Corrigan v. Testa

• Decision Date: 04 May 2016
• Docket Number: No. 2014–1836.,2014–1836.
• Citation: 149 Ohio St.3d 18,73 N.E.3d 381,2016 Ohio 2805
• Parties: CORRIGAN, Appellant, v. TESTA, Tax Commr., Appellee.
• Court: Ohio Supreme Court

149 Ohio St.3d 18

73 N.E.3d 381

2016 Ohio 2805

CORRIGAN, Appellant,

v.TESTA, Tax Commr., Appellee.

No. 2014–1836.

Supreme Court of Ohio.

Submitted Feb. 23, 2016.

Decided May 4, 2016.

Taft, Stettinius & Hollister, L.L.P., and J. Donald Mottley, Columbus, for appellant.

Michael DeWine, Attorney General, and Barton A. Hubbard, David D. Ebersole, and Raina M. Nahra, Assistant Attorneys General, for appellee.

Baker & Hostetler, L.L.P., Edward J. Bernert, Elizabeth A. McNellie, Columbus, and Christopher J. Swift, Cleveland, urging reversal for amicus curiae, Ohio Chamber of Commerce.

O'CONNOR, C.J.

{¶ 1} A 2002 amendment to R.C. 5747.212 broadly imposed Ohio's income tax on a capital gain realized by an out-of-state investor in a pass-through entity if that investor held a 20 percent or greater interest in the entity during a three-year period including the taxable year. The new statute apportioned the capital gain to Ohio based on the percentage of the entity's business conducted in this state during the three-year period. In this appeal, appellant, Patton R. Corrigan, a nonresident taxpayer, contests R.C. 5747.212's imposition of income tax on a portion of the capital gain that he realized in 2004 when he sold his ownership interest in Mansfield Plumbing, L.L.C., a producer of sanitary supplies.

{¶ 2} The resolution of Corrigan's challenge turns on a crucial distinction: Ohio's taxation of Mansfield Plumbing's income to Corrigan and Ohio's taxation of Corrigan's capital gain from the sale of Mansfield Plumbing. It is undisputed that because Mansfield Plumbing constituted a pass-through entity for tax purposes, Ohio was able to tax Corrigan's distributive share of the entity's income (or in this case, loss) based on Mansfield Plumbing's own business activity in Ohio. The issue before us is whether Ohio may also levy income tax on Corrigan's capital gain as if it were income from the business itself.

{¶ 3} If R.C. 5747.212 were not the law, Corrigan would be subject to the ordinary treatment of capital gains derived from intangible property: he would allocate the entire amount of the gain outside Ohio because he was not domiciled in Ohio. See R.C. 5747.20(B)(2)(c). Corrigan asserts that applying R.C. 5747.212 to him is unconstitutional and that he should therefore be permitted to allocate the gain entirely outside Ohio.

{¶ 4} In defending the imposition of R.C. 5747.212 on Corrigan, the tax commissioner does not contend that Corrigan himself was operating or managing the business of Mansfield Plumbing. Instead, the state's theory is that Ohio enjoys the constitutional prerogative of taxing the proceeds of a nonresident's out-of-state sale of intangible property based on nothing more than the fact that the entity being sold conducted some of its business in Ohio. We disagree with the state's contention.

{¶ 5} We hold that R.C. 5747.212, as applied to Corrigan, violates the Due Process Clause of the Fourteenth Amendment to the United States Constitution. We therefore reverse the decision of the Board of Tax Appeals ("BTA") and remand to the tax commissioner to grant Corrigan a refund.

RELEVANT BACKGROUND

FACTS

{¶ 6} In 2000, Mansfield Plumbing was an established enterprise engaged in producing sanitary ware, with plants in Texas and California. It did business in Ohio—in fact, in all 50 states—as well as in other countries.

{¶ 7} In 2000, Corrigan, then a resident of Connecticut, acted in concert with business associates to acquire the assets of Mansfield Plumbing, including the right to use that entity's name. More specifically, the record demonstrates that the consent to use the name "Mansfield Plumbing, L.L.C." is dated November 2000 and that Corrigan's share of the entity—his "membership" interest in the limited-liability company—was 79.29 percent.

{¶ 8} Corrigan became the main co-owner and a "manager," i.e., a member of the board of managers of Mansfield Plumbing. The day-to-day operations of the company were overseen by officers and managers employed by the company. According to Corrigan's brief before the tax commissioner, as a manager, Corrigan visited the company headquarters in Perrysville, Ohio, "for board meetings and management presentations regarding operations, labor, finance, strategic positioning and other matters important to the goal of growing Mansfield's market share." Corrigan testified that that involvement was "easily a hundred hours" per year. According to Corrigan, his role and capacity was as an "investo[r] who bought companies with the intention of providing financing and strategic expertise to grow the company for an eventual exit via a sale to a third party." Corrigan specifically argued to the tax department that his role in the entity involved "stewardship" rather than active management of the business.

{¶ 9} In 2004, Corrigan and his fellow investors sold their interests in Mansfield Plumbing to a third party, Ceramicorp, Inc., a unit of a Colombian entity in the sanitary-wares business that wanted a foothold in North America. As a result of the sale, Corrigan realized a capital gain of $27,563,977 from his share of Mansfield Plumbing. In filing his returns for tax year 2004, Corrigan treated the entire amount of the gain as allocable outside Ohio, apparently because Corrigan was not domiciled in Ohio.

PROCEDURAL HISTORY

{¶ 10} In 2009, Ohio issued an assessment for an unpaid 2004 tax liability of $674,924.58, which, with interest, amounted to a total assessment of $847,085.19. Corrigan paid $100,000 of the assessment, then filed a refund claim for that amount on March 8, 2010. See former R.C. 5747.11(A)(3), Am.Sub.H.B. No. 530, 151 Ohio Laws, Part IV, 6700 (requiring the tax commissioner to refund amounts more than $1 "paid on an illegal, erroneous, or excessive assessment"). These proceedings arise from that claim.

{¶ 11} The tax commissioner denied the refund claim in a final determination issued on August 20, 2012. The final determination applied a straightforward reading of R.C. 5747.212 and concluded that the assessment and payment complied with the statute. The final determination also rejected Corrigan's constitutional arguments.

{¶ 12} Corrigan appealed to the BTA, which held a hearing on January 15, 2014. Corrigan testified at the hearing.

{¶ 13} The BTA issued its decision on September 24, 2014. Noting the presumption favoring the tax commissioner's findings and its own lack of jurisdiction to declare a statute unconstitutional, the BTA "acknowledge[d]" Corrigan's constitutional claims but made "no findings in relation thereto." BTA No. 2012–3244, 2014 Ohio Tax LEXIS 4415, at 4 (Sept. 24, 2014). The BTA also noted that Corrigan raised a statutory argument in his BTA brief but held that it lacked jurisdiction to entertain that contention because Corrigan had not specified that claim in his notice of appeal to the BTA.¹ Id.

{¶ 14} The BTA affirmed the tax commissioner's final determination, and Corrigan appealed to this court.

ANALYSIS

THE DUE PROCESS AND COMMERCE CLAUSES SET LIMITS ON OHIO'S TAXING AUTHORITY

{¶ 15} "It is a venerable if trite observation that seizure of property by the State under pretext of taxation when there is no jurisdiction or power to tax is simple confiscation and a denial of due process of law. ‘ * * * Jurisdiction is as necessary to valid legislative as to valid judicial action.’ " Miller Bros. Co. v. Maryland, 347 U.S. 340, 342, 74 S.Ct. 535, 98 L.Ed. 744 (1954), quoting St. Louis v. Wiggins Ferry Co., 78 U.S. 423, 430, 11 Wall. 423, 20 L.Ed. 192 (1870). And "[g]overnmental jurisdiction in matters of taxation * * * depends upon the power to enforce the mandate of the state by action taken within its borders, either in personam or in rem. " Shaffer v. Carter, 252 U.S. 37, 49, 40 S.Ct. 221, 64 L.Ed. 445 (1920). These precepts point to the importance of the Due Process Clause of the Fourteenth Amendment as a means of "guarding against extraterritorial taxation" by defining the limits of state taxing authority. Hillenmeyer v. Cleveland Bd. of Rev., 144 Ohio St.3d 165, 2015-Ohio-1623, 41 N.E.3d 1164, ¶ 40. Additionally, the United States Supreme Court has held that under the Due Process Clause, "the States * * * are subject to limitations on their taxation powers that do not apply to the Federal Government." F.W. Woolworth Co. v. New Mexico Taxation & Revenue Dept., 458 U.S. 354, 363, 102 S.Ct. 3128, 73 L.Ed.2d 819 (1982).

{¶ 16} Similarly, the dormant Commerce Clause imposes its own restrictions upon state taxing power. "By prohibiting States from discriminating against or imposing excessive burdens on interstate commerce without congressional approval, [the dormant Commerce Clause] strikes at one of the chief evils that led to the adoption of the Constitution, namely, state tariffs and other laws that burdened interstate commerce." Maryland Comptroller of Treasury v. Wynne, ––– U.S. ––––, 135 S.Ct. 1787, 1794, 191 L.Ed.2d 813 (2015).

{¶ 17} "Due process centrally concerns the fundamental fairness of government activity," while the Commerce Clause reflects "structural concerns about the effects of state regulation on the national economy." Quill Corp. v. North Dakota, 504 U.S. 298, 312, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992). Although the constraints imposed by the Due Process Clause and the Commerce Clause are distinct, they partially overlap. Commerce Clause restrictions may run parallel to Due Process Clause restrictions or be imposed in addition to Due Process Clause constraints. That said, under both the Due Process Clause and the Commerce Clause, the bedrock principle is "that a State may not tax value earned outside its borders." Allied–Signal, Inc. v. Dir., Div. of Taxation, 504 U.S. 768, 777, 784, 112 S.Ct. 2251, 119 L.Ed.2d 533 (1992). " ‘No principle is better settled,’ " the high court has stated, " ‘than that the power of a state, even its power of taxation, in respect to property, is limited to such as is within its jurisdiction.’ " Miller Bros. at 342, ...