Ohio Tax Major Developments within the Ohio Supreme Court & - - PDF document
26th Annual Tuesday & Wednesday, January 2425, 2017 Hya Regency Columbus, Columbus, Ohio Workshop W Ohio Tax Major Developments within the Ohio Supreme Court & Ohio Board of Tax Appeals Regarding Ohio & Municipal Income
26th Annual
Tuesday & Wednesday, January 24‐25, 2017
Hya Regency Columbus, Columbus, Ohio
Major Developments within the Ohio Supreme Court & Ohio Board of Tax Appeals Regarding Ohio & Municipal Income Taxation
Tuesday, January 24, 2017 4:15 p.m. to 5:15 p.m.
Biographical Information David D. Ebersole, Associate, McDonald Hopkins, LLC 250 West St., Suite 550, Columbus, OH 43215 (614) 484-0716 debersole@mcdonaldhopkins.com Dave is an associate attorney in McDonald Hopkins’ Tax and Benefits Group who advises clients on a multitude of tax issues, particularly state and local taxes. As a former Assistant Attorney General for the Ohio Attorney General, Mike DeWine, Dave has defended the Ohio Tax Commissioner in tax litigation before the Ohio Board of Tax Appeals and Ohio courts of appeal, including several cases before the Ohio Supreme Court. He has extensive experience with all types of state and local taxes. These taxes include the income tax, sales and use tax, excise tax, personal and real property tax, and Ohio’s gross receipts tax, the CAT. Through his practice Dave also advises clients with respect to federal tax matters, executive compensation, employee benefits, and estate planning. Dave attended The Ohio State University Max M. Fisher College of Business, where he earned his B.S. with honors in Accounting and Finance. He also graduated with honors from The Ohio State University Moritz College of Law. Stephen K. Hall, JD, LLM, Member, Zaino Hall & Farrin, LLC 41 South High Street, Suite 3600, Columbus, OH 43215 shall@zhftaxlaw.com 614-349-4812 Fax: 614-754-6368 Steve provides state and local tax services, legal business counsel, and lobbying services to clients in multiple states and local jurisdictions. He leads the Firm's Real Estate Tax Practice Group, representing real property owners in valuation matters and exemption matters. He has represented clients in all types of state and local income tax, sales and use tax, excise tax, public utility tax, personal and real property tax, and gross receipts tax matters. Steve’s practice focuses on tax controversy and tax policy at the state and local level, including representation of clients before County Boards of Revision, Local Income Tax Boards of Review, the Ohio Board of Tax Appeals, Ohio state courts, and state and local tax agencies across the country. He also frequently represents clients before Ohio’s General Assembly, the Ohio Department of Taxation, and other state and local government agencies, both in tax controversy and lobbying matters. Earlier in his career, he served as Assistant Counsel to the Ohio Tax Commissioner, where he was a policy and technical advisor to the Tax Commissioner, the Ohio Governor’s Office, and the Ohio Department of Development, while representing the Ohio Department of Taxation before the Ohio General Assembly. He has spent significant time drafting tax legislation and lobbying for the implementation of tax law changes both while in the Tax Commissioner’s office and on behalf of clients while in private law practice Steve is a frequent speaker on technical state and local tax matters, state and local tax policy, and national tax policy matters addressing multistate taxation. He is actively involved in lobbying Ohio's General Assembly and participates in various Ohio Bar Association committees addressing Ohio tax policy and procedure. He is the chair of the Ohio State Bar Association subcommittee on municipal income tax matters.
Biographical Information Daniel W. Fausey, Assistant Section Chief – Taxation Section Office of Ohio Attorney General Mike DeWine 30 E. Broad St., 25th Floor, Columbus, Ohio 43215 614-995-9032 Fax: 866-513-0356 Daniel.Fausey@OhioAttorneyGeneral.gov Daniel Fausey is a 2005 graduate of the Ohio State University Moritz College of Law. Dan was a law clerk for Chief Justice Thomas Moyer and Chief Justice Eric Brown of the Ohio Supreme Court. Dan has worked as an Assistant Attorney General in several sections of the Ohio Attorney General’s Office, including Executive Agencies, Charitable Law, and currently Taxation, where he is the Assistant Section Chief. Dan also has been a Deputy Solicitor for the State Solicitor’s Major Appeals Group. Dan’s practice is mainly litigation, having appeared before more than 30 trial-level courts across the state and several administrative agency hearings. Dan’s practice has a heavy appellate focus: he has appeared before numerous Ohio appellate Courts, the Sixth Circuit Federal Court of Appeals, and has made multiple appearances before the Supreme Court of Ohio. Dan previously served as an Adjunct Professor at Ohio State’s Moritz College of Law, where he taught Appellate Advocacy. In his free time, Dan races mountain bikes and serves as a board member for the non-profit Central Ohio Mountain Biking Organization. Dan lives in Columbus with his wife and three children.
R E C E N T D E V E L O P M E N T S I N 2 0 1 5 & 2 0 1 6
Da vid E be rsole , E sq. Mc Donald Hopkins, L L C Ste phe n Hall, E sq. Zaino Hall & F ar r in Danie l F ause y, E sq. Ohio Attor ne y Ge ne r al
1
OVERVIEW
e sta, Slip Opin. 2016-Ohio-2805
. Ryan L e g g I rre vo c ab le T rust v. T e sta, Slip Opin. 2016-Ohio-8418
ro ze n F
7582
e sta, 144 Ohio St.3d 40 (2015)
e sta, Slip Opin. 2016-Ohio-8412
2
INCOME TAX NEXUS
nonresidents to income derived from in-State sources.
rac y, 87 Ohio St.3d 265, 267 (1999)
ransit v. Brady, 430 U.S. 274 (1977)
taxation of nonresidents, or just sales/use taxation?
3
HILLENMEYER V. BD. OF REV.
(2015)
regulation do not tax professional athletes who do not perform services in the City of Cleveland.
(2015)
4
HILLENMEYER V. BD. OF REVIEW
Re v., 144 Ohio St.3d 165, 2015-
Ohio-1623
Hunter Hillenmeyer claims that “game days” apportionment method
income for Cleveland municipal income tax is unconstitutional and violates Due Process.
Cleveland for only one game; Cleveland apportions 1/20 of his income, or 5 percent, to Cleveland under game days method.
5
HILLENMEYER V. BD. OF REV.
performing services in taxing city and denominator is all days worked (“on duty”)
games
will be fined for missing duty days
6
HILLENMEYER V. BD. OF REV.
“We’re talking about pr
ac tic e , not a game, not a
game, not a game, we talking about pr
ac tic e .”
7
HILLENMEYER V. BD. OF REV.
imposing the games days method violates Due Process
the employee performed the work.”
extraterritorial.”
Cases are “inapposite” to Due Process issue presented
8
CORRIGAN V. TESTA
produces $27,563,977 capital gain
headquartered in Ohio and doing business in all 50 states
“easily a hundred” hours per year in Ohio working on the company
followed by partial payment and partial refund claim FACTS
9
CORRIGAN V. TESTA
to owner’s legal or commercial domicile
income to non-Ohio resident’s home state
general rule through R.C. 5747.212
income/gain from the sale of a pass-through entity for which non-Ohio residents own 20 percent or more equity
equity interests with voting rights
10
CORRIGAN V. TESTA
Process as-applied to Mr. Corrigan in this case
taxed and the person
intangible property by a nonresident”
11
CORRIGAN V. TESTA
Analysis, Corrigan v. Testa, State Tax Notes,
849-858 (Jun. 13, 2016)
“If one sc r
atc he s be ne ath the sur fac e of the [Cor r igan] de c ision, howe ve r , and e xamine s the opinion that pur por te dly suppor ts it, one finds a for malistic , poor ly r e asone d, and inde fe nsible analysis that flie s in the fac e of e stablishe d c onstitutional doc tr ine . One c an
c our ts will r e c ognize Cor r igan for the r
12
CORRIGAN V. TESTA
the transaction to the substance
nt’ l Harve ste r v. Wis. De pt. o f Re v., 322 U.S. 345 (1944)
privilege of receiving corporate dividends does not offend Due Process due to benefits that Wisconsin provides shareholders
through statement that the tax at issue in I
nt’ l Harve ste r “never imposes tax liability on the investor.”
13
CORRIGAN V. TESTA
“fairly apportions” to the taxing state the combined income of separate legal entities or divisions of the same entity
income and apply apportionment fraction
Plumbing’s property, payroll, and sales to determine apportionment
apportioned tax on the gain realized by an investor as an unsettled question.” Co rrig an, ¶ 51, citing Me adWe stvac o v. I
ll. De pt. o f Re v., 553 U.S. 16 (2008).
earnings.
rac y, 87 Ohio St.3d 265, 267 (1999)
14
CORRIGAN V. TESTA
“consistent” with holding
“constitutionally sufficient link between the State and the value it wishes to tax” may be “founded” on State’s contacts with
I nc . v. Co mmissio ne r o f F inanc e , 588 N.E.2d 731 (N.Y. 1991)
upholds investee apportionment tax regime
state does not have constitutional “nexus” tax a nonresident’s capital gain income from the sale of an in-state business.
15
CORRIGAN V. TESTA
Court for a writ of certiorari
“unitary,” R.C. 5747.212 may be applied
Lanzinger concurrence in T
. Ryan L e g g I rre vo c ab le T rust v. T e sta.
tax paid under R.C 5747.212, then taxpayer should submit factual and legal reasons that Co rrig an applies
16
LEGG TRUST V. TESTA
Corporation
in effect, to his co-manager and 50% co-owner, Ken Oaks
FACTS
17
LEGG TRUST V. TESTA
from the sale of the TQL shares to Ohio
Amount” to Ohio
the sale, exchange, or other disposition of equity” in a pass- through entity such as TQL
this state and everywhere, as of the last day of the qualifying investee's fiscal or calendar year ending immediately prior to the date on which the trust recognizes the gain or loss” must be “available to the trust.”
18
LEGG TRUST V. TESTA
shares is a “Qualifying Trust Amount” taxable in Ohio
were “available” to the Legg Trust
apportionment formula under R.C. 5747.212
apportioned based upon single factor physical asset formula, Ohio versus everywhere, rather than three factor formula
19
LEGG TRUST V. TESTA
Amount does not violate Due Process
resident trust, its grantor, T. Ryan Legg, is an Ohio resident
business of the pass-through entity.”
resident who conducted business in significant part in Ohio through the corporate form and who disposed of his business and corporate interest not by a personal sale but by means of a trust that he created to accomplish his objective for himself and his
contacts are still material for constitutional purposes.”
20
LEGG TRUST V. TESTA
the trust form in L
e g g T rust v. T e sta but not
disregard the corporate form in Co rrig an v. T
e sta?
e g g T rust
with the unanimous Court in Co rrig an
Ohio in order to tax part of the gain unless the taxpayer shows particular circumstances that make [taxation] unreasonable.”
the corporate business should be irrelevant.”
21
NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW
k F r
d Hts. Inc ome T ax Bd. of Re v., Slip Opinion No. 2016-Ohio-7582.
that initially file d a se par ate ne t profits ta x re turn with the City of Be dford He ig hts ame nd the ne t pr
e tur n to file a c onsolidate d ne t pr
e tur n and c laim a r e fund of tax
paid so long as the ame nde d r e tur n is file d within the sta tute of limita tions?
wa s lowe r, re sulting in ne t re fund due .
22
NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW
OCAL T AXAT ION IN OHIO –Ohio Constitution
ity is one of the “powe r s of loc al se lf gove r nme nt,” Ohio Constitution, Ar tic le XVIII, Se c tion 3, e njoye d by Ohio’s c har te r e d subdivisions.
tic le XVIII, Se c tion 13, pr
passe d to limit the powe r
and inc ur de bts,” (Unde r lining adde d)
tic le XIII, Se c tion 6, pr
al Asse mbly “shall pr
the or ganization of c itie s, and inc or por ate d village s, by ge ne r al laws, and r e str ic t the ir powe r
lining adde d)
23
NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW
ac ts:
axpaye r file d a se par ate r e tur n in Be dfor d He ights for 2005, 2006, 2007 tax ye ar s.
axpaye r the n time ly file d ame nde d r e tur ns on a c onsolidate d basis with the City of Be dfor d He ights.
24
NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW
a w:
Januar y 1, 2003, all Ohio munic ipalitie s shall ac c e pt c onsolidate d r e tur ns if the same gr
file d that way for fe de r al inc ome tax pur pose s.
axpaye r “may not c hange the me thod of ac c ounting or appor tionme nt of ne t pr
the due date for filing the or iginal r e tur n.”
25
NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW
ative Rule adopte d by RIT A:
A Re gulation 5:06(A) T axpaye r “may not c hange the me thod of ac c ounting or appor tionme nt of ne t pr
the me thod of filing afte r the due date for filing the or iginal r e tur n.”
he unde r line d phr ase was adde d by RIT A in 2009 afte r tax ye ar s had e nde d.
d He ights City Counc il. Be dford ha s a “pic k- up”
dinanc e .
26
NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW
e gal Conc e pts:
tionme nt, me thod of ac c ounting, me thod of filing . T hre e (3) diffe re nt thing s.
dinanc e .
he City is the le gislative author ity, not RIT A, and the City may not make standar dle ss de le gation of le gislative author ity to RIT A
e ss limitation or r e str ic tion suc h that all c itie s must allow the ame nde d r e tur ns?
27
NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW
ax Administr ator ’s De c ision:
ax Administr ator for Be dfor d He ights de nie d the ame nde d r e tur ns stating that the “r ule s and r e gulations adopte d by the c ity of Be dfor d He ights pr
e tur ns to c hange the me thod
ffe c tive ly the T A is asse r ting that RIT A’s Rule is the r e ason for the de nial.
28
NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW
d He ights Boar d of Re vie w’s De c ision
axpaye r “may not c hange me thod of a c c ounting or apportionme nt of ne t pr
the due date for filing the or iginal r e tur n.”
A Re gulation 5:06(A) T axpaye r “may not c hange the me thod of ac c ounting or a pportionme nt of ne t profits, nor the me thod of filing afte r the due date for filing the or iginal r e tur n.”
ffe c tive ly saying “T ake n toge the r … ” you c annot do this, you must have done it on the or iginal r e tur n.
29
NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW
d of T ax Appe als De c ision (star t)
A agr e e s with taxpaye r that filing an ame nde d c onsolidate d r e tur n is NOT a “c hange in the me thod of ac c ounting or appor tionme nt of ne t pr
hir d pr
A) is diffe r e nt
doe s not pr
d – the “me thod of
filing.”
30
NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW
d of T ax Appe als de c ision (c on’t)
A holds that the RIT A Rule 5:06(A) disallowe d the 3r
d – the c hange in the
“me thod of filing.”
A doe s not addr e ss the “r e gulation may not e xc e e d the or dinanc e ” issue .
A doe s not addr e ss the “de le gation of le gislative author ity” issue fr
31
NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW
d of T ax Appe als de c ision (c on’t)
axpaye r : T he Or dinanc e must be le gislative ly c hange d and RIT A may not c hange the law in Be dfor d He ights without City Counc il appr
dinanc e has a “we adopt all futur e RIT A r ule s” pr
the RIT A c hange without ne e d for le gislative ac tion by City Counc il.
32
NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW
d of T ax Appe als de c ision (c on’t)
A: T he RIT A Rule is pic ke d up, and BT A doe s not have ability to de c ide c onstitutional issue s
ity” is c onstitutional issue .
imitation or r e str ic tion” of R.C. 718.06 is a c onstitutional issue .
33
NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW
d of T ax Appe als de c ision (c on’t)
axpaye r appe als to Ohio Supr e me Cour t.
Be dfor d Or dinanc e s ne ve r c ite d be for e nor addr e sse d by T A, MBOA, or the BT
34
NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW
e me Cour t – ove r vie w of de c ision
is de nie d the r e fund.
vie w of Analysis fr
t:
he ame nde d r e tur n involve d a “c hange in the me thod of ac c ounting.”
he tax was not “ove r paid” be c ause the taxpaye r had two c hoic e s and both we r e c or r e c t.
A Rule c ould be c onstr ue d as a c lar ific ation.
.
35
NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW
e me Cour t –me thod of ac c ounting
A e rre d by fa iling to find tha t the c hange fr
ate r e tur n to filing a c onsolidate d r e tur n was a “c hange in me thod of ac c ounting” pr
dinanc e in pur suing a r e fund c laim. We the r e for e affir m the BT A’s de nia l of the re fund c la im on the alte rnate gr
the me thod of ac c ounting pr
dinanc e .”
36
NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW
e me Cour t –me thod of ac c ounting
the ove r all plan of ac c ounting for gr
de duc tions or a c hange in the tr e atme nt of any mate r ial ite m use d in suc h ove r all plan.” 26 C.F .R. 1.446- 1(e )(2)(ii)(a). *** inc lude s “c ha ng e [s] involving the adoption, use or disc ontinuanc e of any othe r spe c ialize d me thod of c omputing taxable inc ome , suc h as the c r
e the Inte r nal Re ve nue Code and r e gulations unde r the Inte r nal Re ve nue Code spe c ific ally r e quir e that the c onse nt of the Commissione r [of Inte r nal Re ve nue ] must be obtaine d be for e adopting suc h a c hange .”
37
NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW
e me Cour t – no “ove r paid” tax
r
e tur n doe s not c laim a r e fund
paid taxe s. No one ar gue s that its or iginal se par ate filing was anything but both le gally pr
and fac tually c or r e c t as to the amount of tax owe d and duly
he ame nde d r e tur n doe s not c laim a de duc tion or c r e dit that the c ompany for got to c laim and doe s not se e k a tax be ne fit that it was e ntitle d to that was omitte d
ate r e tur n.”
38
NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW
e me Cour t – RIT A Rule c ould be c onstr ue d as “c lar ific ation”
e is no impe dime nt to c onstr uing the 2009 ame ndme nt of the RIT A r ule as a c lar ific ation r athe r than a substantive c hange .”
39
NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW
e me Cour t – 718.06 is not e xpr e ss
iginal r e tur n was file d, the mandate
e d; the statute did not pur por t to addr e ss whe the r a the [sic ] taxpaye r c ould c hange to a c onsolidate d me thod by filing an ame nde d r e tur n, an issue that involve d polic y de c isions at the loc al le ve l that the Ge ne r al Asse mbly did not addr e ss.”
40
NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW
e me Cour t – 718.06 is not e xpr e ss (c on’t).
he amount of tax r e por te d and paid on the
iginal r e tur n was pe r fe c tly pe r missible and le gal unde r state as we ll as loc al law, give n that the taxpaye r
iginally e xe r c ise d the r ight to file a se par ate r e tur n r athe r than a c onsolidate d r e tur n. T
e fusing the ame nde d r e tur n would c onstitute an additional limit on the c ity’s taxing author ity that was not e xplic itly state d in R.C. 718.06.”
41
NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW
e me Cour t – Don’t ne e d to addr e ss
issue s
he taxpaye r has r aise d c onstitutional c halle nge s to this r uling, inc luding a c laim of unc onstitutional r e tr
de le gation of author ity. Be c ause we r e solve this c ase on the basis of Be dfor d He ights’ limitation pr
the me thod of a c c ounting , we ne e d not c onside r the the or y on whic h the BT A base d its disposition
42
NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW
appor tionme nt fr ac tion?
paid”?
e MF S to MF J r ule .
H.B. 5?
e ss limitation or r e str ic tion”?
43
CUNNINGHAM V. TESTA
law domiciliaries of Ohio for 2008 tax year at issue
FACTS
44
CUNNINGHAM V. TESTA
in Ohio in 2008
Real Property Tax Break for 2008
MORE FACTS
45
CUNNINGHAM V. TESTA
Ohio income tax law
which contemplates (a) residence; and (b) intent to reside in that place permanently or indefinitely
abode; and (b) while away from non-Ohio abode spends a portion of two consecutive days in Ohio
46
CUNNINGHAM V. TESTA
Former R.C. 5747.24(B)(1) reads, in pertinent part:
[A]n individual who during a taxable year has no more than one hundred eight-two contact periods in this state, which need not be consecutive, and who during the entire taxable year has at least one abode outside this state, is pr
e sume d to be not domic ile d in this state dur ing the taxable ye ar if [within a prescribed time], the individual file s
with the tax commissioner, on the form prescribed by the commissioner,
a state me nt fr
ifying that the individual was not domic ile d in this state unde r this division dur ing the taxable ye ar .
* * *
T he pr e sumption that the individual was not domic ile d in this state is ir r e buttable unle ss the individual fails to time ly file the state me nt as r e quir e d or make s a false state me nt. If the individual fails to file the
statement as required or makes a false statement, the individual is presumed under division (C) of this section to have been domiciled inhis state the entire taxable year. (Emphasis added).
47
CUNNINGHAM V. TESTA
me r R.C. 5747.24, Pr e sumptions, and Bur de n of Pr
periods [current law: 213 contact periods]. R.C. 5747.24 (D)
period [current law: 213 contact periods]. R.C. 5747.24(C)
non-Ohio abode
48
CUNNINGHAM V. TESTA
r e buttable Pr e sumption”
this state is irre butta ble unle ss the individua l fails to timely file the statement as required or make s a fa lse sta te me nt.” (Emphasis added).
e me Cour t: Cunninghams have Ohio domicile
he has specific evidence of a false statement and sets it forth in his final determination
home as “principle place of residence” is false statement
preponderance of the evidence but failed to do so here
49
GIDDENS V. TESTA
for trailer parks, including running gear, axles, springs, hitches, and jacks.
who resided in Missouri and owned 100% of Redneck, Inc. through shares held in grantor trusts.
FACTS
50
GIDDENS V. TESTA
the regular course of business during Redneck, Inc.’s C corp years business or nonbusiness income?
course of Redneck’s trade or business during C corp years
income, then entire dividend amount allocated to Missouri
income in Ohio, then dividend is apportionable to Ohio and Giddenses are entitled to dollar-for-dollar resident credit in their home state of Missouri for tax paid to Ohio
51
GIDDENS V. TESTA
rac y, 87 Ohio St.3d 265, 268 (1999)
distributive share income to investors, as business income or nonbusiness income, is determined at the entity level
be determined as if the item were realized from the source from which the corporation realized the item. Thus, business income generated by an S corporation retains its status as business income as it passes through to the shareholders.”
rac y, 85 Ohio St.3d 350, 352
(1999); T
e tlak v. Brate nahl, 92 Ohio St.3d 46, 49 (2001); Ke mppe l v. Z aino , 91 Ohio St.3d 420, 421 (2001)
52
GIDDENS V. TESTA
line of cases in 2002 through R.C. 5747.231
[E ]ac h pe r son shall inc lude in that pe r son's ite ms of busine ss inc ome , no nb usine ss inc o me , adjuste d q ualifying amo unts,
allo c ab le inc o me o r lo ss, appo rtio nab le inc o me o r lo ss, pro pe rty, c o mpe nsatio n, and sale s, the pe r
son's e ntir e distr ibutive shar e or pr
tionate shar e of the ite ms of busine ss inc ome , no nb usine ss inc o me , adjuste d q ualifying
amo unts, allo c ab le inc o me o r lo ss, appo rtio nab le inc o me o r lo ss, pro pe rty, c o mpe nsatio n, and sale s o f any pass-thro ug h e ntity in whic h the pe rso n has a dire c t o r indire c t o wne rship inte re st at any time during the pe rso n's taxab le ye ar. * * *
T he se ite ms shall be in the same for m as was r e c ognize d by the pass-thr
53
GIDDENS V. TESTA
is allocable nonbusiness income not taxable in Ohio
income
distributed
from distributive share income at issue in Ag le y
the income tax liability to the Giddens personally
shareholder when earned by the S corporation
million dividend is not a “proportionate share” of Redneck’s “business income” under the statute
54
QUESTIONS
be rsole
ause y
55
[Cite as Hillenmeyer v. Cleveland Bd. of Rev., 144 Ohio St.3d 165, 2015-Ohio-1623.]
HILLENMEYER, APPELLANT, v. CLEVELAND BOARD OF REVIEW ET AL., APPELLEES. [Cite as Hillenmeyer v. Cleveland Bd. of Rev., 144 Ohio St.3d 165, 2015-Ohio-1623.] Taxation—Municipal income tax—Application of “games played” method of allocating nonresident professional athlete’s income to city, resulting in taxation of income from work performed outside of city, violated NFL player’s right to due process—“Games played” allocation method did not violate municipal ordinance or R.C. Chapter 718—Exclusion of professional athletes from occasional-entrants rule’s 12-day grace period did not violate equal protection. (No. 2014-0235—Submitted January 14, 2015—Decided April 30, 2015.) APPEAL from the Board of Tax Appeals, No. 2009-3688. ____________________ LANZINGER, J. INTRODUCTION {¶ 1} Appellant, Hunter T. Hillenmeyer, a former linebacker for the Chicago Bears of the National Football League (“NFL”), challenges the method by which Cleveland’s municipal income tax was imposed on his earnings during tax years 2004, 2005, and 2006. In each of those seasons, the Bears played one game in Cleveland, for which Hillenmeyer was present in Cleveland two days. And for each of those years, the Bears withheld and then paid the municipal tax from his compensation according to Cleveland’s allocation method known as “games played,” under which the taxable portion of a professional athlete’s
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income is based on the number of games the athlete played in Cleveland in relation to the total number of games played that year. {¶ 2} As a nonresident of Cleveland, Hillenmeyer asserts that Cleveland has adopted an unlawful method of computing the amount of his compensation that is subject to its city income tax. The games-played method, he argues, dramatically overstates his Cleveland income, because his compensation as an NFL player includes earnings not only for the games he played, but also for the training, practices, strategy sessions, and promotional activities he engaged in. {¶ 3} On December 19, 2007, Hillenmeyer filed timely applications for refunds of income taxes paid to Cleveland for tax years 2004 through 2006. He appealed the denial of his applications for tax refunds to the city of Cleveland Board of Review, the Board of Tax Appeals (“BTA”), and now this court. The issues outstanding {¶ 4} Both constitutional and nonconstitutional challenges are levied against the municipal tax: that former R.C. 718.011(B), Am.Sub.S.B. No. 287, 148 Ohio Laws, Part V, 11536,1 the “occasional entrants” statute, violates both the Ohio Constitution and the Equal Protection Clause of the Fourteenth Amendment to the United States Constitution (proposition of law No. 4); that Cleveland’s method of income-tax allocation is contrary to former R.C. 718.01(H), 2007 Am.Sub.H.B. No. 24, and former R.C. 718.03, Am.Sub.H.B. No. 95, 150 Ohio Laws, Part I, 396, this court’s decision in Hume v. Limbach, 61 Ohio St.3d 387, 575 N.E.2d 150 (1991), and Cleveland Codified Ordinances 191.0501(b)(1) (proposition of law No. 1); that the city’s method of allocation violates the Due Process Clause of the United States Constitution (proposition of law No. 2); and that it violates the Commerce Clause of the United States Constitution (proposition of law No. 3).
1 In 2014, R.C. Chapter 718 was extensively revised. 2014 Sub.H.B. No. 5. Those revisionsbecame effective March 23, 2015.
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{¶ 5} We now hold that although Cleveland has the right to tax the compensation earned by a nonresident professional athlete for work performed in Cleveland, the city’s application of its games-played method of allocating income violates the due-process rights of NFL players such as Hillenmeyer. We reverse and remand for calculation of the tax refund and interest due him. FACTUAL BACKGROUND Previous proceedings {¶ 6} Hillenmeyer filed claims for refunds of Cleveland taxes withheld and remitted for tax years 2004, 2005, and 2006. In his refund applications, he argued that the allocation ratio used by Cleveland was “illegal, erroneous, and unconstitutional” and taxed amounts for services that he performed outside the city. {¶ 7} The Central Collection Agency (“CCA”), Cleveland’s tax administration authority, responded to Hillenmeyer’s refund applications by issuing a notice dated January 22, 2008, for each of the tax years, indicating that “[y]our employer withheld the tax correctly.” Hillenmeyer then requested that the CCA issue a final, appealable order. On February 19, 2009, the CCA issued a 29- page final dispositional order upholding its imposition of tax using the games- played method of allocation. {¶ 8} Hillenmeyer appealed the CCA’s order to the city’s board of review, Cleveland’s duly established board for income-tax appeals pursuant to former R.C. 718.11, Am.Sub.H.B. No. 95, 150 Ohio Laws, Part I, 396.2 A hearing was held on July 2, 2009. Thomas DePaso, associate general counsel of the NFL Players’ Association and a former player in the league, testified about Hillenmeyer’s employment and compensation, and Hillenmeyer offered into
2 In Cleveland, the board of review comprises the city’s director of public utilities or delegate, thecity law director or delegate, and one member of city council elected to the board by the council. Cleveland Codified Ordinances 191.2501.
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evidence the NFL collective-bargaining agreement and two of his player contracts, the later of which was dated June 29, 2006, and was a six-year contract extending through 2011. {¶ 9} On September 29, 2009, the board of review issued a nine-page decision deferring to and upholding the CCA’s position. Hillenmeyer then appealed to the BTA. The parties waived a hearing before the BTA and submitted the case on the notice of appeal, the briefs filed, and the record transmitted by the board of review. BTA No. 2009-3688, 2014 WL 351128, *1 (Jan. 14, 2014). {¶ 10} On January 14, 2014, the BTA issued a decision upholding the board of review’s determination. The BTA declined to address Hillenmeyer’s constitutional challenges because of its limitations as an administrative tribunal, relying on Cleveland Gear Co. v. Limbach, 35 Ohio St.3d 229, 520 N.E.2d 188 (1988), and MCI Telecommunications Corp. v. Limbach, 68 Ohio St.3d 195, 625 N.E.2d 597 (1994). BTA No. 2009-3688, 2014 WL 351128, *3. The BTA found that Cleveland’s ordinances “do not operate in contravention of any state statute regarding municipal income taxes or Ohio case precedent.” (Footnote omitted.)
methodology” on the theory that that issue lay outside its jurisdiction. Id. Hillenmeyer appealed the BTA’s decision to this court. Evidence of Hillenmeyer’s compensation {¶ 11} Because it is necessary to look at Hillenmeyer’s total compensation before analyzing the legal issues in this case, we turn to the record, which explains his compensation. Hillenmeyer states in his affidavit to the board of review that he had “been required to provide services to [his] employer from the beginning of the pre-season through the end of the post-season.” He had at least 157 work days in 2004, 165 days in 2005, and 168 days in 2006. The affidavit also establishes that in each of those years, “the Chicago Bears played one game
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in Cleveland, Ohio, traveling to the City the day before the game and leaving the City the same day on which the game was played.” Hillenmeyer himself “was present in and rendered services to [his] employer in Cleveland on those two days during each of these years.” {¶ 12} Hillenmeyer’s statements were corroborated by the affidavit testimony of Cliff Stein, senior director of football administration and general counsel for the Chicago Bears. Stein confirmed that under the NFL standard player contract and from the time that Hillenmeyer joined the Bears in 2003, he was required to “provide services to his employer from the beginning of the pre- season through the end of the post-season, including mandatory mini-camps,
regular season, and post-season games.” Stein also stated that “[t]he compensation Hillenmeyer receives from the Bears is paid for all of these services and not only for games played” and that “[f]ailure to comply with these contractual requirements would subject Hillenmeyer to termination pursuant to Paragraph 12 of his NFL Player Contract and/or fines under Article VIII of the Collective Bargaining Agreement.” {¶ 13} Thomas DePaso testified about Hillenmeyer’s contracts, duties, and elements of compensation at the July 2, 2009 hearing. DePaso described the four distinct phases of an NFL player’s work year. First, players have the mini camp, a mandatory multiple-day event involving a physical exam, meetings, and practices, which takes place after the NFL draft. Second, the preseason training camp typically lasts about six weeks. Players report two weeks in advance of the first of four preseason games, and days are filled with meetings, practices, reviewing films of previous games, and practicing the plays for upcoming games. The regular season is the third phase, which consists of seventeen weeks—sixteen games with one week off—along with the weekly game-preparation schedule. Usually, players come to work on a Monday, when the injured are treated and
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heavy work days on Wednesday, Thursday, and Friday. Saturday, typically the day before game day, involves a relatively light practice with refinement of game strategy and plays. Finally, the team usually travels on Saturday (if the game is away) and plays on Sunday (unless it is an off week). In a successful year, the team may qualify to play postseason games. {¶ 14} DePaso also testified about Hillenmeyer’s employment contract. Under paragraphs 5 and 6 of the standard player contract, entitled “COMPENSATION” and “PAYMENT,” respectively, a certain stated yearly base salary is furnished to the player, paid in weekly or biweekly installments during the regular season. According to DePaso, about 40 percent of the player’s compensation is in addition to that baseline amount. Beyond paragraph 5 compensation, players can receive—based on their specific contracts— performance bonuses based on either individual or team performance, signing bonuses, and roster bonuses, which are paid for being a member of the roster on a certain date. Players can be fined for missing mandatory events, and fines may be deducted from their paragraph 5 compensation, but the collective-bargaining agreement imposes caps on the fines. Termination of a player during the season would lead to the prorated forfeiture of the paragraph 5 compensation, but already-earned bonuses such as roster bonuses are fully owed upon termination even if not yet fully paid out. {¶ 15} Hillenmeyer’s June 29, 2006 contract provided for a term covering the 2006, 2007, 2008, 2009, 2010, and 2011 seasons. His paragraph 5 salary began at $585,000 for 2006 and escalated year by year to $1.8 million for 2011. An addendum provided a roster bonus of $4.5 million for 2006, to be paid out in four increments by September 2007. This bonus compensated Hillenmeyer solely for being “a member of the 80-man roster on July 10, 2006,” and under the
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collective-bargaining agreement the amount was owed and was not forfeitable
Games played vs. duty days {¶ 16} At the heart of the dispute before us is the method that Cleveland has chosen to allocate the taxable income of nonresident professional athletes. Cleveland imposes a 2 percent tax on the income that is allocable to Cleveland. See Cleveland Codified Ordinances 191.0501. CCA Regulation 8:02(E)(6) sets forth a games-played method to allocate the income of a nonresident professional athlete such as Hillenmeyer. This means that Cleveland taxes the one game that Hillenmeyer played in Cleveland each year in proportion to the total number of games the Bears played during the year (approximately 20 preseason and regular- season games in a non-playoff year). Under this methodology, a visiting football player who travels to Cleveland for a single game out of a 20-game season will have one twentieth (5 percent) of his income allocated to Cleveland and then taxed at 2 percent. The Cleveland tax administrator asserts that the games-played method “properly apportions player salaries since the plain language of both [the CBA and the standard player contract] ties a player’s contract salary to one thing—games played.” {¶ 17} Nevertheless, except for Cleveland, municipalities that have chosen to tax professional athletes do so on the basis of the allocation offered by Hillenmeyer—the “duty days” approach. In this approach, the numerator represents the number of days spent in the taxing city: in this case, two days for
2005, and 168 in 2006. When these numbers are used as the denominators to represent the total number of work days, Cleveland would have been allocated approximately 1.27 percent of Hillenmeyer’s income in 2004, 1.21 percent in 2005, and 1.19 percent in 2006. Under the duty-days method, Hillenmeyer claims he is entitled to refunds of $253 for 2004, $359 for 2005, and $4,450 for 2006.
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LEGAL ANALYSIS Cleveland’s allocation method not prohibited by law {¶ 18} Hillenmeyer argues that the method chosen by Cleveland to allocate to itself the income of a nonresident like himself, which is set forth in the CCA Rules and Regulations, conflicts with the underlying tax ordinance passed by the Cleveland City Council. {¶ 19} Cleveland Codified Ordinances 191.0318 defines “taxable income” as “all qualifying wages, net profits and all other income from whatever source derived set forth in Section 191.0501, and the Rules and Regulations as taxable.” The taxing ordinance expressly imposes tax on “all qualifying wages, earned and/or received * * * by nonresidents of the City for work done or services performed or rendered within the City or attributable to the City,” Cleveland Codified Ordinances 191.0501, and it confers authority on the tax administrator to “adopt and promulgate and to enforce and interpret rules and regulations relating to any matter or thing pertaining to the collection of taxes and the administration and enforcement of [the municipal-income-tax ordinances],” subject to approval by the board of review, Cleveland Codified Ordinances 191.2303. {¶ 20} Thus, the ordinances countenance that regulations will spell out how to apply the standard for taxing nonresidents’ income. The ordinances do not restrict how Cleveland’s tax administrator may choose to determine the “work done and services performed or rendered within the City or attributable to the City” when, as here, the taxpayer’s compensation derives from services performed both within and outside of Cleveland. {¶ 21} Hillenmeyer also argues that the games-played method violates state law. Former R.C. 718.01(H)(10), 2007 Am.Sub.H.B. No. 24, prohibits municipal taxation of any wages that are not “qualifying wages,” which according to former R.C. 718.03(A)(2), Am.Sub.H.B. No. 95, 150 Ohio Laws, Part I, 396, 638, means, as relevant here, “wages, as defined in section 3121(a) of the Internal
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Revenue Code.” The Internal Revenue Code provision defines “wages” generally as “all remuneration for employment,” while “employment” in turn is defined as “any service, of whatever nature, performed * * * by an employee for the person employing him.” 26 U.S.C. 3121(a), (b). {¶ 22} From these definitions, Hillenmeyer concludes that Ohio law “requires that employee wages be treated as having been earned for all services performed by an employee for his or her employer.” (Emphasis sic.) He argues that because the undisputed record established that he performed services for the Bears other than playing in football games, Cleveland’s attempt to treat him as being paid only to play in games is contrary to the Revised Code. {¶ 23} This point has surface appeal. But, just as in the case of the
specifically address how to apportion or allocate wage income among the various jurisdictions in which the income has been earned. Municipal home-rule authority to impose taxes may be limited only by a provision of state law that expressly imposes the restriction. Cincinnati Bell Tel. Co. v. Cincinnati, 81 Ohio St.3d 599, 605, 693 N.E.2d 212 (1998). The cited statutes do not satisfy this clear-statement rule. {¶ 24} Nonetheless, although Cleveland’s allocation method may not be prohibited by law, we turn to the arguments that it has been unconstitutionally applied to Hillenmeyer. No waiver of constitutional claims {¶ 25} As a preliminary matter, we resolve the issue of waiver of the constitutional claims. Cleveland faults Hillenmeyer for having appealed to the BTA rather than the common pleas court, where his constitutional issues could have been decided. But Cleveland cites no authority for the supposed obligation to use one appeal avenue as opposed to another. R.C. 5717.011 sets forth an appellant’s right to choose the forum and imposes no restrictions on its doing so.
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We have held that constitutional issues may be raised before the BTA for later determination by the courts on appeal. In such cases, the BTA serves as the forum for presentation of evidence so that a record is available for the court deciding those issues on appeal. Cleveland Gear Co., 35 Ohio St.3d at 232, 520 N.E.2d 188. We therefore reject Cleveland’s contention that Hillenmeyer’s election of appellate avenues has waived his constitutional claims. {¶ 26} Cleveland also suggests that Hillenmeyer should have raised some hypothetical nonconstitutional argument regarding the apportionment of income as a condition precedent to his being able to raise his constitutional arguments. But Hillenmeyer did argue that the CCA’s regulation conflicts with the city
Because there is no basis for concluding that Hillenmeyer has ignored statutory grounds for relief in order to present a constitutional argument, we reject Cleveland’s waiver arguments. Occasional-entrants rule—former R.C. 718.011(B) {¶ 27} Before discussing the method of allocation chosen by Cleveland, we first examine Hillenmeyer’s equal-protection argument that he is entitled to an exemption from the tax because other taxpayers to whom he claims he is similarly situated are so entitled. Hillenmeyer asserts that a statutory 12-day grace period should apply to him because he was in Cleveland for only two days during each
{¶ 28} Former R.C. 718.011, Am.Sub.S.B. No. 287, 148 Ohio Laws, Part V, 11536, 11538, provided: [A] municipal corporation shall not tax the compensation paid to a nonresident individual for personal services performed by the individual in the municipal corporation on twelve or fewer days in a calendar year unless one of the following applies:
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* * * (B) The individual is a professional entertainer or professional athlete, the promoter of a professional entertainment
reasonably defined by the municipal corporation.3 {¶ 29} This provision, sometimes referred to as the occasional-entrants rule, applies to nonresidents who perform some but not all of their work within the taxing municipality. Hillenmeyer asserts that professional entertainers and in particular, athletes, are similarly situated to other occasional entrants and should therefore enjoy the statutory 12-day grace period during which their activities within Cleveland are exempt from local income tax. Tax-law distinctions reviewed deferentially on a rational basis {¶ 30} The classification of professional entertainers or athletes as distinct from other occasional entrants, which neither involves fundamental rights nor proceeds along suspect lines, cannot run afoul of the Equal Protection Clause if there is a rational relationship between the disparity of treatment and some legitimate governmental purpose. See Heller v. Doe, 509 U.S. 312, 319-320, 113 S.Ct. 2637, 125 L.Ed.2d 257 (1993). Under this standard, tax distinctions need not be drawn perfectly. See Phillips Chem. Co. v. Dumas School Dist., 361 U.S. 376, 385, 80 S.Ct. 474, 4 L.Ed.2d 384 (1960). Moreover, the assessment of taxes is fundamentally a legislative responsibility, with the result that “ ‘[t]his already deferential standard “is especially deferential” in the context of classifications arising out of complex taxation law.’ ” Ohio Apt. Assn. v. Levin, 127 Ohio St.3d 76, 2010-Ohio-4414, 936 N.E.2d 919 at ¶ 35, quoting Park Corp. v. Brook Park,
3 The Cleveland ordinances do not directly address the occasional-entrants rule, but CCA’sregulations incorporate it by excluding income “the taxation of which is prohibited by * * * any act of the Ohio General Assembly.” CCA Regulation 6:11.
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102 Ohio St.3d 166, 2004-Ohio-2237, 807 N.E.2d 913, ¶ 23, quoting Nordlinger
No equal-protection violation {¶ 31} Excluding entertainers and athletes such as Hillenmeyer from the 12-day grace rule does not violate the equal-protection guarantee. {¶ 32} First, professional athletes are typically highly paid, and their work is easy to find, so that a city could earn significant revenue with comparative ease. Second, the legislature could rationally find that professional athletes and entertainers and their events incur much larger public burdens relating to police protection and traffic and crowd control, among other public services, than do
reliance interest of municipalities in the continued levy of existing taxes, are sufficient to justify the exclusion of a professional athlete such as Hillenmeyer from the 12-day grace period. 4 {¶ 33} Municipal nonresident-income-tax regulations originally applied predominantly to rock stars, but a new focus on athletes developed once their salaries started to escalate. See Ekmekjian, The Jock Tax: State and Local Income Taxation of Professional Athletes, 4 Seton Hall J.Sport L. 229, 234 (1994). Cleveland’s regulations for taxing athletes were adopted in the early 1990s. {¶ 34} In 2000, the General Assembly added the 12-day grace period to former R.C. 718.01(F)(8), Sub.H.B. 477, 148 Ohio Laws 5120, 5122, later recodifying the provision at R.C. 718.011. We believe it was reasonable for the General Assembly to have restricted the further expansion of municipal taxation
already imposed by Ohio municipalities.
4 Because we reject the equal-protection claim, we need not address the remedial question whetherthe entertainer/athlete exclusion should be severed and the 12-day rule extended to Hillenmeyer or whether unconstitutionality leads to invalidating the 12-day grace period more broadly.
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{¶ 35} In addition, Ohio cities had already been imposing local taxes on entertainers and athletes when the 12-day grace period was enacted. Protection of reliance interests constitutes a valid basis for legislative line drawing. Nordlinger
(1980). Imposing a limit on local taxation while protecting the cities’ interest in collecting existing taxes constituted an adequate rational basis for the General Assembly’s actions. {¶ 36} The United States Supreme Court has recognized that certain taxpayers such as Hillenmeyer may be caught between conflicting rationales: [T]he Constitution grants legislators, not courts, broad authority (within the bounds of rationality) to decide whom they wish to help with their tax laws and how much help those laws ought to
inevitably requires that some persons who have an almost equally strong claim to favored treatment be placed on different sides of the line,’ and the fact the line might have been drawn differently at some points is a matter for legislative, rather than judicial, consideration.” Fitzgerald v. Racing Assn. of Cent. Iowa, 539 U.S. 103, 108, 123 S.Ct. 2156, 156 L.Ed.2d 97 (2003), quoting Fritz at 179, quoting Mathews v. Diaz, 426 U.S. 67, 83-84, 96 S.Ct. 1883, 48 L.Ed.2d 478 (1976). {¶ 37} We hold that the exclusion of Hillenmeyer from the 12-day grace period does not violate the Equal Protection Clause.
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Due-process violation {¶ 38} Although we decide that Cleveland has the power to tax nonresident professional athletes without allowing them the benefit of the 12-day grace period, we hold that the games-played method of determining the tax base fails to afford due process when applied to NFL players like Hillenmeyer. {¶ 39} The Due Process Clause of the Fourteenth Amendment to the U.S. Constitution states that “[no] State [shall] deprive any person of life, liberty, or property, without due process of law.” Cleveland’s power to tax reaches only that portion of a nonresident’s compensation that was earned by work performed in
{¶ 40} In guarding against extraterritorial taxation, “[t]he Due Process Clause places two restrictions on a State’s power to tax income generated by the activities of an interstate business.” Moorman Mfg. Co. v. Bair, 437 U.S. 267, 272-273, 98 S.Ct. 2340, 57 L.Ed.2d 197 (1978). The first is to require “ ‘some definite link, some minimum connection, between a state and the person, property
112 S.Ct. 1904, 119 L.Ed.2d 91 (1992), quoting Miller Bros. Co. v. Maryland, 347 U.S. 340, 344-345, 74 S.Ct 535, 98 L.Ed. 744 (1954). The second restriction is that “the income attributed to the State for tax purposes must be rationally related to ‘values connected with the taxing State.’ ” Moorman Mfg. Co. at 272- 273, quoting Norfolk & W. Ry. Co. v. Missouri State Tax Comm., 390 U.S. 317, 325, 88 S.Ct. 995, 19 L.Ed.2d 1201. {¶ 41} When it first addressed the power of states to impose income taxes, the United States Supreme Court stated that “[g]overnmental jurisdiction in matters of taxation * * * depends upon the power to enforce the mandate of the state by action taken within its borders, either in personam or in rem.” Shaffer v. Carter, 252 U.S. 37, 49, 40 S.Ct. 221, 64 L.Ed. 445 (1920). Extending a state or
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local income tax to all the elements of income realized by city residents rests upon the authority to legislate in personam in relation to those residents and
{¶ 42} Beyond in personam taxing jurisdiction over residents, local authorities may tax nonresidents only if theirs is the jurisdiction “within which the income actually arises and whose authority over it operates in rem.” Id. at 55. The Shaffer court reasoned: [J]ust as a State may impose general income taxes upon its own citizens and residents whose persons are subject to its control, it may, as a necessary consequence, levy a duty of like character, and not more onerous in its effect, upon incomes accruing to non- residents from their property or business within the State, or their
(Emphasis added.) Id. at 52. {¶ 43} Under Shaffer’s principle, the income of a nonresident is the “res,”
performed within that jurisdiction. Thus, local taxation of a nonresident’s compensation for services must be based on the location of the taxpayer when the services were performed. See Thompson v. Cincinnati, 2 Ohio St.2d 292, 208 N.E.2d 747 (1965), paragraphs one and two of the syllabus. {¶ 44} Two main approaches have been recognized for dividing up a nonresident’s income among taxing jurisdictions. Income derived from the conduct of a unitary trade or business may be apportioned by a general formula, while nonbusiness income must usually be more specifically allocated to that place where the particular increment of income is earned. See Peters & Miller,
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Apportionability in State Income Taxation: The Uniform Division of Income for Tax Purposes Act and Allied-Signal, 60 Tax Lawyer 57 (2006). {¶ 45} Cleveland relies on cases involving the apportionment of business
may be apportioned according to a general formula among jurisdictions in which the business has operations. The cases Cleveland relies on involve the particular difficulties of apportioning business income, and to that extent they are
allocated to the place where the employee performed the work. Cleveland’s case citations do not support the use of the games-played method. {¶ 46} Due process requires an allocation that reasonably associates the amount of compensation taxed with work the taxpayer performed within the city. The games-played method results in Cleveland allocating approximately 5 percent
using the duty-days method, however, Cleveland is allocated approximately 1.25 percent based on the same two days. By using the games-played method, Cleveland has reached extraterritorially, beyond its power to tax. Cleveland’s power to tax reaches only that portion of a nonresident’s compensation that was earned by work performed in Cleveland. The games-played method reaches income for work that was performed outside of Cleveland, and thus Cleveland’s income tax violates due process as applied to NFL players such as Hillenmeyer. Hume v. Limbach {¶ 47} Our decision that Cleveland’s application of the games-played method violates the Due Process Clause as it is applied to Hillenmeyer corresponds with an analogous case construing and applying the state income tax. Hume v. Limbach, 61 Ohio St.3d at 387, 575 N.E.2d 150. In that case, the taxpayer, Thomas Hume, a pitcher employed by the Cincinnati Reds, petitioned against a state income-tax deficiency assessment issued against him. The Reds
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employed Hume under a contract requiring him to participate in spring training, preseason exhibition games, regular-season games, and the League Championship and World Series, if necessary, and paying him for these services an annual salary that he received in installments during the regular playing season. As a nonresident of Ohio, Hume claimed a credit on his state-income-tax returns for the number of days he attended spring training and exhibition games played
asserted that Hume could allocate to other states only the income received for the regular-season away games, not the spring training and preseason exhibition
to a significantly higher percentage of Hume’s compensation being subjected to Ohio income tax. The BTA affirmed, but we reversed. {¶ 48} We held that Hume “was compensated for the training season and exhibition games, despite receiving payment only during the playing season.” Id. at 389. In other words, all compensation received for services was to be included as part of a ratio when allocating Ohio and non-Ohio income. Contrary to the BTA’s finding in the present case, Hume did involve a dispute about how the allocation ratio should be constructed in terms of which activities were counted, just as the present case does. {¶ 49} Cleveland’s games-played method imposes an extraterritorial tax in violation of due process, because it foreseeably imposes Cleveland income tax on compensation earned while Hillenmeyer was working outside Cleveland. Consistent with the rule that the taxing authority may not collect tax on a nonresident’s compensation earned outside its jurisdiction, the duty-days method properly includes as taxable income only that compensation earned in Cleveland by accounting for all the work for which an NFL player such as Hillenmeyer is paid, rather than merely the football games he plays each year. This method
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therefore comports with due process and ensures that the tax collected is not disproportionate to the income received for work in Cleveland. Commerce Clause claims not reached {¶ 50} A state tax measure conforms to the requirements of the Commerce Clause, U.S. Constitution, Article I, Section 8, cl. 3, if “ ‘the tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State.’ ” Internatl. Thomson Publishing, Inc. v. Tracy, 79 Ohio St.3d 415, 418, 683 N.E.2d 1091 (1997), quoting Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977). This standard is understood to be a four-prong test. See Norandex, Inc. v. Limbach, 69 Ohio St.3d 26, 27, 630 N.E.2d 329 (1994). {¶ 51} Hillenmeyer raises a claim that the games-played method violates the fair-apportionment prong of the Complete Auto test. He also contends in his brief that the games-played method fails under two other portions—the fairly- related and antidiscrimination prongs of the test. But because the notice of appeal to this court specifies only fair-apportionment, we lack jurisdiction to entertain the
{¶ 52} Furthermore, Hillenmeyer’s Commerce Clause claim under the fair-apportionment prong seeks no relief other than what we have already deemed appropriate pursuant to due process. Because the due-process analysis is dispositive, we decline to address the Commerce Clause challenge. CONCLUSION {¶ 53} We hold that Cleveland’s use of the games-played method violates due process as applied to NFL players such as Hillenmeyer. Under the duty-days method, which provides due process and satisfies Cleveland’s municipal-income- tax ordinance, Hillenmeyer is entitled to a partial refund of the tax paid. While
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suggested any method of alternative relief. {¶ 54} We therefore reverse the decision of the BTA, and we remand with the instruction that tax refunds be awarded on the basis of Hillenmeyer’s duty- days calculation, together with interest as appropriate, in accordance with this
Judgment reversed and cause remanded. O’CONNOR, C.J., and PFEIFER, O’DONNELL, KENNEDY, FRENCH, and O’NEILL, JJ., concur. _________________________ Hemenway & Barnes, L.L.P, Stephen W. Kidder, and Ryan P. McManus; and Zaino, Hall & Farrin, L.L.C., and Richard C. Farrin, for appellant. Barbara A. Langhenry, Cleveland Director of Law, and Linda L. Bickerstaff, Assistant Director of Law, for appellees. Michael DeWine, Attorney General, Eric E. Murphy, State Solicitor, Michael J. Hendershot, Chief Deputy Solicitor, Stephen P. Carney, Deputy Solicitor, and Daniel W. Fausey and David D. Ebersole, Assistant Attorneys General, urging affirmance for amicus curiae state of Ohio. Zaino, Hall & Farrin, L.L.C., and Thomas M. Zaino, urging reversal for amici curiae National Football League Players Association, Major League Baseball Players Association, National Hockey League Players Association, and National Basketball League Players Association. _________________________
[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as Corrigan v. Testa, Slip Opinion No. 2016-Ohio-2805.]
NOTICE This slip opinion is subject to formal revision before it is published in an advance sheet of the Ohio Official Reports. Readers are requested to promptly notify the Reporter of Decisions, Supreme Court of Ohio, 65 South Front Street, Columbus, Ohio 43215, of any typographical or other formal errors in the opinion, in order that corrections may be made before the opinion is published. SLIP OPINION NO. 2016-OHIO-2805 CORRIGAN, APPELLANT, v. TESTA, TAX COMMR., APPELLEE. [Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as Corrigan v. Testa, Slip Opinion No. 2016-Ohio-2805.] Income taxation—R.C. 5747.212—Statute violates Due Process Clause of Fourteenth Amendment as applied to nonresident taxpayer’s capital gain from sale of ownership in limited-liability company that conducted business in Ohio—Board of Tax Appeals’ decision reversed and matter remanded to tax commissioner for grant of refund. (No. 2014-1836—Submitted February 23, 2016—Decided May 4, 2016.) APPEAL from the Board of Tax Appeals, No. 2012-3244. ____________________ O’CONNOR, C.J. {¶ 1} A 2002 amendment to R.C. 5747.212 broadly imposed Ohio’s income tax on a capital gain realized by an out-of-state investor in a pass-through entity if that investor held a 20 percent or greater interest in the entity during a three-year period including the taxable year. The new statute apportioned the capital gain to
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Ohio based on the percentage of the entity’s business conducted in this state during the three-year period. In this appeal, appellant, Patton R. Corrigan, a nonresident taxpayer, contests R.C. 5747.212’s imposition of income tax on a portion of the capital gain that he realized in 2004 when he sold his ownership interest in Mansfield Plumbing, L.L.C., a producer of sanitary supplies. {¶ 2} The resolution of Corrigan’s challenge turns on a crucial distinction: Ohio’s taxation of Mansfield Plumbing’s income to Corrigan and Ohio’s taxation
that because Mansfield Plumbing constituted a pass-through entity for tax purposes, Ohio was able to tax Corrigan’s distributive share of the entity’s income (or in this case, loss) based on Mansfield Plumbing’s own business activity in Ohio. The issue before us is whether Ohio may also levy income tax on Corrigan’s capital gain as if it were income from the business itself. {¶ 3} If R.C. 5747.212 were not the law, Corrigan would be subject to the
allocate the entire amount of the gain outside Ohio because he was not domiciled in Ohio. See R.C. 5747.20(B)(2)(c). Corrigan asserts that applying R.C. 5747.212 to him is unconstitutional and that he should therefore be permitted to allocate the gain entirely outside Ohio. {¶ 4} In defending the imposition of R.C. 5747.212 on Corrigan, the tax commissioner does not contend that Corrigan himself was operating or managing the business of Mansfield Plumbing. Instead, the state’s theory is that Ohio enjoys the constitutional prerogative of taxing the proceeds of a nonresident’s out-of-state sale of intangible property, based on nothing more than the fact that the entity being sold conducted some of its business in Ohio. We disagree with the state’s contention. {¶ 5} We hold that R.C. 5747.212, as applied to Corrigan, violates the Due Process Clause of the Fourteenth Amendment to the United States Constitution.
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We therefore reverse the decision of the Board of Tax Appeals (“BTA”) and remand to the tax commissioner to grant Corrigan a refund. RELEVANT BACKGROUND FACTS {¶ 6} In 2000, Mansfield Plumbing was an established enterprise engaged in producing sanitary ware, with plants in Texas and California. It did business in Ohio—in fact in all 50 states—as well as in other countries. {¶ 7} In 2000, Corrigan, then a resident of Connecticut, acted in concert with business associates to acquire the assets of Mansfield Plumbing, including the right to use that entity’s name. More specifically, the record demonstrates that the consent to use the name “Mansfield Plumbing, L.L.C.” is dated November 2000 and that Corrigan’s share of the entity—his “membership” interest in the limited- liability company—was 79.29 percent. {¶ 8} Corrigan became the main co-owner and a “manager,” i.e., a member
company were overseen by officers and managers employed by the company. According to Corrigan’s brief before the tax commissioner, as a manager, Corrigan visited the company headquarters in Perrysville, Ohio, “for board meetings and management presentations regarding operations, labor, finance, strategic positioning and other matters important to the goal of growing Mansfield’s market share.” Corrigan testified that that involvement was “easily a hundred hours” per
bought companies with the intention of providing financing and strategic expertise to grow the company for an eventual exit via a sale to a third party.” Corrigan specifically argued to the tax department that his role in the entity involved “stewardship” rather than active management of the business. {¶ 9} In 2004, Corrigan and his fellow investors sold their interests in Mansfield Plumbing to a third party, Ceramicorp, Inc., a unit of a Colombian entity
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in the sanitary-wares business that wanted a foothold in North America. As a result
Mansfield Plumbing. In filing his returns for tax year 2004, Corrigan treated the entire amount of the gain as allocable outside Ohio, apparently because Corrigan was not domiciled in Ohio. PROCEDURAL HISTORY {¶ 10} In 2009, Ohio issued an assessment for an unpaid 2004 tax liability
$847,085.19. Corrigan paid $100,000 of the assessment, then filed a refund claim for that amount on March 8, 2010. See former R.C. 5747.11(A)(3), Am.Sub.H.B.
amounts more than $1 “paid on an illegal, erroneous, or excessive assessment”). These proceedings arise from that claim. {¶ 11} The tax commissioner denied the refund claim through a final determination issued on August 20, 2012. The final determination applied a straightforward reading of R.C. 5747.212 and concluded that the assessment and payment complied with the statute. The final determination also rejected Corrigan’s constitutional arguments. {¶ 12} Corrigan appealed to the BTA, which held a hearing on January 15,
{¶ 13} The BTA issued its decision on September 24, 2014. Noting the presumption favoring the tax commissioner’s findings and its own lack of jurisdiction to declare a statute unconstitutional, the BTA “acknowledge[d]” Corrigan’s constitutional claims but made “no findings in relation thereto.” 2014 Ohio Tax LEXIS 4415, BTA No. 2012-3244, at 4 (Sept. 24, 2014). The BTA also noted that Corrigan raised a statutory argument in his BTA brief but held that it
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lacked jurisdiction to entertain that contention because Corrigan had not specified that claim in his notice of appeal to the BTA.1 Id. {¶ 14} The BTA affirmed the tax commissioner’s final determination, and Corrigan appealed to this court. ANALYSIS THE DUE PROCESS AND COMMERCE CLAUSES SET LIMITS ON OHIO’S TAXING AUTHORITY {¶ 15} “It is a venerable if trite observation that seizure of property by the State under pretext of taxation when there is no jurisdiction or power to tax is simple confiscation and a denial of due process of law. ‘* * * Jurisdiction is as necessary to valid legislative as to valid judicial action.’ ” Miller Bros. Co. v. Maryland, 347 U.S. 340, 342, 74 S.Ct. 535, 98 L.Ed. 744 (1954), quoting St. Louis v. Wiggins Ferry Co., 78 U.S. 423, 430, 20 L.Ed. 192 (1870). And “[g]overnmental jurisdiction in matters of taxation * * * depends upon the power to enforce the mandate of the state by action taken within its borders, either in personam or in rem.” Shaffer v. Carter, 252 U.S. 37, 49, 40 S.Ct. 221, 64 L.Ed. 445 (1920). These precepts point to the importance of the Due Process Clause of the Fourteenth Amendment as a means of “guarding against extraterritorial taxation” by defining the limits of state taxing authority. Hillenmeyer v. Cleveland Bd. of Rev., 144 Ohio St.3d 165, 2015-Ohio-1623, 41 N.E.3d 1164, ¶ 40. Additionally, the United States Supreme Court has held that under the Due Process Clause, “the States * * * are subject to limitations on their taxation powers that do not apply to the Federal Government.” F.W. Woolworth Co. v. New Mexico Taxation and Revenue Dept., 458 U.S. 354, 363, 102 S.Ct. 3128, 73 L.Ed.2d 819 (1982).
1 Corrigan contended that the commissioner’s determination significantly overstated the amount ofthe capital gain based on intricacies of the Internal Revenue Code. Corrigan has not raised this contention before this court.
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{¶ 16} Similarly, the dormant Commerce Clause imposes its own restrictions upon state taxing power. “By prohibiting States from discriminating against or imposing excessive burdens on interstate commerce without congressional approval, [the dormant Commerce Clause] strikes at one of the chief evils that led to the adoption of the Constitution, namely, state tariffs and other laws that burdened interstate commerce.” Maryland Comptroller of Treasury v. Wynne, ___ U.S. ___, 135 S.Ct. 1787, 1794, 191 L.Ed.2d 813 (2015). {¶ 17} “Due process centrally concerns the fundamental fairness of government activity,” while the Commerce Clause reflects “structural concerns about the effects of state regulation on the national economy.” Quill Corp. v. North Dakota, 504 U.S. 298, 312, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992). Although the constraints imposed by the Due Process Clause and the Commerce Clause are distinct, they partially overlap. Commerce Clause restrictions may run parallel to Due Process Clause restrictions or be imposed in addition to Due Process Clause
Clause, the bedrock principle is “that a State may not tax value earned outside its borders.” Allied-Signal, Inc. v. Dir., Div. of Taxation, 504 U.S. 768, 777, 784, 112 S.Ct. 2251, 119 L.Ed.2d 533 (1992). “ ‘No principle is better settled,’ ” the high court has stated, “ ‘than that the power of a state, even its power of taxation, in respect to property, is limited to such as is within its jurisdiction.’ ” Miller Bros. at 342, quoting New York, Lake Erie & W. RR. Co. v. Pennsylvania, 153 U.S. 628, 646, 14 S.Ct. 952, 38 L.Ed. 846 (1894). {¶ 18} In considering this case, we are persuaded that the assessment of a tax on Corrigan’s capital gain cannot be sustained under the basic due-process test for the exercise of proper tax jurisdiction. Our disposition of the appeal on those grounds obviates the need for any separate analysis under the Commerce Clause.
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THE OPERATION OF THE TAX STATUTES AS APPLIED TO CORRIGAN {¶ 19} As a general matter, Ohio imposes individual income tax on “every individual * * * residing in or earning or receiving income in this state.” R.C. 5747.02(A); Cunningham v. Testa, 144 Ohio St.3d 40, 2015-Ohio-2744, 40 N.E.3d 1096, ¶ 9. Corrigan is a nonresident, nondomiciliary of Ohio; as such, he is subject to Ohio income tax only with respect to his income earned or received in this state. Id. During his majority ownership, Corrigan was subject to Ohio income tax on a portion of his distributive share of Mansfield Plumbing’s “business income” {¶ 20} R.C. Chapter 5747 puts flesh on the bones of the concept of “earning
Plumbing in 2000, Corrigan subjected himself to Ohio income taxation because of the pass-through nature of the entity in which he invested and by which he sought to profit. {¶ 21} Ohio’s income tax distinguishes between “business income” and “nonbusiness income.” As a general matter, business income is defined as income from “the regular course of a trade or business” and is apportioned to Ohio according to the percentage of the business’s property, payroll, and receipts located in Ohio. See R.C. 5747.01(B) (definition of business income) and 5747.21(B) (providing for apportionment of business income by reference to apportionment statutes of the former corporate franchise tax, R.C. Chapter 5733). {¶ 22} By contrast, nonbusiness income includes compensation, rents, royalties, and capital gains and is specifically allocated to a situs. R.C. 5747.02(C) and 5747.20. Compensation, for example, is specifically allocated to the place where the services were performed; rents are specially allocated to the place where the rental property is located. R.C. 5747.20(B)(1) and (3). In the case of capital gains from the sale of intangible personal property, the tax situs is the domicile of the taxpayer. R.C. 5747.20(B)(2)(c).
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{¶ 23} As majority owner of Mansfield Plumbing for tax years 2000 through 2004 and as a result of that entity being organized and treated as a pass- through entity for tax purposes, Corrigan realized his distributive share of the income or loss that was generated by Mansfield Plumbing’s business. Because that income or loss qualified under the business-income definition as business income
the pass-through taxpayer who included it on his return. See Agley v. Tracy, 87 Ohio St.3d 265, 268, 719 N.E.2d 951 (1999) (income derived from an S corporation’s business activity that passed through the individual taxpayer’s tax return was business income as to the individual taxpayer); R.C. 5747.231. {¶ 24} The appearance of any income from Mansfield Plumbing as part of Corrigan’s federal adjusted gross income would mean that the same income would have been included in Corrigan’s Ohio adjusted gross income. To eliminate Ohio tax on income generated by business conducted outside Ohio, Corrigan would have had recourse to the nonresident credit, R.C. 5747.05(A); that credit would offset the Ohio tax on his distributive share that related to business that Mansfield Plumbing conducted outside Ohio. {¶ 25} In actuality, however, Mansfield Plumbing realized losses rather than profits during the years of Corrigan’s ownership, and those losses were reported on a composite return filed by Mansfield Plumbing on behalf of its
claiming a 100 percent nonresident credit. {¶ 26} Although bereft of profits from his Mansfield Plumbing investment, Corrigan apparently realized a different kind of financial benefit from his
losses to offset other income and reduce the taxes he owed to other jurisdictions.2
2 Both the audit remarks and Corrigan’s testimony at the BTA indicate that the hours Corrigan spentmanaging Mansfield Plumbing and other businesses that he owned satisfied a standard of
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But for R.C. 5747.212, Corrigan would pay no Ohio tax on his capital gain because that gain would have its tax situs outside Ohio {¶ 27} In 2004, Corrigan and his fellow investors sold 100 percent of their membership interests in Mansfield Plumbing. They realized capital gain from the transaction, and in the ordinary course, Corrigan’s capital gain would not have been allocated to Ohio because Ohio was not Corrigan’s residence and domicile. {¶ 28} Corrigan claimed a nonresident credit that eliminated all Ohio liability in 2004. But in 2009, the tax department issued its assessment based on former R.C. 5747.212. The operative part of the version of the statute in effect during tax year 2004 read as follows: A pass-through entity investor that owns, directly or indirectly, at least twenty per cent of the pass-through entity at any time during the current taxable year or either of the two preceding taxable years shall apportion any income, including gain or loss, realized from the sale, exchange, or other disposition of a debt or equity interest in the entity as prescribed in this section. For such purposes, in lieu of using the method prescribed by sections 5747.20 and 5747.21 of the Revised Code, the investor shall apportion the income using the average of the pass-through entity’s apportionment fractions otherwise applicable under section 5747.21 of the Revised Code for the current and two preceding taxable years. If the pass- through entity was not in business for one or more of those years, each year that the entity was not in business shall be excluded in determining the average.
participation under the Internal Revenue Code. Consequently, the Mansfield losses qualified as nonpassive, thereby permitting Corrigan to use those losses more broadly as an offset against his income.
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Am.Sub.S.B. No. 261, 149 Ohio Laws, Part I, 1793, 1870.3 {¶ 29} Corrigan’s situation came within R.C. 5747.212 because he owned
and because he realized a gain from selling his equity interest in Mansfield Plumbing during 2004. DUE PROCESS PREDICATES TAXATION OF A NONRESIDENT’S INCOME ON OHIO’S CONNECTION TO BOTH THE TAXPAYER AND THE TRANSACTION {¶ 30} Due process “ ‘requires some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.’ ” Quill, 504 U.S. at 306, 112 S.Ct. 1904, 119 L.Ed.2d 91, quoting Miller Bros., 347 U.S. at 344-345, 74 S.Ct. 535, 98 L.Ed.2d 744. {¶ 31} A state’s taxing jurisdiction may be exercised over all of a resident’s income based upon the state’s in personam jurisdiction over that person. Hillenmeyer, 144 Ohio St.3d 165, 2015-Ohio-1623, 41 N.E.3d 1164, at ¶ 41, citing Shaffer, 252 U.S. at 52, 40 S.Ct. 221, 64 L.Ed. 445. By contrast, the power to tax nonresidents reflects the state’s in rem jurisdiction over the income-producing activities conducted within the state: “[J]ust as a State may impose general income taxes upon its own citizens and residents whose persons are subject to its control it may, as a necessary consequence, levy a duty of like character, and not more onerous in its effect, upon incomes accruing to non-residents
3 This was the original version of the statute, which was enacted in 2002. The version quoted bythe tax commissioner in his final determination reflected amendments to the statute made in 2005 that were not in effect at the time Corrigan incurred his tax liabilities for tax year 2004. See Am.Sub.H.B. No. 66, 151 Ohio Laws, Part III, 4674.
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from their property or business within the State, or their occupations carried on therein.” (Emphasis deleted.) Hillenmeyer at ¶ 42, quoting Shaffer at 52. {¶ 32} Inherent in the Supreme Court’s pronouncement in Shaffer is the need for a link between the state and the person being taxed as well as between the state and the activity being taxed. The former is expressed in terms of the minimum-contacts test that is familiar in the context of determining the personal jurisdiction that may be exercised by a court sitting in one state and issuing process to a person in another state. See Quill at 307, citing Internatl. Shoe Co. v. Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945), and Shaffer v. Heitner, 433 U.S. 186, 97 S.Ct. 2569, 53 L.Ed.2d 683 (1977). Applying principles from this area of the law, due process requires that a person whom a state proposes to tax have “purposefully availed” himself of benefits within the taxing state. Id. {¶ 33} In addition to the state’s connection with the person to be taxed, “in the case of a tax on an activity, there must be a connection to the activity itself, rather than a connection only to the actor the State seeks to tax.” Allied-Signal, 504 U.S. at 778, 112 S.Ct. 2251, 119 L.Ed.2d 533. In Allied-Signal, New Jersey attempted to tax one corporation’s gain from selling its shares in another corporation, and the court clarified that the mere fact that the taxpayer performed some of its business within the taxing state did not by itself permit the taxation of that taxpayer’s gain from the sale of shares of another corporation. Instead, the high court enforced its earlier pronouncement that “[a] State may not tax a nondomiciliary corporation’s income * * * if it is ‘derived from “unrelated business activity” which constitutes a “discrete business enterprise.” ’ ” Id. at 773, quoting Exxon Corp. v. Wisconsin Dept. of Revenue, 447 U.S. 207, 224, 100 S.Ct. 2109, 65 L.Ed.2d 66 (1980), quoting Mobil Oil Corp. v. Vermont Commr. of Taxes, 445 U.S. 425, 442, 439, 100 S.Ct. 1223, 63 L.Ed.2d 510 (1980).
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Ohio-derived income may be taxed to the person whose business activity generated the income {¶ 34} Shaffer v. Carter demonstrates that the direct conduct of business subjects the nonresident person conducting the business to a tax on the proportionate share of business conducted within the taxing state. This scenario relies on the state’s in rem jurisdiction over the income generated by in-state
protections and benefits of the state’s laws by conducting a portion of the business within that state. Quill, 504 U.S. at 307, 112 S.Ct. 1904, 119 L.Ed.2d 91, citing Shaffer v. Heitner, 433 U.S. at 212, 97 S.Ct. 2569, 53 L.Ed.2d 683. Distributive share may be taxed because the income taxed is generated by Ohio business activity and the pass-through establishes “purposeful availment” {¶ 35} Do due-process protections permit Ohio to impose its individual income tax on the distributive-share income of a nonresident who realizes pass- through income? We answered affirmatively in Agley, 87 Ohio St.3d 265, 719 N.E.2d 951: Appellants have admitted that their S corporations conducted business in Ohio. Thus, it is evident that the S corporations have utilized the protections and benefits of Ohio by carrying on business here. This income was then passed through to the appellants as personal income. Thus, the appellants, through their S corporations, have also availed themselves of Ohio’s benefits, protections, and opportunities by earning income in Ohio through their respective S corporations. We find that this provides Ohio the “minimum contacts” with the appellants to justify taxing appellants on their distributive share of income.
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who did not themselves conduct business in Ohio, we determined that their decision to invest using corporate structures in Ohio and making federal pass-through elections satisfied the purposeful-availment criterion for imposing the tax
Capital gain is generated by the sale of intangible property rather than by Ohio business activity, and thus selling the shares does not involve purposeful availment {¶ 36} The tax at issue here differs, however, with respect to Ohio’s connection both to the activity and to the taxpayer. In this case, the activity at issue is a transfer of intangible property by a nonresident. Thus, Ohio’s connection is an indirect one, whereas in Agley the activity being taxed was the very income derived from business activity in Ohio. Moreover, although Corrigan’s availment of Ohio’s protections and benefits is clear with respect to the pass-through of Mansfield Plumbing’s income to him, Corrigan’s sale of his interest in Mansfield Plumbing did not avail him of Ohio’s protections and benefits in any direct way. {¶ 37} For these reasons, we conclude that Agley does not extend to Corrigan’s capital gain. THE UNITED STATES SUPREME COURT’S PRECEDENTS DO NOT ESTABLISH
THE CONSTITUTIONALITY OF APPLYING R.C. 5747.212 TO CORRIGAN
{¶ 38} Corrigan and the tax commissioner rely on competing United States Supreme Court cases. {¶ 39} Corrigan emphasizes more recent cases in which the U.S. Supreme Court has established that a state may not tax the dividends received by a nonresident corporation from another corporation, or the capital gain realized from selling shares in another corporation, absent a unitary business relationship between the taxpayer and the other corporation. See MeadWestvaco Corp. v. Illinois Dept.
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504 U.S. 768, 112 S.Ct. 2251, 119 L.Ed.2d 533; ASARCO, Inc. v. Idaho State Tax Comm., 458 U.S. 307, 102 S.Ct. 3103, 73 L.Ed.2d 787 (1982); F.W. Woolworth, 458 U.S. at 363, 102 S.Ct. 3128, 73 L.Ed.2d 819. By extension, Corrigan contends that Ohio may not tax his capital gain unless Corrigan himself has engaged in a business that is unitary with that of Mansfield Plumbing. As supplemental authority, Corrigan points out that we have already applied ASARCO in a corporate franchise tax case to bar the apportionment of investment income as business income of the taxpayer. See Am. Home Prods. Corp. v. Limbach, 49 Ohio St.3d 158, 160-161, 551 N.E.2d 201 (1990), citing ASARCO. {¶ 40} The tax commissioner relies on a pair of older Supreme Court decisions addressing and upholding the imposition of Wisconsin’s “privilege dividend tax.” See Internatl. Harvester, 322 U.S. 435, 64 S.Ct. 1060, 88 L.Ed. 1373; Wisconsin v. J.C. Penney Co., 311 U.S. 435, 61 S.Ct. 246, 85 L.Ed. 267 (1940). Instead of being imposed directly on corporate income, the privilege dividend tax was imposed on the privilege of declaring and receiving dividends; in practical operation, the tax required corporations to withhold from the payment of a dividend the amount of the tax and remit the tax to the state. See J.C. Penney at 440, fn. 1 (quoting the underlying statute). {¶ 41} In both older cases, the Supreme Court upheld the measure. {¶ 42} In J.C. Penney, the high court hypothesized that a “supplementary tax on the Wisconsin earnings of [foreign] corporations” that simply “postponed liability for the tax until such earnings were to be paid out in dividends” was consistent with due process and that the characterization of the tax as being levied
holding that the privilege dividend tax was unconstitutional. {¶ 43} In Internatl. Harvester, the high court considered the privilege dividend tax anew in light of the Wisconsin Supreme Court’s clarifications that for
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state constitutional purposes, the tax was a privilege rather than an income tax and that the corporation was not entitled to deduct the privilege dividend tax because the burden of the tax fell upon stockholders. Internatl. Harvester at 438-439. The United States Supreme Court affirmed, adhering to its holding in J.C. Penney. {¶ 44} In arguing that J.C. Penney and Internatl. Harvester control here, the tax commissioner points to the fact that the present case involves using the business-income factors of Mansfield Plumbing, whereas the MeadWestvaco and Allied-Signal line of cases involved state taxes that attempted to use the taxpayer’s business-income factors to apportion the dividend or capital-gain income. This distinction is one that can be characterized as the difference between the “investor apportionment” analysis, in which the courts look at the nexus between the taxpayer/investor (like Corrigan) and the jurisdiction, see, e.g., MeadWestvaco and Allied-Signal, and the “investee apportionment” analysis, in which the courts look at the nexus between the investee (like Mansfield Plumbing) and the taxing jurisdiction, see, e.g., J.C. Penney and Internatl. Harvester. {¶ 45} Seizing on this distinction, the tax commissioner asserts that the unitary-business doctrine, which defined the limits of constitutionality in the MeadWestvaco and Allied-Signal cases, is irrelevant here. The tax commissioner contends that the taxpayer’s liability is determined by the business done by the entity in which the taxpayer has invested and that the investment income realized— whether that income is a dividend, a capital gain from the sale of the investment, or the payment of a debt—may be taxed to the nonresident investor. In this manner, the tax commissioner attempts to justify apportioning both the capital gain and the debt interest pursuant to R.C. 5747.212. {¶ 46} We disagree. {¶ 47} First and foremost, J.C. Penney and Internatl. Harvester address a tax law that, unlike R.C. 5747.212, never imposes tax liability on the investor. To be sure, in upholding the tax, the high court accepted the proposition that the
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economic burden of Wisconsin’s privilege dividend tax fell upon nonresident investors, even though it was actually paid by the corporation that declared and paid the dividend. But the propriety of imposing the economic burden of a tax on a nonresident does not necessarily require the conclusion that the tax liability itself can be imposed on those nonresident investors. The Wisconsin statute at issue did not do so, and the decisions upholding that statute should not be construed to authorize other statutes that were not under review by the high court at that time. {¶ 48} Second, even if J.C. Penney and Internatl. Harvester were construed to extend to the imposition of a state income tax on the nonresident recipient of a dividend, that would still not require the conclusion that the same reasoning extends to a capital gain from the sale of corporate ownership. It is self-evident that the dividend has a more direct relationship to corporate earnings, out of which the dividend is paid, than does the capital gain from the sale of corporate ownership. Indeed, it is possible in a given situation that the purchaser of a business may be more interested in acquiring specific business assets than in the profits generated by the ongoing business. That could, in fact, be true here inasmuch as Mansfield Plumbing realized losses in the years immediately preceding the sale. {¶ 49} Third, our reluctance to accept the tax commissioner’s expansive interpretation of J.C. Penney and Internatl. Harvester is consistent with MeadWestvaco. {¶ 50} In MeadWestvaco, the taxpayer had sold its Lexis-Nexis division, booking an intangible “goodwill” gain of about $1 billion, which the taxpayer treated as nonbusiness income allocable to its domicile outside Illinois. See 371 Ill.App.3d 108, 113, 861 N.E.2d 1131 (2007), reversed, 553 U.S. 16, 128 S.Ct. 1498, 170 L.Ed.2d 404. The state revenue department recharacterized the income as apportionable business income of the taxpayer, and the Illinois courts affirmed. But the United States Supreme Court reversed on the basis of the Allied-Signal line
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L.Ed.2d 404. {¶ 51} Of special relevance here is the question that the high court declined to address. As a fallback position, the state in MeadWestvaco had argued that Lexis-Nexis’s own business in Illinois justified the imposition of the additional tax
new ground for the constitutional apportionment of intangibles based on the taxing State’s contacts with the capital asset rather than the taxpayer.” Id. at 30. (Using the terminology we have employed in this opinion, Illinois was arguing for investee apportionment as an alternative to investor apportionment.) The court then declined to address the “new ground” for apportionment for two reasons. First, it noted that the argument had not previously been raised and passed upon. Second, it recognized that the states that relied on investee apportionment, including Ohio, had not been notified that the constitutionality of their statutes would be
the imposition of an investee-apportioned tax on the gain realized by an investor as an unsettled question. Because the high court has not answered that question, we cannot properly regard it as settled by J.C. Penney and Internatl. Harvester. STATE COURT CASES DO NOT SUPPORT APPLYING R.C. 5747.212
TO CORRIGAN’S CAPITAL GAIN
{¶ 52} The tax commissioner also relies on state court decisions as support for applying R.C. 5747.212 to Corrigan’s capital gain. Most notably, in his brief and at oral argument, the commissioner relied heavily on the Louisiana Supreme
4 The Supreme Court recognized that the Ohio corporation franchise tax contained investee-apportionment provisions at R.C. 5733.051(E) and (F). MeadWestvaco at 31. Division (E) calls for investee apportionment of a corporate taxpayer’s capital gains, and division (F) calls for investee apportionment of a corporate taxpayer’s dividend income. With the phase-out of the franchise tax for most businesses pursuant to the 2005 tax-reform legislation, these provisions have a greatly diminished significance. See Navistar, Inc. v. Testa, 143 Ohio St.3d 460, 2015-Ohio-3283, 39 N.E.3d 509, ¶ 1 (discussing 2005 tax-reform legislation).
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Court’s decision in Johnson v. Collector of Revenue, 246 La. 540, 165 So.2d 466 (1964). {¶ 53} In Johnson, a corporation held as its sole asset certain lands in Louisiana on which oil and gas production activities were conducted. Those activities had led to an appreciation in the value of the land, and accordingly, when the corporation liquidated itself by exchanging shares for interests in the direct
and sold outside the taxing state, and the shareholders were nonresidents. {¶ 54} The statute decisive to the decision upholding Louisiana’s taxation
“In cases where property located in Louisiana is received by a shareholder in the liquidation of a corporation, the stock cancelled
taxable gain under this chapter, be deemed to have its taxable situs in this state to the extent that the property of the corporation distributed in liquidation is located in Louisiana. If only a portion
shall be considered to be derived from Louisiana sources.”
{¶ 55} The lower court had determined that the corporation had conducted no Louisiana business and that the assignment of Louisiana situs was “wholly fictitious and arbitrary, rendering the statute unconstitutional.” Id. at 570. But the Louisiana Supreme Court reversed, observing that had the corporation itself sold the lands to a third party, the corporation would have paid Louisiana tax on that
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gain from the disposition of in-state property. Id. at 572. The court explained that the statute quoted above was intended to prevent the use of a corporate liquidation and conveyance of Louisiana assets to avoid the imposition of tax on the gain associated with such property. “Clearly, such a gain from oil-producing lands in Louisiana reflects the protection and opportunities that the state has afforded,” the court observed. Id. at 573. {¶ 56} Counsel for the state characterizes the Louisiana statute as “identical” to R.C. 5747.212 and its application in this case. We are persuaded, however, not only that there are differences between the two schemes but also that those differences are of decisive import here. {¶ 57} Far from broadly subjecting a nonresident’s capital gain to in-state apportionment as R.C. 5747.212 does, the Louisiana statute applies only when nonresidents receive property with a Louisiana situs in conjunction with redemption of their corporate shares. Moreover, the Louisiana statute allocates the nonresident’s gain to Louisiana only to the extent of the gain on those Louisiana assets. {¶ 58} Quite simply, rather than broadly extending state taxing power to a nonresident’s capital gain, the Louisiana statute does nothing more than prevent avoidance of the Louisiana tax on a capital gain from the sale of a Louisiana asset through a manipulation of corporate forms. We conclude that the Louisiana statute’s limited purpose and effect bears no resemblance to the broad scope and expansive purpose of R.C. 5747.212 and is of limited value in addressing the constitutional question before us. {¶ 59} One state court decision that genuinely adopts investee apportionment comes from the New York Court of Appeals. In Allied-Signal, Inc.
York’s highest court upheld New York City’s imposition of a tax on a nonresident parent corporation’s capital gain from the sale of its interest in a subsidiary, where
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the gain was apportioned to the city based on the subsidiary’s business-income apportionment rather than the parent’s. Based on its reading of the United States Supreme Court’s decision in Internatl. Harvester, the New York Court of Appeals determined that New York City could assert a nexus with the investor’s capital gain. Allied-Signal at 82-84. {¶ 60} As already discussed, however, we decline to read Internatl. Harvester as authorizing the imposition of a tax on the nonresident dividend recipient, given that the statute at issue in that case imposed tax only on the corporation that paid the dividends. In this regard, we find one of the dissenting
faulted the majority for a leap of logic, asserting that the mere fact that the burden
shareholders did not mean that the state had a nexus to tax those shareholders
{¶ 61} And contrary to the tax commissioner’s argument, we find that our
1225 (1996), is inapposite here. In that case, we examined the imposition of Ohio’s income tax on the incremental payments to a nonresident winner of the Ohio lottery in light of constitutional challenges based on due-process, Commerce Clause, and retroactivity grounds. With respect to the basic due-process claim, we observed that “[i]t is difficult to imagine a more fundamental exertion of a state’s taxing power than where the state taxes income on winnings from its lottery.” Id. at 422. Indeed, the winning of the lottery game and the payments that ensued clearly constituted the enjoyment of Ohio-created benefits and protections that justified the imposition of the tax. That taxpayer’s scenario, however, is quite different from Corrigan’s—in law and in fact.
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ENFORCING DUE-PROCESS RESTRAINTS ON STATE TAXATION DOES NOT ELEVATE FORM OVER SUBSTANCE {¶ 62} The tax commissioner argues that Ohio can tax a share of Corrigan’s capital gain because the sale of the ownership interest is merely one form in which the business could be sold and the same gain would be taxable if the business had been sold through an asset sale instead. In his words, the tax commissioner contends that because taxation would be proper under “that economically equivalent situation,” it must be proper in the context with which we are presented. {¶ 63} This argument relies on R.C. 5747.01(B), which includes in the definition of business income the “gain or loss, from a partial or complete liquidation of a business, including, but not limited to, gain or loss from the sale or
transfer of its business assets rather than having the business transferred through a sale of the L.L.C. ownership itself, then the gain from the sale would have been realized at the L.L.C. level, and the Ohio-apportioned share would have been taxed to Corrigan on a pass-through basis. The commissioner argues that because the gain could be taxed to Corrigan in an asset sale, it may also be taxed in the form of Corrigan’s individual capital gain. {¶ 64} Although this argument may appear plausible, the jurisdictional question before us presents more than merely a matter of form. {¶ 65} We recognize that an asset sale and a sale of ownership interest may be different forms involving the same economic substance to the parties, but that does not mean that the jurisdictional limits on Ohio’s taxing powers lack their own substantive importance. Nor is it unusual that two different methods of achieving the same economic result could have drastically different tax implications. {¶ 66} Moreover, the commissioner’s “form over substance” argument can cut both ways. The commissioner argues that taxing Corrigan’s personal capital gain is justified because Ohio law would apportion the gain from an asset sale as
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business income. But one could, with equal logical force, assert that because the sale of assets in liquidation of the business is in substance the same as the sale of the corporate ownership, Ohio cannot constitutionally treat the gain from the asset sale as apportionable “business income.” {¶ 67} We decline to accept the form-over-substance argument as militating against our conclusion, which is based on other grounds, i.e., that Corrigan’s capital gain may not be taxed. R.C. 5747.212 IS NOT FACIALLY UNCONSTITUTIONAL {¶ 68} Corrigan has advanced both an as-applied and a facial challenge to R.C. 5747.212. Our holding of unconstitutionality today is limited to R.C. 5747.212 as applied to Corrigan, in light of the absence of any assertion or finding that Corrigan’s own activities amounted to a unitary business with that of Mansfield Plumbing. {¶ 69} Conceivably, an individual taxpayer might engage in the conduct of a business with or through a corporate entity, and under the MeadWestvaco and Allied-Signal line of cases, the imposition of tax under R.C. 5747.212 could be
unconstitutional because Corrigan has not demonstrated, as he must, that “there exists no set of circumstances under which the statute would be valid.” Harrold v. Collier, 107 Ohio St.3d 44, 2005-Ohio-5334, 836 N.E.2d 1165, ¶ 37. Because there is at least a possibility that the statute could be applied when the unitary-business situation is present,5 we reject the facial challenge.
5 Perhaps recognizing this possibility, Corrigan has made a distinct effort to establish that he has notengaged in active management here, distinguishing his efforts as merely the “stewardship” of a corporate director. For his part, the tax commissioner has consistently argued that the unitary-business doctrine is irrelevant rather than contend that the unitary-business relationship might be present.
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{¶ 70} In light of our disposition of this appeal on due-process grounds, we need not and do not address Corrigan’s claim that R.C. 5747.212 violates the Commerce Clause. CONCLUSION {¶ 71} For the foregoing reasons, we reverse the decision of the BTA, and we remand to the tax commissioner with instructions to grant a refund to Corrigan. Decision reversed and cause remanded. PFEIFER, O’DONNELL, LANZINGER, KENNEDY, FRENCH, and O’NEILL, JJ., concur. _________________ Taft, Stettinius & Hollister, L.L.P., and J. Donald Mottley, for appellant. Michael DeWine, Attorney General, and Barton A. Hubbard, David D. Ebersole, and Raina M. Nahra, Assistant Attorneys General, for appellee. Baker & Hostetler, L.L.P., Edward J. Bernert, Elizabeth A. McNellie, and Christopher J. Swift, urging reversal for amicus curiae, Ohio Chamber of Commerce. _________________
1
Joseph W. Testa, Tax Commissioner Issued: October 7, 2016
Income Tax - Information Release IT 2016-01 – Guidance Relating to an Equity Investor’s Apportionment of a Gain from the Sale of a Closely-Held Business (R.C. 5747.212)
Introduction
On May 4, 2016, the Supreme Court of Ohio decided the case Corrigan v. Testa, 2016-Ohio-2805. Corrigan analyzed the constitutionality of R.C. 5747.212, an Ohio statute that provides special rules for apportioning the gain from a taxpayer’s ownership interest in a “closely held” investment. The Court found that R.C. 5747.212 as applied to Corrigan was unconstitutional under the Due Process Clause of the Fourteenth Amendment to the United States Constitution. The full text of R.C. 5747.212 can be found at: http://codes.ohio.gov/orc/5747.212. The full text of the decision in Corrigan v. Testa can be found at: https://www.supremecourt.ohio.gov/. Since the Corrigan case was decided, many taxpayers and tax preparers have contacted the Department asking for guidance relating to situations where a taxpayer was assessed or paid tax on an amount calculated under R.C. 5747.212.
Observations
After reviewing the decision in Corrigan, the Department has the following observations: The Court’s analysis and holding were confined solely to R.C. 5747.212. The analysis and holdings were not expanded to any other Ohio statute. The Court found that R.C. 5747.212 was unconstitutional as applied to Mr. Corrigan. The Court declined to find the statute unconstitutional on its face (i.e., the statute was not stricken down as unconstitutional in all situations; instead, it was found to be unconstitutional only in this situation). The Court found that an ownership interest in a business is an “intangible asset” and that neither Mr. Corrigan nor the sale of the asset had a taxable link to Ohio. Thus, the Court followed the general rule
2
Guidance
Based upon the above observations, the Department hereby issues the following guidance relating to taxpayers who utilized R.C. 5747.212 in the calculation of their income tax liability: If a taxpayer has already filed a refund application or petitioned an assessment relating to the applicability of R.C. 5747.212, nothing more is needed at this time; such cases will automatically be reviewed in light of the Corrigan decision. That said, if the taxpayer has additional information that, after reading the Corrigan decision, further supports the taxpayer’s position, this information should be sent to your point of contact within the Department as soon as possible. If a taxpayer believes that s/he is entitled to a refund of amounts previously paid, based on the holding in Corrigan v. Testa, said taxpayer may file amended tax returns consistent with this belief per the following instructions:
Corrigan v. Testa, 2016-Ohio-2805 as the basis for the amended return.
reasons why the Corrigan decision is applicable to the R.C. 5747.212 adjustment reported on their
amended return. Under Ohio law, this means any payment of income tax made within four (4) years of the date the refund is requested. For the full text of Ohio’s income tax refund statute, see R.C. 5747.11, which can be found at: http://codes.ohio.gov/orc/5747.11.
subject of a Settlement Agreement with the Department. Amended returns and requests for refund following this guidance will be reviewed in the normal course
filings, as tax situations involving R.C. 5747.212 tend to be very factually and legally intensive. Additionally, to the extent an individual taxpayer recognizes a capital gain relating to the disposition of an interest in a business entity to which R.C. 5747.212 does not apply, that gain is nonbusiness income. Such a gain is allocable to the taxpayer’s state of domicile under R.C. 5747.20(B)(2)(c). Please note, since this gain is considered nonbusiness income, it is not eligible for Ohio’s Small Business Deduction for tax years 2013 and 2014, or Ohio’s Business Income Deduction for tax years 2015 and forward. R.C. 5747.01(A)(31).
Questions?
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Taxpayers may visit www.tax.ohio.gov. Questions may be submitted by clicking on the “Contact” link found at the top right of the page and then choosing the “Email Us” option. Taxpayers with additional questions regarding this subject may contact Individual Income Taxpayer Services at 1-800-282-1780.
[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as T. Ryan Legg Irrevocable Trust v. Testa, Slip Opinion No. 2016-Ohio-8418.]
NOTICE This slip opinion is subject to formal revision before it is published in an advance sheet of the Ohio Official Reports. Readers are requested to promptly notify the Reporter of Decisions, Supreme Court of Ohio, 65 South Front Street, Columbus, Ohio 43215, of any typographical or other formal errors in the opinion, in order that corrections may be made before the opinion is published. SLIP OPINION NO. 2016-OHIO-8418
TESTA, TAX COMMR., APPELLEE AND CROSS-APPELLANT. [Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as T. Ryan Legg Irrevocable Trust v. Testa, Slip Opinion No. 2016-Ohio-8418.] Taxation—R.C. 5747.01(BB)—Challenge to this court’s jurisdiction rejected— Trustee authorized filing of petition for reassessment and notice of appeal to the Board of Tax Appeals—Trust’s capital gains on sale of shares in pass- through entity constituted “qualifying trust amount”—Imposition of tax did not violate trust’s due-process or equal-protection rights—Trust has legal basis for seeking reduced Ohio allocation—Decision affirmed in part and reversed in part and cause remanded for determination of proper Ohio allocation. (No. 2015-0917—Submitted August 30, 2016—Decided December 28, 2016.) APPEAL AND CROSS-APPEAL from the Board of Tax Appeals, No. 2013-1469. ____________________
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FRENCH, J. {¶ 1} Appellant and cross-appellee, the T. Ryan Legg Irrevocable Trust (hereinafter, the “trust”), appeals a decision of the Board of Tax Appeals (“BTA”) that affirmed a tax on the trust’s 2006 income. The trust argues that the tax on its capital gains from the sale of its stock in an Ohio company is unlawful and
lacks jurisdiction because the trustee did not authorize the filing of the trust’s appeal before the BTA or its petition for reassessment before the tax commissioner. {¶ 2} We reject at the outset the jurisdictional arguments raised in the tax commissioner’s cross-appeal and affirm the BTA’s denial of the commissioner’s motion to dismiss. Turning next to the trust’s appeal, we conclude that the trust’s capital gain constituted a “qualifying trust amount” subject to Ohio income tax on an apportioned basis but that the trust had a legal basis for seeking a reduced Ohio
Process Clause of the United States Constitution or the Equal Protection Clauses of the United States and Ohio Constitutions. We therefore affirm in part the BTA’s decision to uphold the assessment, and we vacate that decision in part and remand to the tax commissioner for a determination of the proper Ohio allocation. Facts
{¶ 3} T. Ryan Legg, an Ohio resident in 2005 and 2006, co-founded Total Quality Logistics, Inc. (“Logistics”), a trucking-logistics business, in 1997. He
company’s shares, and for tax purposes, the corporation was a pass-through entity. See R.C. 5747.01(K) (referring to R.C. 5733.04(O), which defines “pass-through entity” as “a corporation that has made an election under subchapter S of Chapter 1 of Subtitle A of the Internal Revenue Code for its taxable year under that code”).
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{¶ 4} In 2005, Legg withdrew from the business. In November 2005, Legg transferred his half of the Logistics shares into two trusts: 32.5 percent of the Logistics shares went into the T. Ryan Legg Irrevocable Trust, the appellant and taxpayer in this case, and 17.5 percent of the shares went into a different trust. On December 2, 2005, the trusts entered into a purchase agreement by which the shares Legg had granted to the trusts would be sold, in effect, to his former business partner Oaks.1 Although the trusts and the purchase agreement are dated November 14, 2005, and December 2, 2005, respectively, the sale of the shares did not close until February 2006. {¶ 5} The trust agreement appointed a trustee under Delaware law, stated that it was controlled by Delaware law, and designated Legg and his family members as beneficiaries. During a specified “initial period,” the trustee was required to retain the trust’s income and add it to the trust assets. That period effectively extended from November 14, 2005, to January 3, 2007. {¶ 6} In February 2006, the trust closed on the purchase and transferred its
{¶ 7} On May 26, 2009, the Ohio Department of Taxation issued a notice
amount due of $1,868,382. The department referred to the gain as “business income” but then proceeded to apply an apportionment method prescribed by R.C. 5747.212 that is proper for certain types of “modified nonbusiness income.” See R.C. 5747.01(BB)(4)(c)(ii). Specifically, the department calculated an apportionment ratio for 2004, 2005, and 2006 based on Logistics’s Ohio-based property, payroll, and sales; took the average for those three years; and apportioned 91.8307 percent of the trust’s 2006 gain to Ohio.
1 The purchase agreement also provides for the sale of Legg’s one-half interest in two other entities.But the gain from the sale of shares in Logistics is the only issue before us.
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{¶ 8} The trust petitioned for reassessment. In his March 2013 final determination, the commissioner found that the trust was a nonresident under R.C. 5747.01(I)(3) and upheld the assessment on two grounds. First, the capital gain was subject to Ohio tax as a “qualifying trust amount” under R.C. 5747.01(BB)(2). Second, as an alternative, the commissioner held that the capital gain was properly apportioned to Ohio under a March 2006 amendment to the statutes that called for “modified nonbusiness income” to be apportioned pursuant to the requirements of R.C. 5747.212. See R.C. 5747.01(BB)(4)(c)(ii); 2006 Am.Sub.H.B. No. 530, 151 Ohio Laws, Part III, 5982, and Part IV, 6690-6691. The final determination upheld the assessment of tax and interest, but abated the late-payment penalty. As a result, the total amount assessed was reduced from $1,868,382 to $1,473,192. {¶ 9} The trust appealed to the BTA, which held a hearing in May 2014. Less than 48 hours before the hearing, the tax commissioner filed a motion to dismiss, arguing that the BTA lacked jurisdiction because the trust had not shown that the trustee had authorized the filing of the notice of appeal and the petition for reassessment. {¶ 10} The BTA issued its decision in May 2015. BTA No. 2013-1469, 2015 WL 2169402, *1 (May 5, 2015). The decision denied the tax commissioner’s motion to dismiss. The BTA noted that then-trustee Charles Schwab Bank had submitted a notice to the commissioner declaring attorneys Mark Loyd and Kevin Ghassomian, along with their law firm, Greenebaum, Doll & McDonald, as the trust’s representatives before the Department of Taxation. Id. The declaration was submitted to the commissioner in August 2008, prior to the assessment and petition for reassessment. Id. In 2009, UBS Trust became the trustee. Id. The BTA found that “the record, as a whole, * * * indicates that UBS, Mr. Legg as grantor/beneficiary of the trust, and counsel themselves, at all times, considered Greenebaum Doll & McDonald (and its successor Bingham Greenebaum Doll LLP) to be the authorized representative of the subject trust.” Id.
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{¶ 11} On the merits, the BTA upheld the assessment based on several
amount” under the statutes but additionally determined that the gain constituted apportionable “business income.” Id. at *3-4. The BTA also determined that the trust was taxable as a resident trust. Id. at *4. {¶ 12} The trust has appealed, and the tax commissioner has asserted a cross-appeal challenging the denial of his motion to dismiss. We reject the cross- appeal, and we affirm the decision of the BTA. The Tax Commissioner Has Not Proved that the Trust’s Counsel Lacked Authority to File the Tax Appeals {¶ 13} Because the cross-appeal presents a threshold question of jurisdiction, we consider it first. We note that the tax commissioner states two reasons why the BTA lacked jurisdiction to review his final determination: counsel did not have the authority to file the notice of appeal on behalf of the trustee and counsel did not have the authority to prosecute the petition for reassessment. We reject both arguments.
authority to file the BTA appeal nor shifted the burden to the trust {¶ 14} With respect to the notice of appeal to the BTA, we hold that the tax commissioner’s cross-appeal must fail because the tax commissioner has not rebutted the presumption that the lawyer representing the trust possessed authority to file the appeal. Mark Loyd was and is an Ohio attorney who, using his Ohio attorney-registration number, signed the notice of appeal and submitted it on behalf
to appear on the trust’s behalf and prosecute the appeal. {¶ 15} “When an attorney files an appeal, it is presumed he has the requisite authority to do so.” State ex rel. Gibbs v. Zeller, 2d Dist. Montgomery No. 9170, 1985 WL 7625, *1 (Jan. 24, 1985); see also FIA Card Servs., N.A. v. Salmon, 180
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Ohio App.3d 548, 2009-Ohio-80, 906 N.E.2d 467, ¶ 13 (3d Dist.) (“ ‘there is a presumption that a regularly admitted attorney has authority to represent the client for whom he appears’ ”), quoting Minnesota v. Karp, 84 Ohio App. 51, 53, 84 N.E.2d 76 (1st Dist.1948); accord Hill v. Mendenhall, 88 U.S. 453, 454, 22 L.Ed. 616 (1874) (“When an attorney of a court of record appears in an action for one of the parties, his authority, in the absence of any proof to the contrary, will be presumed”). {¶ 16} This basic presumption applies with enhanced force in this case, given that attorney Loyd was one of two persons originally appointed to represent the trust before the tax department. His continuous representation extended all the way from that appointment in August 2008, through the filing of the reassessment petition and the appeal to the BTA, to presenting the oral argument in this appeal. {¶ 17} The tax commissioner’s burden was to offer “substantial proof in the form of countervailing evidence that authority is lacking, in order to justify, on that ground, an order to strike” the notice of appeal. (Citations omitted.) See Booth v. Fletcher, 101 F.2d 676, 683 (D.C.Cir.1938). To shoulder this burden and rebut the presumption, the commissioner offered the affidavit of Assistant Attorney General David Ebersole, who affirmed the affidavit’s contents in his live testimony before the BTA. The affidavit relates that during a telephone conversation with Bailey Roese, one of the trust’s lawyers, in response to a suggestion that the current trustee was a party to the BTA case, Roese “identified Thomas Ryan Legg, not the trust itself, as ‘the client’ and the person who authorized her and Mark Loyd to represent the Legg Trust.” (Emphasis sic.) {¶ 18} The tax commissioner characterizes this as an admission that the lawyers lacked authority from the trustee itself, but we reject that contention both because it is an offhand comment embedded in a conversation concerning other matters and because it simply does not constitute a denial that counsel had authority
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from the trust. We do not regard the affidavit testimony as satisfying the “substantial proof” burden. {¶ 19} In addition, the record contains evidence of counsel’s authority in the form of a letter presented by the trust at the BTA hearing and marked as exhibit 23, along with an affidavit submitted in response to the motion to dismiss. These submissions put the issue to rest. The letter was written in response to the tax commissioner’s eleventh-hour motion to dismiss and is signed by trust officers of the then-current trustee, UBS Trust Company. The letter expresses approval of counsel’s actions on behalf of the trust and states that UBS “has also formally engaged [Loyd’s law firm] to pursue the Tax Controversy, including the Appeal [to the BTA].” The affidavit was created after the BTA hearing and attached to the trust’s memorandum opposing the motion to dismiss; it is sworn by a trust officer
{¶ 20} What the tax commissioner is essentially arguing is that no notice of appeal to the BTA could have been filed without (1) a specific act of authorization for that particular filing issued by the trustee to counsel before the filing was effected and (2) proof of that act at the demand of the opposing party, the tax commissioner himself. The tax commissioner further contends that we must infer that there was no such act on the ground that if there had been, the trust would have proved it. {¶ 21} The tax commissioner cites case law stating that the trustee must authorize action on behalf of the trust. The tax commissioner, however, offers no case law or any other authority supporting the premise that a highly specific act of authorization was necessary, given that counsel had clearly been engaged to handle the tax protest. We see no reason why a trustee cannot engage a lawyer, entrust the tax matter to the lawyer, and keep tabs on the progress of the litigation, without additionally being required to maintain a file of specific authorizations that may
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later be produced when a party-opponent chooses to make an issue of the authority possessed by the trust’s lawyer. {¶ 22} We reject the commissioner’s theory that merely because the commissioner raised this issue, the trust acquired the burden of making a specific proof of authorization that is satisfactory to the commissioner’s counsel. The trust had no burden to do anything more than it in fact did. We hold that the notice of appeal to the BTA was validly filed and that it invoked the BTA’s jurisdiction to review the final determination of the tax commissioner.
{¶ 23} The tax commissioner contends that even if the notice of appeal to the BTA were valid, the BTA would still have lacked jurisdiction because of the alleged invalidity of the reassessment petition. The petition was filed on or about July 20, 2009, identified the trust as taxpayer and the assessment being contested, and was signed by Mark A. Loyd on behalf of himself and Kevin R. Ghassomian. {¶ 24} To understand the tax commissioner’s argument, it is necessary to look at the change of trustees and how that relates to the time that the petition was
also provided for the replacement of the trustee. Charles Schwab Bank succeeded U.S. Trust as trustee in January 2008. UBS Trust Company, N.A., succeeded Charles Schwab Bank as trustee on June 5, 2009, and UBS remained trustee at all relevant times thereafter. {¶ 25} The tax commissioner argues that because the trustee changed on June 5, 2009, and because the “address” on the July 20, 2009 petition for reassessment identified the address of the former trustee, Charles Schwab Bank, rather than the current trustee, UBS Trust Company, the petition does not reflect proper authorization by the new trustee. To this circumstance, the tax commissioner adds the inference that he draws from the telephone conversation attested to in Ebersole’s affidavit.
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{¶ 26} We conclude that the petition was validly filed based on the record before us. In response to the initiation of the audit that led to the assessment and subsequent petition, the trust filed two “TBOR-1” forms correctly identifying the trust as taxpayer and Charles Schwab Bank as the then-current trustee. A “Senior Trust Officer” of that bank signed the forms, which appointed “Mark Loyd, Greenbaum Doll & McDonald PLLC” and “Kevin R. Ghassomian, Greenbaum Doll & McDonald PLLC” to “represent the taxpayer before the Department of Taxation,” which expressly included the power to “file petitions or applications.” The forms recite that they remain valid until one year after the date signed, that is,
{¶ 27} Thus, both Loyd and Ghassomian of the Greenebaum law firm had been duly appointed to represent the trust on forms prescribed by the tax department for that very purpose. The tax commissioner does not contest the validity of these forms, and there is no dispute that Charles Schwab Bank was the trustee at the time the forms were executed. On their face, the forms were valid for one year, and the reassessment petition was filed within that year. {¶ 28} Quite simply, Loyd and Ghassomian had uncontested authority to represent the trust conferred by the TBOR-1 forms and to file the petition for reassessment, and the erroneous address on the petition does not change that fact. The tax commissioner has pointed to no requirement in statute or rule that the current trustee’s address be accurately reported on the petition, and it is significant that the statutes impose the tax on the trust itself, which therefore is the taxpayer, the assessed party, and the petitioner in the proceedings before the tax department. R.C. 5747.02(A) (“there is hereby levied [an income tax] on every * * * trust ** * residing in or earning or receiving income in this state * * *”). Loyd and Ghassomian were the duly appointed tax representatives of the trust under tax- department procedures, and they acted timely within the scope of that appointment when they filed the reassessment petition in July 2009.
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{¶ 29} We hold that these circumstances establish that the petition for reassessment was validly filed and that the absence of a specific act of authorization for the filing of the petition from the new trustee did not impair the ability of the trust’s appointed tax representatives to act on behalf of the trust in contesting the tax assessment. {¶ 30} Because we conclude that the tax commissioner’s cross-appeal has no merit, we proceed to consider the issues raised by the trust on appeal. The Capital Gain at Issue Constitutes a “Qualifying Trust Amount” that Can Properly Be Allocated in Part to Ohio {¶ 31} In his final determination, the tax commissioner found that the gain at issue constitutes a “qualifying trust amount” that could be apportioned to Ohio. The BTA affirmed that finding, and on appeal the trust contests that basis for the assessment by arguing that relevant records were not “available,” as the statute requires.
{¶ 32} R.C. 5747.01(BB)(2)’s definition of “qualifying trust amount” includes capital gains realized “from the sale, exchange, or other disposition of equity or ownership interests in, or debt obligations of, a qualifying investee to the extent included in the trust’s Ohio taxable income,” but only if two conditions are
investee’s physical assets in this state and everywhere, as of the last day of the qualifying investee’s fiscal or calendar year ending immediately prior to the date
Second, under R.C. 5747.01(BB)(2)(b), the requirements of R.C. 5747.011 must be satisfied—most notably, the requirement that the trust’s ownership interest be at least 5 percent of the total outstanding ownership interests “at any time during the ten-year period ending on the last day of the trust’s taxable year in which the sale, exchange, or other disposition occurs,” see R.C. 5747.011(B).
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{¶ 33} The trust does not dispute that Logistics constitutes a “qualifying investee” under R.C. 5747.01(BB)(5)(a), nor that the 5-percent-ownership criterion in R.C. 5747.011(B) is also satisfied. The only issue the trust raises on appeal with respect to the satisfaction of the requirements for deeming its capital gain a “qualifying trust amount” concerns the “availability” of the records of Logistics. Under R.C. 5747.01(BB)(6), “available” means that the “information is such that a person is able to learn of the information by the due date plus extensions, if any, for filing the return for the taxable year in which the trust recognizes the gain or loss.” {¶ 34} The BTA found that “the record establishes that the book value of the [Logistics] assets was available to the trust, whether it was actually requested
WL 2169402, at *3. The trust contends that although the information at issue may have been available to its accountant, who was also Logistics’s accountant, that does not mean that the information was available to the trust itself. That is, the accountant had separate duties to each of his clients, and those duties precluded him from making Logistics information available to the trust. {¶ 35} Under the circumstances, and given the language of the “qualifying trust amount” provision, we find unpersuasive the trust’s argument that the book value of Logistics’s physical assets was unavailable to it. First, R.C. 5747.01(BB)(2)(a) establishes that the relevant information is the location of the physical assets of Logistics “as of the last day of [Logistics’s] fiscal or calendar year ending immediately prior to the date on which the trust recognizes the gain.” Since the purchase agreement for the Logistics shares closed in February 2006, the date for determining the physical-assets allocation preceded the closing; indeed, it would probably fall at the end of calendar year 2005. Because the allocation date falls before the shares were transferred, the trust would have been able to exercise its shareholder’s right to access Logistics’s corporate financial information pursuant to R.C. 1701.37(C). That section provides that “[a]ny shareholder” may
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make a “written demand stating the specific purpose thereof” and thereby examine “for any reasonable and proper purpose” various corporate documents, including “books and records of account.” {¶ 36} The trust clearly would have had a “proper purpose” in accessing such information. On the one hand, the trust was a pass-through taxpayer with respect to its share of Logistics’s corporate earnings during 2005. It is difficult to conceive of any valid objection a closely-held corporation could raise to a shareholder’s examining information that directly bears on the shareholder’s own pass-through income-tax liability. And the fact that passed-through business income of the corporation is ordinarily apportioned, in part, by a property factor that would encompass physical assets of the corporation, see R.C. 5747.21(B), citing R.C. 5733.05(B)(2), means that the shareholder as taxpayer to some degree accesses such information in preparing its returns in the ordinary course. {¶ 37} The purchase agreement itself underscores this point by directly addressing the issue of income-tax liability for calendar year 2005. At section 9, the purchase agreement provides that the buyer and seller will split the 2005 tax expense equally and, in relation to that liability, each will receive a distribution from Logistics amounting to its 50 percent share of a specified portion (42.5 percent) of the cash-basis taxable income of the corporation. And under the agreement, the buyer is to deliver that distribution in connection with the closing. {¶ 38} We are persuaded that in enacting the qualifying-trust-amount provision, the legislature thought that the provision would ordinarily apply to a trust that is a pass-through shareholder of a closely-held corporation, precisely because such a trust, as that type of shareholder, would usually have access to the relevant corporate information in the course of complying with its own tax obligations. {¶ 39} Finally, the statute does not on its face preclude a taxpayer from asserting that it failed to obtain or retain information that was once available to it
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and that when it later requested the information, it was refused. Notably, the trust makes no such claim here. {¶ 40} Nevertheless, the trust argues that the purchase agreement prevented it from accessing the relevant information. The only provision of that agreement relevant to this point is Section 2, which grants the trust as seller the right to access Logistics’s books upon the occurrence of a “monetization event”—i.e., one of the events enumerated in the agreement that might require a price adjustment. Because the evidence showed that no monetization event occurred, the trust concludes that the purchase agreement permitted no right of access. We disagree. {¶ 41} Section 2.5 of the purchase agreement states that the buyer “shall provide to Seller the right and opportunity for Seller and Seller’s advisors to review * * * the books and records of [Logistics] to the extent necessary to determine whether a Monetization Event has occurred and the consideration to which Seller is entitled as a result of the Monetization Event.” Under Section 2, a monetization event is an event that occurs after closing that may entitle the seller to receive additional compensation for the sale of its shares. Nothing in that provision purports to address the right of the trust to access pre-closing information that relates to its tax liabilities. And as discussed, it is that information that would include the information relevant to the physical-assets allocation of the gain as a “qualifying trust amount.” We reject the trust’s invitation to read an implied prohibition of access into Section 2, which relates to matters that occur after closing. {¶ 42} The trust also cites Alcan Aluminum Corp. v. Limbach, 42 Ohio St.3d 121, 537 N.E.2d 1302 (1989), but we conclude that the case does not support the trust’s position in this appeal. In that case, we construed the term “available” in a different but analogous statute and held that physical-asset-location information could properly be found to be “available” to a taxpayer that was a 50 percent shareholder of the subsidiary corporation. The trust argues that because it owned
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it did not have the same right of access to Logistics’s asset information. But we do not think that Alcan Aluminum militates against finding that Logistics’s physical- asset information was available here. Although the trust owns a smaller percentage
qualifies as a pass-through shareholder for Logistics, bears the income-tax consequences of the operation of the business, and enjoys the statutory right to access corporate information. For the reasons already discussed, this circumstance supports the BTA’s finding that the physical-asset information was “available” to the trust. {¶ 43} We conclude that the allocation information was “available” to the trust and that the gain at issue therefore constituted a “qualifying trust amount.”
business income” nor “modified nonbusiness income” {¶ 44} The trust next argues that the capital gain at issue should be allocated
However, because we have affirmed the finding that the income is a “qualifying trust amount,” the distinction between business and nonbusiness income is moot. {¶ 45} Ohio taxes trusts on their “modified Ohio taxable income.” R.C. 5747.02(A)(1). The modified Ohio taxable income is the sum of the trust’s Ohio- apportioned or -allocated share of “modified business income,” “qualifying investment income,” and the “qualifying trust amount,” along with the entire amount of a resident trust’s “modified nonbusiness income.” R.C. 5747.01(BB)(4)(a) to (c). R.C. 5747.01(BB)(1) in turn defines “modified business income” as “the business income included in a trust’s Ohio taxable income after such taxable income is first reduced by the qualifying trust amount, if any.” The statute therefore specifically excludes the qualifying trust amount from treatment as modified business income. Additionally, R.C. 5747.01(BB)(3) defines
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“modified nonbusiness income” as income “other than modified business income” and “other than the qualifying trust amount.” It follows that the underlying distinction between business income and nonbusiness income is not relevant once the income in question has been determined to be a “qualifying trust amount,” because, as such, that income is expressly excluded from the other categories of income for purposes of trust income taxation. We hold that because the trust’s income is a “qualifying trust amount,” it was neither “modified business income” nor “modified nonbusiness income.” {¶ 46} We therefore hold that the BTA erred by considering whether the gain at issue was business or nonbusiness income. After upholding the commissioner’s finding that the gain was a “qualifying trust amount,” the BTA proceeded to consider the status of the income in relation to the distinction between business income and nonbusiness income under R.C. 5747.01(B) and (C). That was error because once the BTA affirmed the tax commissioner’s determination that the gain was a “qualifying trust amount,” that fact alone precluded the gain from being treated as “modified business income” or as “modified nonbusiness income” under R.C. 5747.01(BB). {¶ 47} Under these circumstances, we vacate the BTA’s finding that the gain at issue constituted “business income” under R.C. 5747.01(B).
the cause will be remanded {¶ 48} The trust argues that to the extent that the income is a qualifying trust amount, the “income cannot be attributable 100% to Ohio.” That assertion embodies an error concerning the allocation method used by the tax commissioner; he did not allocate the gain from the sale of Logistics shares 100 percent to Ohio. Instead, the commissioner averaged the business-income apportionment factors for three years and, based on that average, apportioned 91.8307 percent to Ohio.
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{¶ 49} Despite the factual error within the trust’s assertion, however, we agree that the trust has a legal basis for seeking a reduced Ohio allocation. Because the income constitutes a “qualifying trust amount,” R.C. 5747.01(BB) prescribes not an apportionment based on the average of three years of Logistics’s business- income factor, but rather an allocation based on the Ohio share of Logistics’s physical assets as of the “last day of [Logistics’s] fiscal or calendar year ending immediately prior to the date on which the trust recognizes the qualifying trust amount.” R.C. 5747.01(BB)(4)(b). {¶ 50} Moreover, contrary to the tax commissioner’s argument, the statute does not authorize an alternative allocation method for the “qualifying trust amount.” The commissioner relies on a passage contained in R.C. 5747.01(BB)(4), which reads as follows: If the allocation and apportionment of a trust’s income under divisions (BB)(4)(a) and (c) of this section do not fairly represent the modified Ohio taxable income of the trust in this state, the alternative methods described in division (C) of section 5747.21 of the Revised Code may be applied in the manner and to the same extent provided in that section. (Emphasis added.) R.C. 5747.01(BB)(4)(c)(ii). The quoted passage explicitly authorizes alternatives for allocating all the other types of trust income (divisions (4)(a) and (4)(c)), and by doing so clearly implies the absence of such authority for division (4)(b), which is the provision addressing the taxation of a “qualifying trust amount.” {¶ 51} The foregoing discussion shows that the trust would be entitled to a reduced Ohio allocation if the physical-asset allocation were less than 91.8307
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than that percentage. Namely, the property factor for tax year 2005, which would presumably include physical assets as of the end of the antecedent tax year, was 80.5094 percent. {¶ 52} The tax commissioner argues that we lack jurisdiction to review and remand this issue because the trust’s only argument before the BTA on this point was that its income should be allocated 100 percent outside Ohio. The tax commissioner couches the argument as a waiver of any other alternative apportionment ratio. However, the trust’s notice of appeal to the BTA asserted that “even under [the tax commissioner’s] own position,” i.e., that the gain was a qualifying trust amount, the commissioner’s apportionment under R.C. 5747.01(BB)(4)(b) was “erroneously overstated” and that the trust was seeking a reduced apportionment as a “fraction” that was “something less than 100%” based
appeal therefore stated the error with sufficient specificity to invoke the BTA’s and this court’s jurisdiction. See MCI Telecommunications Corp. v. Limbach, 68 Ohio St.3d 195, 197, 625, N.E.2d 597 (1994) (declining to deny review based on a “hypertechnical reading” of the notice of appeal), citing Buckeye Internatl., Inc. v. Limbach, 64 Ohio St.3d 264, 268, 595 N.E.2d 347 (1992). {¶ 53} Under these circumstances, we must remand to the tax commissioner for a determination of the proper allocation to Ohio based on the applicable legal standard, as clarified above. The Assessment Violates Neither Due Process nor Equal Protection {¶ 54} To the extent that the statutes permit the assessment, the trust argues that the assessment is unconstitutional as violating its rights to both due process and equal protection. As for due process, the trust argues that the income and the taxpayer lack sufficient connection with Ohio to permit the imposition of the tax. As for equal protection, the trust points to the different treatment accorded to a
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nonresident trust based on whether it owns S-corporation shares or C-corporation shares. {¶ 55} Before considering the constitutional points, however, we address the BTA’s finding that the subject trust should be taxed as a resident trust. This issue has bearing on the trust’s and its income’s contacts with Ohio for due-process
nonresident is the predicate for the equal-protection issue raised by the trust.
determination, is facially defective, and must therefore be vacated {¶ 56} The tax commissioner’s final determination stated that the trust was a nonresident trust pursuant to R.C. 5747.01(I)(3). The commissioner specifically proceeded on that premise when considering, as an alternative to his finding that the income was a “qualifying trust amount,” the proper treatment of the income as “modified nonbusiness income.” Thus, the tax commissioner relied on a finding favorable to the trust: that the trust was a nonresident. For obvious reasons, the trust did not contest this finding, nor did the tax commissioner change his position before the BTA. {¶ 57} Yet the BTA made a contrary finding in its decision. BTA No. 2013- 1469, 2015 WL 2169402, at *4. Under R.C. 5747.01(I)(3)(a), the residency of a trust depends on whether the assets were transferred into the trust by an Ohio domiciliary/resident and whether a “qualifying beneficiary” is an Ohio resident. The BTA found that Legg was an Ohio resident at the relevant times and that he was also a beneficiary of the trust in 2006; that sufficed, according to the BTA, to support the conclusion that the trust was a resident trust. {¶ 58} But the trust has pointed out that the BTA’s analysis skips one crucial element necessary for a finding of resident status. The BTA ignored the requirement that the resident beneficiary be a qualifying beneficiary, meaning that
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the beneficiary had to be a “potential current beneficiary” under Internal Revenue Code 1361(e)(2), R.C. 5747.01(I)(3)(c). We agree with the trust on that point. {¶ 59} The federal provision states: For purposes of this section, the term “potential current beneficiary” means, with respect to any period, any person who at any time during such period is entitled to, or at the discretion of any person may receive, a distribution from the principal or income of the trust (determined without regard to any power of appointment to the extent such power remains unexercised at the end of such period). If a trust disposes of all of the stock which it holds in an S corporation, then, with respect to such corporation, the term “potential current beneficiary” does not include any person who first met the requirements of the preceding sentence during the 1-year period ending on the date of such disposition. 26 U.S.C. 361(e)(2). {¶ 60} The BTA correctly found that Legg was an Ohio resident when he transferred the Logistics shares to the trust, and he was an Ohio resident and a beneficiary during 2006. But the BTA failed to consider the additional requirement that some person qualify as a “potential current beneficiary.” This would require the trust terms to have permitted a distribution to a beneficiary during 2006, which under the trust terms was part of the “initial period.” At the BTA and again before this court, the trust points to section 2.1(a)(1) of the trust agreement, which required the trustee to accumulate income during the initial period, that is, during all of 2006. The tax commissioner’s brief argued in support of the BTA’s residency finding without responding to the trust on this point.
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{¶ 61} At oral argument before us, the tax commissioner’s counsel pointed to two trust provisions that purportedly permitted distributions during 2006: section 3.1(n), which confers upon the trustee the power to “make any distribution or division of trust property in cash or in kind or both, at any time and from time to time,” and section 2.1(c)(ii), which speaks of “mak[ing] all principal distributions” to the grantor or other beneficiaries, with the timing of these discretionary acts being “before the initial funding of the Family Trust or thereafter at any time prior to the termination of the Family Trust.” We decline to accept, however, the tax commissioner’s belated arguments on this point, submitted for the first time at oral argument and never properly briefed or considered below. {¶ 62} Moreover, we confront a BTA finding contrary to the tax commissioner’s final determination that the trust was a nonresident. Absent a finding that the tax commissioner’s conclusion was “clearly unreasonable or unlawful,” the findings in the final determination are “presumptively valid.” See Hatchadorian v. Lindley, 21 Ohio St.3d 66, 488 N.E.2d 145 (1986), paragraph one
(“it is error for the BTA to reverse the commissioner’s determination when no competent and probative evidence is presented to show that the commissioner’s determination is factually incorrect”). {¶ 63} We therefore conclude that the trust should be taxed as a nonresident trust and that the tax commissioner’s original determination of the trust’s residency was presumptively valid. Accordingly, we must vacate the BTA’s residency finding, with the result that the tax commissioner’s finding that the trust is a nonresident is reinstated as the basis on which we decide this appeal.
{¶ 64} The Due Process Clause of the Fourteenth Amendment guards against a state’s exceeding its jurisdiction to tax by establishing a twofold test. First, there must be a definite link or a minimum connection between the state and
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the person, property or transaction that Ohio seeks to tax; second, the income attributed to the state for tax purposes must rationally relate to values connected with the taxing state. Hillenmeyer v. Cleveland Bd. of Rev., 144 Ohio St.3d 165, 2015-Ohio-1623, 41 N.E.3d 1164, ¶ 40, citing Moorman Mfg. Co. v. Bair, 437 U.S. 267, 272-273, 98 S.Ct. 2340, 57 L.Ed.2d 197 (1978), and Quill Corp. v. North Dakota, 504 U.S. 298, 306, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992). {¶ 65} In Corrigan v. Testa, ___ Ohio St.3d ___, 2016-Ohio-2805, ___ N.E.3d ___, we held that the tax imposed by R.C. 5747.212 could not be sustained as applied to Corrigan for two reasons: first, because the link between Ohio and the capital gain of a nonresident who did not engage in the underlying business was attenuated and second, because there was no showing that attributing the gain to Ohio as if it were business income actually related to the values giving rise to the
{¶ 66} We decided Corrigan after the briefing in this case, but the trust’s counsel relied on it at oral argument. To be sure, there are two strong parallels between this case and Corrigan. The tax commissioner found that the trust was a nonresident here, just as Corrigan was a nonresident individual. And the tax commissioner here apportioned to Ohio the capital gain from the sale of the pass- through entity as if it were business income and did so in the very manner prescribed by R.C. 5747.212, the statute that the tax commissioner applied to Corrigan’s capital gains from the sale of his ownership interest in Mansfield Plumbing, L.L.C., a pass-through entity. {¶ 67} A more comprehensive look at the situation, however, persuades us that the differences are more important than the similarities. Although the trust was a nonresident under the statute, it is undisputed that the grantor of the trust and contributor of the Logistics shares, T. Ryan Legg, was an Ohio resident in 2005 and for at least part of 2006. Moreover, unlike Corrigan, Legg was a founder and manager of the business of the pass-through entity—a material distinction, see
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Corrigan at ¶ 68 (finding the tax unconstitutional as applied to Corrigan “in light
to a unitary business with that of Mansfield Plumbing”). {¶ 68} Properly analyzed, this case involves an Ohio resident who conducted business in significant part in Ohio through the corporate form and who disposed of his business and corporate interest not by a personal sale but by means
Although Legg deliberately set up a Delaware trust, his Ohio contacts are still material for constitutional purposes. {¶ 69} In the context of upholding the imposition of inheritance taxes, the United States Supreme Court made a statement that is equally applicable to Legg and his trust in this case. Namely, Legg’s own “power to dispose of the intangibles was a potential source of wealth which was property in [his] hands from which [he] was under the highest obligation, in common with [his] fellow citizens of [Ohio], to contribute to the support of the government whose protection [he] enjoyed.” Curry v. McCanless, 307 U.S. 357, 370-371, 59 S.Ct. 900, 83 L.Ed. 1339 (1939). Just as the inheritance taxes in Curry were not imposed on the deceased state resident herself, so too is the trust income tax not directly imposed on Legg—yet his own contacts with Ohio and with the business easily justify the imposition of the tax on the trust from the standpoint of due process. We hold that the tax assessment at issue did not violate the trust’s due-process rights.
{¶ 70} The trust argues that the taxation of its “qualifying trust amount” violates its equal-protection rights because no tax is imposed on a nonresident trust when the shares at issue are C-corporation shares rather than pass-through-entity
“nonresident trusts” as defined by the statute are “similarly situated” and must therefore be treated the same under the Equal Protection Clause with respect to their
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gain from selling corporate shares. Specifically, the trust argues that state tax law must ignore the distinction between taxpaying C corporations and pass-through entities. {¶ 71} A tax-law classification that “neither involves fundamental rights nor proceeds along suspect lines” will not “run afoul of the Equal Protection Clause if there is a rational relationship between the disparity of treatment and some legitimate governmental purpose.” Hillenmeyer, 144 Ohio St.3d 165, 2015-Ohio- 1623, 41 N.E.3d 1164, at ¶ 30. And because the assessment of taxes is fundamentally a legislative responsibility, the constitutional standard is especially deferential in the context of tax-law classifications. Id. {¶ 72} The trust’s burden as the constitutional claimant is heavy. “Under the rational-basis standard, a state has no obligation to produce evidence to sustain the rationality of a statutory classification. * * * Rather, a taxpayer challenging the constitutionality of a taxation statute bears the burden of negating every conceivable basis that might support the legislation.” Ohio Apt. Assn. v. Levin, 127 Ohio St.3d 76, 2010-Ohio-4414, 936 N.E.2d 919, ¶ 34. And we have endorsed the pronouncement of the United States Supreme Court that “ ‘ “legislatures are presumed to have acted within their constitutional power despite the fact that, in practice, their laws result in some inequality” ’ ” among taxpayers. Huntington
Nordinger v. Hahn, 505 U.S. 1, 10, 112 S.Ct. 2326, 120 L.Ed.2d 1, quoting McGowan v. Maryland, 366 U.S. 420, 425-426, 81 S.Ct. 1101, 6 L.Ed.2d 393 (1961). {¶ 73} We hold that the trust falls well short of proving a constitutional violation in this context. “The comparison of only similarly situated entities is integral to an equal protection analysis.” GTE N., Inc. v. Zaino, 96 Ohio St.3d 9, 2002-Ohio-2984, 770 N.E.2d 65, ¶ 22, citing Tigner v. Texas, 310 U.S. 141, 147, 60 S.Ct. 879, 84 L.Ed. 1124 (1940). Equal protection “does not require things
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which are different in fact * * * to be treated in law as though they were the same.” Tigner at 147. Corporations that are themselves taxpayers are differently situated with respect to state tax law than are pass-through corporations, and, by extension, shareholders who have elected to carry the corporation’s income on their own tax returns are differently situated from those who have not. Moreover, pass-through corporations are more likely to be closely-held corporations in which the shareholder is directly involved in the business, and the fact that this is not universally the case does not defeat the rationality of the distinction overall, see Vance v. Bradley, 440 U.S. 93, 108, 99 S.Ct. 939, 59 L.Ed.2d 171 (1979) (“Even if the classification involved here is to some extent both underinclusive and
the rule that in a case like this ‘perfection is by no means required’ ”), quoting Phillips Chem. Co. v. Dumas Indep. School Dist., 361 U.S. 376, 385, 80 S.Ct. 474, 4 L.Ed.2d 384 (1960). {¶ 74} Contrary to the trust’s argument, this court’s decision in Boothe Fin.
different result. In Boothe, the taxpayer owned computer equipment that it leased to customers. The equipment was manufactured by IBM, which also leased the same type of property to other customers. Boothe reported its leased-out computers
percent of “true value.” As a manufacturer, IBM was permitted to determine the true value of its leased-out equipment by calculating its manufacturing cost less depreciation, whereas Boothe was required to use its acquisition cost less depreciation, which led to a true value that was six times that of IBM’s true value for the same type of equipment. Boothe challenged the disparity, and this court held that it violated the guarantee of equal protection to Boothe. Id. at paragraph two of the syllabus.
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{¶ 75} We characterized IBM’s leased-out equipment as being “grossly undervalued,” and we held that “a taxpayer who leases equipment is denied equal protection when a competitor, who manufactures and leases essentially identical equipment, is allowed to grossly undervalue its property.” Id. at 249-250. Boothe differs from the present case, however, because Boothe involved differential tax treatment of two business competitors with respect to the valuation of equipment directly used in their competing operations. By contrast, the distinction complained
corporate entities in which they have invested. For reasons already stated, this differential treatment is rational. {¶ 76} We hold that the assessment at issue here does not violate the trust’s equal-protection rights. Conclusion {¶ 77} For the foregoing reasons, we vacate the BTA’s rulings that the gain at issue constituted business income and that the trust was a resident trust under the
amount” under the statute, and we vacate and remand to the tax commissioner for a determination of the proper Ohio allocation in accordance with this opinion. Judgment accordingly. O’CONNOR, C.J., and PFEIFER, O’DONNELL, KENNEDY, and O’NEILL, JJ., concur. LANZINGER, J., concurs, with an opinion. _________________ LANZINGER, J., concurring. {¶ 78} I concur in the majority’s opinion but write separately to express concerns over its analysis of due process and reliance on our recent decision in Corrigan v. Testa, ___ Ohio St.3d ___, 2016-Ohio-2805, ___ N.E.3d ___. Based upon my reconsideration of that case in light of this one, and upon further reflection,
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I would overrule Corrigan. I would also presume the constitutionality of the tax assessed against the Legg Trust and hold that the presumption has not been rebutted. {¶ 79} The trust asserts that imposing a tax on its capital gains violates its due-process rights. Before Corrigan, our analysis would have had a clear starting point: the presumption that the state tax laws and the tax commissioner’s application of them was constitutional. See State ex rel. Ohio Congress of Parents & Teachers v. State Bd. of Edn., 111 Ohio St.3d 568, 2006-Ohio-5512, 857 N.E.2d 1148, ¶ 20 (“legislative enactments are entitled to a strong presumption of constitutionality”). But after Corrigan, the state has the burden to justify imposing the tax and the court must analyze each new case for fine points of distinction from
recently decided case, it is a distortion of an integral tenet of proper constitutional review—that laws are presumed to be constitutional. Summary of Corrigan {¶ 80} Briefly stated, Corrigan involved a nonresident individual who sold his ownership interest in a limited-liability company that did part of its business in
state assessed income tax on a portion of the gain from the sale based on the proportion of business activity that the limited-liability company had conducted in this state over three years. We held that the tax imposed under R.C. 5747.212 could not be sustained for two reasons: first, because of the attenuated link between Ohio and the capital gain of a nonresident who did not engage in the underlying business and second, because there was no showing that attributing the gain to Ohio as if it were business income actually related to the values giving rise to the gain. Corrigan at ¶ 36, 48, 68-69. {¶ 81} In this case, the shareholder that earned capital gains is a trust rather than an individual, and the majority distinguishes Corrigan on the grounds that
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Legg, the grantor of the trust, was an Ohio resident and participated in the business before the trust sold its shares. I do not disagree with this analysis, but I believe that it ought to be unnecessary. Our holding in Corrigan was not based on any showing made by the taxpayer but rather on our conclusion that the state had not controverted our constitutional concerns about the tax. {¶ 82} After considering the facts of the instant case, I believe that residency of the trust or the grantor or original involvement with the corporate business should be irrelevant. It ought to be enough that the business assets are connected to Ohio in order to tax part of the gain unless the taxpayer shows particular circumstances that make the exercise of state jurisdiction unreasonable. {¶ 83} Here, I am persuaded that it is the trust’s status as investor in Ohio assets or an Ohio business that justifies the tax. Because Corrigan controverts that view, I am convinced that we should overrule that decision. The Galatis standard {¶ 84} Stare decisis does not prevent us from revisiting Corrigan in this
construction, “beyond the power of the legislature to * * * ‘correct,’ ” it is “incumbent on the court to make the necessary changes and yield to the force of better reasoning.” Rocky River v. State Emp. Relations Bd., 43 Ohio St.3d 1, 6, 539 N.E.2d 103 (1989). {¶ 85} I am not dissuaded by our stringent test for overruling precedent that is set forth in Westfield Ins. Co. v. Galatis, 100 Ohio St.3d 216, 2003-Ohio-5849, 797 N.E.2d 1256, paragraph one of the syllabus. First, after Galatis, we have “recognize[d] a considerable degree of merit” in the argument that “stare decisis should be applied with greater flexibility in cases of constitutional adjudication.” Kaminski v. Metal & Wire Prods. Co., 125 Ohio St.3d 250, 2010-Ohio-1027, 927 N.E.2d 1066, ¶ 90-91.
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{¶ 86} Second, in any event, the present situation satisfies the Galatis test in that (1) Corrigan was wrongly decided at the time, (2) Corrigan defies practical workability, and (3) abandoning Corrigan would not create an undue hardship for those who have relied on it. Corrigan—wrongly decided {¶ 87} Corrigan was wrongly decided because we erroneously focused on whether Corrigan was engaged in the business that the pass-through entity had conducted in Ohio. Instead, we should have focused, as we do here, on the fact that gain from selling an investment in in-state assets and activities can usually be taxed in proper proportion—whether or not the person realizing the gain is a resident or engages in the business. {¶ 88} No one would dispute, for example, that a nonresident owing an asset located in Ohio—say, real estate in Cleveland—can be taxed on the gain derived from selling that asset. And the mere fact that Ohio assets are owned or activities are conducted through a corporate entity does not bar imposition of the
whether that investor causes the company to sell the real estate, or whether the investor sells the company itself: either way, Ohio may tax the gain because the gain relates to property located in Ohio. We acknowledged this point in Corrigan, when we distinguished a decision of the Louisiana Supreme Court. In that case, the tax was justified because it prevented “avoidance of the Louisiana tax on a capital gain from the sale of a Louisiana asset through a manipulation of corporate forms.” Corrigan, ___ Ohio St.3d ___, 2016-Ohio-2805, ___ N.E.3d ___, at ¶ 58. {¶ 89} The proper next step in the Corrigan analysis would have been to conclude that because the nonresident, Corrigan, was an almost 80 percent owner
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could properly tax that portion of the gain that related either to the Ohio business
{¶ 90} But we did not do this. First, we speculated that the gain might not actually relate to the Ohio business, given that the business had suffered losses in the preceding years; the possibility seemed strong that the gain might actually relate to some specific non-Ohio assets. Corrigan at ¶ 48. Second, we read U.S. Supreme Court precedent as distinguishing between state taxes imposed on those who directly conducted the in-state business activity and taxes imposed on those who merely invested in the business. Corrigan at ¶ 50-51, 69. In both respects we erred. {¶ 91} The main error on both points was in failing to presume the constitutionality of Ohio’s tax statutes and the validity of the tax commissioner’s application of them, to the extent that any rebuttal of their constitutionality must meet an enhanced evidentiary standard. See Cleveland Gear Co. v. Limbach, 35 Ohio St.3d 229, 231, 520 N.E.2d 188 (1988) (when tax legislation “is challenged
the burden is upon the party making the attack to present clear and convincing evidence of a presently existing state of facts which makes the Act unconstitutional and void when applied thereto”). More precisely, we should have required Corrigan, the taxpayer in the earlier case, to prove that under the apportionment prescribed by R.C. 5747.212, the income attributed to Ohio for tax purposes was not “ ‘rationally related to “values connected with the taxing state.” ’ ” Hillenmeyer
¶ 40, quoting Moorman Mfg. Co. v. Bair, 437 U.S. 267, 272-273, 98 S.Ct. 2340, 57 L.Ed.2d 197 (1978), quoting Norfolk & W. Ry. Co. v. Missouri State Tax Comm., 390 U.S. 317, 325, 88 S.Ct. 995, 19 L.Ed. 2d 1201 (1968). Without that showing, which Corrigan did not even attempt to make, the tax assessment should have been sustained—particularly in light of the fact that Corrigan’s connection to Ohio was more than that of a minor investor: he was an 80 percent shareholder in a pass-
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through entity that did part of its business in Ohio and he claimed the benefit of material participation in that business for federal income-tax purposes. {¶ 92} By extension, the tax assessment against the Legg trust as a 35 percent owner of Total Quality Logistics, Inc., a pass-through entity that conducted an Ohio business and owned Ohio-based assets, should be sustained here inasmuch as the tax is, by statute, already limited to the portion of gain related to that company’s Ohio business or to its physical assets located in Ohio. {¶ 93} It should be the trust’s burden to establish a due-process violation, not the state’s burden to justify imposing the tax in accordance with the statute. In Corrigan, we distorted the presumption, and we should correct that error by
Corrigan—workability {¶ 94} Because Corrigan reverses the usual burden regarding the constitutionality of tax statutes, it will defy workability over the long haul. Quite simply, the tax commissioner should be able to enforce state law with the burden being on the taxpayer to prove any constitutional infirmity. {¶ 95} I am concerned that Corrigan sets the stage for difficulty in later
he had ceased his activity in conducting the business a year or more before putting the shares into the trust? As time goes on, the shadow cast by Corrigan will require us to make ever finer and more hypertechnical distinctions that are not themselves required by the statutes. Corrigan—no reliance {¶ 96} Finally, I believe that the immediate overruling of Corrigan is appropriate precisely because its precedent is so recent. Our constitutional doctrine should be repaired before the legislature has changed the statutes and private parties have ordered their affairs in reliance on its holding.
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Conclusion {¶ 97} I would overrule Corrigan and hold that the trust has failed to show either that the gain to be taxed lacked a sufficient connection to Ohio or that the statutory allocation does not fairly reflect values associated with the protections afforded by Ohio. I would also reject the due-process challenge in this case because the presumption of the tax’s constitutionality has not been rebutted. In all other respects, I concur in the majority opinion. _________________ Bingham Greenebaum Doll, L.L.P., Mark A. Loyd, Reva D. Campbell, and Bailey Roese, for appellant. Michael DeWine, Attorney General, Daniel W. Fausey, Barton A. Hubbard, and Raina M. Nahra, Assistant Attorneys General, for appellee. _________________
[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as New York Frozen Foods, Inc. v. Bedford Hts. Income Tax Bd. of Rev., Slip Opinion No. 2016-Ohio- 7582.]
NOTICE This slip opinion is subject to formal revision before it is published in an advance sheet of the Ohio Official Reports. Readers are requested to promptly notify the Reporter of Decisions, Supreme Court of Ohio, 65 South Front Street, Columbus, Ohio 43215, of any typographical or other formal errors in the opinion, in order that corrections may be made before the opinion is published. SLIP OPINION NO. 2016-OHIO-7582 NEW YORK FROZEN FOODS, INC., ET AL., APPELLANTS AND CROSS-APPELLEES,
CROSS-APPELLANTS. [Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as New York Frozen Foods, Inc. v. Bedford Hts. Income Tax Bd.
Taxation—Municipal income tax—Refunds—City ordinance barred an entity from changing its separate return to a consolidated return when filing an amended return—Ordinance prohibited any change in the method of accounting when filing an amended return—Decision of the Board of Tax Appeals affirmed. (No. 2015-0575—Submitted August 17, 2016—Decided November 3, 2016.) APPEAL from the Board of Tax Appeals, No. 2012-55. ____________________
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LANZINGER, J. {¶ 1} This appeal involves the attempt to obtain a tax refund by a municipal income taxpayer, New York Frozen Foods, Inc. (“Frozen Foods”), which originally filed its Bedford Heights income-tax returns on a separate-entity basis for tax years 2005, 2006, and 2007. In March 2010, Frozen Foods, together with its affiliates, filed consolidated amended returns for those years and claimed a refund of taxes it had previously paid based on its separate returns. The refund amount claimed was $698,294. Regional Income Tax Agency (“RITA”) denied the refund in its capacity as the city’s tax administrator. This result was sustained by the Bedford Heights Income Tax Board of Review and affirmed by the Board of Tax Appeals (“BTA”). {¶ 2} Now on appeal, Frozen Foods presents several reasons why the BTA erred in affirming the denial of its refund claim. Bedford Heights cross-appealed and maintains that the BTA erred by failing to deny the refund on an alternative ground. {¶ 3} We hold that the BTA erred by failing to find that the change from filing a separate return to filing a consolidated return was a “change in method of accounting” prohibited by the city ordinance in pursuing a refund claim. We therefore affirm the BTA’s denial of the refund claim on the alternate ground that the change constituted a change in the method of accounting prohibited by the city
Factual Background {¶ 4} Before us is a record certified by the Bedford Heights Income Tax Board of Review plus a set of stipulations advanced at the BTA covering the following basic facts: Frozen Foods timely filed separate-entity municipal-income-tax returns for tax years 2005, 2006, and 2007. Frozen Foods filed amended returns on a consolidated basis on March 9, 2010.
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Frozen Foods filed federal income-tax returns with its affiliates on a consolidated basis for tax years 2005, 2006, and 2007. {¶ 5} RITA, Bedford Heights’ tax administrator, denied the amended returns and refund claims, and Frozen Foods appealed to the review board, which issued a decision on November 9, 2011. The decision cites Bedford Heights Codified Ordinances 173.15(a) and 173.32, as well as section 5:06(A) of RITA’s rules and regulations,1 and states that these provisions, taken together, are “identical in effect.” None of them, according to the board of review, “permits a taxpayer to change the method of accounting or the apportionment of net profits nor the method
board affirmed the denial of refunds, and the taxpayer appealed to the BTA. {¶ 6} At the BTA, the parties filed stipulations and briefs. The BTA issued its decision on March 9, 2015, in response to which Frozen Foods filed a motion for reconsideration. The BTA issued a second decision on March 20, denying the motion for reconsideration, vacating the March 9 decision, and substituting the March 20 decision. In doing so, the March 20 decision corrected a typographical error in the original opinion. 2 {¶ 7} On the merits, the BTA agreed with Frozen Foods’ assertion that filing an amended consolidated return did not involve a prohibited change in the method of accounting or apportionment. BTA No. 2012-55, 2015 Ohio Tax LEXIS 1659, 5 (Mar. 20, 2015). The BTA agreed that the amended returns were improper and affirmed the board’s denial of the refund claims. Next, the BTA looked at a rule promulgated by RITA that addressed the filing of refund claims. The language
1 Effective January 1, 1996, Bedford Heights adopted RITA’s rules and regulation for the purposeHowever, the BTA vacated the first decision, and the March 20 decision replaced the March 9 decision, restarting the appeal period. We denied the city’s motion to dismiss Frozen Foods’ appeal as untimely. 144 Ohio St.3d 1481, 2016-Ohio-465, 45 N.E.3d 247.
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the rule to explicitly prohibit a change to consolidated filing on an amended return. The BTA held that the 2009 amendment to the RITA rule did apply, observing that it had no authority to address Frozen Foods’ constitutional objections to applying the amended rule. Accordingly, the BTA affirmed the review board’s denial of the refund claim. Standard of Review {¶ 8} In reviewing a decision of the BTA, we do not sit as “a super BTA or a trier of fact de novo.” EOP-BP Tower, L.L.C. v. Cuyahoga Cty. Bd. of Revision, 106 Ohio St.3d 1, 2005-Ohio-3096, 829 N.E.2d 686, ¶ 17, citing Youngstown Sheet & Tube Co. v. Mahoning Cty. Bd. of Revision, 66 Ohio St.2d 398, 400, 422 N.E.2d 846 (1981). On the other hand, we have held that issues of statutory construction constitute legal issues that we decide de novo on appeal. Akron Centre Plaza, L.L.C. v. Summit Cty. Bd. of Revision, 128 Ohio St.3d 145, 2010-Ohio-5035, 942 N.E.2d 1054, ¶ 10. Because this appeal calls for us to determine the proper construction of statutes and ordinances, we review the BTA’s decision without according it deference. Analysis An entity’s amended return changing from separate filing to consolidated filing constitutes a change in a method of accounting prohibited by the city ordinance {¶ 9} Usually the issues presented by an appeal would be considered before those presented by a cross-appeal. We reverse that order here because there is no need to consider issues raised by Frozen Foods’ appeal if the Bedford Heights
rather than a separate, return. {¶ 10} The BTA found that Frozen Foods’ change from a separate return to a consolidated return did not constitute a change in the method of accounting, which
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is barred by the amended-returns provision of Bedford Heights Codified Ordinance 173.15(a). The ordinance allowing consolidated returns reads as follows: Filing of consolidated returns may be permitted or required in accordance with rules and regulations prescribed by the Tax
return for federal income tax purposes pursuant to section 1501 of the Internal Revenue Code may file a consolidated return with the City of Bedford Heights. However, once the affiliated group has elected to file a consolidated return or a separate return with the City, the affiliated group may not change their method of filing in any subsequent tax year without written approval from the Administrator. (Italics added to show 2004 amendment.) Bedford Heights Codified Ordinances 173.14. {¶ 11} The ordinance providing for amended returns and refunds reads as follows: Where necessary an amended return must be filed in order to report additional income and pay additional tax due, or claim a refund of tax overpaid, subject to the requirements, limitations, or both, contained in Sections 173.30 through 173.35. Such amended return shall be on a form obtainable on request from the Tax
accounting or apportionment of net profits after the due date for filing the original return.
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Bedford Heights Codified Ordinances 173.15(a). {¶ 12} The RITA rule reads as follows, with language that was added in 2009 italicized: Where necessary, an amended return must be filed in order to report additional income and pay additional tax due or claim a refund of tax overpaid subject to the requirements or limitations contained in the Ordinance. Such return shall be clearly marked “Amended.” A taxpayer may not change the method of accounting
Amended returns cannot be filed after three (3) years from the
{¶ 13} In deciding whether an entity’s change from filing a separate return to filing a consolidated return was prohibited, the BTA noted that Frozen Foods argued that “a change in the ‘method of accounting’ encompasses only cash versus accrual accounting.” 2015 Ohio Tax LEXIS 1659, 5. The BTA reasoned that if changing a separate return to a consolidated return was a prohibited change in the method of accounting, then RITA would not have had to amend its rule in 2009 to specifically address the method of filing. On this basis, the BTA held that Frozen Foods’ amended return did not qualify as a change in the method of accounting. Id. {¶ 14} We reject the BTA’s conclusion both because of the language of the city ordinance and because of the meaning of the term “change in method of accounting” in federal law. First, close inspection of the language of Bedford Heights Codified Ordinance 173.15(a) supports a restrictive view of the circumstances that justify amended returns. Amended returns may be filed
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“[w]here necessary * * * in order to report additional income and pay additional tax due, or claim a refund of tax overpaid.” {¶ 15} Frozen Foods’ amended return does not claim a refund of overpaid
proper and factually correct as to the amount of tax owed and duly paid. The amended return does not claim a deduction or credit that the company forgot to claim and does not seek a tax benefit that it was entitled to that was omitted on the separate return. {¶ 16} Bedford Heights Codified Ordinance 175.15(a) is a remedial provision that should be construed liberally in favor of furnishing the remedy it was enacted to provide but should not be construed to create a remedy that was not
Ohio St.3d 201, 2012-Ohio-581, 963 N.E.2d 794, ¶ 27; Phoenix Amusement Co. v. Glander, 148 Ohio St. 592, 595-596, 76 N.E.2d 605 (1947). The principle of liberal construction has been applied to a “provision passed for the purpose of ‘protecting the citizen from illegal exactions,’ ” Sheldon Rd., ¶ 27, quoting Stephan v. Daniels, 27 Ohio St. 527, 536 (1875). {¶ 17} As the court noted in Phoenix Amusement: In approaching the problem of making a correct and reasonable interpretation of the provision [for applying for a refund], with respect to the time when the 90-day period starts to run, it should be borne in mind that the applicant is not trying to evade taxes or to reduce or minimize a tax assessment legally made, but is trying to recover tax moneys which never should have been collected in the first place.
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(Emphasis added.) Id. at 595. Because the original separate return was accurate and the payment made based on that return was legal, Frozen Foods’ payment does not involve an “illegal exaction” by the city. And there was no attempt to “recover tax moneys which never should have been collected in the first place.” Instead, the amended return takes a broadly different approach to the basic computation of taxable income. Frozen Foods tries to “reduce or minimize a tax assessment legally made,” i.e., the assessment made on the original separate return. The new approach to computing Frozen Foods’ taxable income lies within the intended scope of a prohibited change in the method of accounting. But the taxpayer itself chose which method to use in originally reporting its income, and this militates against viewing the tax paid on that return as an illegal exaction. In summary, the liberal construction of a refund provision in favor of the taxpayer does not advance Frozen Foods’ claims. {¶ 18} Second, contrary to the argument advanced by Frozen Foods at the BTA, federal treasury regulations do not state that “a change in the ‘method of accounting’ ” would encompass “only cash versus accrual accounting.” 2015 Ohio Tax LEXIS 1659, 5. The treasury regulations support a more expansive view of what constitutes a change in the method of accounting. {¶ 19} First, we note what is not a “method of accounting” under federal
mathematical or posting errors” or of computational errors in determining tax
Ordinance 173.15(a) appears to target the type of error correction excluded from the federal definition of “change in method of accounting.” {¶ 20} Next, we examine the criteria that determine whether a change is a change in the method of accounting and whether those factors would apply to the change from filing a separate return to filing a consolidated return. Broadly, a “change in the method of accounting includes a change in the overall plan of
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accounting for gross income or deductions or a change in the treatment of any material item used in such overall plan.” 26 C.F.R. 1.446-1(e)(2)(ii)(a). More specifically, that includes “change[s] involving the adoption, use or discontinuance
method” and “change[s] where the Internal Revenue Code and regulations under the Internal Revenue Code specifically require that the consent of the Commissioner [of Internal Revenue] must be obtained before adopting such a change.” Id. {¶ 21} On the one hand, a change from filing a separate return to filing a consolidated return systematically affects the computation of taxable income by aggregating transactions of individual members of the consolidated group. A consolidated return also eliminates the tax effect of transactions within the affiliate group that would otherwise affect the taxable income of the members of the group as an individual taxpaying entity. See 26 C.F.R. 1.1502-11 through 1.1502-28; 26 C.F.R. 1.1502-12(a) (the “separate taxable income” of each member of the group, which will be aggregated for the entire group under 1.1502-11, must be computed in accordance with 1.1502-13); 26 C.F.R. 1.1502-13 (providing rules for treating transactions between companies within the consolidated group as if they were divisions of the same corporation). {¶ 22} On the other hand, although statutes and regulations allow the filing
1501 and 26 C.F.R. 1.1502-75(a), reverting from filing a consolidated return to filing a separate return requires good cause and approval of the IRS, 26 C.F.R. 1.1502-75(c). The regulation requires the choice to file a consolidated return be made by the due date of the return for the common parent of the consolidated group.
cannot amend its return by filing a consolidated return as part of an affiliated group. See Internal Revenue Manual, Section 4.11.6.3(1) (May 13, 2005) (“A taxpayer
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filing its first return may adopt any permissible method of accounting,” but “[o]nce the taxpayer adopts a proper method of accounting by filing its return using such method, it may not adopt a different method of accounting by the filing of an amended return”). {¶ 23} This review of the treasury regulations supports our conclusion that the change from filing a separate return to filing a consolidated return constitutes a change in the method of accounting prohibited under the Bedford Heights
{¶ 24} Finally, the BTA held that RITA’s amendment of one of its rules in 2009 to specify that a change in the method of filing was prohibited established that a “method of accounting” did not encompass the method of filing before the
the 2009 amendment of the RITA rule as a clarification rather than a substantive
(1993) (statutory change codified prior case-law holding); Williams v. Akron, 54 Ohio St.2d 136, 141, 374 N.E.2d 1378 (1978) (constitutional amendment was intended only to clarify language); Bailey v. Evatt, 142 Ohio St. 616, 621, 53 N.E.2d 812 (1944) (statutory amendment to exemption served to clarify existing scope rather than add substantive changes). R.C. 718.06 does not prohibit cities from limiting refund claims {¶ 25} It is now necessary to consider Frozen Foods’ contention that state law preempts a local government’s limitation on refund claims that would preclude a change from filing a separate return to filing a consolidated return. If that is correct, then state law preempted Bedford Heights’ prohibition of a change in the method of accounting in this case. In 2000, the General Assembly amended R.C. Chapter 718, which imposes limitations on the way cities tax income. Sub.H.B.
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On and after January 1, 2003, any municipal corporation that imposes a tax on the income or net profits of corporations shall accept for filing a consolidated income tax return from any affiliated group of corporations subject to the municipal corporation’s tax if that affiliated group filed for the same tax reporting period a consolidated return for federal income tax purposes. Former R.C. 718.06, 148 Ohio Laws, Part II, at 5126. {¶ 26} Bedford Heights Ordinance 173.14(a) was amended effective December 21, 2004. While the original language had permitted consolidated returns in accordance with city regulations, new language was added stating that an affiliated group “may not change their method of filing in any subsequent tax year without written approval from the Administrator.” {¶ 27} Thus, both ordinance and state law expressly permitted filing consolidated returns in tax years 2005, 2006, and 2007. But during that entire period, city law also barred the filing of a refund claim based on a change in the method of accounting or a change in the method of apportionment. Thus, if the change from filing a single return to filing a consolidated return constituted a change in an accounting or apportionment method, the change was barred when filing amended returns. {¶ 28} We reject Frozen Foods’ preemption argument. The plain language
apportionment method when filing an amended return. The lack of an explicit limitation is fatal to this argument. {¶ 29} Bedford Heights’ taxing authority is one of the “powers of local self- government,” Ohio Constitution, Article XVIII, Section 3, enjoyed by Ohio’s chartered subdivisions, but it is subject to state control under two provisions of the Ohio Constitution: Article XVIII, Section 13, providing that “[l]aws may be passed
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to limit the power of municipalities to levy taxes and incur debts,” and Article XIII, Section 6, providing that the General Assembly “shall provide for the organization
taxation.” Although R.C. Chapter 718 purports to broadly define what local income-tax laws must look like, we have held that the General Assembly’s exercise
the power to tax; state law may not be construed as imposing local taxes by
addition, the preclusive power of state law is confined to those limitations that are expressly stated in the state legislation—there is no implied preemption of local tax
212 (1998) (“it is evident that a proper exercise of this limiting power requires an express act of restriction by the General Assembly”); compare Panther II Transp.,
N.E.3d 904 (broad preemptive statute barred imposition of local net-profits tax because state law explicitly protected the category of taxpayer from local taxes, even though the state law did not specifically mention the type of local tax at issue). {¶ 30} Under this case law, if former R.C. 718.06 was an exercise of the General Assembly’s statutory power, the statute must have limited local power to impose tax and the limitation must have been explicitly stated. Former R.C. 718.06 did limit local taxing authority by requiring the city to “accept for filing a consolidated income tax return.” Under Bedford Heights’ ordinance, Frozen Foods could have filed, and Bedford Heights was required to accept, a consolidated return for each tax year at issue, but for the original filings it received not a consolidated but a separate return. Once the original return was filed, the mandate of R.C. 718.06 expired; the statute did not purport to address whether a the taxpayer could change
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to a consolidated method by filing an amended return, an issue that involved policy decisions at the local level that the General Assembly did not address. {¶ 31} Changing from filing a separate return to a consolidated return did not correct any tax-accounting error in the original return. The amount of tax reported and paid on the original return was perfectly permissible and legal under state as well as local law, given that the taxpayer originally exercised the right to file a separate return rather than a consolidated return. To prohibit the city from refusing the amended return would constitute an additional limit on the city’s taxing authority that was not explicitly stated in R.C. 718.06. We have rejected this type of implied limitation in the past. {¶ 32} The city had another strong policy reason to limit refund claims. The city’s fiscal stability depended upon the finality of the filing election, as the present case demonstrates. We emphasize the distinction between the correction of errors
method of reporting and computing income: by ordinance, the city was liable to grant relief in the former instance, but the refund ordinance foreclosed the city’s liability in the latter. Frozen Foods’ constitutional arguments need not be addressed {¶ 33} The BTA predicated its denial of Frozen Foods’ refund claim on a 2009 amendment to RITA’s rules that explicitly prohibited a change from a separate return to a consolidated return when filing an amended return. The taxpayer has raised constitutional challenges to this ruling, including a claim of unconstitutional retroactivity and improper delegation of authority. Because we resolve this case on the basis of Bedford Heights’ limitation prohibiting a change in the method of account, we need not consider the theory on which the BTA based its disposition of the case.
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Conclusion {¶ 34} For the foregoing reasons, we hold that the city ordinance barred a change from a separate return to a consolidated return when filing an amended return, because the change constituted a change in the method of accounting prohibited by the ordinance. We vacate the remainder of the BTA’s decision and do not reach any of the other issues presented. Finally, we affirm the decision to deny Frozen Foods’ claim for a refund. Decision affirmed. O’CONNOR, C.J., and PFEIFER, and O’NEILL, JJ., concur. O’DONNELL, J., dissents, with an opinion joined by KENNEDY and FRENCH, JJ. _________________ O’DONNELL, J., dissenting. {¶ 35} Respectfully, I dissent. {¶ 36} On March 9, 2015, the Board of Tax Appeals (“BTA”) affirmed the decision of the Bedford Heights Income Tax Board of Review denying the administrative appeal brought by New York Frozen Foods, Inc., in which it sought to amend its net profits tax returns for 2005, 2006, and 2007. {¶ 37} Pursuant to R.C. 5717.03(F), this decision is “final and conclusive * * * unless reversed, vacated, or modified as provided in section 5717.04 of the Revised Code.” R.C. 5717.04, in turn, provides that “[t]he proceeding to obtain a reversal, vacation, or modification of a decision of the board of tax appeals shall be by appeal to the supreme court or the court of appeals for the county in which the property taxed is situate or in which the taxpayer resides.” This statute further provides, “Such appeals shall be taken within thirty days after the date of the entry
section, by the filing by appellant of a notice of appeal with the court to which the appeal is taken and the board.”
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{¶ 38} In this case, the record shows that rather than file a timely notice of appeal with this court or the court of appeals, New York Frozen Foods moved for reconsideration of the BTA’s decision on March 18, 2015. In response to that motion, the BTA not only denied reconsideration on March 20, 2015, but also purported to vacate its decision to correct a typographical error, and it then republished the same opinion verbatim, adding only a statement denying reconsideration and vacating its prior order and correcting the typographical error to change the word “disagree” to “agree.” New York Frozen Foods filed its notice
but only 21 days after the republished March 20 BTA decision. {¶ 39} New York Frozen Foods filed an untimely appeal. Neither R.C. 5717.03 nor 5717.04 provides authority for the BTA to vacate its own final decision
unless it is appealed to this court or the court of appeals. Our caselaw, however, suggests that the BTA has inherent authority to reconsider and vacate its own
(1949); 1495 Jaeger, L.L.C. v. Cuyahoga Cty. Bd. of Revision, 132 Ohio St.3d 222, 2012-Ohio-2680, 970 N.E.2d 949, ¶ 15. But this line of cases is inconsistent with the statutory requirement that “[t]he proceeding to obtain a reversal, vacation, or modification of a decision of the board of tax appeals shall be by appeal * * *.” (Emphasis added.) R.C. 5717.04. Because the BTA is a creature of statute, it is necessarily limited to the powers conferred by the legislature, Delaney v. Testa, 128 Ohio St.3d 248, 2011-Ohio-550, 943 N.E.2d 546, ¶ 20, and therefore, it has no statutory authority to vacate its own final order as a substitute for an appeal. {¶ 40} Nor can a tribunal vacate and reissue a final order to extend the time for a party to commence an appeal. See State v. Dowdy, 8th Dist. Cuyahoga No. 96642, 2012-Ohio-2382, ¶ 8 (“As a general matter, a trial court does not have the power to reenter a judgment in order to circumvent the App.R. 4(A) limitation
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period for the filing of an appeal”); State v. Bernard, 2d Dist. Montgomery No. 18058, 2000 WL 679008, *2 (May 26, 2000) (“the trial court lacked authority to vacate and reinstate its judgment in order to facilitate Bernard's appeal”); Kertes Ents., Inc. v. Orange Village Planning Zoning Comm., 68 Ohio App.3d 48, 49, 587 N.E.2d 409 (8th Dist.1990) (“the court may not re-enter judgment to circumvent the App.R. 4(A) limitation period”). The BTA’s decision to vacate its original decision and then republish it adding only a statement denying reconsideration and vacating the original order to correct a clerical error contemplated extending the time for perfecting an appeal. {¶ 41} However, the BTA decision denying reconsideration and correcting the clerical error is not itself a final appealable order. In Southside Community Dev.
explained that in determining whether a BTA decision is a final appealable order, “R.C. 2505.02(B)(2) applies, and that provision deems to be ‘final’ an ‘order that affects a substantial right made in a special proceeding.’ ” {¶ 42} Here, the BTA issued a final order on March 9, 2015, and the March 20, 2015 order appealed from in this case did not affect any substantial rights. Denial of reconsideration left the parties in the same position that they were in before the denial, and notably, the BTA’s procedural rules clarify that “a motion for reconsideration shall not enlarge the period of time upon which an appeal may be taken from this board nor shall the filing of such motion suspend or toll the statutory appeal period,” Ohio Adm.Code 5717-1-12(D). {¶ 43} In reality, republishing the prior decision to correct the clerical error is in substance a nunc pro tunc entry. Although “administrative tribunals possess inherent authority to correct errors in judgment entries so that the record speaks the truth[,] * * * nunc pro tunc entries are limited in proper use to reflecting what the court actually decided.” State ex rel. Fogle v. Steiner, 74 Ohio St.3d 158, 164, 656 N.E.2d 1288 (1995). And as we noted in State v. Thompson, 141 Ohio St.3d 254,
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2014-Ohio-4751, 23 N.E.3d 1096, ¶ 43, “a nunc pro tunc entry does not replace the
{¶ 44} Thus, a nunc pro tunc entry does not affect substantive rights, and it is not a new final order for purposes of appeal. Perfection Stove Co. v. Scherer, 120 Ohio St. 445, 448-449, 166 N.E. 376 (1929) (nunc pro tunc entry that “did not
had accorded them, nor make that order any less final, was not effective to postpone the date when the period within which an appeal is authorized to be prosecuted begins to run”); State v. Lester, 130 Ohio St.3d 303, 2011-Ohio-5204, 958 N.E.2d 142, syllabus (“A nunc pro tunc judgment entry issued for the sole purpose of complying with Crim.R. 32(C) to correct a clerical omission in a final judgment entry is not a new final order from which a new appeal may be taken”); Gold Touch,
(“the use of the nunc pro tunc order in this case did not act to extend the normal thirty-day filing period for an appeal since no substantive changes were made to the final order”). {¶ 45} Accordingly, the BTA entered the only final appealable order in this case on March 9, 2015, and its republished March 20, 2015 entry denying reconsideration, correcting a clerical error, and purporting to vacate the March 9 entry did not restart the time period for perfecting an appeal. Therefore, New York Frozen Food’s notice of appeal filed on April 10, 2015, is untimely and this matter should be dismissed. KENNEDY and FRENCH, JJ., concur in the foregoing opinion. _________________ Zaino, Hall & Farrin, L.L.C., Stephen K. Hall, and Richard C. Farrin, for appellants and cross-appellees. Calfee, Halter & Griswold, L.L.P., Anthony F. Stringer, Matthew A. Chiricosta, and Thomas R. O’Donnell, for appellees and cross-appellants.
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Amy L. Arrighi, in support of appellees and cross-appellants for amicus curiae, Regional Income Tax Agency. _________________
[Cite as Cunningham v. Testa, 144 Ohio St.3d 40, 2015-Ohio-2744.]
CUNNINGHAM ET AL., APPELLEES, v. TESTA, TAX COMMR., APPELLANT. [Cite as Cunningham v. Testa, 144 Ohio St.3d 40, 2015-Ohio-2744.] Taxation—Income—Domicile—R.C. 5747.24—Taxpayer’s claim under R.C. 5747.24(B)(1) to be domiciled outside Ohio is not binding on tax commissioner when other statements support an Ohio domicile— Common-law principles for determining domicile still apply—Taxpayer’s statement verifying non-Ohio domicile can be false if it is not supported by common law of domicile. (No. 2014-0532—Submitted March 10, 2015—Decided July 8, 2015.) APPEAL from the Board of Tax Appeals, No. 2011-4641. ____________________ PFEIFER, J. {¶ 1} The issue in this case is whether a taxpayer’s explicit claim under R.C. 5747.24(B)(1) to be domiciled outside Ohio binds the tax commissioner without regard to other statements and actions by the taxpayer that indicate a domicile inside Ohio. We conclude that a taxpayer’s statement does not bind the tax commissioner and reverse the decision of the Board of Tax Appeals. BACKGROUND {¶ 2} Appellee Kent Cunningham filed an “Affidavit of Non-Ohio Domicile” for tax year 2008 in March 2009, using the form prescribed by the tax
Cincinnati address. Cunningham declared under penalties of perjury that he “was not domiciled in Ohio at any time during taxable year 2008” and that he was domiciled in Tennessee. Cunningham did not identify his out-of-state abode. He stated that he would not be filing an Ohio individual income tax return for 2008 and affirmed that he “had fewer than 183 contact periods in Ohio during the
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taxable year.” Under former R.C. 5747.24(B)(1), a person is presumed not to be domiciled in Ohio if, among other things, he has had no more than 182 “contact periods” in this state during a taxable year. Sub.H.B. No. 73, 151 Ohio Laws, Part V, 9444, 9463. Cunningham signed and dated the form. Appellee Sue Cunningham (Kent’s wife) did not file such an affidavit for tax year 2008. {¶ 3} Neither of the Cunninghams filed an Ohio income tax return for
Cincinnati address as their home address. {¶ 4} The tax commissioner issued first a notice, then an assessment, based upon the nonfiling and nonpayment of Ohio income tax. The tax commissioner assessed tax owed ($6,597.75), preassessment interest ($318.85), and a penalty ($2,309.21), for a total assessment of $9,225.81. {¶ 5} The Cunninghams filed a petition for reassessment. After additional correspondence, the tax commissioner issued his final determination, in which he discussed R.C. 5747.24 and common-law domicile. The commissioner found that “the petitioners owned residential property in Tennessee for the entire year in question.” The commissioner noted the January 24, 2008 filing of an Ohio homestead-exemption application, with its declarations under penalty of perjury that the Cincinnati house was their principal place of residence and that the Tennessee house was a second or vacation home. The commissioner found that “[t]his document suggests that the petitioners were residents for at least some portion of 2008 and that the petitioners did not intend to abandon their Ohio domicile.” The commissioner considered the Tennessee utility bills submitted by the Cunninghams, but noted that they were sent to the Cincinnati address. This fact was found to be further evidence that the Cunninghams did not intend to remain in Tennessee or abandon their Ohio abode. {¶ 6} Thereafter, the commissioner considered the Affidavit of Non-Ohio Domicile, which was filed after the homestead-exemption application, and found
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that “[t]his sworn statement contradicts the petitioners’ prior sworn statement that they occupied, as their principal place of residence, their home in Cincinnati, and that the Tennessee home was either a second home or a vacation home.” Because
necessarily concludes that the petitioners’ Affidavit of Non-Ohio Domicile contains a false statement as described in R.C. 5747.24(B)(1).” {¶ 7} The commissioner’s determination stated that “the petitioners provided no evidence of their contact periods with Ohio, other than as sworn on the statement.” As a consequence of these findings, the commissioner concluded that “the petitioners are not irrebuttably presumed under R.C. 5747.24(B) to be domiciled outside of Ohio.” The consequence is that the “the petitioners are presumed to be domiciled in Ohio for the entire taxable year under R.C. 5747.24(C).” See R.C. 5747.24(B)(1) (if “the individual fails to file the statement as required or makes a false statement, the individual is presumed under division (C) of this section to have been domiciled in this state the entire taxable year”). The commissioner concluded that the Cunninghams failed to rebut the presumption of Ohio domicile. {¶ 8} The Cunninghams appealed to the BTA. The BTA found that Kent had filed the domicile affidavit under R.C. 5747.24(B). The BTA also found that because Sue had not filed a domicile affidavit, she was unable to claim the irrebuttable presumption and that regardless of the number of contact periods, the totality of the evidence established that she had an Ohio domicile under common- law principles. BTA No. 2011-4641, 2014 WL 1155688, *3-4 (Mar. 6, 2014). The BTA held that because “ ‘domicile’ is a legal concept defined for individual income tax purposes by R.C. 5747.24,” a “taxpayer may lose the irrebuttable presumption of non-Ohio domicile only if making a false statement regarding (1) contact periods, or (2) having an abode outside Ohio.” Id. at *3. According to the BTA, Kent Cunningham had “complied with the requirements of R.C.
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5747.24(B)(1)” and was, therefore, “irrebuttably presumed to be not domiciled in Ohio for Ohio individual income tax purposes.” Id. The BTA reversed the commissioner’s determination with regard to Kent Cunningham, and the tax commissioner has appealed. ANALYSIS Income tax and domicile {¶ 9} Ohio’s income tax is levied “on every individual * * * residing in or earning or receiving income in this state.” R.C. 5747.02(A). “Resident” is defined as an “individual who is domiciled in this state, subject to section 5747.24
individual * * * that is not a resident.” R.C. 5747.01(J). {¶ 10} Residents generally pay tax on all of their Ohio adjusted gross income, R.C. 5747.02(A), subject to reduction by a “resident credit” designed to prevent double taxation when an Ohioan has been subject to tax on the same income in another state. R.C. 5747.05(B); see Brachman v. Limbach, 52 Ohio St.3d 1, 2, 556 N.E.2d 146 (1990). A nonresident pays tax only on the portion of his income that is earned or received in Ohio. See R.C. 5747.01(A) (income tax “is hereby levied on every individual * * * residing in or earning or receiving income in this state”). {¶ 11} During the many years that the Cunninghams earned their income in Ohio from business and employment activities before their retirement, that income would have been taxable by Ohio regardless of their state of domicile. But by 2008 both had retired, and their income no longer consisted of wages or business income but was derived from sources such as pensions, interest, dividends, and IRA distributions, the allocation of which depends solely on where they are domiciled. See R.C. 5747.20(B)(2)(c) (income from disposition of intangible property “allocable to this state if the taxpayer’s domicile was in this state at the time of such sale or other transfer”); 5747.20(B)(6) (any item of
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income or deduction included in the computation of the taxpayer’s adjusted gross income that is not otherwise specifically allocated, including interest, dividends, and distributions, and IRA income, “shall not be allocated to this state unless the taxpayer’s domicile was in this state at the time such income was paid or accrued”). Thus, the issues of domicile and residence are dispositive with respect to whether Kent Cunningham’s 2008 income should be taxed by Ohio. Common-law domicile {¶ 12} We recently stated that “domicile is ‘the technically pre-eminent headquarters that every person is compelled to have in order that certain rights and duties that have been attached to it by the law may be determined.’ ” Schill v. Cincinnati Ins. Co., 141 Ohio St.3d 382, 2014-Ohio-4527, 24 N.E.3d 1138, ¶ 24, quoting Williamson v. Osenton, 232 U.S. 619, 625, 34 S.Ct. 442, 58 L.Ed. 758 (1914). In the tax context, the BTA has observed that although “the terms ‘resident’ and ‘domicile’ are frequently used interchangeably, * * * they in fact are distinctly different, albeit related, concepts.” Davis v. Limbach, BTA No. 89- C-267, 1992 WL 275694, *4 (Sept. 25, 1992). Domicile “is generally defined as a legal relationship between a person and a particular place which contemplates two factors: first, residence, at least for some period of time and, second, the intent to reside in that place permanently or at least indefinitely.” Id.; accord Schill, ¶ 25. At common law, “the issue of domicile is one of intent determined by the facts of the individual case,” including “the acts and declarations of the person” and the totality of “accompanying circumstances.” Davis at *4, citing State ex rel. Kaplan v. Kuhn, 8 Ohio N.P. 197, 202, 11 Ohio Dec. 321 (1901). See Cleveland v. Surella, 61 Ohio App.3d 302, 305-306, 572 N.E.2d 763 (8th Dist.1989) (“[e]videntiary factors” include “filing federal income tax returns, voting, automobile registration or location of spouse and children”). {¶ 13} We have held that “for a change in domicile to be established, the person must have a physical presence in the new residence and intend to stay
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there.” Schill, ¶ 26, quoting Williamson, 624. Moreover, “ ‘[t]he essential fact that raises a change of abode to a change of domicile is the absence of any intention to live elsewhere * * *.’ ” Id., quoting Williamson, 624. See E. Cleveland v. Landingham, 97 Ohio App.3d 385, 390, 646 N.E.2d 897 (8th Dist.1994) (“no one loses his old domicile until a new one is acquired”). {¶ 14} The Cunninghams state in their brief that they were both “common law domiciliaries of Ohio during the 2008 tax year.” This concession is supported by various facts, including that Kent and Sue were both born, raised, and educated in Ohio; that they were married in Ohio; that they have lived in Ohio throughout their entire marriage up to the time of the BTA hearing in 2012 (except for several years in the 1970s); that their mail was generally delivered to their Cincinnati home and not forwarded to the Tennessee address; that they have lived in the Cincinnati area and raised a family there in three houses, including the home that they currently own in Indian Hill; and that they held Ohio driver’s licenses and voted in Ohio in 2008, the tax year at issue. See generally In re Hutson’s Estate, 165 Ohio St. 115, 133 N.E.2d 347 (1956). The “bright-line statute,” R.C. 5747.24 {¶ 15} In 1993, the General Assembly enacted R.C. 5747.24, which we will refer to as the “bright-line” statute. S.B. No 123, 145 Ohio Laws, Part I, 1113, 1120-1122. The bright-line statute “sets forth certain presumptions regarding an individual’s domicile” for tax purposes. Tyson v. Zaino, BTA No. 2001-B-1327, 2003 WL 22294864, *4 (Oct. 3, 2003). Those presumptions depend on two circumstances: having an “abode” or place of residence outside Ohio during the entire taxable year and having no more than a certain number of “contact periods in this state” during the taxable year. R.C. 5747.24(B)(1). {¶ 16} Pursuant to R.C. 5747.24(A)(1), a “contact period in this state” is defined in terms of two elements. The taxpayer satisfies the first element by being away, overnight, from an “abode” (a place of residence) of the taxpayer that
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is located outside Ohio. The second is satisfied if the taxpayer, while away
days in Ohio, however minimal the portion of each day might be. As a general matter, this can be characterized as an “overnight” test, where the overnight stay need not be in Ohio, but probably would be in most instances. {¶ 17} In 2006, the legislature amended the bright-line statute, creating a presumption of non-Ohio domicile for a taxpayer with 182 or fewer contact periods in Ohio. 151 Ohio Laws, Part V, 9463 (amending R.C. 5747.24(B)(1)). The presumption is irrebuttable unless the taxpayer fails to timely file a statement verifying that he was not domiciled in Ohio and he had at least one abode outside Ohio, both during the entire taxable year. The statement must identify the abode(s). The statement is rebuttable if it contains a “false statement.” {¶ 18} It is well settled that “ ‘the general assembly will not be presumed to have intended to abrogate a settled rule of the common law unless the language used in a statute clearly supports such intention.’ ” Mandelbaum v. Mandelbaum, 121 Ohio St.3d 433, 2009-Ohio-1222, 905 N.E.2d 172, ¶ 29, quoting State ex rel. Hunt v. Fronizer, 77 Ohio St. 7, 16, 82 N.E. 518 (1907). See also Carrel v. Allied
line statute creates an irrebuttable presumption, it does not affect the substantive law of domicile. See Maple v. Tracy, BTA Nos. 98-T-268 and 98-T-312, 1999 WL 706543, *3 (Sept. 3, 1999) (“While R.C. 5747.24 has set forth certain presumptions and burdens with respect to domicile, it has not altered the basic concept of what constitutes a domicile”); Tyson, BTA No. 2001-B-1327, 2003 WL 22294864, *6 (quoting Maple). {¶ 19} Moreover, by clear implication, R.C. 5747.24 incorporates the common law of domicile and preserves it. A taxpayer who does not enjoy the irrebuttable presumption against Ohio domicile under R.C. 5747.24(B) is
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presumed to be domiciled in Ohio and bears the burden of rebutting that
substantive elements of domicile under the common law. See Schill, 141 Ohio St.3d 382, 2014-Ohio-4527, 24 N.E.3d 1138, ¶ 35-37 (outlining the facts in the taxpayer’s testimony that would rebut a presumption against a Florida domicile under R.C. 5747.24). {¶ 20} At the time pertinent to this appeal, R.C. 5747.24(B)(1) under the 2006 amendment stated: [A]n individual who during a taxable year has no more than one hundred eight-two contact periods in this state, which need not be consecutive, and who during the entire taxable year has at least one abode outside this state, is presumed to be not domiciled in this state during the taxable year if [within a prescribed time], the individual files with the tax commissioner, on the form prescribed by the commissioner, a statement from the individual verifying that the individual was not domiciled in this state under this division during the taxable year. * * * The presumption that the individual was not domiciled in this state is irrebuttable unless the individual fails to timely file the statement as required or makes a false statement. If the individual fails to file the statement as required or makes a false statement, the individual is presumed under division (C) of this section to have been domiciled in this state the entire taxable year. 151 Ohio Laws, Part V, 9463.
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{¶ 21} The Cunninghams argue that R.C. 5747.24(B)(1) abrogated the common-law principles of domicile. They argue that the General Assembly did not intend to permit a finding that a taxpayer filed a “false statement” merely because other evidence shows that the taxpayer meets the common-law criteria for domicile. Rather, they claim, the statement required under R.C. 5747.24(B) is false only if the taxpayer does not meet the statutory requirements for the irrebuttable presumption of a non-Ohio domicile. They contend that the description of the statement as verifying that the individual was not domiciled in Ohio “under this division” bolsters their conclusion. We disagree. {¶ 22} The statute is not as narrow as the Cunninghams claim. A statement verifying non-Ohio domicile can be false if it is not supported by the common law of domicile. That the taxpayer must “verify” domicile status militates strongly against the argument that the underlying common-law facts of domicile do not matter. In a legal context, “verify” usually means either presenting evidence of a provable fact or stating a matter as being fact under oath. See Black’s Law Dictionary 1793 (10th Ed.2014). If the common law does not matter, as the Cunninghams assert and as the BTA held, then the statutory requirement that the individual “verify” non-Ohio domicile would be rendered meaningless. {¶ 23} R.C. 5747.24(B)(1) states that when an individual satisfies the contact-period test and has an abode outside Ohio, the individual is presumed to be not domiciled in this state during the taxable year if, on or before the fifteenth day of the fourth month following the close of the taxable year [i.e., April 15 of the following year for calendar-year taxpayers], the individual files with the tax commissioner, on the form prescribed by the commissioner, a
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statement from the individual verifying that the individual was not domiciled in this state under this division during the taxable year. {¶ 24} There is no factual dispute concerning the two crucial elements under R.C. 5747.24(B)(1). The record extensively documents that the Cunninghams owned a house in Tennessee throughout 2008, which would constitute an “abode outside this state.” Moreover, the Cunninghams presented uncontroverted evidence that they had 182 or fewer contact periods during 2008. According to the Cunninghams, this should end the matter. They argue that the statute requires nothing more than verifying the separate and discrete facts of the number of contact periods and an abode outside Ohio. We disagree for two reasons. {¶ 25} First, division (B) distinguishes verification of domicile from verification of contact periods and abode; it does not conflate them. The domicile statement itself asks for a declaration not only of contact periods and an abode
was not domiciled in Ohio during the tax year in question and for an identification
that verifying domicile is not the same as verifying the two statutory criteria. {¶ 26} Second, division (B)(1) states that the taxpayer statement must verify two things: (1) that “[d]uring the entire taxable year, the individual was not domiciled in this state” and (2) that “[d]uring the entire taxable year, the individual had at least one abode outside this state [whose location must be identified].” R.C. 5747.24(B)(1)(a) and (b). When the statute sets forth these precise requirements for the statement, it does not limit the concept of domicile to domicile “under this division.” Because of this, we conclude that the Cunninghams place unwarranted emphasis on the use of the phrase elsewhere in the statute.
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False statement under R.C. 5747.24(B)(1) {¶ 27} The tax commissioner found that Kent Cunningham’s verification
been made under penalties of perjury and with the purpose of obtaining the property-tax benefit of the homestead exemption for his Cincinnati home. The BTA disagreed, concluding, as the Cunninghams argue, that the statute permits a finding of falsity only for a false statement pertaining to contact periods and
stated a substantial basis for the false-statement finding: the contradictory application for the homestead exemption. {¶ 28} The homestead-exemption application was dated January 24, 2008. It claimed the tax break both for the current year 2008 and as a belated application for 2007. It identified Sue Cunningham as the applicant. She identified herself as a “disabled person” as the basis for claiming the exemption. The application also identified Kent as the spouse of the applicant, the Cincinnati house as the home address, and the Tennessee home as “a second or vacation home.” Both Sue and Kent signed the application, asserting, under penalty of perjury: (1) “I occupied this property as my principal place of residence on Jan. 1 of the year(s) for which I am requesting the homestead exemption”; (2) “I currently occupy this property as my principal place of residence”; (3) “I have examined this application, and to the best of my knowledge and belief, this application is true, correct and complete.” {¶ 29} As the tax commissioner found, the claim of homestead exemption contradicted the income tax affidavit in two respects: it asserted that the Cincinnati house was the principal place of residence and that the Tennessee house was a second or vacation home. For purposes of the homestead exemption, R.C. 323.151(A)(1) defines “homestead” as “[a] dwelling * * * owned and
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commissioner found that claiming the property-tax exemption was inconsistent with claiming non-Ohio domicile for 2008. {¶ 30} We conclude that there is a substantial factual basis for rejecting the claim of non-Ohio domicile as a false statement. (Our holding in this case should not be construed as impugning the motives of the taxpayer. The Cunninghams appear to have acted on the basis of a good-faith belief that the statements in the two affidavits were not contradictory.) {¶ 31} The Cunninghams argue that the irrebuttable presumption provided by R.C. 5747.24(B)(1) loses all force if the commissioner can make a false- statement finding with respect to the taxpayer’s domicile verification. We conclude that when the tax commissioner has information that furnishes a substantial basis for rejecting the claim of non-Ohio domicile and he sets forth that basis in his determination, the statute does not fail of its essential purpose of streamlining domicile determinations. The tax commissioner would not be justified in making a false-statement finding unless he could point to specific information that warranted the finding. We hold that the commissioner must set forth his basis for determining that the domicile statement is false and that when he does so, the purposes of the statute have not been frustrated. {¶ 32} As noted, R.C. 5747.24(B)(1) specifically states that “[i]f the individual * * * makes a false statement, the individual is presumed under division (C) of this section to have been domiciled in this state the entire taxable year.” Under division (C), a taxpayer who is not irrebuttably presumed to be domiciled outside Ohio may prove non-Ohio domicile by a preponderance of the
his false-statement finding, to consider whether the evidence rebutted the presumption of Ohio domicile under division (C); he understandably concluded that it did not.
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CONCLUSION {¶ 33} The BTA erred by reversing the tax commissioner’s denial of the irrebuttable presumption created under R.C. 5747.24(B)(1). Because the Cunninghams concede that they were Ohio domiciliaries under the common law for 2008, there is no call for any further determination of that issue. We therefore reverse the decision of the BTA and reinstate the tax commissioner’s assessment. Decision reversed. O’CONNOR, C.J., and O’DONNELL, LANZINGER, and O’NEILL, JJ., concur. KENNEDY and FRENCH, JJ., dissent. __________________ FRENCH, J., dissenting. {¶ 34} Kent Cunningham demonstrated that he performed the actions R.C. 5747.24(B)(1) requires to raise an irrebuttable presumption that for purposes of Ohio’s income tax, he was not domiciled in Ohio during 2008. Those actions were three in number: (1) he maintained an abode outside the state during the year at issue (here, the house in Tennessee qualified as such an abode), (2) he limited his presence in Ohio to 182 contact periods or fewer, and (3) he timely filed a statement attesting to the foregoing facts while also verifying that he was in fact domiciled outside Ohio during the entire year. Because Cunningham satisfied these three criteria, I would hold that he was entitled to the irrebuttable presumption the statute prescribes. Therefore, I respectfully dissent from the majority’s contrary holding. {¶ 35} The key issue of statutory construction lies in whether the tax commissioner may make a finding that the taxpayer’s verification of out-of-state domicile is false. The majority holds that the commissioner may do so based on
irrebuttability of the presumption that arises once a taxpayer has satisfied the three criteria, as Cunningham has done here. A contrary state of the facts can defeat a
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rebuttable presumption, but not an irrebuttable one. See Black’s Law Dictionary 957, 1377 (10th Ed.2014) (recognizing “irrebuttable presumption” as synonymous with “conclusive presumption,” which is “[a] presumption that cannot be
irrefutable proof that establishes a fact beyond dispute”). {¶ 36} I agree with the conclusion of the Board of Tax Appeals (“BTA”) that R.C. 5747.24(B)(1) permits a finding of false statement only with respect to
with the BTA’s trenchant observation that the tax commissioner’s approach “essentially renders the ‘bright-line’ non-residency status established by R.C. 5747.24(B) moot, as the commissioner could always challenge the veracity of the statement that the taxpayer was not domiciled in Ohio.” BTA No. 2011-4641, 2014 WL 1155688, *3 (Mar. 6, 2014). {¶ 37} Whether a taxpayer is domiciled in Ohio is a finding of ultimate fact that includes a legal conclusion predicated on the underlying basic facts. In my view, the purpose of R.C. 5747.24(B)(1) is to premise the legal conclusion on selected basic facts (namely, out-of-state abode and number of contact periods) to the exclusion of other facts that would be significant under the common-law test. Indeed, the essential purpose of R.C. 5747.24(B)(1)’s irrebuttable presumption is to avoid the wide-ranging and open-ended inquiry into a myriad of domicile facts that occurs under common law. {¶ 38} In Davis v. Limbach, BTA No. 89-C-267, 1992 WL 275694, *4 (Sept. 25, 1992), the BTA noted that “[t]here is no bright line test stating exactly which factors are necessary for an individual to effectively change his domicile.” At the next regular legislative session, the General Assembly enacted the first version of R.C. 5747.24. S.B. No. 123, 145 Ohio Laws, Part I, 1113. In doing so, the General Assembly’s stated purpose included “establish[ing] income tax domicile tests.” Id.; Tyson v. Zaino, BTA No. 2001-B-1327, 2003 WL 22294864,
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*4 (Oct. 3, 2003). In other words, by enacting R.C. 5747.24, the General Assembly sought to create the very “bright line” that the BTA had acknowledged was missing. The majority’s interpretation defeats this legislative purpose. {¶ 39} Also unpersuasive is the majority’s acquiescence in the view that the Cunninghams’ homestead-exemption application contradicts the verification
different taxes—the state income tax and the local real estate tax—have statutory provisions that create two different tax breaks. It lies well within the authority of the legislature to adopt different domicile standards for two completely different tax provisions, particularly where, as here, the legislature’s actions expand the scope of exemption and restrict the scope of taxation. {¶ 40} The General Assembly had the authority to, and in my view did, decide to limit the reach of the state income tax as to persons who might
the General Assembly’s authority to confer a real estate tax benefit based on a broader common-law definition of domicile. And if the law does indeed do what I have described, there is no reason why the taxpayer cannot claim the benefit of both tax breaks. {¶ 41} For these reasons, I would affirm the decision of the BTA and remand to the tax commissioner for a determination of the amount of Cunningham’s income, which must be removed from the tax assessment. Because the majority concludes otherwise, I dissent. KENNEDY, J., concurs in the foregoing opinion. __________________ Taft, Stettinius & Hollister, L.L.P., and J. Donald Mottley, for appellees. Michael DeWine, Attorney General, and Daniel W. Fausey and Melissa
__________________
[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as Giddens v. Testa, Slip Opinion No. 2016-Ohio-8412.]
NOTICE This slip opinion is subject to formal revision before it is published in an advance sheet of the Ohio Official Reports. Readers are requested to promptly notify the Reporter of Decisions, Supreme Court of Ohio, 65 South Front Street, Columbus, Ohio 43215, of any typographical or other formal errors in the opinion, in order that corrections may be made before the opinion is published. SLIP OPINION NO. 2016-OHIO-8412 GIDDENS ET AL., APPELLANTS, v. TESTA, TAX COMMR., APPELLEE. [Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as Giddens v. Testa, Slip Opinion No. 2016-Ohio-8412.] Taxation—Treatment of distribution of C corporation earnings generated before S corporation pass-through selection—Tax commissioner’s denial of nonresident tax credit reversed. (No. 2014-2012—Submitted August 16, 2016—Decided December 28, 2016.) APPEAL from the Board of Tax Appeals, No. 2012-359. ____________________ Per Curiam. {¶ 1} This is an appeal from a decision of the Board of Tax Appeals (“BTA”), which affirmed the assessment of the appellee, tax commissioner, of Ohio individual income tax against appellants, Ernest and Louann Giddens, for tax year
through grantor trusts, of shares in a corporation that did some of its business in
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passed through for tax purposes. {¶ 2} The part of the assessment at issue here involves the tax commissioner’s reduction of the amount of a tax credit, the “nonresident credit,” that relates to a distribution from the corporation. The Giddenses allocated the distribution outside Ohio on the grounds that it constituted a dividend that was “nonbusiness income” allocable to Missouri, their place of domicile. {¶ 3} The tax commissioner, however, proceeded on the theory that the distribution should be treated as “business income,” and he deemed a portion of it to be taxable by Ohio based on the proportion of the corporation’s business in Ohio. The BTA affirmed the assessment, and the Giddenses have appealed. {¶ 4} We conclude that the taxpayers properly treated the income at issue as nonbusiness income rather than business income. We therefore reverse the decision of the BTA with respect to dividend allocation. FACTUAL BACKGROUND {¶ 5} Redneck, Inc. is a wholesale supplier of equipment for trailer parks, including running gear, axles, springs, hitches, and jacks. In 2008, Redneck’s shareholders, Ernest and Louann Giddens, paid income tax to Ohio on the
Subchapter S corporation. See Ardire v. Tracy, 77 Ohio St.3d 409, 674 N.E.2d 1155 (1997), fn. 1 (“For tax purposes, a Subchapter S corporation differs significantly from a normal corporation in that the profits generated through the S corporation are taxed as personal income to the shareholders”). Each had a grantor trust (i.e., a trust over which the grantor retained extensive power, such as complete revocability) that owned one-half of Redneck, and because the trust in each instance was a “grantor trust” for federal tax purposes, the trust itself—as well as the S corporation—was a pass-through for income-tax purposes. See Knust v. Wilkins, 111 Ohio St.3d 331, 2006-Ohio-5791, 856 N.E.2d 243, ¶ 23 (“ ‘Basically, therefore,
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[a grantor] trust is completely ignored for income tax purposes’ ”), quoting Ferguson, Freeland & Ascher, Federal Income Taxation of Estates, Trusts, and Beneficiaries Section 10.05[C], at 10-25 to 1-26 (3d Ed.2000). (Brackets sic.) Thus, in 2008, Redneck income would be reflected on the joint return of the Giddenses. {¶ 6} However, during 2008, Redneck distributed $74,099,830 to its two shareholders through their trusts. This distribution was of earnings and profits recorded when Redneck was a C corporation—before the Giddenses elected pass- through treatment for Redneck. September 1, 2004, was the effective date of the pass-through election. {¶ 7} The Giddenses treated the distribution as a dividend, and as nonresidents of Ohio, they allocated the dividend entirely outside this state by claiming a full nonresident credit to offset all Ohio income tax associated with the
deficiency. {¶ 8} The main item in the assessment, and the only item at issue in this appeal, is the dividend.1 The tax commissioner treated the dividend as business income rather than as nonbusiness income, and as a result, the commissioner applied Redneck’s apportionment factors to the dividend—that is, 3.9 percent of the dividend was treated as Ohio income. The total amount of tax deficiency assessed was $182,809.89, most of which was attributable to the apportionment of the dividend. {¶ 9} When the Giddenses petitioned for reassessment, the tax commissioner’s final determination upheld the assessment, relying with respect to
1 The other adjustments consisted of treating interest income and certain wages as business income.The Giddenses’ merit brief unequivocally states that the “sole issue in this case is the Tax Commissioner’s improper characterization of a dividend * * *.” Accordingly, the Giddenses have waived or abandoned their objections to any other aspect of the assessment. E. Liverpool v. Columbiana Cty. Budget Comm., 116 Ohio St.3d 1201, 2007-Ohio-5505, 876 N.E.2d 575, ¶ 3.
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the dividend issue on this court’s pronouncement in Agley v. Tracy, 87 Ohio St.3d 265, 268, 719 N.E.2d 951 (1999) that “the character of the item distributed to a shareholder [of an S corporation] is to be determined as if the item were realized from the source from which the corporation realized the item.” {¶ 10} The Giddenses appealed to the BTA, which held a hearing at which Ernest Giddens testified. The tax commissioner called a supervising tax agent as a witness, and both parties submitted exhibits. {¶ 11} In its decision, the BTA relied on the same Agley pronouncement that the tax commissioner had cited. BTA No. 2012-359, 2014 Ohio Tax LEXIS 4783, 5 (Oct. 20, 2014). The BTA held that because the S election was in place in 2008, the 2008 dividend was to be treated as business income. ANALYSIS {¶ 12} In this appeal, we confront a question of how to apply the statutory provisions relating to the income taxation of dividends and business income to the Giddens’s 2008 distribution. Because this presents primarily a question of statutory construction, we review the BTA’s decision de novo, without deference. Akron Centre Plaza, L.L.C. v. Summit Cty. Bd. of Revision, 128 Ohio St.3d 145, 2010- Ohio-5035, 942 N.E.2d 1054, ¶ 10.
as nonbusiness income that is allocated entirely to their Missouri residence {¶ 13} R.C. 5747.02(A) imposes Ohio income tax on “every individual * * * residing in or earning or receiving income in this state.” As a general matter, all income of Ohio residents is taxable wherever earned or received, subject to a “resident credit” at R.C. 5747.05(A) for amounts of state income tax paid to another state in which the income was earned or received. Cunningham v. Testa, 144 Ohio St.3d 40, 2015-Ohio-2744, 40 N.E.3d 1096, ¶ 10. As for nonresidents, only that portion of their income that is “earned or received in this state” is taxable. Id. The
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nonresident credit, R.C. 5747.05(A), allows the nonresident who must file an Ohio return to remove all Ohio income tax that is associated with any income that was not earned or received in this state. See Krehnbrink v. Testa, __ Ohio St.3d __, 2016-Ohio-3391, __ N.E.3d __, ¶ 21, 23. {¶ 14} Against this legal backdrop, the Giddenses’ joint return for 2008 reflected a nonresident credit that subtracted all Ohio tax pertaining to the Redneck
equal to the “tax otherwise due * * * on such portion of the combined adjusted gross income and business income of any nonresident taxpayer that is not allocable
Code.” Next, the Giddenses looked to R.C. 5747.20(B)(6), which provides that, among other types of income, a nonresident’s “dividends and distributions * * * shall not be allocated to this state unless the taxpayer’s domicile was in this state at the time such income was paid or accrued.” In opposing the tax commissioner’s assessment, the Giddenses contend that the dividend at issue here falls squarely under R.C. 5747.20(B)(6).
share of Redneck’s current income {¶ 15} The tax commissioner does not contest the general validity of the proposition that dividends and distributions are nonbusiness income. Instead, the tax commissioner asserts that because Redneck was an S corporation when the dividend was declared, the dividend needs to be treated as though it were distributive-share income of the S corporation. To explain the point, it is necessary to discuss the difference between S corporations and C corporations. {¶ 16} Under the conventional tax structure, a corporation pays income tax
must pay tax on the dividend. That arrangement can be referred to as the “C corp” situation, after Subchapter C of the Internal Revenue Code (“IRC”).
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{¶ 17} By electing pass-through treatment under IRC Subchapter S, however, shareholders can avoid the two levels of taxation. The “largest differentiator between an S corporation and a C corporation is the fact that income
Tax and Accounting Center, U.S. Income Portfolios (“BNA”) 732-1st, S Corporations: Shareholder Tax Issues, Section I.A. Instead, “all items of income, deduction, loss and credit recognized at the corporate level are passed through to the S corporation shareholders,” who are “taxed on their allocable share of the income even if the corporation does not make distributions.” Id. {¶ 18} The income from an S corporation passed through to the individual shareholder is often referred to as the shareholder’s “distributive share” of the corporate income, even though it is taxed as pass-through income and the associated tax liability does not depend on any actual distribution of the income to the
(deciding that “the distributive share income nonresident shareholders of an Ohio S corporation receive and report as part of their federal adjusted gross income is subject to Ohio personal income tax”). After corporate earnings have accrued and have been taxed to the shareholder as his or her distributive share, “for the most part, S corporations can distribute S corporation earnings tax free. The taxation of S corporation distributions can differ if the S corporation has accumulated earnings and profits (E&P).” BNA 731-3d: S Corporations: Corporate Tax Issues, Section II. {¶ 19} As already noted, we have recognized and endorsed the pass-through
nonresidents, noting that an S corporation’s “profits * * * are taxed as personal income to the shareholders.” Ardire, 77 Ohio St.3d 409, 674 N.E.2d 1155, fn. 1, (Ohio residents); Dupee at 352 (the “character of a shareholder’s S corporation income remains the same for residents and nonresidents”). We have also endorsed
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for Ohio tax-law purposes the proposition derived from federal law that the character of the distributive-share income as business or nonbusiness income depends upon viewing how the income arose from the standpoint of the corporation itself, rather than the shareholder. That is, the business versus nonbusiness character “is to be determined as if the item were realized from the source from which the corporation realized the item.” Agley, 87 Ohio St.3d at 268, 719 N.E.2d 951; see also Kemppel v. Zaino, 91 Ohio St.3d 420, 421, 746 N.E.2d 1073 (2001) (“Because the Kemppels are shareholders in a subchapter S corporation, the character of the income attributed to them from [the S corporation] is determined as though they had received it directly from the same source as [the S corporation]”). {¶ 20} What the tax commissioner did in this case is apply the proposition just quoted to the dividend income received by the Giddenses here. He apportioned the income to Ohio based on the Ohio apportionment factor of Redneck itself, which was 3.9 percent. We disagree with this approach for the reasons that follow.
is a dividend rather than distributive share {¶ 21} As discussed, when the Subchapter S election applies, the shareholder pays income tax when the income accrues to the corporation; the subsequent distribution is an event that usually does not trigger its own tax liability. What happens instead is an adjustment to the shareholder’s basis in the shares of the corporation, and the income that arose as corporate earnings is held, for tax purposes, in what is called an “accumulated adjustments account,” which is “generally the accumulation of previously taxed, but undistributed, earnings of the S corporation.” BNA 731-3d: S Corporations: Corporate Tax Issues, Section II.C.1. {¶ 22} By contrast, a distribution of earnings and profits that accrued to a C corporation that later became an S corporation is subject to the rule that “[a]ny
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amount distributed in excess of the [accumulated adjustments account] will generally be treated as a dividend to the extent of the corporation's accumulated E & P” from its C corporation days. Id. at II.B.3 {¶ 23} That is what occurred here. The Giddenses through their trusts received a dividend from Redneck traceable to earnings that accrued before the S election in 2004. That dividend was taxable as a dividend at the federal and potentially the state level. {¶ 24} In disputing the tax commissioner’s treatment of the dividend as business income, the Giddenses do not disagree that the ultimate source of their dividend income (though once removed) lay in accumulated earnings of Redneck. Nor does their argument contradict the proposition that any 2008 distributive-share income derived from Redneck’s operations that year should be apportioned to Ohio as business income. Instead, the Giddenses insist on a distinction between distributive-share income that is taxed on a pass-through basis, and a later dividend paid out of “accumulated earnings and profits” that is subjected to income taxation. The latter, according the Giddenses, is not business income but is taxed to them solely by virtue of its having been distributed by the corporation. {¶ 25} We agree with the Giddenses’ interpretation and conclude that the dividend was nonbusiness income subject to allocation under R.C. 5747.20(B)(6). Crucial to the analysis is the nature of the event that triggered the income-tax liability—here, the declaration of the dividend. That contrasts to the liability of the Giddenses as S-corporation shareholders when they report their distributive share
situation, the event that triggers the tax liability is the accrual of income to the corporation by virtue of its business activity.
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nor its codification at R.C. 5747.213, applies in this situation {¶ 26} In Agley, 87 Ohio St.3d 265, 719 N.E.2d 951, we confronted the taxpayers’ contention that an S corporation’s income that passed through to nonresident shareholders should be classified as nonbusiness income by analogy to a dividend or distribution. We held that “the character of the item distributed to a shareholder [of an S corporation] is to be determined as if the item were realized from the source from which the corporation realized the item.” Id. at 268. {¶ 27} The tax commissioner focuses on “item distributed,” contends that the dividend issued to the Giddenses’ trusts by Redneck is an “item distributed,” and then points to the origin of that dividend in Redneck’s earnings during earlier
when earned, the dividend paid out of such earnings must also be business income, according to the tax commissioner. {¶ 28} Although this argument may appear plausible, that appearance arises from our misstatement in Agley. We used the term “item distributed” in Agley, even though no actual distribution of corporate earnings was at issue because the income was a distributive share. Id. at 268. We should have said that the character
income is to be determined as if that income had been realized by the shareholder from the source from which the corporation realized the income. {¶ 29} Once the correction is made, the tax commissioner’s argument evaporates, because the income at issue in this case is not the Giddenses’ distributive share of Redneck’s current income. Instead, the income subject to taxation here is a dividend paid out of earnings that accrued to the corporation during earlier years. {¶ 30} The tax commissioner also cites R.C. 5747.231, a statute enacted in 2002 that essentially codifies the Agley holding. R.C. 5747.231 states:
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[E]ach person shall include in that person’s items of business income, nonbusiness income, adjusted qualifying amounts, allocable income or loss, apportionable income or loss, property, compensation, and sales, the person’s entire distributive share or proportionate share of the items of business income, nonbusiness income, adjusted qualifying amounts, allocable income or loss, apportionable income or loss, property, compensation, and sales of any pass-through entity in which the person has a direct or indirect
* * * These items shall be in the same form as was recognized by the pass-through entity. {¶ 31} The commissioner interprets this statute to apply to the Giddenses’ 2008 dividend by highlighting the taxpayer’s “proportionate share of the items of business income of the pass-through entity,” asserting that the dividend somehow qualifies as a “proportionate share” of Redneck’s “business income.” But contrary to the commissioner’s theory, the income being taxed in this case is not a “proportionate share” of Redneck’s own “business income.” Instead, the income at issue here is a dividend paid out to the Giddenses from previously accumulated corporate earnings. {¶ 32} It is worth reiterating that the material distinction is the event that triggers a tax liability for the individual income taxpayer: it is not Redneck’s business activity that made the dividend appear as a taxable item on the Giddenses’
{¶ 33} Because the Agley principle does not apply, the dividend constitutes nonbusiness income to be allocated entirely outside Ohio. The assessment must
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therefore be overturned to the extent that it reflects the tax commissioner’s denial
CONCLUSION {¶ 34} For the foregoing reasons, we reverse the decision of the BTA to the extent that it upheld the tax commissioner’s assessment in relation to the amount of credit associated with the dividend income. In all other respects, the BTA decision remains in force. We remand this cause to the tax commissioner with instruction that he take appropriate steps to effectuate this decision. Judgment accordingly. O’CONNOR, C.J., and PFEIFER, O’DONNELL, LANZINGER, KENNEDY, FRENCH, and O’NEILL, JJ., concur. _________________ Baker & Hostetler, L.L.P., and Edward J. Bernert, for appellant. Michael DeWine, Attorney General, and Barton A. Hubbard, Assistant Attorney General, for appellee. _________________