Healthsouth Corp. v. Levin

• Citation: 121 Ohio St.3d 282,903 N.E.2d 1179,2009 Ohio 584
• Decision Date: 17 February 2009
• Docket Number: No. 2007-2281.,2007-2281.
• Parties: HEALTHSOUTH CORPORATION, Appellee, v. LEVIN, Tax Commr., Appellant.
• Court: Ohio Supreme Court

903 N.E.2d 1179

121 Ohio St.3d 282

2009-Ohio-584

HEALTHSOUTH CORPORATION, Appellee, v. LEVIN, Tax Commr., Appellant.

No. 2007-2281.

Supreme Court of Ohio.

Submitted December 16, 2008.

Decided February 17, 2009.

Siegel, Siegel, Johnson & Jennings Co., L.P.A., and Nicholas M.J. Ray, for appellee.

Richard Cordray, Attorney General, and Barton A. Hubbard, Assistant Attorney General, for appellant.

O'CONNOR, J.

{¶ 1} In this personal-property tax case involving tax year 2002, the Tax Commissioner appeals from a decision of the Board of Tax Appeals ("BTA") that granted appellee, HealthSouth Corporation, a substantial reduction in the taxable value of personal property in 19 Ohio taxing districts. That reduction would lead to significant refunds of property taxes.

{¶ 2} Pursuant to R.C. 5711.26, HealthSouth filed an application for final assessment requesting the reductions. The commissioner issued final assessment certificates without making the requested reductions, explaining that HealthSouth had not adequately documented its request.

{¶ 3} Reversing the commissioner, the BTA stated that HealthSouth had presented sufficient evidence of value to justify the reductions. The BTA did not, however, specifically address the commissioner's objections to HealthSouth's evidence, and it did not address the commissioner's argument that the refund claim was legally or equitably barred.

{¶ 4} In its appeal to this court, the commissioner challenges HealthSouth's entitlement to refunds on two grounds.

{¶ 5} First, the commissioner argues that the refund claim was barred because the excessive tax payments in this case did not occur as the result of good-faith error or mistake. The commissioner points to evidence that former HealthSouth managers, as part of a scheme to inflate corporate income and assets to attract investors, entered fictitious assets on the company's books that were then reported on property tax returns. HealthSouth's claim seeks to remove the fictitious assets from the tax assessment and thereby obtain a refund of overpayments. The commissioner argues that the deliberately false reporting of the assets should defeat HealthSouth's claim as a matter of law and equity.

{¶ 6} Second, the commissioner renews his contention that HealthSouth failed to provide sufficient documentation of the amount of taxable value that was fraudulently reported on the company's original return for 2002.

{¶ 7} We find no support for the commissioner's first argument in the Ohio statutes and the case law. We hold that the property tax statutes do not authorize the commissioner or the BTA to refuse to reduce a tax assessment on the grounds that the excess taxable value was reported as part of an accounting fraud. Additionally, we hold that the circumstances presented do not justify recognizing estoppel as a bar to HealthSouth's claim. Because the correction and refund claim were not barred as a matter of law, the BTA was obligated to determine whether HealthSouth had submitted sufficient evidence to document the fictitious and fraudulent assets originally reported in Ohio taxing districts. The BTA failed to make that determination. Accordingly, we vacate the BTA's decision and remand to the BTA to evaluate the evidence in light of the commissioner's objections.

Relevant Background

The Fraud and Fictitious Assets

{¶ 8} On March 19, 2003, the Securities and Exchange Commission filed suit against HealthSouth and its chairman, Richard M. Scrushy, claiming that HealthSouth had deliberately overstated its earnings by at least $1.4 billion in 1999. Within weeks, nearly a dozen current and former HealthSouth executives, including all five who had served as chief financial officer, pleaded guilty to criminal violations of the federal securities laws and related statutes. In conjunction with these events, the corporation's board of directors established a Special Audit Review Committee on March 22, 2003.

{¶ 9} That committee examined the corporation's accounting for the period 1996 through 2002 and determined that "accounting fraud at HealthSouth was by any standard both enormous and complex." HealthSouth misstated revenues and expenses to inflate earnings, a fraud that involved making over $2.7 billion in false or unsupported entries in the accounting systems. The concealment of revenue inflation involved transfers out of a corporate "suspense account" (an account used temporarily for doubtful receipts, disbursements, or discrepancies pending their analysis and permanent classification) onto the balance sheets of various HealthSouth facilities. Because the adjustments were so large and difficult to account for, the corporation invented more than $1 billion in fictitious assets in order to conceal income-statement fraud.

Removal of the Fictitious Assets

{¶ 10} As of December 31, 2001, the tax lien date at issue, HealthSouth owned multiple health-care facilities in Ohio, including physical rehabilitation, surgery, and sports medicine centers. It paid personal-property tax on the tangible personal property utilized in providing services at those locations.

{¶ 11} For tax year 2002, HealthSouth filed an intercounty return with the Tax Commissioner on June 19, 2002. Spreadsheets were submitted with the return purporting to detail the assets at the Ohio locations. The Tax Commissioner issued preliminary assessment certificates based on the return on August 12, 2002. Those certificates reveal personal property in 19 taxing districts throughout Ohio. Total assessed value equaled $5,262,130.

{¶ 12} On August 4, 2004, HealthSouth filed its application for final assessment, which sought to correct the tax assessment for 2002 and thereby obtain refunds of excess taxes that had been paid with respect to that tax year. In support of the application, HealthSouth submitted a set of spreadsheets called "Amended Fixed Assets." The application was filed, and the Amended Fixed Asset list was prepared by Brian T. Scully, an outside representative associated with the accounting firm KPMG, L.L.P. The underlying business records, however, were not submitted. The method HealthSouth apparently employed in making the correction consisted of simply removing from the assessment items with a certain designation.¹ The application, if accepted, would reduce the total assessed value by $2,668,679.

{¶ 13} In reviewing the application, the commissioner requested that HealthSouth submit "full and detailed journal entries that are reflective of the write-off and/or write-down of these assets in Ohio showing that the originally reported costs have been written off of the books of HealthSouth Corporation." HealthSouth did not comply. On July 15, 2005, the commissioner issued final assessment certificates along with a cover letter noting "a lack of evidence to establish that these items have fully been removed from the assets as required by [generally accepted accounting principles]." As a result, the final assessment certificates reflect a "0 change in list value."

{¶ 14} At the BTA hearing on appeal of the commissioner's ruling, HealthSouth presented the testimony of Michael D. Martin, a vice-president of tax who oversees sales, use, and property tax obligations, and a number of exhibits. HealthSouth presented the evidence in an attempt to justify its request for reduction through revised financial statements and business records. But the Tax Commissioner strenuously objected to Martin's testimony as relying on hearsay and as lacking a foundation of personal knowledge. The commissioner also challenged some exhibits as insufficiently authenticated.

{¶ 15} At the conclusion of the BTA hearing, the commissioner advanced the theory that HealthSouth's claim was barred because the fictitious assets were reported as part of a deliberate fraud. The commissioner did not file a brief.

{¶ 16} In its decision, the BTA reversed the commissioner. Without specifically addressing the commissioner's objections to HealthSouth's evidence, the BTA found that HealthSouth had proved its case. The BTA did not address the commissioner's argument that the claim was barred because of the underlying fraud.

Analysis

Ohio law does not condition corrective reductions of property tax assessments on a good-faith mistake

{¶ 17} In his first proposition of law, the commissioner argues that a taxpayer's intentional overreporting of asset values and resultant tax due for the purpose of concealing the taxpayer's own accounting fraud operates to bar any refund of the overpaid taxes. Before we address this argument, we note that HealthSouth contends that the Tax Commissioner waived the argument because he did not file a brief at the BTA.

{¶ 18} Under the present circumstances, HealthSouth's argument has no merit. The Tax Commissioner forcefully presented the argument in a closing statement to the BTA. Although the commissioner did not follow up by filing a brief, that does not mean he waived or abandoned the argument. When a party before the BTA files no brief at all, that omission does not justify the conclusion that the party has abandoned arguments that it had previously advanced during the BTA hearing.² We thus turn to the merits of the commissioner's argument.

{¶ 19} Our review of the property tax statutes leads us to conclude that the rights to have an assessment corrected and to receive a refund of property taxes do not depend on good faith by the taxpayer in filling out the original property tax return. Under Ohio law, the process consists of several steps. First, the assessment is corrected, and any deficiency or excess in relation to prior assessments is noted. The corrected assessment is then certified to the county auditor. R.C. 5711.26. When there is an excess, county officials take action that leads to a refund or to a credit against future taxes. R.C. 5711.32(A)(1) and 319.36. At neither stage does the law condition relief on the taxpayer's good faith, nor does the law confer...