McLean Trucking Co. v. Lindley, 81-1423

• Decision Date: 26 May 1982
• Docket Number: No. 81-1423,81-1423
• Citation: 435 N.E.2d 414,24 O.O.3d 187,70 Ohio St.2d 106
• Parties: , 24 O.O.3d 187 McLEAN TRUCKING COMPANY, Appellee and Cross-Appellant, v. LINDLEY, Tax Commr., Appellant and Cross-Appellee.
• Court: Ohio Supreme Court

Page 106

70 Ohio St.2d 106

435 N.E.2d 414, 24 O.O.3d 187

McLEAN TRUCKING COMPANY, Appellee and Cross-Appellant, v. LINDLEY, Tax Commr., Appellant and Cross-Appellee.

No. 81-1423.

Supreme Court of Ohio.

May 26, 1982.

Porter, Wright, Morris & Arthur, Roger F. Day and Leonard A. Carlson, Columbus, for appellee and cross-appellant.

William J. Brown, Atty. Gen., and Charles M. Steines, Asst. Atty. Gen., for appellant and cross-appellee.

PER CURIAM.

The two critical issues in this case concern the three-year limitations period for assessments made by the commissioner, pursuant to R.C. 5733.11, and the commissioner's calculation of appellee's sales factor, pursuant to R.C. 5733.05 and Special Instruction 21. We shall consider these issues seriatim.

I.

Statute of Limitations: Tax Years 1973-1976.

R.C. 5733.11, which sets forth the three-year limitation for assessments, provides, in pertinent part:

"When any corporation required to file a report by this chapter fails to file such report within the time prescribed, files an incorrect report, or fails to remit the full amount of the tax due for the period covered by the report, the tax commissioner may make an assessment against such corporation for the period for which such report or tax is due, based upon any information in his possession. The commissioner shall give the corporation against whom such assessment is made written notice of such assessment by personal service or certified mail.

"No such assessment shall be made or issued against a taxpayer more than three years after the final date as of which such report subject to assessment was required to be filed, provided that there shall be no bar or limit to an assessment against a taxpayer that failed to file the report subject to assessment as required by this chapter." (Emphasis added.)

In other words, R.C. 5733.11 bars the commissioner from issuing an assessment against the taxpayer more than three years after the final date as of which the report subject to assessment was required to be filed with the commissioner. By the same reasoning, however, R.C. 5733.11 eliminates any bar to an assessment against the taxpayer that fails to file the report subject to assessment pursuant to R.C. Chapter 5733.

The fundamental question posed by appellee is whether the assessment issued insofar as it pertains to increases in its 1973 through 1976 franchise tax obligation unrelated to the corrections made by the IRS is barred by R.C. 5733.11. For the reasons that follow, we conclude that the limitations period of R.C. 5733.11: (1) is an absolute bar insofar as the instant assessment pertains to increases in appellee's 1973 through 1976 franchise tax obligation unrelated to the corrections made as a result of the IRS audit; and (2) does not preclude the instant assessment insofar as it pertains to increases in appellee's 1973 through 1976 franchise tax obligation related to the corrections made as a result of the IRS audit.

Pursuant to R.C. 5733.031(C), ² appellee, subsequent to the audit and assessment of the IRS, was statutorily obligated to notify the commissioner of the aforementioned federal alterations by filing an amended franchise tax report within 120 days after the federal alterations became final. As the record reveals, appellee failed to file an amended franchise tax report with the commissioner for the tax years 1973 through 1976.

Thus, our inquiry narrows to the question of whether the failure to file an amended franchise tax report constitutes a failure to file a report, for R.C. 5733.11 purposes, thus rendering inapplicable the statutory time limitation to which assessments are restricted.

After a careful review of the precise language of R.C. 5733.11, we conclude that the "reports" anticipated by this section include annual reports and amended reports. In this cause, however, the "reports" which the taxpayer "fail(ed) to file * * * (which are) subject to assessment," are the amended reports, not the annual franchise tax returns. Therefore when, after the federal audit and assessment, appellee failed to file the amended franchise tax reports with the commissioner, appellee was in violation of R.C. 5733.11, thus suspending the three-year ban to any state assessment related to the federal adjustments.

We categorically reject, as impractical, appellant's contention that, if a taxpayer fails to file an amended franchise tax report, there is no bar or no time limit to the assessment which may be issued. The wholesale re-opening of a taxpayer's reports on such an unrestricted basis would impede the attainment of the goals of certainty and finality in tax planning and tax collection-for both the taxpayer and the Tax Commissioner.

In light of the foregoing analysis, therefore, we conclude that only the amended reports for the tax years 1973 through 1976 are subject to assessment. The taxpayer's annual reports, which have already been filed and are subject to the three-year limitation of R.C. 5733.11, may not now be reopened, except for the limited purpose of rendering an assessment with respect to the federal corrections that would have been reflected if the amended reports had been timely filed. Thus, we affirm that part of the board's audit which: (1) permitted the $1,270.50 deficiency assessment and (2) disallowed the $208,619.67 deficiency assessment.

II.

Computation of Appellee's Sales Factor for Tax Year 1977.

In its cross-appeal, appellee has challenged the commissioner's computation of the sales factor, pursuant to R.C. 5733.05, for the tax year 1977.

R.C. 5733.05(B) sets forth an apportionment formula for determining the amount of net income which a corporation engaged in interstate commerce shall allocate to Ohio, based on three factors: property, payroll and sales. ³

R.C. 5733.05(B)(2)(c) provides in pertinent part:

"* * * (A) fraction the numerator of which is the value of business done, measured by sales of tangible personal property in this state by the corporation during the taxable year, and the denominator of which is the total value of its business done, measured by sales of tangible personal property by the corporation everywhere during such year. * * *

" * * *

"Sales, other than sales of tangible personal property, are in this state if either:

"(i) The income-producing activity is performed in this state;

"(ii) The income-producing activity is performed both within and without this state and a greater proportion of the income-producing activity is performed within this state than in any other state, based on costs of performance. * * * "

Additionally, R.C. 5733.05(B)(2)(d), an exception to R.C. 5733.05(B)(2)(a), (b) and (c), provides that if the foregoing three-factor formula does not fairly represent the extent of the taxpayer's business activity in Ohio, the commissioner may require a separate accounting, the exclusion of one or more factors, or the inclusion of one or more factors in order to represent the taxpayers allocated or apportioned base in this state.

Specifically, R.C. 5733.05(B)(2)(d) provides:

"If the allocation and apportionment provisions of division (B) of this section do not fairly represent the extent of the taxpayer's business activity in this state, the taxpayer may request, * * * or the tax commissioner may require, in respect to all or any part of the taxpayer's allocated or apportioned base, if reasonable, any one or more of the following:

"(i) Separate accounting;

"(ii) The exclusion of any one or more of the factors;

"(iii) The inclusion of one or more additional factors which will fairly represent the taxpayer's allocated or apportioned base in this state.

"An alternative method will be effective only with approval by the tax commissioner." (Emphasis added.)

Resolution of appellee's challenge to the commissioner's computation of its sales factor necessarily entails deciding: (1) whether the commissioner, in apportioning appellee's revenues through the system-wide mileage ratio of Special Instruction 21, properly proceeded under R.C. 5733.05(B)(2)(d); and (2) whether Special Instruction 21 constitutes an administrative rule which was promulgated in accordance with R.C. 119.03 and 5703.14.

During the course of appellee's audit, the commissioner discovered that appellee was equally allocating income for freight transportation between the state in which the shipment originated and the state in which the shipment terminated. This allocation method failed to apportion income to those states through which appellee transported freight. To remedy this unrepresentative allocation, the commissioner, by means of Special Instruction 21, reapportioned appellee's revenues by employing a sales factor based on a system-wide mileage ratio.

After having considered and evaluated the arguments advanced by all the litigants at bar, we conclude, for the reasons that follow, that: (1) the commissioner, in apportioning appellee's revenues through the system-wide mileage ratio of Special Instruction 21, did not properly proceed under, or in compliance with, R.C. 5733.05(B)(2)(d); and (2) Special Instruction 21 is an administrative rule which was not promulgated in accordance with R.C. 119.03 and 5703.14 and is, therefore, invalid.

Initially, it is imperative to note that R.C. 5733.05(B)(2)(d) furnishes no authority for the commissioner's apportionment of appellee's sales factor pursuant to Special Instruction 21. More precisely, R.C. 5733.05(B)(2)(d), by its express language, contemplates a customized, individualized allocation, tailored to each taxpayer on a case-by-case basis, when the three-factor formula of R.C. 5733.05(B)(2)(a), (b) and (c) does not fairly represent the extent of the taxpayer's business activity in Ohio. Clearly, Special Instruction 21 which, by its own terms, applies to all interstate carriers in a general, across-the-board, all-encompassing manner, does not reflect the particularized apportionment approach which, in our view,...