Cleveland Gear Co. v. Limbach

• Decision Date: 09 March 1988
• Docket Number: No. 86-1553,86-1553
• Citation: 520 N.E.2d 188,35 Ohio St.3d 229
• Parties: CLEVELAND GEAR CO., f.n.a. Dyna Cure Precoated Steel, Inc., Appellant, v. LIMBACH, Tax Commr., Appellee.
• Court: Ohio Supreme Court

Page 229

35 Ohio St.3d 229

520 N.E.2d 188

CLEVELAND GEAR CO., f.n.a. Dyna Cure Precoated Steel, Inc., Appellant, v. LIMBACH, Tax Commr., Appellee.

No. 86-1553.

Supreme Court of Ohio.

March 9, 1988.

Syllabus by the Court

1. The Board of Tax Appeals is an administrative agency, a creature of statute, and is without jurisdiction to determine the constitutional validity of a statute. (S.S. Kresge Co. v. Bowers [1960], 170 Ohio St. 405, 11 O.O.2d 157, 166 N.E.2d 139, paragraph one of the syllabus, approved and followed.)

2. The question of whether a tax statute is unconstitutional on its face may be raised initially in the Supreme Court or the courts of appeals, although not previously raised before the Board of Tax Appeals. (S.S. Kresge Co. v. Bowers [1960], 170 Ohio St. 405, 11 O.O.2d 157, 166 N.E.2d 139, paragraph two of the syllabus, modified.)

3. The question of whether a tax statute is unconstitutional when applied to a particular state of facts must be raised in the notice of appeal to the Board of Tax Appeals, and the Board of Tax Appeals must receive evidence concerning this question if presented, even though the Board of Tax Appeals may not declare the statute unconstitutional. (Bd. of Edn. of South-Western City Schools v. Kinney [1986], 24 Ohio St.3d 184, 24 OBR 414, 494 N.E.2d 1109, construed.)

On September 1, 1980, Dyna Cure Precoated Steel, Inc. ("Dyna Cure"), a wholly owned subsidiary of Vesper Corporation, purchased the Cleveland Gear Division of Eaton Corporation. Prior to that date Dyna Cure was not qualified to do business in Ohio and did not engage in business in Ohio. This transaction involved the purchase of the assets of an entire manufacturing plant from Eaton which was located in Cuyahoga County, Ohio. Dyna Cure purchased all the inventories of finished goods, partially finished goods, and raw materials.

For its 1981 personal property tax return, Dyna Cure reported the average monthly value of its manufacturing inventory on hand as of the last day of each of the four calendar months of September through December 1980, and divided that sum by twelve. The appellee Tax Commissioner audited this return and recomputed the average monthly value by dividing the sum by four, the number of months that Dyna Cure conducted business in Ohio as a manufacturer in 1980.

For its 1981 return, Eaton reported the average monthly value of inventory for the tax year by totalling month-end inventories for the eight months it held inventory at this plant, and divided that sum by twelve, the number of months that Eaton conducted business in Ohio as a manufacturer during 1980. Eaton apparently continued in business in Ohio at another location in 1980 after its sale of the Cleveland Gear Division to Dyna Cure.

The average monthly value of the inventory of Dyna Cure increased from $2,752,371, as reported in the return, to $8,257,114 after audit by appellee. The tax increased from $67,722 to $203,166.

Dyna Cure changed its name to Cleveland Gear Company, hereinafter "appellant," on or about February 1, 1982.

The Board of Tax Appeals ("BTA") held that the statutes and prior case law directed that the inventory be valued in the manner in which appellee had determined it. The BTA further declined to comment upon the constitutional implications in the application of the challenged statute (R.C. 5711.16) because appellant had not challenged the statute at the first available opportunity, i.e., during the proceedings before appellee, citing Bd. of Edn. of South-Western City Schools v. Kinney (1986), 24 Ohio St.3d 184, 24 OBR 414, 494 N.E.2d 1109. The BTA thus affirmed the assessment.

The cause is now before this court upon an appeal as of right.

Jones, Day, Reavis & Pogue, Roger F. Day and John L. Kraus, Columbus, for appellant.

Anthony J. Celebrezze, Jr., Atty. Gen., and Mark A. Engel, Columbus, for appellee.

PER CURIAM.

Appellant no longer challenges the method of valuation; it maintains that the method denies it equal protection of the laws. Appellant did not raise this constitutional challenge during the proceedings before appellee, but argues that, by raising it with the BTA and presenting the facts which support the constitutional claim before appellee, appellant created a record upon which this court may consider this challenge. Although appellant makes the prefatory statement that R.C. 5711.16 is facially discriminatory, its argument stresses the specific facts of record. Thus, appellant's argument is that the statute is unconstitutional as it applies to the particular state of facts which it has presented. As appellant's argument falls squarely within the syllabus of Bd of Edn. of South-Western City Schools v. Kinney, supra, the success of its argument depends upon our review of that decision.

The syllabus of Bd. of Edn. of South-Western City Schools v. Kinney, supra, provides the following:

"A party that challenges the constitutionality of the application of a tax statute in a particular situation is required to raise that challenge at the first available opportunity during the proceedings before the Tax Commissioner, and the failure to do so constitutes a waiver of that issue."

In that decision, we noted the fundamental distinction between the constitutional application of legislation to particular facts and the facial unconstitutionality of the legislation itself. The latter question is to be decided by considering the Act itself without regard to extrinsic facts. If the Act is challenged on the ground that it is unconstitutional when applied to a particular state of facts, 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. Belden v. Union Central Life Ins. Co. (1944), 143 Ohio St. 329, 28 O.O. 295, 55 N.E.2d 629, paragraph six of the syllabus.

In Bd. of Edn. of South-Western City Schools we recognized that it would be difficult to develop a factual record necessary to resolve the constitutional issue unless the question was raised at the first available opportunity. Furthermore, the opponent who argues that the statute was applied constitutionally would be denied an opportunity to develop an evidentiary record to show that the statute was constitutionally applied. We also noted, id. at fn. 2, that S.S. Kresge Co. v. Bowers (1960), 170 Ohio St. 405, 11 O.O.2d 157, 166 N.E.2d 139, ¹ had been overruled by implication in Petrocon v. Kosydar (1974), 38 Ohio St.2d 264, 67 O.O.2d 332, 313 N.E.2d 373, and Sun Finance & Loan Co. v. Kosydar (1976), 45 Ohio St.2d 283, 74 O.O.2d 434, 344 N.E.2d 330. We also offered the observation in the same footnote that the constitutional issue is to be raised at the Board of Tax Appeals level, in conflict with the syllabus of the case.

Kresge, Petrocon and Sun Finance all turned upon the lack of sufficient evidence of record to declare the statute unconstitutional as applied to the particular taxpayer involved. Rather than overrule Kresge, Petrocon and Sun Finance actually follow the rule established in Kresge. While Kresge still retains some vitality, it is to be limited to those situations where the challenge is that the statute is facially invalid. Thus, as we noted in Kresge, the Board of Tax Appeals is an administrative agency, a creature of statute, and is without jurisdiction to determine the constitutional validity of a statute. Further, since extrinsic facts are not needed to determine that a statute is unconstitutional on its face, the question of whether a tax statute is unconstitutional on its face may be raised initially in the Supreme Court or the courts of appeals, although the question was not previously raised before the Board of Tax Appeals.

When a statute is challenged on the basis that it is unconstitutional in its application, this court needs a record, and the proponent of the constitutionality of the statute needs notice and an opportunity to offer testimony supporting his or her view.

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