Vought Industries, Inc. v. Tracy

[This opinion has been published in Ohio Official Reports at 72 Ohio St.3d 261.]

VOUGHT INDUSTRIES, INC. ET AL., APPELLEES, v. TRACY, TAX COMMR.,

APPELLANT.

[Cite as Vought Industries, Inc. v. Tracy, 1995-Ohio-18.]

Taxation—Franchise tax—R.C. 5733.06(E) does not apply to a corporation in

reorganization under Section 1102, Title 11, U.S. Code.

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A corporation in reorganization under Section 1102, Title 11, U.S. Code is

not equivalent to a corporation which has been adjudicated bankrupt or for which a

receiver has been appointed; therefore, R.C. 5733.06(E), the exemption from the

franchise tax imposed by R.C. 5733.01, does not apply to the corporation in

reorganization.

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(No. 94-175—Submitted February 22, 1995—Decided May 24, 1995.)

APPEAL from the Board of Tax Appeals, Nos. 91-H-119, 91-H-120, 91-H-121, 91

H-122, 91-H-123, 91-H-124, 91-H-126 and 91-H-127.

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{¶ 1} The Tax Commissioner, appellant, challenges the Board of Tax

Appeals' ("BTA's") decision to relieve eight LTV Corporation Ohio subsidiaries

("LTV subsidiaries"), appellees, from the corporation franchise tax while the LTV

subsidiaries were reorganizing in Section 1100 et seq., Title 11, U.S. Code

("Chapter 11"), bankruptcy proceedings. The franchise tax years involved are

1987, 1988, and 1989, but vary as to each LTV subsidiary.

{¶ 2} The LTV subsidiaries and LTV Corporation jointly filed Chapter 11

bankruptcy proceedings in the United States Bankruptcy Court for the Southern

District of New York on July 17, 1986. During the relevant tax years, LTV

Corporation continued to operate the subsidiaries as debtor in possession, and the

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LTV subsidiaries held valid certificates authorizing their exercise of corporate

privileges in Ohio.

{¶ 3} For the tax years in issue, the LTV subsidiaries paid the minimum

franchise tax of fifty dollars because they interpreted R.C. 5733.06(E) to excuse all

but the minimum tax. The commissioner, after auditing the returns and conducting

a departmental review, rejected the LTV subsidiaries' exemption claim and issued

assessments for both taxes and interest.

{¶ 4} The LTV subsidiaries appealed to the BTA, which reversed the

commissioner's orders. The BTA reasoned that "adjudicated bankrupt," as used in

R.C. 5733.06(E), was a term which encompassed both liquidation and

reorganization judicial proceedings; therefore, the LTV subsidiaries had in effect

been "adjudicated bankrupt." The BTA also reasoned that reorganization

proceedings are an outgrowth of and a functional equivalent to federal equity

receivership proceedings. Thus, LTV Corporation's status as "debtor in possession"

was the functional equivalent of having a receiver appointed for the businesses.

Finally, the BTA concluded that the LTV subsidiaries were impaired under the

bankruptcy filing because LTV Corporation needed court approval to conduct some

aspects of its business.

{¶ 5} The cause is now before this court upon an appeal as of right.

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Jones, Day, Reavis & Pogue, Roger F. Day and Laura A. Kulwicki, for

appellees.

Betty D. Montgomery, Attorney General, and Richard C. Farrin, Assistant

Attorney General, for appellant.

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COOK, J.

{¶ 6} In this case, we are presented with the issue of whether a corporation

involved in Chapter 11 bankruptcy proceedings is equivalent to either having a

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receiver appointed for it or having been "adjudicated bankrupt," so that it qualifies

for exemption under R.C. 5733.06(E) and need pay only the minimum franchise

tax. For the reasons that follow, we answer that question in the negative.

{¶ 7} At the outset we note that federal law does not preclude the taxation

of corporations in bankruptcy. 3A Collier on Bankruptcy (14 Ed. 1975) 1517-1518,

Section 62.14(3). Taxation or exemption of corporations in bankruptcy, therefore,

is a matter of state law.

{¶ 8} The statute that controls this case is R.C. 5733.06(E)1, which states:

"No tax shall be charged from any corporation which has been adjudicated

bankrupt, or for which a receiver has been appointed, or which has made a general

assignment for the benefit of creditors, except for the portion of the then current tax

year during which the tax commissioner finds such corporation had the power to

exercise its corporate franchise unimpaired by such proceedings or act. The

minimum payment for all corporations shall be fifty dollars."

{¶ 9} The LTV subsidiaries contend that R.C. 5733.06(E) defines a subject

of taxation and should be construed strictly in favor of the taxpayer. Zalud

Oldsmobile, Inc. v. Limbach (1994), 68 Ohio St.3d 516, 519, 628 N.E.2d 1382,

1385. The commissioner argues that division (E) is an exemption from taxation;

therefore, it should be strictly applied in favor of taxation. Ares, Inc. v. Limbach

(1990), 51 Ohio St.3d 102, 104, 554 N.E.2d 1310, 1312.

{¶ 10} The franchise tax is imposed by R.C. 5733.01 on all corporations

organized for profit for the privilege of doing business in Ohio, owning or using

part or all of their capital or property in Ohio, or holding a certificate of compliance

with the laws of Ohio authorizing them to do business in Ohio during the year in

which the fee is payable. R.C. 5733.06 establishes the rate of the tax that is to be

1. Former R.C. 5733.06, applicable during the tax years in question, was, in relevant part,

substantially identical to the current section.

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charged corporations subject to the franchise tax. Before 1925, when the General

Assembly originally enacted the predecessor to R.C. 5733.06 (G.C. 5495, 111 Ohio

Laws 471, 472, effective July 20, 1925), corporations in bankruptcy or receivership

were subject to the franchise tax. See Guardian Sav. & Trust Co. v. Templar

Motors Co. (1927), 116 Ohio St. 95, 155 N.E. 691; Gerke Brewing Co. v. Kuerze

(1916), 7 Ohio App. 37. With the enactment of the statute, corporations in

bankruptcy or under receivership were exempted from the franchise tax.

{¶ 11} Divisions (A), (B) and (C) of R.C. 5733.06 set forth the general

method for calculating the tax charged corporations doing business in Ohio.

Division (E) allows a corporation which meets its definition to pay the minimum

fee of fifty dollars and exempts that corporation from the general provisions of

divisions (A), (B) and (C). Thus, we hold that R.C. 5733.06(E) sets forth an

exemption from the franchise tax imposed by R.C. 5733.01, rather than defining a

subject of taxation. "[T]axation is the rule, and exemption is the exception. Since

the reduction depends on legislative grace, the statute must clearly express the

exemption, Cleveland v. Bd. of Tax Appeals (1950), 153 Ohio St. 97, 99-100, 41

O.O. 176, 178, 91 N.E.2d 480, 482, paragraph one of the syllabus, and a taxpayer

must show his entitlement to it, Natl. Tube Co. v. Glander (1952), 157 Ohio St.

407, 47 O.O. 313, 105 N.E.2d 648, paragraph two of the syllabus." Ares at 104,

554 N.E.2d at 1312.

{¶ 12} Both the LTV subsidiaries and the commissioner agree that the

language of R.C. 5733.06(E) is clear. An exemption from the franchise tax for a

corporation occurs when one of the following applies:

(1) a corporation has been adjudicated bankrupt,

(2) a receiver has been appointed for the corporation, or

(3) the corporation has made a general assignment for the benefit of

creditors. Further, the exemption does not apply to any portion of a tax year during

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which the corporation's power to exercise its corporate franchise was unimpaired

by the above enumerated legal restraints.

{¶ 13} LTV subsidiaries claim, however, that ambiguity exists in R.C.

5733.06(E) because if the court literally interpreted the statute's plain terms, the

exemption would no longer apply to any corporation, as the literal conditions for

exemption have no modern-day relevance. First, LTV subsidiaries contend that

because no one is "adjudicated bankrupt" under the federal Bankruptcy Code

enacted in 1978, 92 Stat. 2549, Title 11, U.S. Code, that term is rendered

ambiguous. Because of the ambiguity, R.C. 5733.06 must be construed in light of

the General Assembly's intent at the time of the statute's enactment. That intent,

LTV subsidiaries claim, was to exempt any corporation involved in either a

bankruptcy proceeding or a receivership. LTV subsidiaries argue that because

reorganizations were accomplished through the federal Bankruptcy Act of 1898,

the term "adjudicated bankrupt" by inference includes both liquidation and

reorganization proceedings.

{¶ 14} The commissioner concedes that R.C. 5733.06 needs to be

construed, in so far as the term "adjudicated bankrupt" has been replaced by the

term "order for relief" and no one is adjudicated bankrupt under the current federal

bankruptcy law. See Section 301, Title 11, U.S. Code. The commissioner,

however, contends that "adjudicated bankrupt" applies only to corporations for

which an order for relief has been granted in a liquidation proceeding.

{¶ 15} Until the 1933 and 1934 federal Bankruptcy Acts, bankruptcy was

primarily a mechanism of liquidation rather than reorganization. 5 Collier on

Bankruptcy (15 Ed. 1994) 1100A-25, Section 1100A.03. Prior to those Acts, no

provision was specifically designed for reorganizing a debtor corporation. Id. at

1100A-23. Under the 1933 and 1934 Bankruptcy Acts, corporate reorganizations

were accomplished through Sections 77 and 77B of Chapter 8. Section 77(B)

specifically stated that upon approval of the petition for reorganization under

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Section 77, an adjudication of bankruptcy would not be rendered. 48 Stat. 912.

Only where the reorganization failed and the proceedings were converted into a

liquidation proceeding was an adjudication of bankruptcy entered. Section

77B(c)(8); Sections 236 and 238, Chapter 10, Bankruptcy Act of 1938, 52 Stat.

899-900. Thus, in construing R.C. 5733.06(E), we find the term "adjudicated

bankrupt" specifically means a corporation which has been liquidated in a

bankruptcy proceeding. As the LTV subsidiaries were not in liquidation

proceedings, they were not "adjudicated bankrupt" for purposes of R.C. 5733.06.

{¶ 16} LTV subsidiaries next assert that the terms "equitable receivership"

and "general assignment for the benefit of creditors" have both, for all practical

purposes, been replaced by the federal bankruptcy laws and are thus obsolete. LTV

subsidiaries contend that those terms must also be construed so that R.C. 5733.06

is not rendered meaningless. A debtor in possession, the current method for

Chapter 11 reorganization, is the evolutionary successor to a receiver and is its

equivalent; therefore, under LTV subsidiaries' interpretation of the General

Assembly's intent, the subsidiaries qualified for the exemption while involved in

Chapter 11 proceedings.

{¶ 17} The commissioner asserts that the plain language of the statute

precludes relief for the LTV subsidiaries. Pointing to Ohio statutes which employ

provisions relating to receiverships and assignments for the benefit of creditors,

R.C. Chapter 1313 and Chapter 2735, the commissioner argues that those terms do

not need to be construed, as the terms presently have meaning. We agree with the

commissioner.

{¶ 18} The first rule of statutory construction is that a statute which is clear

is to be applied, not construed. "There is no authority under any rule of statutory

construction to add to, enlarge, supply, expand, extend or improve the provisions

of the statute to meet a situation not provided for." State ex rel. Foster v. Evatt

(1944), 144 Ohio St. 65, 29 O.O. 4, 56 N.E. 265, paragraph eight of the syllabus.

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Our obligation is to apply the statute as written. R.W. Sidley, Inc. v. Limbach

(1993), 66 Ohio St.3d 256, 257, 611 N.E.2d 815, 817.

{¶ 19} Contrary to what LTV subsidiaries assert, R.C. 5733.06 is not

rendered meaningless if it is not applied to corporations in Chapter 11 reorganizing

proceedings. Unlike the term "adjudicated bankrupt," Ohio law presently provides

for "appointment of receivers" in R.C. 2735.01(E) for corporations under specific

circumstances.

{¶ 20} The Ohio General Assembly has considered and amended R.C.

5733.06 numerous times since the adoption of the current federal Bankruptcy Code

without altering the conditions for exemption. The General Assembly has the

power to grant a tax exemption and has chosen not to clearly express an exemption

for corporations reorganizing under Chapter 11. The plain meaning of R.C.

5733.06 compels us to hold that a corporation in reorganization under Section 1102,

Title 11, U.S. Code is not equivalent to a corporation which has been adjudicated

bankrupt or for which a receiver has been appointed; therefore, R.C. 5733.06(E),

the exemption from the franchise tax imposed by R.C. 5733.01, does not apply to

the corporation in reorganization.

{¶ 21} The decision of the BTA, being unreasonable and unlawful, is

reversed.

Decision reversed.

MOYER, C.J., DOUGLAS and F.E. SWEENEY, JJ., concur.

WRIGHT, RESNICK and PFEIFER, JJ., dissent.

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ALICE ROBIE RESNICK, J., dissenting.

{¶ 22} I respectfully dissent from the majority holding that the LTV Ohio

subsidiaries do not qualify for exemption from the franchise tax during the period

of their Chapter 11 reorganization proceedings. To hold, as the commissioner and

majority have, that exemption is unavailable since LTV subsidiaries have not

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technically been "adjudicated bankrupt," have not technically had a receiver

appointed, and have not technically made a general assignment for the benefit of

their creditors is to ignore the obvious intention of the legislature to provide

franchise tax exemption to financially distressed corporations. The foregoing

bankruptcy determinations, i.e., adjudged bankrupt, appointment of a receiver or

general assignment for the benefit of creditors, have become obsolete by the

reorganization provisions of the current federal Bankruptcy Code. The bankruptcy

laws have evolved so that today no corporation is adjudicated bankrupt or has a

receiver appointed. Unless the court interprets this provision in light of the

evolution of the bankruptcy laws, R.C. 5733.06(E) has no application today.

{¶ 23} The LTV Ohio subsidiaries argue compellingly to apply R.C.

5733.06 to their status as a debtor in possession. Their status is a direct descendent

of a receiver in equity in reorganizing its business. A review of the history of the

bankruptcy laws discloses this fact. This court has consistently read Ohio statutes

in context with a federal scheme to interpret other Ohio statutes. See Ohio Chamber

of Commerce v. State Emergency Response Comm. (1992), 64 Ohio St.3d 619, 624-

625, 597 N.E.2d 487, 491.

{¶ 24} The majority holds that the LTV Ohio subsidiaries have not been

adjudicated bankrupt, nor has a receiver been appointed for them. Hence, strict

construction of R.C. 5733.06(E) would require denial of the LTV Ohio subsidiaries'

exemption claim.

{¶ 25} However, if the majority's reasoning were followed, the statute

would not apply to any corporation under today's Bankruptcy Code. Perhaps the

term "adjudicated bankrupt" could refer to a liquidation pursuant to an order for

relief and the receivership language refers to Ohio's receivership process. However,

this tortured interpretation underscores the ambiguity which it presents, and if part

of R.C. 5733.06(E) is ambiguous, perhaps the better result is to conclude that the

entire statute is ambiguous and in need of interpretation.

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{¶ 26} According to R.C. 1.47:

"In enacting a statute, it is presumed that:

"***

"(B) The entire statute is intended to be effective;

"***

"(D) A result feasible of execution is intended."

{¶ 27} Thus, this court must presume that the General Assembly intended

these terms to continue to have some effect, especially in view of the fact that R.C.

5733.06 itself has been amended numerous times, but the provisions at issue have

not been substantially altered. See History of R.C. 5733.06 and G.C. 5499,

appearing in Page's Ohio Revised Code Annotated and Ohio General Code

Annotated.

{¶ 28} Furthermore, under R.C. 1.49(A), the court, in determining the

intention of the General Assembly in reviewing an ambiguous statute, may consider

"[t]he object sought to be attained ***." In determining the object sought to be

accomplished, it becomes increasingly clear that R.C. 5733.06(E) must be held

applicable to the corporate reorganizations of today. Corporate reorganizations are

utilized for a variety of goals, rather than purely financial purposes. The BTA

correctly pointed this out: "They [corporate reorganizations] are increasingly

successful, and there may be an increased incidence of corporate reorganizations.

Where does the public interest presently lie, [if not] with the protection of creditor's

interests and fostering of corporate reorganizations by forgoing the levy of

franchise tax or the revenue needs of the state. The ultimate benefit to the state

from the rehabilitation of corporate taxpayers may well outweigh the amount of tax

forgone. Such considerations and others, suggest that the General Assembly might

well review and consider the exemption now granted by R.C. 5733.06(E)."

{¶ 29} According to R.C. 5733.06(E), a corporation is not charged tax

"except for the portion of the then current tax year during which the tax

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commissioner finds such corporation had the power to exercise its corporate

franchise unimpaired by" an adjudication in bankruptcy or appointment of a

receiver or a general assignment for the benefit of creditors. According to Black's

Law Dictionary (6 Ed.1990) 752, to "impair" means: "[t]o weaken, to make worse,

to lessen in power, diminish or relax, or otherwise affect in an injurious manner."

As the BTA concluded, the LTV Ohio subsidiaries' power to operate their

businesses was lessened or weakened or diminished by their need to ask the court

for permission to perform many of their functions. The BTA correctly concluded

that the LTV Ohio subsidiaries were impaired during the pendency of the

reorganization.

{¶ 30} I would affirm the BTA's findings that the Chapter 11 reorganization

proceedings are essentially receivership proceedings with the taxpayers as debtors

in possession and that the exercise of the taxpayers' corporate franchises is impaired

by such proceedings. As a result, LTV Ohio subsidiaries should be exempt from

the franchise tax during the years at issue.

WRIGHT and PFEIFER, JJ., concur in the foregoing dissenting opinion.

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