Snodgrass v. Testa

• Citation: 50 N.E.3d 475,145 Ohio St.3d 418
• Decision Date: 24 December 2015
• Docket Number: No. 2014–1362.,2014–1362.
• Parties: SNODGRASS, Aud., Appellee and Cross–Appellant, v. TESTA, Tax Commr., Appellee and Cross–Appellee; Martin Marietta Energy Systems, Inc., n.k.a. Lockheed Martin Energy Systems, Inc., Appellant and Cross–Appellee.
• Court: Ohio Supreme Court

145 Ohio St.3d 418

50 N.E.3d 475

SNODGRASS¹ Aud., Appellee and Cross–Appellant

v.TESTA, Tax Commr., Appellee and Cross–Appellee;

Martin Marietta Energy Systems, Inc., n.k.a. Lockheed Martin Energy Systems, Inc., Appellant and Cross–Appellee.

No. 2014–1362.

Supreme Court of Ohio.

Submitted Sept. 15, 2015.

Decided Dec. 24, 2015.

Robert Junk, Pike County Prosecuting Attorney; Kevin L. Shoemaker, Columbus; Keating, Muething & Klekamp, P.L.L., and William Posey, Cincinnati; and Law Office of Sean A. McCarter and Sean A. McCarter, for appellee and cross-appellant.

Michael DeWine, Attorney General, and Daniel W. Fausey and Melissa W. Baldwin, Assistant Attorneys General, for appellee and cross-appellee tax commissioner.

Vorys, Sater, Seymour & Pease, L.L.P., Robert E. Tait, Hilary J. Houston, and Steven L. Smiseck, Columbus, for appellant and cross-appellee.

KENNEDY

, J.

{¶ 1} This is an appeal and cross-appeal from a decision of the Board of Tax Appeals (“BTA”) that affirmed the tax commissioner's cancellation of a December 23, 2010 assessment of personal property tax issued by appellee and cross-appellant, the Pike County auditor, against appellant and cross-appellee, Martin Marietta Energy Systems, Inc., n.k.a. Lockheed Martin Energy Systems, Inc. (hereafter both referred to as “LMES”), for tax year 1993. Although LMES prevailed before the BTA by obtaining cancellation of the assessment, it prosecuted its appeal to this court based on the BTA's failure to address its contentions that the auditor issued the assessment frivolously and in bad faith. The county auditor's cross-appeal goes to the core issue of this case: the propriety of the assessment.

{¶ 2} The parties advance numerous propositions of law, including a threshold challenge raised by the auditor to the propriety of LMES's appeal. For the reasons that follow, we hold that LMES had standing as an aggrieved party to prosecute its appeal to this court, thereby establishing this court as the forum for this case under R.C. 5717.04

, to the exclusion of the Fourth District Court of Appeals. On the merits of LMES's appeal, we hold that the BTA lacked the authority to make a finding of frivolous conduct or bad faith by the auditor with respect to the assessment that was placed before it through the appellate process. We also decline to grant LMES's request that we make a finding that the auditor acted in bad faith or engaged in frivolous conduct.

{¶ 3} As for the auditor's cross-appeal, we hold that the tax commissioner properly canceled the assessment, as affirmed by the BTA, because we conclude that LMES was never shown to qualify as a “taxpayer” as that term is statutorily defined for purposes of the personal property tax. We do not address the other possible grounds for canceling the assessment.

{¶ 4} In light of these holdings, we affirm the decision of the BTA.

I. FACTS AND PROCEDURAL HISTORY

A. Background

{¶ 5} The Portsmouth Gaseous Diffusion Plant located at Piketon in Pike County (“the Piketon plant”) was developed as a uranium-enrichment facility by the United States Atomic Energy Commission, and from the mid–1950s forward, the plant was owned by the federal government but operated by private contractors. In 1977, the United States Department of Energy (“DOE”) was created and assumed authority over the plant. In 1986, LMES became the contractor that conducted the operations at the site, taking over in that capacity from Goodyear Atomic Corporation.

{¶ 6} At issue in this appeal is a personal-property-tax assessment for tax year 1993 against LMES. That is the first of 45 assessments the Pike County auditor issued against Goodyear Atomic Corporation and LMES pertaining to tax years 1955 through 1999.² The county auditor issued the assessment at issue here on December 23, 2010.

B. The federal government owned the property, and LMES used it

{¶ 7} The evidence presented before the BTA is voluminous. It includes the hearing testimony of the county auditor who issued the assessment, the contract of more than 180 pages between the DOE and LMES that covered the management and operation of the plant during the tax year at issue, and the hearing depositions of three persons with knowledge of LMES's operation of the Piketon plant: a retired government-contracting officer, a retired contract negotiator who had worked for LMES, and a retired LMES employee who had managed the Piketon plant. The most significant established fact for this appeal, stipulated by the auditor to be accurate, is that all the tangible property at the plant was titled to the federal government. The former plant manager testified that the contract specified that “all the land, the buildings, the equipment, even the pens and pencils were property of the U.S. government,” an assertion confirmed by other witnesses. The contract's government-property clause specifically provided for the contractor to be reimbursed by the government for any property acquired and provided that title to the property passed directly from the vendor to the government.

{¶ 8} Although the DOE owned the personal property, the contract gave LMES possession, custody, and control of that property. The contract required LMES to keep detailed records of the government-owned property, which was tagged and tracked, and to follow the DOE's directions in disposing of any worn-out or surplus property.

{¶ 9} Another important contract provision was the organizational-conflicts-of-interest clause, which, according to the retired LMES contract negotiator, “required an arm's length relationship between the entity performing the contract * * * and the parent corp[orate] organization,” to the extent that “we couldn't permit staff from the corporate entity or its affiliates to come onsite. We couldn't share data with them.” He also stated that the government-property clause in conjunction with the conflict-of-interest clause “created a fence around the facility so that it was very clear that the operation was solely for the purpose of performing the contracts at the ongoing direction of the Department of Energy.” In sum, according to the LMES negotiator, the DOE structured the contract so that the contractor was “a legal entity with really no financial background, no capital assets, basically a talent pool to come in and manage” the plant. (Emphasis added.)

{¶ 10} LMES was paid a base fee under the contract plus a facility-specific “award fee” determined by the DOE based on LMES's performance using both subjective and objective criteria. All the profits realized by LMES resulted from the fees paid under the contract; LMES did not profit in any way from the DOE's sales of the plant's product. Moreover, the contract expressly forbade the use of any DOE property for any purpose other than performing obligations under the contract.

C. The DOE was an indemnitor for state and local tax claims and entered into a payment-in-lieu-of-tax agreement with local officials

{¶ 11} The contract between the DOE and LMES also provided that LMES would notify the DOE of any attempt by state or local authorities to collect taxes and would be subject to the directions of the DOE regarding the nonpayment or payment under protest of taxes, with the understanding that the DOE would be granted any right to contest the taxes and would hold the contractor harmless as to them.

{¶ 12} Pursuant to federal statutes, the DOE was authorized to enter into payment-in-lieu-of-tax (“PILOT”) agreements with local governments for federally owned real and personal property. The tax year assessed here, 1993, was the subject of a PILOT agreement entered into in 1998 covering tax years 1992 through 1997. The PILOT agreement provided for a single payment of $175,546.83 for the six years covered, an average of $29,257.80 a year. The PILOT agreement's stated reason for the DOE's “payment in lieu of property taxes for County government purposes” was to replace “ad valorem tax revenue” that was forgone because the United States owned the Piketon plant. The agreement also stated:

Such payment shall constitute full satisfaction of any and all claims the County may have for taxes for tax years 1992 through 1997 against DOE and DOE's contractors, of any nature whatsoever, on, with respect to, or measured by the value or use of Government-owned real or personal property which is utilized in carrying on activities of DOE.

(Emphasis added.)

{¶ 13} An exhibit to the PILOT agreement recognized LMES as one of the DOE's contractors. The preamble to the agreement identified the parties as the United States of America, represented by the Secretary of the Department of Energy, and Pike County, Ohio, stated to be a “duly constituted local taxing authority of the State of Ohio.” The agreement was signed for the federal government by a contracting officer acting as an agent of the secretary of energy and for Pike County by the chairperson of the Pike County Board of Commissioners. Although the county auditor played a significant role in negotiating the PILOT agreement, neither the auditor nor the county treasurer signed or were identified as parties to the PILOT agreement executed in 1998.

D. Course of proceedings

{¶ 14} For many years, the taxing authorities in Ohio regarded personal property owned by the federal government and used by its contractors as not subject to taxation. In 1958, the tax commissioner issued County Auditor Bulletin No. 126

, in which he informed the county auditors that in Ohio, “personal property taxes could not be assessed against persons in possession of [federal] government property.” This announcement was specifically based on a written opinion of the Ohio attorney general that the tax commissioner had requested on the subject. See 1958 Ohio Atty.Gen.Ops. No. 2471, syllabus. But in 2010, an administrator of the Ohio Department of Taxation, in written correspondence on the department's letterhead, stated the “conclusion that the [federal government's] personal property is subject to taxation...