Dana Corp. v. Testa
| Decision Date | 24 April 2018 |
| Docket Number | No. 2015–0460,2015–0460 |
| Citation | 2018 Ohio 1561,99 N.E.3d 393,152 Ohio St.3d 602 |
| Parties | DANA CORPORATION, n.k.a. Dana Holding Corporation, Appellant and Cross–Appellee, v. TESTA, TAX COMMR., Appellee and Cross–Appellant. |
| Court | Ohio Supreme Court |
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, and Barton A. Hubbard, Assistant Attorney General, for appellee and cross-appellant.
{¶ 1} In this appeal we confront an issue arising out of the special credit against the commercial-activity tax ("CAT") set forth at R.C. 5751.53 (the "CAT credit"). One factor in calculating the CAT credit is the net operating losses ("NOLs") that were incurred by the corporation before the enactment of the CAT. To take the credit, a company was required to file a report with appellee and cross-appellant, the tax commissioner, that calculated, based on a formula set forth in R.C. 5751.53(A)(9), an amount that would be applied gradually over a period of up to 20 years ("amortizable amount") against the CAT. Appellant and cross-appellee, Dana Corporation, now known as Dana Holding Corporation, filed its report indicating that its amortizable amount was $12,493,003. Based on his audit of Dana Corporation's amortizable-amount report, the tax commissioner ordered two reductions that decreased the amortizable amount to $4,728,051. Dana agreed with the first of the two adjustments, which reduced the amortizable amount to $10,935,324, but contested the second reduction from $10,935,324 to $4,728,051. Dana argues that the second adjustment, a percentage reduction consistent with the percentage reduction of Dana's federal NOLs on account of its cancellation-of-debt income ("CODI") that resulted from its bankruptcy, was not authorized by R.C. 5751.53(F). The Board of Tax Appeals ("BTA") disagreed with Dana's position and affirmed the tax commissioner's full reduction. This issue forms the principal basis for Dana's appeal to this court. In the alternative, Dana argues that even if it was proper for the tax commissioner to reduce the amortizable amount, his calculation of the reduction was erroneous.
{¶ 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 R.C. 5717.04, order modification of the amortizable amount to $10,935,324.
{¶ 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 R.C. 5733.04(I)(1)(b) ; Navistar at ¶ 9. And because the potential tax benefit of NOLs constitutes a type of corporate asset, NOLs are reflected as deferred tax assets on a corporation's books and records. Navistar at ¶ 10. However, because the CAT is a gross-receipts tax under which the tax rate is applied to gross revenues rather than net income, the Ohio-related NOL asset on the corporate books would lose its value as the 2005 tax reform was phased in. Id. at ¶ 2.
{¶ 6} To address this concern, the General Assembly included R.C. 5751.53, the CAT credit, in the CAT legislation. The statute has two main features. First, an "amortizable amount" had to be calculated and reported to the tax commissioner by the taxpayer by June 30, 2006, R.C. 5751.53(D) ; that amount is based on the NOL carryforwards and other deferred tax assets on the company's books as of the fiscal year ending 2004 (the last taxable year under the franchise tax before enactment of the 2005 tax reform). R.C. 5751.53(A)(5) through (9) ; see Navistar at ¶ 12. The tax commissioner was authorized to audit and modify the amortizable amount reported by the taxpayer by issuing a final determination no later than June 30, 2010 (unless the deadline was extended by consent, as it was in this case). R.C. 5751.53(D).
{¶ 7} Second, R.C. 5751.53(B) sets forth how the credit may be taken (i.e., how the "amortizable amount" is amortized) over a 10– to 20–year period to offset CAT liability. The amortizable amount is a factor in the calculation that determines how much credit can be used each year and constitutes a cap on the total amount of credit available to the taxpayer.
{¶ 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 26 U.S.C. 381, subject to whatever reduction occurred as a result of the realization of CODI.
{¶ 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 26 C.F.R. 1.1502–11 through 1.1502–28. Thus, "Dana's NOLs" refers to the aggregate NOLs of the constituent corporations. See 26 CFR 1.1502–21 and 1.1502–28.
{¶ 11} R.C. 5751.53(D) afforded the tax commissioner until June 30, 2010, to audit and adjust the amount reported in the amortizable-amount report. In this case, the parties extended the audit period by one year to June 30, 2011, which was permitted under R.C. 5751.53(D).
{¶ 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 information contained in amended tax reports filed by Dana. Dana accepted that adjustment as appropriate. Second, the tax commissioner reduced the amortizable amount from $10,935,324 to $4,728,051 based on a percentage reduction that matched the percentage reduction of Dana's federal NOLs by CODI that Dana realized as a result of the bankruptcy. Dana appealed from the tax commissioner's final determination and seeks a return to an amortizable amount of $10,935,324.1
{¶ 13} The BTA began its analysis by rejecting Dana's argument that R.C. 5751.53(F) does not apply to Dana's nondivisive reorganization. The BTA stated that because division (F) constitutes the only statutory provision that permits the CAT credit to be transferred from one entity to another, it must apply to Dana's transfer of the credit from old Dana to new Dana. Next, the BTA rejected Dana's argument that although division (F) incorporated 26 U.S.C. 381 and 26 CFR 1.1502–21, which address transfer of NOLs in the context of corporate acquisitions or reorganizations, it did not incorporate 26 U.S.C. 108 and 26 CFR 1.1502–28, which address offsetting CODI against tax attributes, such as NOLs.2 The BTA concluded that " R.C. 5751.53(F) is not restrictive as to the applicability of any particular Internal Revenue Code section; any/all sections of the code shall apply, as warranted." BTA No. 2011–2287, 2015 WL 971051, *4 (Feb. 18, 2015).
{¶ 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 [ 26 U.S.C.] 108." Id. Making no mention of Dana's proposed alternative method of computing the offset of Ohio NOLs, the BTA affirmed the tax commissioner's final determination. Dana and the tax commissioner appealed.
{¶ 15} In reviewing a decision of the BTA, we determine whether it 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).
{¶ 16} R.C. 5751.53(F) provides:
If one entity transfers all or a portion of its assets and equity to another entity as part of an entity organization...
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