Pi in the Sky, L. L.C. v. Testa

• Decision Date: 07 December 2018
• Docket Number: No. 2017-0236,2017-0236
• Citation: 155 Ohio St.3d 113,119 N.E.3d 417,2018 Ohio 4812
• Parties: PI IN THE SKY, L.L.C., Appellant, v. TESTA, Tax Commr., Appellee.
• Court: Ohio Supreme Court

155 Ohio St.3d 113

119 N.E.3d 417

2018 Ohio 4812

PI IN THE SKY, L.L.C., Appellant,

v.TESTA, Tax Commr., Appellee.

No. 2017-0236

Supreme Court of Ohio.

Submitted September 11, 2018

Decided December 7, 2018

Advocate Consulting Legal Group, P.L.L.C., and Letisha D. Bivins ; and The Honerlaw Firm, L.L.C., and Joseph Honerlaw, for appellant.

Michael DeWine, Attorney General, and Daniel G. Kim and Daniel W. Fausey, Assistant Attorneys General, for appellee.

Per Curiam.

{¶ 1} Appellant, Pi In The Sky, L.L.C., purchased an aircraft without paying sales or use tax on it and then leased it to its sole corporate member. When appellee, tax commissioner, assessed use tax against Pi In The Sky for the purchase, Pi In The Sky asserted that its act of leasing the aircraft for consideration constituted a resale for tax purposes, thereby making its purchase nontaxable under the definition of "retail sale," also known as the sale-for-resale exception. See R.C. 5739.01(E) and 5741.02(C)(2). The tax commissioner rejected this argument because, in his view, Pi In The Sky was not "engaging in business," R.C. 5739.01(E), within the meaning of the exception. This conclusion, in turn, led the tax commissioner to declare the lease a sham transaction under R.C. 5703.56(A)(1). The Board of Tax Appeals ("BTA") affirmed, and Pi In The Sky has appealed. For the reasons that follow, we affirm the BTA's decision.

FACTS AND PROCEDURAL BACKGROUND

{¶ 2} Pi In The Sky is a single-member limited-liability company. According to its brief to the BTA, Pi In The Sky was created to hold an aircraft for lease and has engaged in no other business activity except for aircraft leasing. Pi In The Sky's single member is Mitchell's Salon and Day Spa, Inc. ("Mitchell's"), which operates several hair salons and spas in the Cincinnati area. The president of Mitchell's is Deborah Mitchell Schmidt, a licensed pilot.

{¶ 3} In December 2011, "Pi In The Sky, L.L.C./Deborah M. Schmidt" purchased an aircraft from an Indiana-based vendor for $1,217,460. Schmidt signed the purchase agreement. The agreement contains a space to reflect the amount of sales tax due on the transaction, and in that space, the phrase "Out of State" is typed. To help fund the purchase, Schmidt obtained a $973,963 loan in her individual capacity. The lender obtained a "commercial guaranty" from Pi In The Sky, by which Pi In The Sky guaranteed the payment of Schmidt's indebtedness.

{¶ 4} On May 14, 2012, the Federal Aviation Administration ("FAA") issued an aircraft bill of sale that identified Pi In The Sky as the aircraft's purchaser. That same day, Pi In The Sky, as lessor, and Mitchell's, as lessee, entered into a lease agreement for the aircraft. Schmidt signed the agreement on behalf of both Pi In The Sky and Mitchell's. Among other things, the lease granted Mitchell's nonexclusive use of the aircraft, required Mitchell's to provide for the aircraft's operation, maintenance, and storage, and prescribed a rental rate of $80 per flight hour. There is no dispute that the agreement is in the nature of a "dry lease," by which a lessor furnishes an aircraft—but not an operator—for use by a lessee.

Proceedings before the tax commissioner

{¶ 5} In November 2013, the tax commissioner issued a notice of use-tax assessment against Pi In The Sky for $68,426.50, representing unpaid taxes, interest, and a penalty.¹ Pi In The Sky petitioned for reassessment, asserting that its purchase and lease of the aircraft to Mitchell's met the requirements of the sale-for-resale exception. In an August 2015 final determination, the tax commissioner rejected Pi In The Sky's argument and upheld the assessment.

{¶ 6} The tax commissioner relied on three factors in concluding that Pi In The Sky was not "engaging in business," R.C. 5739.01(E), within the meaning of the sale-for-resale exception. First, the tax commissioner scrutinized Pi In The Sky's conduct. In the tax commissioner's view, Pi In The Sky was not engaged in the operation of a legitimate aircraft-leasing business because its single member was its only lessee and it never marketed or advertised the aircraft for lease to others. The tax commissioner also assigned significance to the fact that Pi In The Sky's address matched Schmidt's residential address, noting that without acquiring a visible business location, Pi In The Sky appeared disinclined to attract lessees.

{¶ 7} Second, the tax commissioner found the lease terms uncharacteristic of an arm's-length transaction, observing that while Mitchell's did not acquire a defined right to use the aircraft, it nevertheless bore the costs of operation, maintenance, and storage. Further, the tax commissioner found that the lease's rental rate of $80 per hour was so low that it would be impossible for Pi In The Sky to generate a revenue sufficient to service the monthly $6,461.43 loan payment and operate profitably. And the tax commissioner viewed Schmidt's decision to sign the lease on behalf of both Pi In The Sky and Mitchell's as evidence that no functional separation existed between lessor and lessee.

{¶ 8} The third factor considered by the tax commissioner was Schmidt's conduct in relation to the aircraft. The tax commissioner cited flight logs showing that the aircraft made 29 flights—primarily in the summer—to and from an airport near a lakefront home in northern Michigan owned by the "Deborah M. Schmidt Revocable Trust" as evidence of Schmidt's apparent personal use of the aircraft. Logs additionally showed that the aircraft made 43 Mitchell's-operated flights with zero passengers, leading the tax commissioner to infer that Schmidt was flying the aircraft herself. The tax commissioner questioned the business need for the aircraft, noting that all of Mitchell's locations are in the Cincinnati area. And he also found it unusual that Schmidt, a corporate officer, personally borrowed money to fund the purchase of a company asset.

{¶ 9} On account of all these factors, the tax commissioner further concluded that Pi In The Sky's lease to Mitchell's was a "sham transaction" under R.C. 5703.56(A)(1), because Pi In The Sky's "only motivation" for purchasing and leasing the aircraft "was to avoid taxation." Pi In The Sky appealed to the BTA.

BTA proceedings

{¶ 10} The parties waived a hearing (at the urging of Pi In The Sky), and thus, the BTA heard the case on the record certified to it by the tax commissioner along with the parties' briefs. The BTA then affirmed the tax commissioner's final determination, reasoning that Pi In The Sky did not purchase the aircraft for the purpose of leasing it to others as part of a business enterprise. As part of its analysis, the BTA reasoned that by waiving a hearing, Pi In The Sky lost its opportunity to present testimony or other evidence to dispute the presumptive validity of the tax commissioner's findings. This appeal followed.

STANDARD OF REVIEW

{¶ 11} We will affirm a BTA decision that is reasonable and lawful. Satullo v. Wilkins , 111 Ohio St.3d 399, 2006-Ohio-5856, 856 N.E.2d 954, ¶ 14. We apply de novo review to the BTA's resolution of legal questions. Crown Communication, Inc. v. Testa , 136 Ohio St.3d 209, 2013-Ohio-3126, 992 N.E.2d 1135, ¶ 16. But we defer to the "BTA's determination of the credibility of witnesses and its weighing of the evidence subject only to an abuse-of-discretion review on appeal." HealthSouth Corp. v. Testa , 132 Ohio St.3d 55, 2012-Ohio-1871, 969 N.E.2d 232, ¶ 10.

DISCUSSION

{¶ 12} Pi In The Sky argues in this appeal that the BTA (1) misapplied the sale-for-resale exception and the sham-transaction statute, (2) erred in disregarding certain portions of its brief, and (3) erred in making certain discovery rulings. We address each argument in turn.

The sale-for-resale exception

{¶ 13} The term "sale," as defined by Ohio's sales-tax law, includes "transactions for a consideration in any manner, whether absolutely or conditionally, whether for a price or rental, in money or by exchange, and by any means whatsoever." R.C. 5739.01(B). To illustrate, a "sale" takes place when "title or possession, or both, of tangible personal property, is or is to be transferred, or a license to use or consume tangible personal property is or is to be granted." R.C. 5739.01(B)(1).

{¶ 14} An exception applies, however, when "the purpose of the consumer is to resell the thing transferred or benefit of the service provided, by a person engaging in business, in the form in which the same is, or is to be, received by the person." R.C. 5739.01(E). To paraphrase, "when the purchaser's intent in buying goods or services is to resell them to yet another purchaser without changing the goods or services in any way, the original purchase is not considered a ‘retail sale’ and is therefore not subject to sales tax."

Satullo , 111 Ohio St.3d 399, 2006-Ohio-5856, 856 N.E.2d 954, at ¶ 26. This provision is known as the ‘‘sale-for-resale exception.’’ Standards Testing Laboratories, Inc. v. Zaino , 100 Ohio St.3d 240, 2003-Ohio-5804, 797 N.E.2d 1278, ¶ 14. And under R.C. 5741.02(C)(2), "any sale not subject to the sales tax is likewise not subject to the use tax." Satullo at ¶ 26.

{¶ 15} The parties have framed the debate around the exception's "engaging in business" requirement, R.C. 5739.01(E). To satisfy this requirement, a taxpayer must show that it was engaging in an activity "with the object of gain, benefit, or advantage, either direct or indirect." R.C. 5739.01(F) (defining "business"). Bearing this directive in mind, we consider whether Pi In The Sky was engaging in business against the backdrop of the BTA's extensive findings of fact.

{¶ 16} In its decision, the BTA found that the arrangement between Pi In The Sky and its sole member, Mitchell's, was predicated on a lease agreement that lacked substance. The lease did not confer a defined term of use on Mitchell's, yet Mitchell's bore responsibility for virtually every cost associated with the aircraft's maintenance and operation. Pi In The Sky...