Progressive Plastics, Inc. v. Testa, 2011–1793.
| Decision Date | 17 October 2012 |
| Docket Number | No. 2011–1793.,2011–1793. |
| Parties | PROGRESSIVE PLASTICS, INC., Appellant, v. TESTA, Tax Commr., Appellee. |
| Court | Ohio Supreme Court |
Corsaro & Associates Co., L.P.A., Christian M. Bates, and Joseph G. Corsaro, for appellant.
Michael DeWine, Attorney General, and Daniel W. Fausey, Assistant Attorney General, for appellee.
{¶ 1} In this appeal, Progressive Plastics, Inc. ("PPI") challenges the tax commissioner's decision to increase PPI's personal property tax assessments for 2004 and 2005. In amending the assessments, the commissioner recomputed the value of PPI's inventory based on the FIFO (first in, first out) accounting method rather than the LIFO (last in, first out) method, which PPI had used on its books. The Board of Tax Appeals ("BTA") affirmed the commissioner's amended assessments, and PPI's main contention here is that the commissioner lacked an individualized evidentiary basis for issuing and upholding the amended assessments against PPI. As a result, the assessments were, in PPI's view, illegal and did not invoke a presumption of validity at the Board of Tax Appeals ("BTA"). Additionally, PPI challenges the BTA's finding that collateral estoppel barred PPI's FIFO/LIFO claim on the grounds that the issue had already been litigated and decided against PPI in the tax-year 2003 proceedings.
{¶ 2} Because 2004 and 2005 were separate and distinct tax years presenting potentially different facts from tax year 2003, we disapprove the BTA's determination that collateral estoppel applied to PPI's appeal for the 2004 and 2005 tax years. On the merits, we conclude that the BTA erred by upholding the commissioner's assessments for the tax years before us. Namely, the tax commissioner substituted FIFO for LIFO based not upon the content of the taxpayer's return or taxpayer-specific evidence, but rather upon a general proposition that FIFO should be used to value inventory. Consistent with R.C. 5711.18, R.C. 5711.21, and the general proposition that the tax commissioner cannot confer the force of law on an accounting method without promulgating it as an administrative rule, we hold that the substitution of FIFO for LIFO was impermissible under the circumstances of this case. We therefore reverse the decision of the BTA.
{¶ 3} In dispute is whether the tax commissioner was justified, when auditing PPI's property tax returns, in substituting FIFO (the first-in, first-out method of accounting for inventory) for LIFO (the last-in, first-out method). These methods are two of the four accepted methods of assigning value to inventory items for accounting purposes. See Larson & Miller, Fundamental Accounting Principles 486–490 (13th Ed.1993). Unlike "specific-invoice inventory pricing" or "average inventory pricing," FIFO and LIFO each assume that inventory is reduced in a particular order in relation to acquisition or manufacture of the items. Id. FIFO assumes that "the items in the beginning inventory are to be sold first," with additional sales being made in the order that the items were acquired. Id. at 488. By contrast, LIFO makes the opposite assumption: under LIFO, "the cost of the last goods received are charged to cost of goods sold and matched with revenue from sales." Id. at 489.
{¶ 4} The issuance of amended assessments for 2004 and 2005 occurred against the backdrop of the commissioner's audit and review for tax year 2003, and the statutory transcript reflecting the 2003 tax-year proceedings before the tax department has been made part of the record of this case. In that case, the tax audit agent's remarks referred to the 1986 Ohio Personal Property Tax Manual for the proposition that, because "the effect of LIFO is to assign old costs to new inventory, it is not acceptable for reporting inventory values for property tax purposes." Under the heading "Conclusion and Reasons," the agent stated that he had "added the LIFO Reserve back into the computation of inventories for each month in the audit period," noted that the "ultimate goal of the assessment is a determination of the true value of the property taxed," and stated that the LIFO method "can give rise to an unrealistic picture of inventory value."
{¶ 5} On June 22, 2006, the commissioner issued his final determination for tax year 2003, in which he addressed PPI's contention that the substitution of FIFO for LIFO was unjustified. In that determination, the commissioner observed that under LIFO, "the last items purchased are considered to be sold first, leaving older inventory items as considered unsold and comprising the value of inventory on hand." Because of this, the commissioner reasoned that the LIFO method did not properly value the inventory because "the most recent purchases of inventory are a more accurate indicia [sic] of true value as such purchases were made closer to the tax listing date than the older purchases * * *."
{¶ 6} PPI appealed the tax-year 2003 determination to the BTA, which affirmed the commissioner, noting that the "critical inquiry" for purposes of personal property tax is the "value of the inventory on hand." Progressive Plastics, Inc. v. Wilkins, BTA No. 2006–M–1043, 2008 WL 2072355, *2 (May 13, 2008). Citing and relying on Champion Spark Plug Co. v. Lindley, 6 Ohio St.3d 56, 451 N.E.2d 514 (1983), the BTA rejected PPI's contention that the commissioner had to accept book value in the absence of a finding, based on evidence specific to the taxpayer, that book value did not reflect the true value of the assets.
{¶ 7} The BTA considered the affidavit of PPI's chief operating officer, who stated that based on his knowledge of PPI's inventory flow, "the true value of Progressive Plastics inventory is not based exclusively on the FIFO valuation method."1 Id. at *5. The BTA accorded little weight to this testimony because PPI did not provide corroborating evidence. Accordingly, the BTA affirmed the FIFO/LIFO aspect of the commissioner's final determination in the tax-year 2003 case.
{¶ 8} PPI then appealed the BTA's decision in the 2003 tax-year case to the Eighth District Court of Appeals. On April 30, 2009, that court issued a decision affirming the BTA. Progressive Plastics, Inc. v. Levin, 8th Dist. No. 91614, 2009-Ohio-2033, 2009 WL 1156725. With respect to the FIFO/LIFO issue, the court observed that, because LIFO assumes that the last merchandise purchased or manufactured is sold before the sale of the older merchandise in stock is sold, and because FIFO relies on the opposite assumption, "FIFO generally better reflects the current replacement costs of the inventory than LIFO because the average inventory values under the FIFO method will be based on the acquisition costs of the most newly acquired inventory, rather than the earliest acquired inventory." Id. at ¶ 2, fn. 1. Based on the case law, the appeals court rejected PPI's theory that a departure from book value must be justified by evidence relating to the particular taxpayer. The appeals court also brushed aside PPI's contention that the commissioner had made no proper finding, holding that the final determination's assertion of the usual superiority of FIFO as an indicator of value constituted such a finding. PPI attempted a further appeal, but this court declined to accept jurisdiction. Progressive Plastics, Inc. v. Levin, 123 Ohio St.3d 1408, 2009-Ohio-5031, 914 N.E.2d 205.
{¶ 9} Against the backdrop of the commissioner's audit and review for tax year 2003, the commissioner issued amended preliminary assessments in the current case for tax years 2004 and 2005.
{¶ 10} For both tax years, PPI submitted its county return of taxable personal property, which listed an average value of manufacturing inventory of $2,499,652 and $2,521,590, respectively, in accordance with the LIFO method. Once the assessment percentage of 23 percent was applied, the returns reported a listed value of $563,420 and $579,966, respectively.
{¶ 11} Substituting FIFO for LIFO, the tax commissioner issued amended preliminary assessment certificates for both tax years on July 21, 2006. For each tax year the amended assessment recomputed the value of PPI's manufacturing inventory and thereby increased the actual assessed values of that inventory to $810,140 and $915,370—an increase of 43 percent for 2004 and 58 percent for 2005. PPI contested the commissioner's action by filing its petition for reassessment (covering both years) on September 22, 2006.
{¶ 12} During the audit for 2004 and 2005, PPI asked that the commissioner postpone action for those years pending final disposition of litigation concerning the 2003 tax year. The commissioner, facing the statutory deadline for completing the tax-year 2004 assessment, declined to do so. See R.C. 5711.25 (). The tax commissioner's agent accordingly proceeded to complete the assessment based on information already in the commissioner's possession. The agent estimated LIFO reserves for later years based on a percentage extrapolated from earlier years.
{¶ 13} On December 26, 2007, the commissioner issued his final determination in the present case, which rejected PPI's argument that its LIFO accounting should be used to value inventory for tax years 2004 and 2005. The final determination again emphasized the superiority of FIFO for purposes of determining inventory value. PPI again appealed to the BTA, which issued its decision on September 20, 2011. Progressive Plastics, Inc. v. Levin, BTA No. 2008–A–241, 2011 WL 4437290 (Sept. 20, 2011). In that decision, the BTA (1) rejected PPI's...
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