Renacci v. Testa (Slip Opinion)
148 Ohio St. 3d 470
| Ohio | 2016Background
- Taxpayers James B. and Tina D. Renacci did not report 2000 S‑corporation pass‑through income on their Ohio individual return; the income was held by an electing small business trust (ESBT) that arguably could be taxed to the trust rather than the grantor under 26 U.S.C. §641(c).
- Ohio Department of Taxation issued information releases (2000 and 2002) directing taxpayers to treat ESBT S‑income as taxable to the grantor when the trust also qualified as a grantor trust; Ohio audited and assessed the Renaccis, adding back roughly $13.9 million to FAGI and assessing tax plus a double‑interest penalty for late payment.
- The Renaccis initially contested but later paid the total assessed amounts and sought a refund of only the double‑interest penalty; the tax commissioner denied remission, finding willful filing contrary to a clear Department position.
- The Board of Tax Appeals affirmed denial, emphasizing the taxpayers’ failure to follow the Department’s information release; the Renaccis appealed to the Ohio Supreme Court.
- The Ohio Supreme Court evaluated (1) whether a refund claim that seeks only penalty relief was authorized under the statute in effect when filed; and (2) whether the commissioner abused his discretion by denying penalty abatement where taxpayers relied on a reasonable (though ultimately incorrect) interpretation of federal law and on ambiguous federal guidance.
Issues
| Issue | Renacci's Argument | Testa's Argument | Held |
|---|---|---|---|
| Whether the former R.C. 5747.11 authorized a refund claim limited to penalty (after full payment) | Former statute’s “excessive” language permits refund of penalty-only payments | Refund limited to tax overpayment or deficiency procedures; commissioner and BTA lacked jurisdiction to refund only penalty | Former statute allowed refund of amounts paid on an "excessive" assessment; penalty‑only refund claim was permissible |
| Whether taxpayers had "reasonable cause" to resist paying (abate double-interest penalty under R.C. 5747.15) | Reasonable, good‑faith reliance on a plausible reading of federal ESBT statute and on the absence/ambiguity of binding federal regulation for their taxable year | Failure to follow the Department’s clear information release shows willful neglect; information releases are dispositive | Commissioner abused discretion by denying abatement where his finding rested solely on non‑binding information releases and ignored taxpayers’ reasonable‑cause arguments |
| Legal significance of Department information releases | Releases are non‑binding guidance; departure from them does not, by itself, establish willful neglect when a reasonable legal argument exists | Releases reflect a clear Department position; failure to follow them indicates willful filing contrary to Department policy | Releases lack force of law; using them as the exclusive basis to deny remission is arbitrary and unconscionable |
| Effect of intervening federal/state decisions on reasonable cause timing (Knust / Lovell) | Reasonable cause persisted until Lovell (Nov. 2007) because Renaccis’ situation arguably fell outside the treasury regulation’s coverage | Reasonable cause ended earlier (after Knust), so delay in payment thereafter was unreasonable | Reasonable cause continued through announcement of Lovell; payment delay until that decision did not forfeit right to remission |
Key Cases Cited
- Knust v. Wilkins, 111 Ohio St.3d 331 (Ohio 2006) (interpreting interplay of ESBT and grantor‑trust rules)
- Lovell v. Levin, 116 Ohio St.3d 200 (Ohio 2007) (further resolving ESBT/grantor trust disputes)
- Brown v. Levin, 119 Ohio St.3d 335 (Ohio 2008) (related ESBT/grantor trust decision)
- Progressive Plastics, Inc. v. Testa, 133 Ohio St.3d 490 (Ohio 2012) (administrative pronouncements require rulemaking to have force of law)