Capital Finance Corp. v. Glander (153 Ohio St. 50, 1950)

By the Court.

Under the provisions of Section 5414-2, General Code, the shares of stockholders in an incorporated dealer in intangibles must be listed and assessed at their fair value. In the valuation of such shares it is necessary to determine the net value of accounts receivable, and to that end the amount of future losses must be computed and deducted from the total amount of accounts receivable.

The taxpayer claims that the commissioner erred in his computation of the reserve for losses probably sustainable by the taxpayer, and that, the result and method employed for such ascertainment were unreasonable and unlawful. The primary question before this court, as before the Board of Tax Appeals, is whether the value of the taxpayer’s outstanding installment loans, as they stood on December 31, 1947, and as found by the commissioner, was unreasonable or unlawful, and the incidental question whether the method pursued by the commissioner in arriving at the reserve value was unreasonable or unlawful.

In determining the value of taxpayer’s corporate shares the commissioner used a method of computation commonly known as the “percentage-to-volume” method. He started with the volume of business for each of the five years immediately preceding the tax year 1948, the volume of business being the amount of installment loans. He then determined the amount of bad debts charged off in each year and deducted therefrom the amount of recoveries in such year on previous charge-offs. The net charge-off for each year was divided by the year’s volume and the resultant percentage factors for the five years were averaged. To the average percentage factor of .44562 was added a percentage factor of .05 for “exigency allowance,” and, by the application of the final percentage factor of .94526 to the unpaid balances of installment loans, $150,681.81 was obtained as the amount of the bad-debt reserve.

On the other hand, the taxpayer claims that what is known as the “percentage-to-unpaid balances” method should be used, i.