxpayer’s shares are traded or disposed during the taxable year, the market value of stock becomes a factor for the determination of the capital stock value.

(4) A copy of the taxpayer’s Annual Report to the Securities and Exchange Commission or any other documents or reports which set forth the taxpayer’s corporate financial statements shall be submitted to the Department.

(b) Determination of the capital stock value. As a general rule, the Department requires that the valuation of capital stock of domestic corporations and foreign corporations doing business in this Commonwealth, for the purpose of determining Capital Stock-Foreign Franchise Tax liability, shall be computed by using one of the following methods:

(1) Stockholder Equity Method. This method uses 70% of stockholder equity to determine the capital stock value. Reference should also be made to § § 155.22 and 155.23(d) (relating to definitions; and determination of valuation factors).

(2) Three-Way Method (Computed Value Using Earnings Method). This method is to be used principally when earnings and average earnings capitalized are comparable to stockholder equity. This method uses the current earnings, the 5 year average earnings and stockholder equity to determine the capital stock value. This method is used when the taxpayer does not distribute dividends.

Example:

Earnings ($450,000) capitalized at 10%
	(10 x $450,000)	$4,500,000
Average Earnings ($250,000) capitalized at 10%
	($250,000 x 10)	2,500,000
Stockholder Equity		2,000,000
		$9,000,000
Average (Total divided by 3)		$3,000,000

The average may be adjusted depending upon various other pertinent factors in determining the capital stock value.

(3) Five-Way Method (Computed Value Using Earnings and Dividends Method). This method is to be used when the taxpayer distributes dividends. This method uses the current earnings, 5 year average earnings, the current dividends, the 5 year average dividends, and stockholder equity to determine the capital stock value. This method is used principally when dividends capitalized, average dividends capitalized, earnings capitalized and average earnings capitalized are comparable to stockholder equity.

Example:

Earnings ($450,000) capitalized at 10%
	(10 x $450,000)	$4,000,000
Average Earnings ($400,000) capitalized at 10%
(10 x $400,000) $400,000)		4,000,000
Dividends Declared ($400,000) capitalized at 8%
(12 1/2 x $400,000) $400,000)		5,000,000
Average Dividends Declared ($400,000) capitalized
at 8% (12 1/2 x $400,000) x $400,000)		5,000,000
Stockholder Equity		5,000,000
		$23,500,000
Average (Total divided by 5)		$4,700,000

The average may be adjusted depending upon various other pertinent factors in determining the capital stock value.

(4) As a general rule, the value of the capital stock shall be the highest of the preceding three amounts. The amount, that is, the highest of (1), (2) or (3), as finally determined by the Department, taking into consideration the various factors and circumstances pertinent to each taxpayer, shall be the value of the capital stock of domestic corporations and foreign corporations doing business in this Commonwealth for the purpose of determining Capital Stock-Foreign Franchise Tax liability.

(c) Exceptions. Exceptions shall be as follows:

(1) Minimum capital stock value. The Department requires a minimum of $1,000 capital stock value for domestic companies. There is no minimum capital stock value for foreign corporations doing business in this Commonwealth.

(2) Incorporation—first year companies. A taxpayer for its first tax year (the year of incorporation) should compute the capital stock value based upon the daily average of the value of capital paid in during the tax year or the market value of stock. From that value the first year book income should be added or the first year book loss deducted.

Example 1. The taxpayer incorporated (in this Commonwealth) on January 1. It issued capital stock in the amount of $50,000 at that time. During the year ending December 31, its operations resulted in a loss of $15,000. The capital stock value is $35,000 ($50,000 minus $15,000).

Example 2. The taxpayer incorporated (in this Commonwealth) on January 1. It had no capital transactions until April 1 at which time it issued capital stock in the amount of $50,000. During the year ending December 31, its operations resulted in a loss of $15,000. The capital stock value is computed by apportioning the minimum value of $1,000 for 90/365 year ($247) and the paid in capital of $50,000 for 275/365 year ($37,671) and deducting the book loss of $15,000. The capital stock value is $22,918 ($37,918 minus $15,000).

Example 3. The taxpayer incorporated (in this Commonwealth) on April 1. It had no capital transactions until July 1 at which time it issued capital stock in the amount of $50,000. During the year ending December 31, its operations produced book income of $10,000. The capital stock is computed by apportioning the minimum value of $1,000 for 91/275 year ($331) and the paid in capital of $50,000 for 184/275 year ($33,455) and adding the book income of $10,000. The capital stock value is $43,786 ($33,786 plus $10,000). However, if the first year corporate taxpayer operated in prior years in another business form, such as a partnership or sole proprietorship, its earnings history shall be adjusted to reflect reasonable compensation to owners and Federal and State taxes which would have been imposed had the predecessor been a corporation. After the adjustments, the taxpayer shall apply the valuation methods set forth in subsection (b) to determine its capital stock value.

(3) Dissolution—last year companies. The taxpayer’s capital stock value is computed for the year of its dissolution by reference to the amount or value of its liquidating distributions. The amount or value of each distribution is averaged for the portion of the tax year held by the taxpayer. The average amounts are added and the total represents the taxpayer’s capital stock value.

Example 1. On December 31, (the last day of the tax year) the taxpayer files a certificate of election to dissolve. On the same day it distributes the assets to the stockholders. The actual value of the assets distributed is $100,000. The capital stock value is $100,000.

Example 2. On September 30, the taxpayer files a certificate of election to dissolve. The tax year ends December 31. The actual value of the assets to be distributed is $125,000. Distribution to the stockholder is made as follows: on October 1, $50,000; on November 1, $25,000; and a final distribution on December 31, $50,000. The capital stock value is calculated as follows:
$50,000 x 274/365 = $ 37,534
$25,000 x 304/365 = $ 20,822
$50,000 x 365/365 = $ 50,000
Total $108,356

The capital stock value is $108,356.

(4) Liquidation in progress. When a taxpayer is going out of business or has already discontinued business and is in the process of complete liquidation, its capital stock value is computed by reference to the net value of assets remaining at the end of the taxable year plus, if any, the value of liquidating distributions during the tax year averaged for the period of the tax year the distributed assets were held by taxpayer.

Example 1. The taxpayer has discontinued business operations and is in the process of complete liquidation. It makes no distribution during the tax year. On the last day of the tax year the actual value of net assets is $75,000. The capital stock value is $75,000.

Example 2. The taxpayer has discontinued business operations and is in the process of complete liquidation. The taxable year ends December 31. It makes one distribution on October 1 of $50,000. On the last day of the tax year the actual value of net assets remaining is $25,000. The capital stock value is computed as follows:

$50,000 x 274/365 =	$ 37,534
25,000	25,000
	$ 62,534

The capital stock value is $62,534.

If the remaining $25,000 is distributed on January 31 of the following year, the capital stock for the short period is $25,000.

(5) Cash sale of assets or outstanding shares. In cash sales the value is generally determined by reference to the selling price.

Example 1. The taxpayer transfers for cash and notes totaling $100,000 all of its assets and liabilities. The capital stock value is $100,000.

Example 2. The outstanding shares of the taxpayer were sold in a single transaction for $50,000. The taxpayer’s capital stock value is $50,000.

(6) Regulated investment companies. Section 602(g)(1) of the TRC (72 P. S. § 7602(g)(1)) provides that the capital stock value of a regulated investment company shall be determined by adding its net asset value as of the last day of each month during the taxable period or year and dividing the total sum by the number of months involved, for which purpose net asset value means the actual market value (that is, the quoted selling price or the appraised market value on a designated day) of assets owned by the corporation without exemptions or exclusions less its liabilities, debts and other obligations.

Example 1. The sum of the net asset values for the tax year is $267,000,000. The capital stock value is $22,250,000 ($267,000,000 ÷ 12).

(7) Sale of an asset. When a taxpayer sells an asset (real property or tangible or intangible personal property) at a value substantially higher or lower than book value, the stockholder’s equity is revised for the prior tax year by adding or subtracting the actual value of the asset sold in the current year. Therefore, the capital stock value is recomputed in prior years by considering revised equity. The adjustment of the capital stock value of a prior tax year or years whereby the capital stock value is increased shall be made by the Department under section 407(b) of the TRC (72 P. S. § 7407(b)). When the adjustment would result in a decrease of the capital stock value of a prior tax year or years, the taxpayer shall initiate the adjustment under sections 503(a)(1), 1102 or 1103 of the FC (72 P. S. § § 503(a)(1), 1102 or 1103).

Example 1. An asset had a book value of $50,000 for the current tax year. Taxpayer disposed of the asset for $500,000 which resulted in a $450,000 capital gain. The taxpayer’s capital stock value in the prior tax year was $70,000 based on a stockholder’s equity of $100,000 ($100,000 x 70%). The revised stockholder’s equity in the prior tax year is $550,000 ($450,000 plus $100,000). The capital stock value recomputed for the prior tax year shall be $385,000 ($550,000 x 70%).

Example 2. An asset had a book value of $500,000 for the current year. Taxpayer disposed of the asset for $100,000 which resulted in a $400,000 loss. The taxpayer’s capital stock value in the prior tax year was $700,000 based on a stockholder equity of $1,000,000 ($1,000,000 x 70%). The revised stockholder’s equity in the prior tax year is $600,000 ($1,000,000 minus $400,000). The capital stock value recomputed for the prior tax year shall be $420,000 ($600,000 x 70%).

(8) Stock for stock exchange transaction. When a taxpayer’s total outstanding shares are purchased in exchange for the shares of the purchasing company, the capital stock value for the current tax year and prior tax year or years will be based upon the exchange value of the stock. The exchange value of the shares will be based upon the current market value of the shares. The capital stock value for the current tax year shall be computed at approximately 90% of the exchange value of shares. The capital stock value for the immediate prior tax year shall be computed at approximately 80% of the exchange value of shares. The capital stock value for the second prior tax year shall be computed as approximately 70% of the exchange value of shares and so forth.

Example 1. The taxpayer’s total outstanding shares are purchased by A corporation for one million shares of A corporation. The value of the one million shares is $25,000,000. The capital stock value for the current tax year shall be $22,500,000 ($25,000,000 x 90%). The capital stock value for the immediate prior tax year shall be $20,000,000 ($25,000,000 x 80%). The capital stock value for the second prior tax year shall be $17,500,000 ($25,000,000 x 70%).

The provisions of this § 155.24 adopted September 1, 1978, effective September 2, 1978, 8 Pa.B. 2457.

Notation

Notes of Decisions

The capitalization rates for earnings and dividends incorporated into 61 Pa. Code § 155.24 have no applicability to capital stock valuation for years prior to the promulgation of the provisions in August of 1979. Commonwealth v. Bessemer and Lake Erie Railroad Co., 427 A.2d 699 (Pa. Cmwlth. 1981); exceptions dismissed 433 A.2d 909 (Pa. Cmwlth. 1981).

Cross References

This section cited in 61 Pa. Code § 155.21 (relating to general); 61 Pa. Code § 155.22 (relating to definitions); and 61 Pa. Code § 155.28 (relating to capital stock value methods—fixed formula).