Corrigan v. Testa (Slip Opinion)
73 N.E.3d 381
Ohio2016Background
- Patton R. Corrigan, a Connecticut domiciliarian, acquired a 79.29% membership interest in Mansfield Plumbing, L.L.C. (a pass-through entity) in 2000 and served as a manager; Mansfield did business in Ohio and nationwide.
- In 2004 Corrigan sold his membership interest and realized a capital gain of $27,563,977; he treated the gain as entirely allocable outside Ohio on his Ohio return.
- Ohio assessed tax under former R.C. 5747.212, which apportioned gain of a pass-through investor (≥20% owner during a three-year window) to Ohio using the investee’s apportionment factors; Corrigan paid part of the assessment and sought a refund.
- The Tax Commissioner denied the refund; the Board of Tax Appeals affirmed (declining to decide the constitutional claim), and Corrigan appealed to the Ohio Supreme Court.
- The central legal question: whether applying R.C. 5747.212 to tax a nonresident’s capital gain from selling an interest in an out‑of‑state pass-through that did business in Ohio violates the Due Process Clause.
Issues
| Issue | Plaintiff's Argument (Corrigan) | Defendant's Argument (Testa) | Held |
|---|---|---|---|
| Whether R.C. 5747.212 may constitutionally apportion to Ohio a nonresident investor’s capital gain from sale of pass‑through ownership based solely on the pass‑through’s Ohio activity | Statute unconstitutional as applied: capital gain from sale of intangible property has situs at taxpayer’s domicile and Ohio lacks the requisite nexus to tax the investor’s gain | Ohio may tax a portion of the investor’s gain because the investee (Mansfield) conducted business in Ohio and the statute apportions gain using the investee’s in‑state factors | Held unconstitutional as applied: statute violates Fourteenth Amendment due process when taxpayer’s gain is not unitary with investee’s business activity |
| Whether Corrigan’s pass‑through distributive income justifies taxing his subsequent capital gain | Corrigan: pass‑through income avails him of Ohio only for distributive income, not for a separate intangible capital gain from an out‑of‑state sale | Testa: Corrigan’s purposeful availment via the pass‑through supports apportioning the capital gain | Court: purposeful availment of Ohio for distributive income does not automatically permit taxation of a separate capital gain absent a unitary business relationship |
| Whether precedent upholding state "privilege" taxes (J.C. Penney/International Harvester) authorizes investee‑based apportionment of investor capital gains | Corrigan: recent Supreme Court precedents (MeadWestvaco, Allied‑Signal, ASARCO) require unitary nexus and disfavor taxing intangibles based only on taxpayer’s in‑state activity; privilege‑tax cases don’t authorize direct taxation of nonresident investors | Testa: older cases (J.C. Penney, International Harvester) and some state decisions support taxing investor gains based on investee’s in‑state activities | Court: privilege‑tax precedents do not control here; MeadWestvaco left investee‑apportionment unresolved and Supreme Court line requires unitary connection for taxing investor’s intangible gains |
| Whether R.C. 5747.212 is facially unconstitutional | Corrigan: facial challenge argued | Testa: statute applies validly in some circumstances | Court: statute is not facially invalid; it may be constitutional when investor and investee form a unitary business, but unconstitutional as applied to Corrigan absent unitary relationship |
Key Cases Cited
- Miller Bros. Co. v. Maryland, 347 U.S. 340 (establishes limits on extraterritorial state taxation and need for jurisdiction to tax)
- Shaffer v. Carter, 252 U.S. 37 (in rem jurisdiction over income-producing activities within a state)
- Quill Corp. v. North Dakota, 504 U.S. 298 (minimum contacts/purposeful availment for state taxing authority)
- F.W. Woolworth Co. v. New Mexico Taxation and Revenue Dept., 458 U.S. 354 (limits on state taxation of nondomiciliaries)
- Allied‑Signal, Inc. v. Dir., Div. of Taxation, 504 U.S. 768 (limits on taxing nonunitary intangible gains)
- MeadWestvaco Corp. v. Illinois Dept. of Revenue, 553 U.S. 16 (reaffirmed unitary‑business requirement for apportioning intangibles; declined to decide investee‑apportionment)
- International Harvester Co. v. Department of Treasury, 322 U.S. 435 (upheld state privilege dividend tax structure)
- Wisconsin v. J.C. Penney Co., 311 U.S. 435 (upheld state privilege tax on dividends)
- ASARCO, Inc. v. Idaho State Tax Comm., 458 U.S. 307 (unitary business analysis for taxing intangibles)
- Agley v. Tracy, 87 Ohio St.3d 265 (Ohio precedent: pass‑through distributive income can create nexus to tax that distributive income)