DANA CORPORATION, N.K.A. DANA HOLDING CORPORATION, APPELLANT AND CROSS-APPELLEE, v. TESTA, TAX COMMR., APPELLEE AND CROSS-APPELLANT.
Slip Opinion No. 2018-Ohio-1561
SUPREME COURT OF OHIO
April 24, 2018
No. 2015-0460—Submitted December 5, 2017—APPEAL and CROSS-APPEAL from the Board of Tax Appeals, No. 2011-2287.
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.
Taxation—Commercial-activity-tax credit—
Per Curiam.
{¶ 1} In this appeal we confront an issue arising out of the special credit against the commercial-activity tax (“CAT”) set forth at
{¶ 2} On cross-appeal, the tax commissioner faults the BTA for rejecting his post-final-determination calculation of the amortizable amount that relies on the testimony of the tax commissioner’s expert witness, who opined that the amortizable amount ought to be zero. Additionally, the tax commissioner contends that the BTA ought to have entertained his alternative theory, raised for the first time shortly before the hearing at the BTA, that Dana’s NOLs were fully offset by a properly recomputed valuation allowance.
{¶ 3} We agree with Dana’s main contention on appeal, and we reject the arguments advanced by the tax commissioner on cross-appeal. We therefore reverse the decision of the BTA and, pursuant to
I. Nature of the CAT Credit
{¶ 4} Ohio’s 2005 tax reform provided for a phase out of the corporation franchise tax and a phase in of the CAT. We discussed the relationship between the two in Navistar, Inc. v. Testa, 143 Ohio St.3d 460, 2015-Ohio-3283, 39 N.E.3d 509.
{¶ 5} Ohio’s corporation-franchise-tax law permitted a carryforward of NOLs, so that those losses could constitute a tax benefit by offsetting otherwise taxable income in later years. See
{¶ 6} To address this concern, the General Assembly included
II. Course of Proceedings
A. From “old Dana” to “new Dana”
{¶ 8} In this case, the tax commissioner ordered a reduction of the amortizable amount reported by Dana because of a tax-free reorganization of the corporation that was consummated on January 31, 2008. The parties use the term “old Dana” when referring to the corporation before the reorganization and “new Dana” when referring to the corporation after the reorganization. We adopt that terminology herein.
{¶ 9} Old Dana timely filed the amortizable-amount report on June 30, 2006. Old Dana was a consolidated group of affiliated corporations, meaning that the group reported income and deductions as a single taxpayer. The total amortizable amount reported was $12,493,003. Around the same time that old Dana filed the report, the old Dana consolidated group went into Chapter 11 bankruptcy, during which it reorganized. It emerged from bankruptcy on January 31, 2008, as new Dana, a consolidated group that had all the NOLs transferred from old Dana pursuant to
{¶ 10} Like old Dana, new Dana is a consolidated group of affiliated entities for federal income-tax purposes. Consolidated filing “systematically affects the computation of taxable income by aggregating transactions of individual members of the consolidated group,” while “eliminat[ing] the tax effect of transactions within the affiliate group.” New York Frozen Foods, Inc. v. Bedford Hts. Income Tax Bd. of Rev., 150 Ohio St.3d 386, 2016-Ohio-7582, 82 N.E.3d 1105, ¶ 21, citing
B. The tax commissioner’s audit and adjustment
{¶ 11}
{¶ 12} As a result of the audit, the tax commissioner reduced the amortizable amount for two separate reasons. First, the tax commissioner reduced the amortizable amount from the reported $12,493,003 to $10,935,324 based on
III. The BTA Decision
{¶ 13} The BTA began its analysis by rejecting Dana’s argument that
{¶ 14} Finally, the BTA rejected the tax commissioner’s “revised calculation of the credit to zero dollars” as “inconsistent with and an improper application of [
IV. Standard of Review
{¶ 15} In reviewing decisions of the BTA, we determine whether its decision is reasonable and lawful. Satullo v. Wilkins, 111 Ohio St.3d 399, 2006-Ohio-5856, 856 N.E.2d 954, ¶ 14. Although the BTA is responsible for determining factual issues, the court “ ‘will not hesitate to reverse a BTA decision that is based on an incorrect legal conclusion.’ ” Id., quoting Gahanna-Jefferson Local School Dist. Bd. of Edn. v. Zaino, 93 Ohio St.3d 231, 232, 754 N.E.2d 789 (2001).
A. The parties’ arguments
{¶ 16}
If one entity transfers all or a portion of its assets and equity to another entity as part of an entity organization or reorganization or subsequent entity organization or reorganization for which no gain or loss is recognized in whole or in part for federal income tax purposes under the Internal Revenue Code, the credits allowed by this section shall be computed in a manner consistent with that used to compute the portion, if any, of federal net operating losses allowed to the respective entities under the Internal Revenue Code. The tax commissioner may prescribe forms or rules for making the computations required by this division.
{¶ 17} The focal point of the dispute in this case is the meaning of the phrase “the portion, if any, of federal net operating losses allowed to the respective entities under the Internal Revenue Code.” For his part, the tax commissioner argues that this language means that the successor entity or entities after a tax-free reorganization should be subjected to a reduction of the amortizable amount to the same extent that the NOLs are offset by CODI under the Internal Revenue Code and treasury regulations. The BTA’s decision reflects its agreement with this position.
{¶ 18} On the other hand, Dana asserts that “
R.C. 5751.53(F) all provisions of the Internal Revenue Code are applicable is inconsequential
{¶ 19} In addition to claiming that
{¶ 20} Indeed, contrary to Dana’s argument, the offset of CODI against NOLs is a routine computation under
{¶ 21} But the question whether
C. R.C. 5751.53(F) does not authorize adjustment of the amortizable amount
{¶ 22} Close scrutiny of the statutory language reveals that it can plausibly be cited in support of either position. On the one hand, the tax commissioner can reasonably assert that the phrase “the portion, if any, of federal net operating losses allowed to the respective entities under the Internal Revenue Code” in
{¶ 23} We therefore conclude that the parties’ conflicting readings of division (F), both plausible, expose an ambiguity in the statute. See Pittsburgh Steel Co. v. Bowers, 173 Ohio St. 74, 77, 179 N.E.2d 915 (1962) (in addition to “the indefiniteness of the meaning of a word or phrase,” ambiguity may result from a word or
{¶ 24} The tax commissioner maintains that the principle that tax exemptions and reductions should be strictly construed against the claimant requires Dana to demonstrate its entitlement to the
{¶ 25} In rejecting the tax commissioner’s position on this point, we do not question the basic proposition that because the CAT credit is a tax-reduction provision, Dana must show that
{¶ 26} Because the question here is one of credit computation, not credit applicability, we are be guided by the more general aids for construing ambiguous statutes that are generally employed when construing allocation and apportionment provisions. See Gulf Oil Corp. v. Kosydar, 44 Ohio St.2d 208, 216-217, 339 N.E.2d 820 (1975) (in constructing the ambiguous “business-done” apportionment formula the court sought to give effect to the paramount object of the statute as a whole while avoiding unreasonable or absurd consequences); Rio Indal, Inc. v. Lindley, 62 Ohio St.2d 283, 285, 405 N.E.2d 291 (1980) (using general statute-construing aids to construe allocation provision). Specifically, under this case law, we must construe the computation required under
{¶
{¶ 28} First,
{¶ 29} Second, the procedure required under
{¶ 30} To be sure, that disruptive effect does not occur here, because the reorganization at issue came early enough to permit the tax commissioner to perform his adjustment during the prescribed period for auditing the amortizable amount. But if the reorganization had occurred later, the tax commissioner’s position implies that
{¶ 31} This aspect of the tax commissioner’s interpretation of division (F) conflicts with our holding in Internatl. Paper Co. In that case, we squarely rejected the theory that the amortizable amount could be adjusted outside the procedure set forth in division (D). Internatl. Paper Co., 150 Ohio St.3d 348, 2016-Ohio-7454, 81 N.E.3d 1225, ¶ 11-17. The intent of the legislature was to “require the tax commissioner to formalize his decision” and to fulfill the purpose of the credit to “permit the taxpayer to account for the tax asset on its books going forward.” Id. at ¶ 15. That logic cuts against the tax commissioner’s reading of
{¶ 32} Third, our decision in Navistar acknowledged that the CAT credit was intended to reflect the deferred tax assets and valuation allowance of a company as of a specific point in time, as reported on the amortizable-amount report, subject only to corrections of errors or inaccuracies. Navistar, 143 Ohio St.3d 460, 2015-Ohio-3283, 39 N.E.3d 509, ¶ 6, 35. Because the tax commissioner’s audit authority under
{¶ 33} This limited authority in adjusting the CAT credit militates strongly against the tax commissioner’s position in this appeal. The offset of CODI against NOLs that resulted from the bankruptcy reorganization is an adjustment arising from an event that occurred entirely after 2004, the year that is the reference point for determining the amortizable amount,
{¶ 34} Fourth,
{¶ 35} Dana’s proposed alternative recalculation shows that an adjustment of the amortizable amount in light of the reduction of Ohio NOLs for franchise-tax purposes would be drastically different from the federal calculation, not only because the amount of Ohio NOLs may differ in relation to Ohio-related CODI but also because Ohio’s franchise tax does not prescribe a “short taxable year” for old Dana as transferor in conjunction with the bankruptcy reorganization. In opposing Dana’s alternative calculation, the tax commissioner argues that division (F) incorporates federal-law provisions that are inconsistent with the franchise-tax law that Dana relies on for its calculation. But this argument points out the illogic of reading division (F) to require the adjustment at all. Had the General Assembly intended such reductions, it would have linked them to adjustments relevant for Ohio franchise-tax purposes, consistent with the overall purpose of the CAT credit.
{¶ 36} Finally, the disputed phrase in
{¶ 37} For all these reasons, we conclude that
{¶ 38} Our conclusion that the amortizable amount should not have been reduced on account of CODI obviates the need to address the relative merits of the various methods of computing the reduction of the amortizable amount that have been advanced. We therefore turn to that aspect of the tax commissioner’s cross-appeal that calls for a recalculation of Dana’s valuation allowance.
A. The tax commissioner is aggrieved only to a limited extent
{¶ 39} Earlier in this appeal, we granted in part and denied in part Dana’s motion to dismiss the tax commissioner’s cross-appeal. We dismissed the cross-appeal to the extent that the tax commissioner was “advanc[ing] an affirmative challenge to the decision of the Board of Tax Appeals,” but declined to dismiss it “to the extent that the cross-appeal is purely protective.” 145 Ohio St.3d 1441, 2016-Ohio-1596, 48 N.E.3d 581. Our disposition of the motion rested on the settled doctrine that the tax commissioner is not aggrieved by a BTA decision to the extent that the decision affirms his final determination. Newman v. Levin, 116 Ohio St.3d 1205, 2007-Ohio-5507, 876 N.E.2d 960, ¶ 3; Equity Dublin Assocs. v. Testa, 142 Ohio St.3d 152, 2014-Ohio-5243, 28 N.E.3d 1206, ¶ 23.
{¶ 40} As a result of that doctrine, the tax commissioner lacks standing to seek relief that reduces the amortizable amount below the amount determined in his final determination: $4,728,051. However, his protective cross-appeal would permit him to advance his valuation-allowance claim to restore the reduction of Dana’s amortizable amount to $4,728,051 were that proposal not barred by the doctrine of tax-commissioner waiver.
B. The tax commissioner waived his argument proposing a valuation-allowance adjustment to the amortizable amount
{¶ 41} Dana argues that the tax commissioner “had a full five years to audit Dana’s Amortizable Amount Report, obviously had full access to Dana’s publicly available Form 10-Ks, * * *, actually reviewed the valuation allowance recorded on Dana’s audited financial statements for 2004, and issued a final determination and never raised any question regarding the accuracy of the valuation allowance recorded for that period until the hearing before the BTA.” As a result, Dana asserts, the subject of the valuation allowance “is not relevant to the issues before the BTA.”
{¶ 42} We agree with Dana on this point. We have stated that “[o]nce the tax commissioner’s final determination omitted to address [an] issue as a ground for denying [an] exemption, that official incurred the burden to timely notify [the taxpayer] that it must prove the existence of a previously unaddressed element of the exemption claim.” The Chapel v. Testa, 129 Ohio St.3d 21, 2011-Ohio-545, 950 N.E.2d 142, ¶ 27; Kinnear Rd. Redevelopment, L.L.C. v. Testa, 151 Ohio St.3d 540, 2017-Ohio-8816, 90 N.E.3d 926, ¶ 30, 34; compare Krehnbrink v. Testa, 148 Ohio St.3d 129, 2016-Ohio-3391, 69 N.E.3d 656, ¶ 26-30 (tax commissioner was not barred from making belated assertion that taxpayers were taxable as Ohio residents, because taxpayers neither contested the assertion nor argued that it
VII. Conclusion
{¶ 43} For the foregoing reasons, we reverse the decision of the BTA and order modification of the amortizable amount to $10,935,324.
Judgment accordingly.
O’CONNOR, C.J., and O’DONNELL, and FRENCH, JJ., concur.
KENNEDY and DEWINE, JJ., concur in judgment only.
FISCHER and DEGENARO, JJ., not participating.
Zaino, Hall & Farrin, L.L.C., Richard C. Farrin, Debora D. McGraw, and Thomas M. Zaino, for appellant and cross-appellee.
Michael DeWine, Attorney General, Barton A. Hubbard, Assistant Attorney General, for appellee and cross-appellant.