(Supplemented by STC Bulletin 14 of 1996)

DATE: January 26, 1996
TO:    Assessing Officers and County Equalization Directors
FROM:    Michigan State Tax Commission

RE: ADDITIONAL INFORMATION TO CLARIFY STC BULLETIN NO. 18 OF 1995 REGARDING PROCEDURAL CHANGES TO BE IMPLEMENTED STARTING IN THE 1996 ASSESSMENT YEAR

This bulletin is a supplement to STC Bulletin No. 18 of 1995 which discussed procedural changes which begin for the 1996 Assessment Year.

This bulletin will cover three topics:

1. Solutions to specific problems involving the calculation of the Value Change Multiplier (VCNl).
2. Situations Involving the Prior Year's Taxable Value in the Capped Value Formula
3. Further clarification of ADDITIONS and LOSSES as reported on form L4025 and as used in the calculation of:

1. Capped Value (as required by Michigan Compiled Law (MCL) 211.27a(2))
2. The "Headlee" Millage Reduction Fraction (as required by MCL 211.34d and 211.34e)
3. The Truth in Taxation Base Tax Rate Fraction (as required by MCL 211.24e)

IMPORTANT NOTE: The definition of ADDITIONS and LOSSES for various purposes has become a perplexing area to some. It's easy to confuse the assessed value of NEW and LOSS (required for equalization on STC Form L-4021, L-4022, and L-4023) with the amount of ADDITIONS and LOSSES (used in the calculation of the "Headlee" Millage Reduction Fraction and the Truth in Taxation Base Tax Rate Fraction and reported on form 1.4025). Now, with the advent of the Proposal A Capped Value equation, there are also calculations necessary in part of the Capped Value formula that use ADDITIONS and LOSSES, and there are additional calculations in another part of the Capped Value formula (namely, the Value Change Multiplier, which is commonly referred to as the VCM) that use the State Equalized Value of NEW and LOSS as defined for equalization purposes. When assessors, equalization department employees, and assessing services vendors communicate regarding this subject, it is especially necessary to clearly identify the area being discussed in order that mutual understanding can be maintained. There are Quick Reference charts at the end of this bulletin to help clarify the distinctions between the terms NEW and LOSS and the terms ADDITIONS and LOSSES and some pertinent pages from prior bulletins. The Quick Reference charts may not cover every circumstance which may occur.

1. Solutions to Specific Problems Involving the Calculation of the Value Change Multiplier (VCM) which is Used in the Capped Value Formula.

The following is the Capped Value Formula for calculating 1996 Capped Values for each individual parcel of Real Property (including items of a real property nature assessed on the personal property roll):

1996 Capped Value - (1995 Taxable Value Losses) X (The lowest of 1.05 or the Inflation Rate of 1.028 or the Value Change Multiplier) + Additions.

The formula for the 1996 Value Change Multiplier (VCM) contained in the Capped Value Formula above is as follows:

1996 Value Change Multiplier = 1996 SEV - 1996 SEV of NEW Property
                                                       1995 SEV -1995 SEV of LOSS

1. Problem in Calculating the VCM When There is an Assessment Roll CLASS CHANGE on a Particular Parcel. (Assessment Roll class changes are governed by MCL 211.3k)

A problem arises in the calculation of the Value Change Multiplier (VCM) for a particular parcel of property when there has been a class change on that parcel. The problem arises because class changes are considered to be Equalization NEW and LOSS and are therefore expected to be included in the calculation of the Value Change Multiplier (VCM).

This creates a problem in that, when class changes are taken as NEW and LOSS in the formula for calculating the Value Change Multiplier, the VCM calculates out to be 0/0 even when the VCM  is correctly some other number.

EXAMPLE

Given:
1995 SEV of a parcel is 10,000
1995 Class of the parcel is Agricultural
1996 SEV of the parcel is 10,200
1996 Class of the parcel is changed to Reclentia

Because class changes are Equalization NEW and LOSS, a literal interpretation of the VCM formula would be as follows:

1996 VCM = 1996 SEV -1996 SEV of NEW Property
                           1995 SEV -1995 SEV of LOSS

= 10,200 -10,200
   10,000 -10,000

= 0
   0

THIS IS AN INCORRECT ANSWER

Since the purpose of the VCM is to measure the change in SEV of each individual parcel of real property from one year to the next, the correct VCM for this property is 1.0200 which results from:

10,200 = 1.0200
10,000

SOLUTION TO THIS CLASS CHANGE PROBLEM

The solution to this problem is that class changes are NOT NEW and LOSS in the calculation of the VCM even though they ARE NEW and LOSS for purposes of equalization.

IMPORTANT NOTE If a parcel with a class change alto has physical changes such as new construction or a fire loss, those physical changes are still NEW and LOSS in the calculation of the VCM, even though the NEW and LOSS attributable t o the class change are NOT NEW and LOSS in the VCM formula.

Therefore, in the example above, if a garage with a 1996 SEV of $5,000 was constructed in 1995, the 1996 SEV would be $15,200 (that is $10,200 + $5,000) and the VCM should be calculated as follows:

1996 VCM = 1996 SEV - 1996 SEV of NEW Property
                           1995 SEV -1995 SEV of LOSS

= 15,200 - 5,000
      10,000 - 0

= 10,200
   10,000

= 1.0200  THIS IS THE CORRECT VCM

IMPORTANT NOTE: In order to be able to make the calculation above, it is necessary for the assessor to separately keep track of NEW and LOSS attributable to class changes and NEW and LOSS attributable to the other changes.

2. Problem in Calculating the VCM Where There is a Split from a Particular Parcel. There is a problem m the calculation of the Value Change Multiplier (VCM) for a parcel of property when there has been a split from that parcel in the previous year.

There is a problem m the calculation of the Value Change Multiplier (VCM) for a parcel of property when there has been a split from that parcel in the previous year.

For the purposes of this example let us call the source parcel which is split the "parent" parcel and the derivative parcel(s) the "child" parcel(s).

The problem arises if, when a split occurs, the parcel identification number of the "parent" parcel is retired and new parcel identification numbers are assigned to the "child" parcel(s). This results in 2 VCM problems:

1. There is no prior year's SEV for the "child" parcel(s) because they did not exist in the prior year. This is a problem because the VCM formula requires that the prior year's SEV be divided into the current year's SEV in order to determine how much the value has changed.

SOLUTION TO THE FIRST SPLIT PROBLEM

Allocate the prior year's SEV of the "parent" parcel among the "child" parcels and use the allocated amount as each child parcel's PRIOR YEAR SEV.

EXAMPLE:

A "parent" parcel with a 1995 SEV of 100,000 is split into two "child" parcels. The parcel identification code for the "parent" parcel is retired and two new codes are assigned to the "child" parcels. The SEWS of the "child" parcels are $61,200 and $40,600, In order to calculate a VCM for the "child" parcels, it is necessary to allocate the 1995 SEV of the "parent" parcel of $100,000 among the two "child" parcels so that they each have a 1995 SEV. In this example, the allocation of the 1995 SEV was $60,000 and $40,000 which resulted in VCM's of 1.0200 and 1.0150 because 61,200 / 60,000 = 1.0200 and 40,600 / 40,000 = 1.0150

NOTE: If one of the "child" parcels had a "transfer of ownership" in 1995, it would NOT be necessary to calculate a VCM for that "child" parcel for 1996 because its Taxable Value would be uncapped in 1996 and would be the same as the 1996 SEV. There is no requirement for a VCM because the VCM is used only in the Capped Value formula and a Capped Value is not needed. Remember, when a parcel's Taxable Value is uncapped due to a "transfer of ownership" in the prior year, the Taxable Value in the year following the "transfer of ownership" shall be the same as the SEV in the year following the "transfer of ownership".

2. The other problem relating to Spris is that the SEV's of new "child" parcels are considered to be Equalization NEW and a literal interpretation of the VCM formula would require that they be included as NEW in the VCM formula. The problem is that, when the SEV's of the "child" parcels are utilized as NEW in the VCM formula, the result is 0 divided by another number, which is the wrong answer.

Thus, in the example discussed in paragraph "a" above, the VCM for the parcel which had a 1996 SEV of 61,200 and an allocated, assigned 1995 SEV of 60,000 would be as follows: 

1996 VCM = 1996 SEV - 1996 SEV of NEW Property
                            1995 SEV - 1995 SN of LOSS

= 61,200 - 61,200
         60,000

= 0
60,000

THIS RESULTS IN AN INCORRECT VCM

Since the purpose of the VCM is to measure the change in SEV of each individual parcel of real property from one year to the next, the correct VCM for this property is 1.0200 which results from $61,204 / $60,000

SOLUTION TO THE SECOND SPLIT PROBLEM

The solution to this problem involving splits is to NOT utilize the SEWS of "child" parcels as NEW in the calculation of the VCM even though they are to be included as NEW for equalization calculations.

IMPORTANT NOTE: If a "child parcel has physical changes such as new construction or a fire loss, those physical changes are still NEW and LOSS in the calculation of the VCM. The rest of the new attributable only to the split is not NEW in the VCM formula. In order to be able to make the necessary calculations, the assessor must separately keep track of NEW attributable to splits and NEW and LOSS attributable to other changes.

Also note that the the same solutions to splits also apply when a new subdivision is created. Each subdivision lot would have a 1996 SEV which would be compared in the VCM formula to an allocated 1995 SEV for each lot. Changes in SEV attributable to physical changes such as new roads and utilities would be treated as NEW in the VCM formula. The process of estimating the value of these physical changes requires good judgment by the assessor in order to avoid "wild" answers. The assessor should attempt to base his/her answers on as many facts as possible.

EXAMPLE

A 50 acre parcel had a 1995 SEV of $200,000 (and a true cash value of $400,000). During 1995, this parcel was platted into 40 lots with an SEV for 1996 of $10,000 for each lot (and a true cash value of $20,000 each).

The SEV attributable to physical changes such as new roads and utilities is $4,000 each per lot.

The VCM for each lot may be calculated as follows:

First, allocate the 1995 SEV to each lot by dividing the 1995 SEV of the "parent" parcel by the number of children parcels $200.000 / 40 = $5,000 (This allocation assumes that the 40 lots are all approximately equal in value. This may not be the case in many situations. If so, the allocation method would need to be different)

Then, the 1996 VCM for each lot = 1996 SEV - 1996 SEV of NEW Property
                                                           1995 SEV - 1995 SEV of LOSS

= 10,000 - 4,000
        5,000

= 6,000
   5,000

= 1.2000 THIS WOULD BE THE CORRECT VCM FOR THIS EXAMPLE.

3. Problem in Calculating the VCM When There is a Combination of Parcels into One New Parcel and the Assessing Unit Has a Policy of Retiring the Parcel Code Numbers of the Combined Parcels.

There is a problem in the calculation of the current year's Value Change Multiplier (VCM) for a particular parcel of property when there has been a combination of parcels to create that parcel and the assessing unit has a policy of retiring the parcel code numbers of the combined parcels.

When a combination occurs, the problem arises because the parcel identification numbers of the old individual parcels which are being combined are retired, and a new parcel identification number is assigned to the parcel resulting from the combination. This causes 2 problems just as the split caused 2 problems.

1. There is no prior year's SEV for the newly created combined parcel because it did not exist in the prior year. This is a problem because the VCM formula requires that the prior year3 SEV be divided into the current year's SEV.

SOLUTION TO THE FIRST COMBINATION PROBLEM

Add up the prior year's SEWS of all the parcels which were combined and assign this total to be the prior year's SEV of the newly created combined parcel.

EXAMPLE

Two parcels which had 1996 to create a combined parcel with a 1996 SEV of $56,100. in order to calculate a VCM for the newly created combined parcel it is necessary to total the 1995 SEVs of the parcels involved in the combination so that there is a 1995 SEV for the newly created combined parcel. In this example the 1995 SEV for the SEVs of $30,000 and $25,000 were combined for newly created combined parcel is $55,000 (which is $30,000 + $25,000). This results in a VCM of 1.0200 because $56,100 / $55,000 = 1.0200

NOTE If one of the parcels which were combined was a "transfer of ownership" in 1995, it would not be necessary to calculate a VCM for that part of the combined property for 1996, because the Taxable Value for that part would be uncapped in 1996.

2. The other problem relating to combinations is that the current year's SEV of a newly created combined parcel is considered to be Equalization NEW and a literal interpretation of the VCM formula would require that the SEV of the newly created combined parcel be included as NEW in the calculation of the Value Change Multiplier (VCM). Again, please note that this is only a problem when the assessing unit has a policy of retiring the parcel code numbers of combined parcels. The problem is that, when the SEV of the newly-created combined parcel is treated as NEW m the VCM formula, the result is 0 divided by another number. This always results in the answer 0. Thus, in the example discussed in paragraph "a" above, the VCM for the parcel which had a 1996 SEV of 56,100 and an assigned 1995 SEV of 55,000 would be calculated as follows:

1996 VCM = 1996 SEV - 1996 SEV of NEW Property
                           1995 SEV - 1095 SEV of LOSS

= 56,100 - 56,100
           55,000

= 0
55,000

THIS RESULTS IN AN INCORRECT VCM

Since the purpose of the VCM is to measure the change in SEV of each individual parcel of real property from one year to the next, one would expect the correct VCM for this property to be 1.0200 which is $56.100 / $55,000.

SOLUTION TO THE SECOND COMBINATION PROBLEM

The solution to this problem involving combinations is that the SEV of a newly created combined parcel is not NEW in the calculation of the VCM even though it is NEW for the purposes of equalization.

IMPORTANT NOTE If a newly created combined parcel also has physical changes such as new construction or a fire loss, those physical changes are still NEW and LOSS in the calculation of the VCM even though the new attributable only to the combination is not NEW in the VCM formula. In order to be able to make the necessary calculations, the assessor must separately keep track of NEW attributable to combinations and NEW and LOSS attributable to other changes.

4. Problem Related to Certain Changes by the July and December Boards of Review, by the State Tax Commission, or by the Michigan Tax Tribunal

Sometimes changes in Assessed Value made by the July or December Boards of Review, by the State Tax Commission, or by the Michigan Tax Tribunal (MTT) qualify as equalization NEW or LOSS. For example, an increase in Assessed Value by the STC caused by omitted property qualifies as NEW. (Changes based entirely on valuation disputes between assessors and taxpayers are not ordinarily equalization NEW or LOSS but are PLUS or MINUS adjustments.)

When changes in Assessed Value made by the July or December Boards of Review, by the State Tax Commission, or by the Michigan Tax Tribunal qualify as equalization NEW or LOSS, they are NEW and LOSS for equalization purposes on forms 14021, 14022, and 1.4023, but NOT for the calculation of the VCM.

This is true because the VCM formula starts with the prior year's FINAL SEV. The FINAL SEV is the SEV after all changes by the July and December Boards of Review, the State Tax Commission and the Michigan Tax Tribunal.

Therefore, since the Prior Year's FINAL SEV already incorporates these changes into the VCM formula, it would be a mistake to also treat them as NEW or LOSS in. the VCM formula.

EXAMPLE

The State Tax Commission increased the 1985 Assessed Value on a property from $50,000 to $70,000 due to a section 154 filing by the assessor. The increase in Assessed Value of $20,000 was due to the fact that a family room constructed in 1994 was not placed on the 1905 assessment roll. The Assessed Value attributable to the family room for 1096 is $20,200. This is NEW for equalization purposes but NOT for purposes of calculating the VCM.

This is depicted in the formulas below:
(In this example, assume the 1095 equalization factor is 1.0000 and the 1906 SEV is $70,700)

CORRECT CALCULATION:

1996 VCM = 1996 SEV - 1996 SEV of NEW Property
                            1995 SEV - 1995 SEV of LOSS

= $70,700 - 0
   $70,000 - 0

= 1.0100                     CORRECT

INCORRECT CALCULATION:

1996 VCM = $70,700 - $20.200
                           $70,000 - 0

= 1.7214                    INCORRECT

IMPORTANT NOTE: In order to be able to implement the procedure discussed above, the assessor must separately keep track of the SEV of HEW and LOSS resulting from changes by the July or December Boards of Review, by the State Tax Commission, and by the Michigan Tax Tribunal.

5. Problem When Previously Exempt Property Is No Longer Exempt In the Current Year

There is a problem in the calculation of the Value Change Multiplier (VCM) for a property which was totally exempt in the previous year and becomes assessable in the current year. The problem arises because there is no previous year’s SEV for the Calculation of the VCM.

SOLUTION TO THIS EXEMPTION PROBLEM

Do not calculate a VCY for the Capped Value formula for properties which were TOTALLY exempt in the prior year. Instead, use the lower of 1.05 or the inflation rate. (Since the factor chosen will be multiplied by the prior year’s Taxable Value of 0 in the first part of the Capped Value Formula, the resulting answer in that part of the formula will always be 0 regardless of which factor is chosen. The exempt property will then return to the roll as an ADDITION in the last part of the Capped Value formula.)

EXAMPLE

A property was totally exempt in 1995 but is assessable in 1996 and the 1996 SEV is $100,000. Since there is no 1995 SEV for this property, the 1996 VCM would result in the following:

1996 VCM = 1996 SEV - 1996 SEV of NEW Property
                            1995 SEV - 1995 SEV of LOSS

= $100,000 - $100,000
               0 - 0

= 0
   0

MOST COMPUTERS WILL NOT BE ABLE TO PROCESS THIS ANSWER

By using the 1996 inflation rate of 1.028, the computer is able to calculate a factor to multiply the prior year's Taxable Value of 0 by. The Capped Value then becomes the amount of the ADDITION in the Capped Value formula. This is depicted below:

1996 Capped Value (for this problem only) = (1995 Taxable Value -LOSSES) X (Lower of 1.05 or the Inflation Rate of 1.028) + ADDITIONS

= (0-0) X 1.028 + $100,000

= $100,000 CORRECT ANSWER

2. Situations Involving the Prior Year's Taxable Value in the Capped Value Formula

The first item used in the Capped Value formula is the Prior Year's (FINAL) Taxable Value. Since Taxable Value is the tax base that is used to calculate ad valorem property taxes for all properties, the pnor Taxable Value is the FINAL value that was used in the immediately preceding year to calculate that year's property taxes. Normally, the Taxable Value for a parcel which appears in the immediately preceding year's assessment roll is the prior Year's Final Taxable Value to be used to calculate Capped Value. Note the following exceptions to this rule.

There are several circumstances when the Taxable Value in the immediately preceding year's assessment r&l is NOT the Prior Year's (FINAL) Taxable Value that will be used as the beginning point in the formula to calculate the Capped Value for the current year. For example, splits, platting, combinations and annexations create new parcels which do not have a prior Taxable Value. The assessor must determine the prior Taxable Value for the newly created parcels.

July or December Board of Review (MCL 211.53b) changes, State Tax Commission changes (under MCL 211.154), and Michigan Tax Tribunal changes to the prior year's Assessed, Equalized, or Taxable Values may change the Taxable Value posted in the prior assessment roll or in the prior tax roll. In such instances, a new prior Taxable Value based on these actions must be used as the beginning point in the Capped Value formula to correctly calculate Capped Value for the current year.

There is more information about these situations in Section C that follows.

3. Further Clarification of ADDITIONS and LOSSES as reported on Form 1.4025 and Used in the Calculation of Capped Value, the "Headlee" Millage Reduction Fraction, and the Truth in Taxation Base Tax Rate Fraction.

There are two situations in which ADDITIONS and LOSSES are NOT utilized as ADDITIONS and LOSSES for purposes of calculating Capped Value but ARE utilized as ADDITIONS and LOSSES for purposes of calculating the "Headlee" Millage Reduction Fraction and the Truth in Taxation Base Tax Rate Fraction.

1. Sometimes changes in Taxable Value made by the July or December Boards of Review, by the State Tax Commission, or by the Michigan Tax Tribunal (MTT) qualify as ADDITIONS or LOSSES as defined in MCL 211.34d and in STC Bulletin No. 3 of 1995. For example, an increase in Taxable Value caused by the STC placing omitted property on a local Assessment Roll qualifies as an ADDITION.

When changes in Taxable Value made by the July or December Boards of Review, by the State Tax Commission, or by the Michigan Tax Tribunal qualify as ADDITIONS or LOSSES, they are ADDITIONS and LOSSES used in the calculation of the "Headlee" Millage Reduction Fraction and the Truth in Taxation Earn Tax Rate Fraction but are NOT used in the calculation of the Capped Value formula.

This is true because these ADDITIONS and LOSSES have already been accounted for in the Capped Value formula. The Capped Value formula starts with the prior year's FINAL, Taxable Value. The FINAL Taxable Value is the Taxable Value after all changes by the July and December Boards of Review, by the State Tax Commission and by the Michigan Tax Tribunal.

Therefore, since the Prior Year's Taxable Value already incorporates these changes into the Capped Value formula, it would be a mistake to also treat them as ADDITIONS or LOSSES in the Capped Value formula for the current year simply because they were reported on the form 1.4025 as ADDITIONS OR LOSSES.

EXAMPLE

The State Tax Commission increased the 1995 Taxable Value on a property from $10,000 to $60,000 due to a section 154 filing by the assessor to place omitted property on an Assessment Roll. The increase in Taxable Value of $50,000 was due to the fact that a house constructed in 1994 was not placed on the 1995 assessment roll. The Taxable Value increase of $50,000 is an ADDITION for purposes of calculating the "Headlee" Millage Reduction Fraction and the Truth in Taxation Base Tax Rate Fraction but the Taxable Value increase of $50,000 is NOT an ADDITION in the Capped Value formula because its inclusion would account for that $50,000 increase twice.

This is depicted in the formulas below:
(For the sake of this example, assume the VCM is 1.0000 and that there are no LOSSES)

CORRECT CALCULATION:

1996 Capped Value = (1995 Taxable Value -Losses) X (lowest of 1.05 or the Inflation Rate of 1.028 or the VCM of 1.0000 (Given)) + Additions

= (60,000 -0) X 1.0000 + 0 for Additions

= 60,000 X 1.0000

= 60,000            CORRECT

INCORRECT CALCULATION:

1996 Capped Value = (60,000 - 0) X 1,0000 + 50,000 for Additions

= 60,000 X 1.0000 + 50,000

= 110,000

INCORRECT

It would also be INCORRECT to use $10,000 as the 1995 Taxable Value in the Capped Value formula because the f o d a requires that the prior year's FINAL Taxable Value of $60,000 be used and not the tentative Taxable Value of $10,000.

IMPORTANT NOTE In order to be able to implement the procedure discussed above, the assessor must separately keep track of ADDITIONS and LOSSES resulting from changes by the July or December Boards of Review, by the State Tax Commission, and by the Michigan Tax Tribunal

2. The following ARE also used as ADDITIONS and LOSSES in the calculation of the "Headlee" Millage Reduction Fraction and the Truth in Taxation Base Tax Rate Fraction but are NOT used in the Capped Value calculation:

1. When property is removed from one school district and annexed to another school district. This is an ADDITION and LOSS when calculating the "Headlee" Millage Reduction Fraction and the Truth in Taxation Base Tax Rate Fraction for the affected school districts but is NOT and ADDITION and LOSS for the Capped Value calculation.

2. When additional property is included in a Downtown Development Authority (DDA) or other similar authorities. This is an ADDITION for the "Headlee" and Truth in Taxation calculation for the DDA but is NOT an ADDITION for the Capped Value calculation.

3. When property changes from Homestead to Non Homestead or vice versa or from Qualified Agricultural Property to Non Qualified Agricultural and vice versa. These changes DO result in ADDITIONS and LOSSES for the "Headlee" and Truth in Taxation calculations for the K-12 school district in which the properties are located but are NOT ADDITIONS and LOSSES for the Capped Value calculation.

Items a, b, and c above do NOT result in ADDITIONS and LOSSES in the Capped Value formula because, though they are ADDITIONS and LOSSES to and from school districts, they remain in the township or city in which they are located.

IMPORTANT NOTE In order to be able to correctly calculate the "Headlee" Millage Reduction Fraction and the Truth in Taxation Base Tax Rate Fraction, the assessor must separately keep track of ADDITIONS and LOSSES resulting from:

1. school district and DDA annexations

2. changes from Homestead to Non Homestead and vice versa

3. changes from Qualified Agricultural Property to Non Qualified Agricultural Property and vice versa

The calculation of the "Headlee" Millage Reduction Fraction and the Truth in Taxation Base Tax Rate Fraction will be discussed further in the annual STC Bulletin regarding Millage Requests and Millage Rollbacks which is usually sent in April.

QUICK REFERENCE

QUICK REFERENCE

This chart is for quick reference and may not cover every circumstance which may occur. * See pages 9 and 12 of this bulletin.