Glass Wholesalers, Inc. v. State of Ind. Bd. of Tax Com'rs

• Decision Date: 28 March 1991
• Docket Number: No. 45T05-8911-TA-00056,45T05-8911-TA-00056
• Citation: 568 N.E.2d 1116
• Parties: GLASS WHOLESALERS, INC., Petitioner, v. STATE OF INDIANA BOARD OF TAX COMMISSIONERS, Respondent.
• Court: Indiana Tax Court

Page 1116

568 N.E.2d 1116

GLASS WHOLESALERS, INC., Petitioner, v. STATE OF INDIANA BOARD OF TAX COMMISSIONERS, Respondent.

No. 45T05-8911-TA-00056.

Tax Court of Indiana.

March 28, 1991.

James J. Nagy, Munster, for petitioner.

Linley E. Pearson, Atty. Gen. by Marilyn S. Meighen, Deputy Atty. Gen., Indianapolis, for respondent.

FISHER, Judge.

Glass Wholesalers, Inc. (Glass) appeals the Indiana State Board of Tax Commissioners' (State Board) final determination denying an adjustment for abnormal obsolescence on inventory reported on Glass' 1988 business tangible personal property tax return.

FACTS

In 1986, Glass Wholesalers was incorporated for the purpose of wholesaling automobile glass. Glass stocked its inventory chiefly with Chrysler product windshields it agreed to purchase from Lansing Auto Glass. The inventory obtained from Lansing Auto Glass was the only inventory Glass maintained. Customer orders that could not be filled from this inventory were filled by Glass after the customer ordered the windshield.

At the end of 1987, Glass indicated the inventory's value was $588,130.15 ¹ on its federal tax return and on its other books and records. On its 1988 amended federal income tax return, Glass reported the value of the same inventory was $242,032.60 at the end of 1988. Although Glass gave no reason at the time for the substantial drop in value, Glass' secretary and accountant testified at the trial that the inventory was obsolete; however, the books were not adjusted prior to the end of 1988 because that was the first time Glass' accountant became aware of the obsolescence.

On its state business tangible personal property tax returns, Glass valued its inventory in the following manner: for 1987, a cash value of $106,633 and an assessed value ² of $35,544.33; for 1988, a cash value of $103,480 and an assessed value of $34,493.33; for 1989, a cash value of $125,709 and an assessed value of $41,903.

On April 6, 1989, under the authority granted by IC 6-1.1-14-10 and IC 6-1.1-14-11, the State Board notified Glass of a hearing to be held on April 27th, partly for the purpose of reviewing Glass' reported self-assessment of its inventory on the 1988 personal property tax return. ³ After the hearing on May 10, 1989, a hearing officer visited Glass' premises, visually inspected the inventory, and examined Glass' books and records, a depreciation schedule, the 1987 federal income tax return, the 1988 January and February sales and purchase receipts, financial statements consisting of balance sheets, the 1988 original federal On June 21, 1989, the hearing officer issued her recommendation for the 1988 assessment which increased Glass' total assessed value from $42,490 to $141,530. On June 27, 1989, Glass requested an administrative hearing which was held on September 13, 1989. On September 29, 1989, the State Board issued its written findings which provide in pertinent part:

income tax return, ⁴ and some inventory record cards. Glass' 1987 federal income tax return showed the ending inventory value of $588,130.15, as did the 1987 balance sheet and the beginning inventory value listed on the 1988 federal tax return. The amended federal return Glass filed for 1988 also indicated the value of beginning inventory for 1988 was $588,130.15.

The question at issue ... is the Taxpayer's claim for an abnormal obsolescence adjustment ... on a portion of its inventory. The issue has been partially addressed in Don Medow....

....

... [There are] only two criteria for establishing a claim for abnormal obsolescence on inventory:

1. Exceptional technological obsolescence, or

2. Destruction by catastrophe.

Neither of these criteria have been proven by the Taxpayer.

The Taxpayer claims that it had suffered 'unforeseen changes in market value' on a portion of its inventory and, therefore, had abnormal obsolescence on that same portion of its inventory. In Don Medow, the Court also addressed this issue.

'... (O)ther provisions of 50 IAC 4.1-3 allow for changes in market condition.

50 IAC 4.1-3-5 allows the taxpayer to elect to value inventory on the prior calendar year average. This provides relief from the burden of excess inventory on the assessment date. 50 IAC 4.1-3-6 provides for a method of valuing inventory at the lower of cost or market. There are requirements which must be met in using these methods which may cause a taxpayer not to elect to use them. However, both of these options do allow for changes in market condition and the record suggests that these options were available to the taxpayer.'

The State Board would make it clear that the options mentioned above were available to the Taxpayer. No other evidence was presented by the Taxpayer to establish a value for inventory below the value recommended by the Hearing Officer in her recommendation to the State Board. The Taxpayer failed to produce any evidence in support of its claim that the [sic] it had attempted to sell the inventory for less than the recorded value.

In summary, the State Board does not believe that the Taxpayer is entitled to an adjustment for obsolescence under Regulation 16, Rule 3, Section 9 (50 IAC 4.1-3-9).

Therefore, for the above-mentioned reasons, the State Board of Tax Commissioners has adopted the recommended assessment of its Hearing Officer in the amount of $141,530 assessed value....

(Citation omitted.)

Additional facts will be provided as necessary.

ISSUES

The issues are:

I. Whether Glass is entitled to an adjustment for abnormal obsolescence on the value of its inventory under 50 I.A.C. 4.1-3-9 for the tax year 1988 and whether Glass is entitled to use alternative methods to value its inventory under 50 I.A.C. 4.1-3-5 or 50 I.A.C. 4.1-3-6?

II. If Glass is not entitled to an abnormal obsolescence adjustment under 50 I.A.C. 4.1-3-9 for the 1988 assessment, should the State Board be estopped from disallowing the adjustment for 1988 because the State Board's hearing officer approved Glass' 1987 and 1989 state tax returns reflecting abnormal obsolescence adjustments in 1989 and the State Board

approved the hearing officer's recommendation for 1989 in 1990, ⁵ where Glass' books and records support the divergent values approved by the State Board and its hearing officer, and the adjustment was not claimed by Glass on Form 103 or Form 106 for 1987 or 1989?

DISCUSSION AND DECISION

The court's review is limited to determining whether the State Board's determination "is supported by substantial evidence, is an abuse of discretion, is arbitrary or capricious, or is in excess of the State Board's statutory authority." Hatcher v. State Bd. of Tax Comm'rs (1990), Ind.Tax, 561 N.E.2d 852, 853 (citing Bailey Seed Farms, Inc. v. State Bd. of Tax Comm'rs (1989), Ind.Tax, 542 N.E.2d 1389, 1391).

I.

In 1988, 50 I.A.C. 4.1-3-9 provided:

Sec. 9. Obsolescence--A taxpayer may claim an adjustment for abnormal obsolescence as defined in Section 1 of Rule 7 (50 IAC 4.1-7-1) ⁶ of this regulation on inventory, provided that such taxpayer follows the procedures and meets the requirements regarding an adjustment for abnormal obsolescence contained in Rule 7 (50 IAC 4.1-7) of this regulation.

(A) Limitation--No adjustment will be allowed for normal obsolescence as defined in Section 1(B) of Rule 7 (50 IAC 4.1-7-1(B)) of this regulation. ⁷ The valuation reserve pursuant to Section 8 of Rule 3 (50 IAC 4.1-3-8) of this regulation automatically takes into consideration this type of obsolescence.

(B) Eligibility--The adjustment requested for abnormal obsolescence, as herein defined, will be allowed providing a taxpayer can substantiate that he has incurred abnormal obsolescence which has not as of the assessment date been recorded on his regular books and records. The term 'abnormal obsolescence' will be strictly construed and be limited to a situation where unforeseen changes in values as a result of exceptional technological obsolescence or destruction by catastrophe occur, providing that such events have a direct effect on the value of the inventory of the taxpayer at the tax situs in question on a going concern basis.

(C) Adjustment--The dollar amount of the adjustment pursuant to this section will be based upon the adjusted book cost of such inventory, determined pursuant to Section 7 of Rule 3 (50 IAC 4.1-3-7) of this regulation, less the scrap or realizable value of the obsolete inventory. Sixty-five percent of such amount will be allowable as an adjustment for abnormal obsolescence in inventory.

(Emphasis added) (footnotes added) (recodified in 50 I.A.C. 4.2-5-14, effective March 1, 1989).

To receive an adjustment for abnormal obsolescence on inventory, a taxpayer must show the value of its inventory has changed, the change in value was unforeseen, and the unforeseen change in value was the result of exceptional technological obsolescence or destruction by catastrophe. Don Medow Motors, Inc. v. State Bd. of Tax Comm'rs (1989), Ind.Tax, 545 N.E.2d 851, 852; 50 I.A.C. 4.1-3-9.

Glass asserts exceptional technological obsolescence caused the unforeseen change and deterioration of its inventory to scrap or salvage value ($4.00 to $5.00 per windshield). ⁸ The exceptional technological obsolescence stemmed from changes in demand, design and technical change, and age. Conversely, the State Board contends any decrease in value was not unforeseen; Glass' explanation of "going out of style" was foreseeable; and Glass has not shown that the windshields were exceptionally technologically obsolete.

Glass' records and federal income tax returns indicated the value of the inventory changed. ⁹ The value of Glass' closing inventory on the 1987 federal income tax return was $588,130, and on the 1988 amended federal income tax return was reported as $242,032. On its state property tax returns, however, Glass reported less of a change in the inventory's cash value, $106,633 in 1987 and $103,480 in 1988. Nonetheless, because both the State Board's final...