Ariz. Admin. Code § 15-4-203

Current through Register Vol. 30, No. 50, December 13, 2024

Section R15-4-203 - Income Approach Procedures for Mines

A. The income approach estimate of value for mine property shall be based on a discount of projected future cash flows to a present value at a discount rate adequate to justify current mine investments. Derivation of the cash flows shall be based on the use of a 5-year arithmetic average margin per unit of product multiplied by projected output of metal or mineral over the life of the mine. The life of the mine shall be based on the size of the ore reserve and the projected rate of production. Cash flow shall be based on an all-equity investment on a production basis, not a sales basis, assuming all production is sold in the year produced. Financing and interest charges shall not be considered.

B. Discount rates shall be developed annually by the Department. The discounting technique used by the Department shall be the single rate method. No adjustments shall be made for sales, product inventory, financing or interest charges.

C. To calculate the margin, the 5-year period shall be on a cents or dollars per unit of production basis and averaged to find the historic margin. The historic 5-year margin shall be calculated on the following basis:

1. Gross income, calculated by summing subsections (C)(1)(a) and (b) below:

a. The gross value of production. The historic average selling price per unit of each mineral product should be computed by dividing the sales revenue of each mineral product by the units of that product which were sold.

This quotient shall be multiplied by the quantity of mine output and the product shall be the historical gross value of production for the year.

b. Miscellaneous revenue composed of the income or loss from power sales, water sales, miscellaneous sales, acid sales, as well as toll processing, the rentals of real and personal property, and hospital facilities if operated as part of the mine unit.

2. Expenses, calculated by deducting subsections (C)(2)(a), (b), and (c) below:

a. All expenses associated with the production, administration, distribution, development and marketing functions of the operation on the basis of generally accepted accounting principles and the cash expenses associated with the miscellaneous revenue specified in subsection (C)(1)(b) above, if not already deducted. Income tax charges, depreciation and depletion, and amortization of fixed assets shall not be included as expenses. The expenses for smelting and/or refining will be calculated on a market basis if the material is processed out of state or at a location which is locally assessed and not includable in the producing mine unit from which the material was extracted. Intracompany charges between centrally assessed producing mine units within the state will be calculated at actual cost.

b. Federal and Arizona income taxes shall be based upon general tax concepts, computed with respect to the mining property. Provisions contained in Federal and Arizona income tax statutes and regulations shall not be determinative. Due to their hypothetical nature all tax calculations shall be governed exclusively by the rules contained below.

i. Income taxes shall be calculated as if the producing mine were a separate taxable entity. The effective tax rate for mines shall be developed annually by the Department and included in the manual.

ii. Income taxes shall be calculated separately for each year of the 5-year historic margin period. In this respect, the following shall apply:

(1) Negative as well as positive tax liabilities shall be determined, and

(2) No provision is made for the carryback or carryover of losses or credits.

iii. Taxable income shall be determined by subtracting the expenses specified in rule R15-4-19(C)(2) from the gross income specified in rule R15-4-19(C)(1).

iv. Federal and Arizona income tax liabilities, both positive and negative liabilities, shall be determined by multiplying the effective tax rate by the final taxable income or loss determined in accordance with all provisions of subsection (C)(2)(b)(iii) above.

c. All replacement and mandated capital expenditures incurred during the year. Capitalized lease payments for replacement and mandated items will be treated as capital expenditures. For the purposes of this subsection "capital expenditures" means allowable capital expenditures computed on an amortization or depreciation basis over 10 years, or the life of the mine, whichever is less.

3. The historic margin shall be determined based on the 5 years preceding the current tax year, including loss years. Nonrepresentative years in which a drastic change or a prolonged shutdown occurs shall not be utilized. A drastic change or a prolonged shutdown must be one so significant that the 5-year average margin cannot be adjusted adequately to reflect current conditions.

D. Temporary suspension of operations due to strikes and losses resulting from operations during unfavorable market conditions shall be included in the 5-year historic margin. If the suspension is not likely to recur it shall not be included.

E. In instances where a particular property has not been taxed as a producing mine for 5 years preceding the tax year, the historic margin shall be determined based upon the number of years the property has been a producing mine.

F. The historic margin shall be applied to estimated future production to derive future cash flows. The taxpayer shall be required to report estimated future production and the factors used in the estimating procedure. The historic margin used in the cash flow computation shall be adjusted under certain circumstances to reflect changes in economic or operating conditions. Such adjustments shall not be made unless conditions exist that will have a significant impact on the future economic performance of the unit and are not reflected in the historic margin. Any adjustment made to the historic margin shall account for all reasonable operating and capital cost changes, shall be supported by documentation and field visit data, and shall include an income tax adjustment. The taxpayer's estimates of future production shall be adjusted, where appropriate, by the appraiser. Other adjustments shall be made, provided such adjustments are not based on speculation or made for conditions already reflected in the historic margin.

Ariz. Admin. Code § R15-4-203

Adopted effective December 10, 1985 (Supp. 85-6). Amended effective May 24, 1989 (Supp. 89-2).