NAVISTAR, INC., APPELLANT, v. TESTA, TAX COMMR., APPELLEE.
No. 2014-0140
Supreme Court of Ohio
Decided August 18, 2015
143 Ohio St.3d 460, 2015-Ohio-3283
FRENCH, J.
Submitted May 6, 2015
Tribbie, Scott, Plummer & Padden and Stephanie L. Mitchell, for appellant.
Towne, Evanchan, Palmisano & Hobson, L.L.C., Robert Roe Fox, and Leiby Hanna Rasnick, for appellee.
FRENCH, J.
{11} Under Ohio‘s 2005 tax-reform legislation, the new commercial-activity tax (“CAT“) was enacted “to replace the existing corporate-franchise and personal-property taxes,” which were phased out under that legislation for industrial corporations like Navistar, Inc. Beaver Excavating Co. v. Testa, 134 Ohio St.3d 565, 2012-Ohio-5776, 983 N.E.2d 1317, ¶ 23, citing Am.Sub.H.B. No. 66, 151 Ohio Laws, Part II, 2868;
{12} According to the testimony of employees of the Department of Taxation, the tax break at issue here, referred to simply as the “CAT credit,” was intended to restore a portion of the value of a corporate asset, known as a “deferred-tax asset,” the value of which would otherwise be substantially reduced by the transition from the franchise tax to the CAT. Specifically, the CAT credit would preserve part of the value of net operating losses (“NOLs“) that taxpayers like Navistar had accumulated and were entitled to carry forward to later years and
{13} In this appeal, Navistar complains that as a result of Navistar‘s 2007 restatement of its 2004 financial statement, the tax commissioner erroneously reduced the amount of its potential CAT credit from over $27 million to zero. The tax commissioner based his determination on the restatement‘s increase in the “valuation allowance,” an accounting entry that reflects the company‘s estimation of its future ability to realize the tax benefit of its NOLs. The 2007 restatement increased Navistar‘s valuation allowance from 62.4 percent to 100 percent; that increase led to a 100 percent offset of the NOLs for purposes of computing Navistar‘s potential CAT credit.
{14} Navistar contends that the tax commissioner had no statutory authority to adjust the amount of potential CAT credit based on accounting changes that were made after the deadline for applying for the CAT credit in June 2006. The tax commissioner, on the other hand, argues that his statutory audit authority under
{15} In addition, the parties disagree on a legal and factual issue concerning the importance of generally accepted accounting principles (“GAAP“). Navistar argues that the CAT-credit statute took a “snapshot” of the company‘s books and records as of the time the credit application was filed in June 2006 and that no subsequent changes to the accounting entries can be taken into account, even if those changes are necessary to bring the company‘s financial reporting into compliance with GAAP. But Navistar also argues that even if GAAP compliance is required to qualify for the credit, it has proved through expert testimony that the restatement‘s increase in the valuation allowance to 100 percent did not involve a correction required by GAAP, but instead constituted a different estimation of probabilities made by different management at a different point in time. The original valuation allowance for 2004, under this view, was reasonable because it was within the range permitted under GAAP.
{16} We read
{17} Whether Navistar‘s original valuation allowance was in compliance with GAAP is a question of fact that must be determined in light of evidence that militates both ways. The Board of Tax Appeals (“BTA“) considered certain statements by Navistar as relevant to this point but ignored the testimony of Navistar‘s experts, an omission that makes the BTA‘s decision unreasonable and unlawful. We therefore vacate the BTA‘s decision and remand the cause for a determination whether the original valuation allowance was in compliance with GAAP based upon all the evidence in the record. Disposition of this case will depend upon that determination.
NET OPERATING LOSSES AND THE CAT CREDIT
{18} The franchise tax‘s net-income method used the corporation‘s federal “taxable income,” with Ohio adjustments, as the base on which the tax was imposed. See
{19} Under the franchise-tax law, which previously applied to Navistar, a corporation that experienced an NOL one year was allowed to use that loss to offset income in a different year by “carrying back” or “carrying forward” the NOL and using it as a deduction against income in a different year. See
{110} Because Ohio‘s franchise-tax law, along with other corporate-income-tax laws, allowed a carryforward of NOLs, accounting principles required that the future benefit be reflected as an asset on the corporation‘s books and records and accompanying financial statements. When the CAT was enacted in 2005, corporations feared that the substantial Ohio portion of the NOL asset on their books would lose its value. To soften that blow, the CAT credit was devised and was included in the original CAT legislation. Navistar refers to the promulgation of
{111} Under
{12} The starting point for determining the potential CAT credit was the amount of Ohio-related NOLs on the corporation‘s books at the end of fiscal year 2004.
{13} To take the credit, a company was required to file an Amortizable Amount Report with the tax commissioner by June 30, 2006, that set forth the computation of the amortizable amount.
FACTUAL BACKGROUND
{14} Navistar is in the business of manufacturing commercial trucks, buses, and military vehicles under the brand names International, Navistar Defense, and IC. Navistar has long operated a manufacturing plant in Springfield, Ohio, as well as facilities in other states. Before enactment of the CAT, Navistar was a longtime franchise-tax payer in Ohio.
{15} Navistar timely filed its Amortizable Amount Report (together with its franchise-tax return for tax year 2005) on or about June 23, 2006. To qualify for the CAT credit, a taxpayer must have “qualifying Ohio net operating loss
{16} Under
{17} In December 2007, Navistar undertook a massive restatement of its books and financial statements as noted in its annual Form 10-K filed with the Securities and Exchange Commission (“SEC“). Among other things, the restatement increased Navistar‘s valuation allowance from 62.4 percent to 100 percent. The restated financials did not eliminate the NOLs or other deferred-tax assets from the company‘s books; instead, the restatement merely increased the valuation allowance to the point that it completely offset the value of the assets as part of the company‘s net worth.
{18} The tax commissioner issued his final determination in this matter on January 11, 2010. The commissioner noted his statutory authority to audit the accuracy of the amortizable amount under the CAT-credit statute,
{19} Navistar appealed to the BTA.
EVIDENCE PRESENTED DURING THE BTA PROCEEDINGS
Navistar‘s admissions
{120} The tax commissioner points to certain statements that he views as admissions by Navistar, some of which were relied upon in the BTA decision.
{21} Second, the revised Form 10-K that Navistar filed with the SEC on December 10, 2007, pertaining to the 2005 fiscal year, specifically stated that Navistar “determined that [it] did not apply FASB Statement No. 109 properly and that a full valuation allowance should be established for net U.S. and Canadian deferred tax assets based on the weight of positive and negative evidence, particularly our recent history of operating losses.” (Emphasis added.)
{22} Third, Form 8-K, which Navistar filed with the SEC in April 2006, identified four matters that required restatement; these matters did not involve deferred-tax assets. But the document went on to enumerate 11 “items being reviewed,” and those items included deferred-tax assets.
{123} The tax commissioner also urged the BTA to consider a civil complaint filed by Navistar‘s parent corporation against its former accountants. See Navistar Internatl. Corp. v. Deloitte & Touche, L.L.P., N.D.Ill. No. 1:11-cv-03507. The BTA examiner accepted the complaint into evidence, but refused to consider the complaint as an admission by Navistar. In its decision, the BTA took no position on the examiner‘s ruling, and instead stated as follows:
While we acknowledge the commissioner‘s reference to the existence of litigation between [Navistar] and the accounting firm previously involved in the audit of its financial returns, such litigation and the allegations made by [Navistar] therein need not serve as the basis upon which we decide this matter given the grant [to audit the accuracy of the amortizable amount] provided by
R.C. 5751.53(D) .
BTA No. 2010–575, 2013 Ohio Tax LEXIS 7601, 9 (Dec. 31, 2013), fn. 4.
Expert testimony
{1124} The tax commissioner introduced testimony of accounting professor Ray Stephens. The hearing examiner accepted Stephens as an expert for purposes of the issues before the board, and the BTA reinforced that ruling by “reject[ing] as unfounded [Navistar‘s] argument that * * * Stephens[ ] be found unqualified to offer an expert opinion regarding the accounting issues involved herein.” Id.
{1126} Navistar introduced two experts who testified to the crucial factual issue that the BTA ought to resolve in this case: whether the original valuation allowance for 2004 was in compliance with GAAP.
{27} Douglas Pinney, a certified public accountant and a specialist in income-tax accounting issues, opined that the restated valuation allowance should have no effect on the computation of the CAT credit. Pinney supported his conclusion by noting that his review of documentation indicated that the tax-adjusting entries on Navistar‘s books in relation to the restated financials did not occur until after the filing deadline for the Amortizable Amount Report and were not part of the 2004 books and records that the statute requires be used in computing the amortizable amount. Pinney also explained that the valuation allowance involves subjective factors with respect to projecting whether the benefit of deferred-tax assets is likely to be actually realized. For that reason, Pinney testified, there is never a single number that is the “correct” valuation allowance, but instead, there is a range of numbers that might be acceptable for a valuation allowance under GAAP. Pinney testified that the original valuation allowance, which was made part of the company‘s books and records in early 2005 and formed the basis for the 2006 Amortizable Amount Report, was reasonable and was in compliance with GAAP.
{128} Pinney also testified about Navistar‘s Form 8-K from 2006 and Form 10-K with the restated financials from 2007. On Form 10-K, Navistar stated, “[W]e did not apply FASB Statement No. 109 properly” with respect to the deferred-tax assets and valuation allowance. Asked how he reconciled that statement with his other opinions, Pinney responded that the quoted statement “doesn‘t necessarily mean that the valuation allowance itself was incorrect.” With respect to Navistar‘s Form 8-K, Pinney testified that Navistar was “simply indicat[ing] they were going to review this area,” i.e., the deferred-tax assets and valuation allowance.
{29} Navistar also called Beth Savage, a certified public accountant who was a consultant for troubled companies. Her testimony amplified Pinney‘s point that the determination of the valuation allowance involves subjective judgment in weighing factors and predicting future events. She described the full valuation
Fact testimony
{130} Navistar called its vice president of tax, Carol Garnant, who confirmed the subjective aspect of the valuation allowance and added the historical perspective of having gone through the restatement process in her position at Navistar, testifying that neither the IRS nor any state authorities had found any fraudulent entries or accounting practices. She also testified that Navistar had in fact been able to realize the value of its NOLs.
{31} Navistar also called three Ohio Department of Taxation officials as on cross-examination to establish the historical background of the CAT credit.
THE BTA DECISION
{132} The BTA affirmed the tax commissioner‘s determination. Taking as its starting point
ANALYSIS
{133} Navistar presented a twofold argument to the BTA and presents the same arguments here. On the one hand, Navistar asserts that the tax commissioner lacked any authority to adjust the valuation allowance based on the restatement of financial statements that occurred after the June 2006 deadline for filing the Amortizable Amount Report. On the other hand, Navistar presented considerable evidence to the BTA to negate any inference that the 2007 restate-
{134} We disagree with Navistar‘s first argument. The plain language of
{135} We also agree with the tax commissioner that because the amortizable amount is computed by using amounts reflected in the company‘s books and records,
{136} The BTA acknowledged the tax commissioner‘s statutory authority to correct error, but the BTA‘s decision is unreasonable and unlawful in its failure to consider and weigh all the conflicting evidence concerning whether the original valuation allowance was in compliance with GAAP. Specifically, the BTA considered the official statements made by Navistar in its SEC filings as admissions, but it failed to consider the countervailing expert and lay testimony offered by Navistar. We therefore vacate the BTA‘s decision and remand the cause with the instruction that the BTA carefully consider and weigh all pertinent evidence before determining whether Navistar‘s original valuation allowance was in compliance with GAAP.
{1137} One point of dispute remains. Before the BTA and this court, the tax commissioner has sought to rely on the complaint filed in Illinois by Navistar‘s parent corporation against its former accountants. The hearing examiner admit-
{138} The BTA‘s decision neither explicitly nor implicitly overturned the hearing examiner‘s ruling; instead, the board acquiesced in the ruling by noting that it need not rely on the complaint in reaching its decision. 2013 Ohio Tax LEXIS 7601, 9, fn. 4. As a result, the hearing examiner‘s ruling that precluded the use of the Illinois complaint as an admission has merged into the BTA‘s decision and constitutes the law of this case, subject to challenge by the tax commissioner in this appeal. See Grover v. Bartsch, 170 Ohio App.3d 188, 2006-Ohio-6115, 866 N.E.2d 547, ¶ 9 (“Interlocutory orders * * * are merged into the final judgment,” with the result that “an appeal from the final judgment includes all interlocutory orders merged with it“).
{139} The tax commissioner has not adequately challenged the BTA‘s evidentiary ruling: he has neither specified it as an error in a protective notice of cross-appeal1 nor formally contested it through a proposition of law and argument in his brief. See Household Fin. Corp. v. Porterfield, 24 Ohio St.2d 39, 46, 263 N.E.2d 243 (1970) (an issue “considered by the board and alluded to in both oral argument and the briefs” was nonetheless “deemed to be abandoned” when it was “not presented to this court as a proposition of law and argued as such“); E. Liverpool v. Columbiana Cty. Budget Comm., 116 Ohio St.3d 1201, 2007-Ohio-5505, 876 N.E.2d 575, ¶ 3. Although the commissioner did allude to the issue in a footnote of his brief to this court, and although he reiterated the point during oral argument, his bare assertion that the Illinois complaint constitutes admissions against interest does not acknowledge the BTA examiner‘s contrary ruling, much less advance specific arguments in opposition to that ruling. See Util. Serv. Partners, Inc. v. Pub. Util. Comm., 124 Ohio St.3d 284, 2009-Ohio-6764, 921 N.E.2d 1038, ¶ 53 (argument effectively waived where “[n]o argument is supplied regarding whether the relevant case law, applied to the facts of this case, justifies a decision in [the party‘s] favor“); In re Application of Columbus S. Power Co., 129 Ohio St.3d 271, 2011-Ohio-2638, 951 N.E.2d 751, ¶ 19 (“it is not generally the proper role of this court to develop a party‘s arguments“). The tax commissioner has not shouldered the burden of demonstrating an abuse of discretion by the
CONCLUSION
{40} For these reasons, we vacate the BTA‘s decision and remand the cause with the instruction that the BTA determine, based on a consideration of all the evidence in accordance with this opinion, whether the valuation allowance originally reported on Navistar‘s Amortizable Amount Report was or was not in compliance with GAAP. If the BTA determines that the original valuation allowance was in compliance with GAAP, the BTA shall reverse the tax commissioner‘s determination and reinstate the amortizable amount as originally reported. If the BTA determines that the original valuation allowance was not in compliance with GAAP, the BTA shall affirm the tax commissioner‘s determination.
Judgment accordingly.
O‘CONNOR, C.J., and LANZINGER, KENNEDY, and O‘NEILL, JJ., concur.
PFEIFER and O‘DONNELL, JJ., dissent.
PFEIFER, J., dissenting.
{41} I agree with much of the majority opinion, including its most important holding, that
{142} I disagree, however, with the majority‘s ultimate disposition of the case, vacating the decision of the Board of Tax Appeals (“BTA“) and remanding the cause to the BTA. The majority concludes that the BTA did not consider the testimony of appellant Navistar, Inc.‘s experts regarding whether the original valuation allowance was in compliance with GAAP, and it admonishes the BTA to, on remand, “carefully consider and weigh all pertinent evidence before determining whether Navistar‘s original valuation allowance was in compliance with GAAP.” Majority opinion at ¶ 36.
In its Form 10-K, [Navistar] stated, in part: “In addition, in previously issued financial statements, we had established a partial valuation allowance with respect to our net U.S. and Canadian deferred tax assets. We reassessed our need for a valuation allowance and determined that we did not apply FASB Statement No. 109 properly and that a full valuation allowance should be established for net U.S. and Canadian deferred tax assets based on the weight of positive and negative evidence, particularly our recent history of operating losses.”
(Emphasis sic.) Id. at fn. 5. The BTA concluded that Navistar‘s books were “corrected to comport with generally accepted accounting principles.” Id. at 11. There is no reason for this court to tamper with that factual finding. This case should be over.
{144} I also disagree with the majority‘s ruling regarding the complaint by Navistar‘s parent corporation filed in federal court in Illinois against its former accountants, Deloitte & Touche, L.L.P. (“Deloitte“), alleging multiple GAAP violations in accounting services Deloitte performed for Navistar in the time period relevant to this case. Navistar Internatl. Corp. v. Deloitte & Touche, L.L.P., N.D.Ill. No. 1:11-cv-03507. One assertion in the complaint reads as follows:
As a direct result of Deloitte‘s fraudulent statements and omissions, as well as Deloitte‘s incompetence and malpractice, Navistar was forced to fire Deloitte in 2006, hire new auditors, overhaul its accounting records
and, in 2007, issue a massive restatement of its financial statements for fiscal years 2003, 2004, and the first three quarters of 2005 * * *.
{45} The majority holds that “the tax commissioner has waived his right to rely on the Illinois complaint as an admission by Navistar and may not do so on remand.” Majority opinion at ¶ 39. But the complaint has been admitted into evidence, and it is unclear what the BTA‘s position is on whether the tax commissioner can use the complaint to prove his case. It has some evidentiary value. The hearing examiner, near the end of the hearing, told the tax commissioner‘s counsel, “You can make any argument you want about it at this point. It is evidence in the record.” The BTA itself never ruled on how the complaint could be used; it concluded only that it did not need to rely on the complaint to arrive at its decision:
While we acknowledge the commissioner‘s reference to the existence of litigation between [Navistar] and the accounting firm previously involved in the audit of its financial returns, such litigation and the allegations made by [Navistar] therein need not serve as the basis upon which we decide this matter given the grant provided by
R.C. 5751.53(D) .
2013 Ohio Tax LEXIS 7601 at 9, fn. 4. This is not a ruling that precludes the use of the complaint for any reason. How the commissioner may use the complaint remains an open question. It is the BTA, as fact-finder, that must decide what significance to accord the complaint on remand.
O‘DONNELL, J., concurs in the foregoing opinion.
Maryann B. Gall; Vorys, Sater, Seymour & Pease, L.L.P., Laura A. Kulwicki, and Steven L. Smiseck, for appellant.
Michael DeWine, Attorney General, and Barton A. Hubbard, Assistant Attorney General, for appellee.
Bricker & Eckler, L.L.P., Mark A. Engel, and Anne Marie Sferra, urging reversal for amici curiae, Ohio Manufacturers’ Association and Ohio Chamber of Commerce.