Columbus Div. of Income Tax v. Boles

• Decision Date: 10 March 1992
• Docket Number: No. 91AP-907,91AP-907
• Parties: COLUMBUS DIVISION OF INCOME TAX, Appellant, v. BOLES, Appellee.
• Court: Ohio Court of Appeals

Page 617

78 Ohio App.3d 617

605 N.E.2d 981

COLUMBUS DIVISION OF INCOME TAX, Appellant, v. BOLES, Appellee.

No. 91AP-907.

Court of Appeals of Ohio, Tenth District, Franklin County.

Decided March 10, 1992.

Ronald J. O'Brien, City Atty., and James D. Newcomer, Columbus, for appellant.

Baker & Hostetler, Edward J. Bernert and George H. Boerger, Columbus, for appellee.

PETREE, Judge.

This is an appeal from the Franklin County Municipal Court, which granted judgment to E. Thomas Boles, Jr., M.D., defendant herein. The city of Columbus, Division of Income Tax, plaintiff herein, appeals and asserts the following assignments of error:

"I. The trial court committed prejudicial error in determining that income from defendant's interest in the Atlas Building was not taxable by the City of Columbus.

"II. The trial court committed prejudicial error by entering judgment for defendant and against plaintiff on plaintiff's complaint and by entering judgment against plaintiff and for defendant on defendant's counterclaim."

These two assignments of error present a single question for our review. That question is whether Columbus may tax a nonresident for limited partnership income derived from partnership business operations conducted within city limits.

Plaintiff filed a complaint on May 17, 1990 in the Franklin County Municipal Court against defendant, alleging that he failed to pay sufficient municipal income tax for the years 1986 and 1987. Plaintiff demanded judgment in the amount of $1,565.92 plus interest. Defendant answered and defended, arguing that plaintiff had no authority to tax his limited partnership income. He also counterclaimed for a refund of certain taxes previously paid for such income.

The parties submitted stipulations and the cause was tried to the court. The stipulations state that defendant is a resident of Upper Arlington, Ohio. During the years 1986 and 1987, defendant was a limited partner in several business ventures, including Atlas Building, Ltd. The principal office and location of operations of this limited partnership is in Columbus. In 1986, defendant derived $32,856 in income from his interest in Atlas Building, Ltd. In 1987, he derived $84,026 in income from it.

Given these elementary facts, the trial court held that plaintiff could not tax defendant's limited partnership income. First, the trial court decided that defendant's investment activity in a Columbus enterprise did not qualify as a taxable activity under the local tax code. Second, the trial court concluded that limited partnership income, by its very nature, is intangible income that is not subject to municipal income taxation in any event. Accordingly, the trial court entered judgment against plaintiff and for defendant.

The threshold issue in this appeal is whether the trial court erred in concluding that the language of the local income tax code precludes the taxation of defendant's limited partnership income. During the tax periods in question, the Columbus City Code Net Profits Tax, contained in Section 361.19 of the code, read:

"To provide for the purposes of general municipal operations, maintenance, new equipment, and capital improvements of the City, there is hereby levied a tax at the rate of two (2.0) percent per annum upon the following:

" * * *

"(c) Net Profits "(1) On the net profits earned of all unincorporated businesses, professions, or other activities conducted by residents of the City.

"(2) On the net profits earned of all unincorporated businesses, professions, or other activities conducted in the City by nonresidents.

"(3) For purposes of (c)(1) and (c)(2) above, an association shall not be taxable as an entity, but any member thereof who is a resident of the City shall be taxed individually on his entire share whether distributed or not, of the annual net profits of the association, and any non-resident member thereof shall be taxed individually only on that portion of his share, whether distributed or not, of the annual net profits of the association as is derived from work done, services performed or rendered, and business or other activities conducted in the City."

In this appeal the parties present widely disparate interpretations of this particular impost. Plaintiff emphasizes that defendant's partnership, which qualifies as an "association" under Sections 361.03 and 361.19(c)(3), was located in Columbus and did business there. Because of this, plaintiff contends that the resident partnership's net profits were taxable under Section 361.19(c)(1) and then attributable to defendant under Section 361.19(c)(3). Contrarily, defendant contends that the foregoing provisions clearly state in Section 361.19(c)(3) that no entity tax is imposed on an association such as a partnership. ¹ Rather, defendant argues that partners are taxed only for their actual personal activities in Columbus. Because defendant was merely a "passive" investor, defendant contends that he neither personally conducted any activity in Columbus nor personally conducted any business there. Hence, defendant contends that no tax can be imposed upon him.

At the outset, we note that the local income tax code is by no means a model of clarity. Like other Ohio municipalities, Columbus entered the income tax field in the 1940s after the city of Philadelphia, Pennsylvania, pioneered this area of municipal finance in 1938. See, generally, Fordham & Mallison, Local Income Taxation (1950), 11 Ohio St.L.J. 217, 220-223; Note, Municipal Personal Income Taxation of Nonresidents (1970), 31 Ohio St.L.J. 770, 785. Today, the Columbus City Code retains much of the same language as was contained in that early 1938 Philadelphia ordinance.

In Benua v. Columbus (1959), 170 Ohio St. 64, 9 O.O.2d 459, 162 N.E.2d 467, the Ohio Supreme Court had occasion to interpret this language in an essentially similar version of Section 361.19(c)(2) of the Columbus City Code Net Profits Tax. In that case, a nonresident owner of real estate, which was situated in Columbus, challenged the authority of the city to impose its municipal net profits tax on the rents the taxpayer received from the Columbus property. In addition to raising various constitutional arguments that were ultimately rejected by the court, the taxpayer also contended that simply receiving rents was not a "business" under the net profits tax. The Supreme Court rejected this contention in light of the broad definition of the term "business" in the city ordinance, which read: " * * * 'an enterprise, activity, profession, or undertaking of any nature conducted for profit or ordinarily conducted for profit.' * * * " Id. at 66, 9 O.O.2d at 461, 162 N.E.2d at 469. ² The court wrote in paragraph one of the syllabus that: "Where a legislative body incorporates in an enactment definitions of words and phrases used therein, such definitions will be controlling in making a determination of the legislative intent."

While Benua is not entirely on point, it undoubtedly establishes that the language of the taxing ordinance itself should control our analysis here and that the relatively passive activity of receiving rent can qualify as "business" under the broadly drafted Columbus tax ordinance.

In the present case, the trial court found that receiving income from a Columbus limited partnership is not an "activity" under Section 361.19(c)(2). In addition, defendant urges on appeal that he cannot be said to have "conducted" any activity in Columbus because a limited partner, by statute, is only a passive investor with no right of day-to-day control or management responsibilities. ³

These same arguments were raised in Philadelphia and considered by the courts there years ago. For instance, in Freedman v. Tax Review Bd. of City of Philadelphia (1968), 212 Pa.Super. 442, 243 A.2d 130, a resident taxpayer challenged the taxation of his limited partnership income derived from a Philadelphia limited partnership operating there. Relying on several previous cases limiting the Philadelphia ordinance to "earned" income, the appellate court held that limited partnership income was not taxable. The court reasoned that a limited partner is a passive investor who does not "earn" income.

The Superior Court's ruling in Freedman was appealed to the Supreme Court of Pennsylvania. In a one-sentence, per curiam opinion, the ruling was affirmed by an evenly divided Supreme Court. Freedman v. Tax Review Bd. of City of Philadelphia (1969), 434 Pa. 282, 258 A.2d 323. There were two separate dissenting opinions.

We do not find these Pennsylvania cases to be persuasive in the case at hand. First, the Philadelphia ordinance has received strict construction and very restrictive treatment from the courts in that state, in part because of limitations set forth in the state's amended Sterling Act, which initially allowed for municipal income taxation in 1932. Consequently, unlike Ohio courts, the Pennsylvania courts have felt constrained by principles of state preemption to create an "earned" income restriction, which in the final analysis has lead to much litigation and various restrictive holdings. See Breitinger v. Philadelphia (1950), 363 Pa. 512, 522, 70 A.2d 640, 645-646. See, also, Fordham & Mallison, supra, at 222, 245-247. For instance, in contrast to the Ohio Supreme Court's holding in Benua, supra, ⁴ the Pennsylvania courts have rejected municipal taxation of rents derived from buildings within the city. Breitinger, supra; Murray v. Philadelphia (1950), 363 Pa. 524, 70 A.2d 647.

Second, the points made in the dissenting opinions of Freedman have much force. The net profits tax ordinance, on its face, makes no distinction between types of business association partners, be they general, limited, silent, or otherwise. Further, regardless of the amount of personal control over operations, the limited partner is definitely reaping benefits from conducting business within the city. ⁵ And, if limited partners could...