T. Ryan Legg Irrevocable Trust v. Testa (Slip Opinion)

[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as T.

Ryan Legg Irrevocable Trust v. Testa, Slip Opinion No. 2016-Ohio-8418.]

NOTICE

This slip opinion is subject to formal revision before it is published in an

advance sheet of the Ohio Official Reports. Readers are requested to

promptly notify the Reporter of Decisions, Supreme Court of Ohio, 65

South Front Street, Columbus, Ohio 43215, of any typographical or other

formal errors in the opinion, in order that corrections may be made before

the opinion is published.

SLIP OPINION NO. 2016-OHIO-8418

T. RYAN LEGG IRREVOCABLE TRUST, APPELLANT AND CROSS-APPELLEE, v.

TESTA, TAX COMMR., APPELLEE AND CROSS-APPELLANT.

[Until this opinion appears in the Ohio Official Reports advance sheets, it

may be cited as T. Ryan Legg Irrevocable Trust v. Testa, Slip Opinion No.

2016-Ohio-8418.]

Taxation—R.C. 5747.01(BB)—Challenge to this court’s jurisdiction rejected—

Trustee authorized filing of petition for reassessment and notice of appeal

to the Board of Tax Appeals—Trust’s capital gains on sale of shares in pass-

through entity constituted “qualifying trust amount”—Imposition of tax did

not violate trust’s due-process or equal-protection rights—Trust has legal

basis for seeking reduced Ohio allocation—Decision affirmed in part and

reversed in part and cause remanded for determination of proper Ohio

allocation.

(No. 2015-0917—Submitted August 30, 2016—Decided December 28, 2016.)

APPEAL AND CROSS-APPEAL from the Board of Tax Appeals, No. 2013-1469.

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SUPREME COURT OF OHIO

FRENCH, J.

{¶ 1} Appellant and cross-appellee, the T. Ryan Legg Irrevocable Trust

(hereinafter, the “trust”), appeals a decision of the Board of Tax Appeals (“BTA”)

that affirmed a tax on the trust’s 2006 income. The trust argues that the tax on its

capital gains from the sale of its stock in an Ohio company is unlawful and

unconstitutional. On cross-appeal, the tax commissioner contends that this court

lacks jurisdiction because the trustee did not authorize the filing of the trust’s appeal

before the BTA or its petition for reassessment before the tax commissioner.

{¶ 2} We reject at the outset the jurisdictional arguments raised in the tax

commissioner’s cross-appeal and affirm the BTA’s denial of the commissioner’s

motion to dismiss. Turning next to the trust’s appeal, we conclude that the trust’s

capital gain constituted a “qualifying trust amount” subject to Ohio income tax on

an apportioned basis but that the trust had a legal basis for seeking a reduced Ohio

allocation. We also conclude that the tax assessment did not violate the Due

Process Clause of the United States Constitution or the Equal Protection Clauses of

the United States and Ohio Constitutions. We therefore affirm in part the BTA’s

decision to uphold the assessment, and we vacate that decision in part and remand

to the tax commissioner for a determination of the proper Ohio allocation.

Facts

1. The family trust

{¶ 3} T. Ryan Legg, an Ohio resident in 2005 and 2006, co-founded Total

Quality Logistics, Inc. (“Logistics”), a trucking-logistics business, in 1997. He

owned the business with Ken Oaks. Legg and Oaks each held 50 percent of the

company’s shares, and for tax purposes, the corporation was a pass-through entity.

See R.C. 5747.01(K) (referring to R.C. 5733.04(O), which defines “pass-through

entity” as “a corporation that has made an election under subchapter S of Chapter

1 of Subtitle A of the Internal Revenue Code for its taxable year under that code”).

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{¶ 4} In 2005, Legg withdrew from the business. In November 2005, Legg

transferred his half of the Logistics shares into two trusts: 32.5 percent of the

Logistics shares went into the T. Ryan Legg Irrevocable Trust, the appellant and

taxpayer in this case, and 17.5 percent of the shares went into a different trust. On

December 2, 2005, the trusts entered into a purchase agreement by which the shares

Legg had granted to the trusts would be sold, in effect, to his former business

partner Oaks.1 Although the trusts and the purchase agreement are dated November

14, 2005, and December 2, 2005, respectively, the sale of the shares did not close

until February 2006.

{¶ 5} The trust agreement appointed a trustee under Delaware law, stated

that it was controlled by Delaware law, and designated Legg and his family

members as beneficiaries. During a specified “initial period,” the trustee was

required to retain the trust’s income and add it to the trust assets. That period

effectively extended from November 14, 2005, to January 3, 2007.

{¶ 6} In February 2006, the trust closed on the purchase and transferred its

shares. The sale generated capital gain of $18,614,242.

2. Procedural history

{¶ 7} On May 26, 2009, the Ohio Department of Taxation issued a notice

of assessment for $1,275,597 in unpaid taxes, plus interest and penalties, for a total

amount due of $1,868,382. The department referred to the gain as “business

income” but then proceeded to apply an apportionment method prescribed by R.C.

5747.212 that is proper for certain types of “modified nonbusiness income.” See

R.C. 5747.01(BB)(4)(c)(ii). Specifically, the department calculated an

apportionment ratio for 2004, 2005, and 2006 based on Logistics’s Ohio-based

property, payroll, and sales; took the average for those three years; and apportioned

91.8307 percent of the trust’s 2006 gain to Ohio.

1

The purchase agreement also provides for the sale of Legg’s one-half interest in two other entities.

But the gain from the sale of shares in Logistics is the only issue before us.

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SUPREME COURT OF OHIO

{¶ 8} The trust petitioned for reassessment. In his March 2013 final

determination, the commissioner found that the trust was a nonresident under R.C.

5747.01(I)(3) and upheld the assessment on two grounds. First, the capital gain

was subject to Ohio tax as a “qualifying trust amount” under R.C. 5747.01(BB)(2).

Second, as an alternative, the commissioner held that the capital gain was properly

apportioned to Ohio under a March 2006 amendment to the statutes that called for

“modified nonbusiness income” to be apportioned pursuant to the requirements of

R.C. 5747.212. See R.C. 5747.01(BB)(4)(c)(ii); 2006 Am.Sub.H.B. No. 530, 151

Ohio Laws, Part III, 5982, and Part IV, 6690-6691. The final determination upheld

the assessment of tax and interest, but abated the late-payment penalty. As a result,

the total amount assessed was reduced from $1,868,382 to $1,473,192.

{¶ 9} The trust appealed to the BTA, which held a hearing in May 2014.

Less than 48 hours before the hearing, the tax commissioner filed a motion to

dismiss, arguing that the BTA lacked jurisdiction because the trust had not shown

that the trustee had authorized the filing of the notice of appeal and the petition for

reassessment.

{¶ 10} The BTA issued its decision in May 2015. BTA No. 2013-1469,

2015 WL 2169402, *1 (May 5, 2015). The decision denied the tax commissioner’s

motion to dismiss. The BTA noted that then-trustee Charles Schwab Bank had

submitted a notice to the commissioner declaring attorneys Mark Loyd and Kevin

Ghassomian, along with their law firm, Greenebaum, Doll & McDonald, as the

trust’s representatives before the Department of Taxation. Id. The declaration was

submitted to the commissioner in August 2008, prior to the assessment and petition

for reassessment. Id. In 2009, UBS Trust became the trustee. Id. The BTA found

that “the record, as a whole, * * * indicates that UBS, Mr. Legg as

grantor/beneficiary of the trust, and counsel themselves, at all times, considered

Greenebaum Doll & McDonald (and its successor Bingham Greenebaum Doll

LLP) to be the authorized representative of the subject trust.” Id.

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January Term, 2016

{¶ 11} On the merits, the BTA upheld the assessment based on several

findings. The BTA found that the capital gain constituted a “qualifying trust

amount” under the statutes but additionally determined that the gain constituted

apportionable “business income.” Id. at *3-4. The BTA also determined that the

trust was taxable as a resident trust. Id. at *4.

{¶ 12} The trust has appealed, and the tax commissioner has asserted a

cross-appeal challenging the denial of his motion to dismiss. We reject the cross-

appeal, and we affirm the decision of the BTA.

The Tax Commissioner Has Not Proved that the Trust’s Counsel Lacked

Authority to File the Tax Appeals

{¶ 13} Because the cross-appeal presents a threshold question of

jurisdiction, we consider it first. We note that the tax commissioner states two

reasons why the BTA lacked jurisdiction to review his final determination: counsel

did not have the authority to file the notice of appeal on behalf of the trustee and

counsel did not have the authority to prosecute the petition for reassessment. We

reject both arguments.

1. The commissioner has neither rebutted attorney Loyd’s presumptive

authority to file the BTA appeal nor shifted the burden to the trust

{¶ 14} With respect to the notice of appeal to the BTA, we hold that the tax

commissioner’s cross-appeal must fail because the tax commissioner has not

rebutted the presumption that the lawyer representing the trust possessed authority

to file the appeal. Mark Loyd was and is an Ohio attorney who, using his Ohio

attorney-registration number, signed the notice of appeal and submitted it on behalf

of the trust. As a result, a very strong presumption arose that Loyd had the authority

to appear on the trust’s behalf and prosecute the appeal.

{¶ 15} “When an attorney files an appeal, it is presumed he has the requisite

authority to do so.” State ex rel. Gibbs v. Zeller, 2d Dist. Montgomery No. 9170,

1985 WL 7625, *1 (Jan. 24, 1985); see also FIA Card Servs., N.A. v. Salmon, 180

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SUPREME COURT OF OHIO

Ohio App.3d 548, 2009-Ohio-80, 906 N.E.2d 467, ¶ 13 (3d Dist.) (“ ‘there is a

presumption that a regularly admitted attorney has authority to represent the client

for whom he appears’ ”), quoting Minnesota v. Karp, 84 Ohio App. 51, 53, 84

N.E.2d 76 (1st Dist.1948); accord Hill v. Mendenhall, 88 U.S. 453, 454, 22 L.Ed.

616 (1874) (“When an attorney of a court of record appears in an action for one of

the parties, his authority, in the absence of any proof to the contrary, will be

presumed”).

{¶ 16} This basic presumption applies with enhanced force in this case,

given that attorney Loyd was one of two persons originally appointed to represent

the trust before the tax department. His continuous representation extended all the

way from that appointment in August 2008, through the filing of the reassessment

petition and the appeal to the BTA, to presenting the oral argument in this appeal.

{¶ 17} The tax commissioner’s burden was to offer “substantial proof in the

form of countervailing evidence that authority is lacking, in order to justify, on that

ground, an order to strike” the notice of appeal. (Citations omitted.) See Booth v.

Fletcher, 101 F.2d 676, 683 (D.C.Cir.1938). To shoulder this burden and rebut the

presumption, the commissioner offered the affidavit of Assistant Attorney General

David Ebersole, who affirmed the affidavit’s contents in his live testimony before

the BTA. The affidavit relates that during a telephone conversation with Bailey

Roese, one of the trust’s lawyers, in response to a suggestion that the current trustee

was a party to the BTA case, Roese “identified Thomas Ryan Legg, not the trust

itself, as ‘the client’ and the person who authorized her and Mark Loyd to represent

the Legg Trust.” (Emphasis sic.)

{¶ 18} The tax commissioner characterizes this as an admission that the

lawyers lacked authority from the trustee itself, but we reject that contention both

because it is an offhand comment embedded in a conversation concerning other

matters and because it simply does not constitute a denial that counsel had authority

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January Term, 2016

from the trust. We do not regard the affidavit testimony as satisfying the

“substantial proof” burden.

{¶ 19} In addition, the record contains evidence of counsel’s authority in

the form of a letter presented by the trust at the BTA hearing and marked as exhibit

23, along with an affidavit submitted in response to the motion to dismiss. These

submissions put the issue to rest. The letter was written in response to the tax

commissioner’s eleventh-hour motion to dismiss and is signed by trust officers of

the then-current trustee, UBS Trust Company. The letter expresses approval of

counsel’s actions on behalf of the trust and states that UBS “has also formally

engaged [Loyd’s law firm] to pursue the Tax Controversy, including the Appeal [to

the BTA].” The affidavit was created after the BTA hearing and attached to the

trust’s memorandum opposing the motion to dismiss; it is sworn by a trust officer

of UBS and, in essence, reiterates the content of the letter.

{¶ 20} What the tax commissioner is essentially arguing is that no notice of

appeal to the BTA could have been filed without (1) a specific act of authorization

for that particular filing issued by the trustee to counsel before the filing was

effected and (2) proof of that act at the demand of the opposing party, the tax

commissioner himself. The tax commissioner further contends that we must infer

that there was no such act on the ground that if there had been, the trust would have

proved it.

{¶ 21} The tax commissioner cites case law stating that the trustee must

authorize action on behalf of the trust. The tax commissioner, however, offers no

case law or any other authority supporting the premise that a highly specific act of

authorization was necessary, given that counsel had clearly been engaged to handle

the tax protest. We see no reason why a trustee cannot engage a lawyer, entrust the

tax matter to the lawyer, and keep tabs on the progress of the litigation, without

additionally being required to maintain a file of specific authorizations that may

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SUPREME COURT OF OHIO

later be produced when a party-opponent chooses to make an issue of the authority

possessed by the trust’s lawyer.

{¶ 22} We reject the commissioner’s theory that merely because the

commissioner raised this issue, the trust acquired the burden of making a specific

proof of authorization that is satisfactory to the commissioner’s counsel. The trust

had no burden to do anything more than it in fact did. We hold that the notice of

appeal to the BTA was validly filed and that it invoked the BTA’s jurisdiction to

review the final determination of the tax commissioner.

2. The petition for reassessment was also validly filed

{¶ 23} The tax commissioner contends that even if the notice of appeal to

the BTA were valid, the BTA would still have lacked jurisdiction because of the

alleged invalidity of the reassessment petition. The petition was filed on or about

July 20, 2009, identified the trust as taxpayer and the assessment being contested,

and was signed by Mark A. Loyd on behalf of himself and Kevin R. Ghassomian.

{¶ 24} To understand the tax commissioner’s argument, it is necessary to

look at the change of trustees and how that relates to the time that the petition was

filed. The trust agreement named U.S. Trust Company of Delaware as trustee and

also provided for the replacement of the trustee. Charles Schwab Bank succeeded

U.S. Trust as trustee in January 2008. UBS Trust Company, N.A., succeeded

Charles Schwab Bank as trustee on June 5, 2009, and UBS remained trustee at all

relevant times thereafter.

{¶ 25} The tax commissioner argues that because the trustee changed on

June 5, 2009, and because the “address” on the July 20, 2009 petition for

reassessment identified the address of the former trustee, Charles Schwab Bank,

rather than the current trustee, UBS Trust Company, the petition does not reflect

proper authorization by the new trustee. To this circumstance, the tax

commissioner adds the inference that he draws from the telephone conversation

attested to in Ebersole’s affidavit.

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January Term, 2016

{¶ 26} We conclude that the petition was validly filed based on the record

before us. In response to the initiation of the audit that led to the assessment and

subsequent petition, the trust filed two “TBOR-1” forms correctly identifying the

trust as taxpayer and Charles Schwab Bank as the then-current trustee. A “Senior

Trust Officer” of that bank signed the forms, which appointed “Mark Loyd,

Greenbaum Doll & McDonald PLLC” and “Kevin R. Ghassomian, Greenbaum

Doll & McDonald PLLC” to “represent the taxpayer before the Department of

Taxation,” which expressly included the power to “file petitions or applications.”

The forms recite that they remain valid until one year after the date signed, that is,

one year from August 28, 2008.

{¶ 27} Thus, both Loyd and Ghassomian of the Greenebaum law firm had

been duly appointed to represent the trust on forms prescribed by the tax department

for that very purpose. The tax commissioner does not contest the validity of these

forms, and there is no dispute that Charles Schwab Bank was the trustee at the time

the forms were executed. On their face, the forms were valid for one year, and the

reassessment petition was filed within that year.

{¶ 28} Quite simply, Loyd and Ghassomian had uncontested authority to

represent the trust conferred by the TBOR-1 forms and to file the petition for

reassessment, and the erroneous address on the petition does not change that fact.

The tax commissioner has pointed to no requirement in statute or rule that the

current trustee’s address be accurately reported on the petition, and it is significant

that the statutes impose the tax on the trust itself, which therefore is the taxpayer,

the assessed party, and the petitioner in the proceedings before the tax department.

R.C. 5747.02(A) (“there is hereby levied [an income tax] on every * * * trust ** *

residing in or earning or receiving income in this state * * *”). Loyd and

Ghassomian were the duly appointed tax representatives of the trust under tax-

department procedures, and they acted timely within the scope of that appointment

when they filed the reassessment petition in July 2009.

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SUPREME COURT OF OHIO

{¶ 29} We hold that these circumstances establish that the petition for

reassessment was validly filed and that the absence of a specific act of authorization

for the filing of the petition from the new trustee did not impair the ability of the

trust’s appointed tax representatives to act on behalf of the trust in contesting the

tax assessment.

{¶ 30} Because we conclude that the tax commissioner’s cross-appeal has

no merit, we proceed to consider the issues raised by the trust on appeal.

The Capital Gain at Issue Constitutes a “Qualifying Trust Amount” that Can

Properly Be Allocated in Part to Ohio

{¶ 31} In his final determination, the tax commissioner found that the gain

at issue constitutes a “qualifying trust amount” that could be apportioned to Ohio.

The BTA affirmed that finding, and on appeal the trust contests that basis for the

assessment by arguing that relevant records were not “available,” as the statute

requires.

1. The gain constituted a “qualifying trust amount”

{¶ 32} R.C. 5747.01(BB)(2)’s definition of “qualifying trust amount”

includes capital gains realized “from the sale, exchange, or other disposition of

equity or ownership interests in, or debt obligations of, a qualifying investee to the

extent included in the trust’s Ohio taxable income,” but only if two conditions are

satisfied. First, under R.C. 5747.01(BB)(2)(a), the “book value of the qualifying

investee’s physical assets in this state and everywhere, as of the last day of the

qualifying investee’s fiscal or calendar year ending immediately prior to the date

on which the trust recognizes the gain or loss” must be “available to the trust.”

Second, under R.C. 5747.01(BB)(2)(b), the requirements of R.C. 5747.011 must be

satisfied—most notably, the requirement that the trust’s ownership interest be at

least 5 percent of the total outstanding ownership interests “at any time during the

ten-year period ending on the last day of the trust’s taxable year in which the sale,

exchange, or other disposition occurs,” see R.C. 5747.011(B).

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January Term, 2016

{¶ 33} The trust does not dispute that Logistics constitutes a “qualifying

investee” under R.C. 5747.01(BB)(5)(a), nor that the 5-percent-ownership criterion

in R.C. 5747.011(B) is also satisfied. The only issue the trust raises on appeal with

respect to the satisfaction of the requirements for deeming its capital gain a

“qualifying trust amount” concerns the “availability” of the records of Logistics.

Under R.C. 5747.01(BB)(6), “available” means that the “information is such that a

person is able to learn of the information by the due date plus extensions, if any, for

filing the return for the taxable year in which the trust recognizes the gain or loss.”

{¶ 34} The BTA found that “the record establishes that the book value of

the [Logistics] assets was available to the trust, whether it was actually requested

or not, as it was utilized by the trust’s tax preparer.” BTA No. 2013-1469, 2015

WL 2169402, at *3. The trust contends that although the information at issue may

have been available to its accountant, who was also Logistics’s accountant, that

does not mean that the information was available to the trust itself. That is, the

accountant had separate duties to each of his clients, and those duties precluded him

from making Logistics information available to the trust.

{¶ 35} Under the circumstances, and given the language of the “qualifying

trust amount” provision, we find unpersuasive the trust’s argument that the book

value of Logistics’s physical assets was unavailable to it. First, R.C.

5747.01(BB)(2)(a) establishes that the relevant information is the location of the

physical assets of Logistics “as of the last day of [Logistics’s] fiscal or calendar

year ending immediately prior to the date on which the trust recognizes the gain.”

Since the purchase agreement for the Logistics shares closed in February 2006, the

date for determining the physical-assets allocation preceded the closing; indeed, it

would probably fall at the end of calendar year 2005. Because the allocation date

falls before the shares were transferred, the trust would have been able to exercise

its shareholder’s right to access Logistics’s corporate financial information

pursuant to R.C. 1701.37(C). That section provides that “[a]ny shareholder” may

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make a “written demand stating the specific purpose thereof” and thereby examine

“for any reasonable and proper purpose” various corporate documents, including

“books and records of account.”

{¶ 36} The trust clearly would have had a “proper purpose” in accessing

such information. On the one hand, the trust was a pass-through taxpayer with

respect to its share of Logistics’s corporate earnings during 2005. It is difficult to

conceive of any valid objection a closely-held corporation could raise to a

shareholder’s examining information that directly bears on the shareholder’s own

pass-through income-tax liability. And the fact that passed-through business

income of the corporation is ordinarily apportioned, in part, by a property factor

that would encompass physical assets of the corporation, see R.C. 5747.21(B),

citing R.C. 5733.05(B)(2), means that the shareholder as taxpayer to some degree

accesses such information in preparing its returns in the ordinary course.

{¶ 37} The purchase agreement itself underscores this point by directly

addressing the issue of income-tax liability for calendar year 2005. At section 9,

the purchase agreement provides that the buyer and seller will split the 2005 tax

expense equally and, in relation to that liability, each will receive a distribution

from Logistics amounting to its 50 percent share of a specified portion (42.5

percent) of the cash-basis taxable income of the corporation. And under the

agreement, the buyer is to deliver that distribution in connection with the closing.

{¶ 38} We are persuaded that in enacting the qualifying-trust-amount

provision, the legislature thought that the provision would ordinarily apply to a trust

that is a pass-through shareholder of a closely-held corporation, precisely because

such a trust, as that type of shareholder, would usually have access to the relevant

corporate information in the course of complying with its own tax obligations.

{¶ 39} Finally, the statute does not on its face preclude a taxpayer from

asserting that it failed to obtain or retain information that was once available to it

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January Term, 2016

and that when it later requested the information, it was refused. Notably, the trust

makes no such claim here.

{¶ 40} Nevertheless, the trust argues that the purchase agreement prevented

it from accessing the relevant information. The only provision of that agreement

relevant to this point is Section 2, which grants the trust as seller the right to access

Logistics’s books upon the occurrence of a “monetization event”—i.e., one of the

events enumerated in the agreement that might require a price adjustment. Because

the evidence showed that no monetization event occurred, the trust concludes that

the purchase agreement permitted no right of access. We disagree.

{¶ 41} Section 2.5 of the purchase agreement states that the buyer “shall

provide to Seller the right and opportunity for Seller and Seller’s advisors to review

* * * the books and records of [Logistics] to the extent necessary to determine

whether a Monetization Event has occurred and the consideration to which Seller

is entitled as a result of the Monetization Event.” Under Section 2, a monetization

event is an event that occurs after closing that may entitle the seller to receive

additional compensation for the sale of its shares. Nothing in that provision

purports to address the right of the trust to access pre-closing information that

relates to its tax liabilities. And as discussed, it is that information that would

include the information relevant to the physical-assets allocation of the gain as a

“qualifying trust amount.” We reject the trust’s invitation to read an implied

prohibition of access into Section 2, which relates to matters that occur after

closing.

{¶ 42} The trust also cites Alcan Aluminum Corp. v. Limbach, 42 Ohio St.3d

121, 537 N.E.2d 1302 (1989), but we conclude that the case does not support the

trust’s position in this appeal. In that case, we construed the term “available” in a

different but analogous statute and held that physical-asset-location information

could properly be found to be “available” to a taxpayer that was a 50 percent

shareholder of the subsidiary corporation. The trust argues that because it owned

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only 35 percent of Logistics and was not itself engaged in the business of Logistics,

it did not have the same right of access to Logistics’s asset information. But we do

not think that Alcan Aluminum militates against finding that Logistics’s physical-

asset information was available here. Although the trust owns a smaller percentage

of corporate shares and is not itself engaged in the corporate business, it nonetheless

qualifies as a pass-through shareholder for Logistics, bears the income-tax

consequences of the operation of the business, and enjoys the statutory right to

access corporate information. For the reasons already discussed, this circumstance

supports the BTA’s finding that the physical-asset information was “available” to

the trust.

{¶ 43} We conclude that the allocation information was “available” to the

trust and that the gain at issue therefore constituted a “qualifying trust amount.”

2. Because the income is a “qualifying trust amount,” it is neither “modified

business income” nor “modified nonbusiness income”

{¶ 44} The trust next argues that the capital gain at issue should be allocated

outside Ohio as “modified nonbusiness income,” not “modified business income.”

However, because we have affirmed the finding that the income is a “qualifying

trust amount,” the distinction between business and nonbusiness income is moot.

{¶ 45} Ohio taxes trusts on their “modified Ohio taxable income.” R.C.

5747.02(A)(1). The modified Ohio taxable income is the sum of the trust’s Ohio-

apportioned or -allocated share of “modified business income,” “qualifying

investment income,” and the “qualifying trust amount,” along with the entire

amount of a resident trust’s “modified nonbusiness income.” R.C.

5747.01(BB)(4)(a) to (c). R.C. 5747.01(BB)(1) in turn defines “modified business

income” as “the business income included in a trust’s Ohio taxable income after

such taxable income is first reduced by the qualifying trust amount, if any.” The

statute therefore specifically excludes the qualifying trust amount from treatment

as modified business income. Additionally, R.C. 5747.01(BB)(3) defines

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January Term, 2016

“modified nonbusiness income” as income “other than modified business income”

and “other than the qualifying trust amount.” It follows that the underlying

distinction between business income and nonbusiness income is not relevant once

the income in question has been determined to be a “qualifying trust amount,”

because, as such, that income is expressly excluded from the other categories of

income for purposes of trust income taxation. We hold that because the trust’s

income is a “qualifying trust amount,” it was neither “modified business income”

nor “modified nonbusiness income.”

{¶ 46} We therefore hold that the BTA erred by considering whether the

gain at issue was business or nonbusiness income. After upholding the

commissioner’s finding that the gain was a “qualifying trust amount,” the BTA

proceeded to consider the status of the income in relation to the distinction between

business income and nonbusiness income under R.C. 5747.01(B) and (C). That

was error because once the BTA affirmed the tax commissioner’s determination

that the gain was a “qualifying trust amount,” that fact alone precluded the gain

from being treated as “modified business income” or as “modified nonbusiness

income” under R.C. 5747.01(BB).

{¶ 47} Under these circumstances, we vacate the BTA’s finding that the

gain at issue constituted “business income” under R.C. 5747.01(B).

3. Because the state used the wrong method of allocating the gain to Ohio,

the cause will be remanded

{¶ 48} The trust argues that to the extent that the income is a qualifying trust

amount, the “income cannot be attributable 100% to Ohio.” That assertion

embodies an error concerning the allocation method used by the tax commissioner;

he did not allocate the gain from the sale of Logistics shares 100 percent to Ohio.

Instead, the commissioner averaged the business-income apportionment factors for

three years and, based on that average, apportioned 91.8307 percent to Ohio.

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{¶ 49} Despite the factual error within the trust’s assertion, however, we

agree that the trust has a legal basis for seeking a reduced Ohio allocation. Because

the income constitutes a “qualifying trust amount,” R.C. 5747.01(BB) prescribes

not an apportionment based on the average of three years of Logistics’s business-

income factor, but rather an allocation based on the Ohio share of Logistics’s

physical assets as of the “last day of [Logistics’s] fiscal or calendar year ending

immediately prior to the date on which the trust recognizes the qualifying trust

amount.” R.C. 5747.01(BB)(4)(b).

{¶ 50} Moreover, contrary to the tax commissioner’s argument, the statute

does not authorize an alternative allocation method for the “qualifying trust

amount.” The commissioner relies on a passage contained in R.C. 5747.01(BB)(4),

which reads as follows:

If the allocation and apportionment of a trust’s income under

divisions (BB)(4)(a) and (c) of this section do not fairly represent the

modified Ohio taxable income of the trust in this state, the

alternative methods described in division (C) of section 5747.21 of

the Revised Code may be applied in the manner and to the same

extent provided in that section.

(Emphasis added.) R.C. 5747.01(BB)(4)(c)(ii). The quoted passage explicitly

authorizes alternatives for allocating all the other types of trust income (divisions

(4)(a) and (4)(c)), and by doing so clearly implies the absence of such authority for

division (4)(b), which is the provision addressing the taxation of a “qualifying trust

amount.”

{¶ 51} The foregoing discussion shows that the trust would be entitled to a

reduced Ohio allocation if the physical-asset allocation were less than 91.8307

percent. Indeed, the record indicates the possibility of a physical-assets ratio less

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January Term, 2016

than that percentage. Namely, the property factor for tax year 2005, which would

presumably include physical assets as of the end of the antecedent tax year, was

80.5094 percent.

{¶ 52} The tax commissioner argues that we lack jurisdiction to review and

remand this issue because the trust’s only argument before the BTA on this point

was that its income should be allocated 100 percent outside Ohio. The tax

commissioner couches the argument as a waiver of any other alternative

apportionment ratio. However, the trust’s notice of appeal to the BTA asserted that

“even under [the tax commissioner’s] own position,” i.e., that the gain was a

qualifying trust amount, the commissioner’s apportionment under R.C.

5747.01(BB)(4)(b) was “erroneously overstated” and that the trust was seeking a

reduced apportionment as a “fraction” that was “something less than 100%” based

on the book value of Logistics’s physical assets in Ohio. The trust’s notice of

appeal therefore stated the error with sufficient specificity to invoke the BTA’s and

this court’s jurisdiction. See MCI Telecommunications Corp. v. Limbach, 68 Ohio

St.3d 195, 197, 625, N.E.2d 597 (1994) (declining to deny review based on a

“hypertechnical reading” of the notice of appeal), citing Buckeye Internatl., Inc. v.

Limbach, 64 Ohio St.3d 264, 268, 595 N.E.2d 347 (1992).

{¶ 53} Under these circumstances, we must remand to the tax commissioner

for a determination of the proper allocation to Ohio based on the applicable legal

standard, as clarified above.

The Assessment Violates Neither Due Process nor Equal Protection

{¶ 54} To the extent that the statutes permit the assessment, the trust argues

that the assessment is unconstitutional as violating its rights to both due process and

equal protection. As for due process, the trust argues that the income and the

taxpayer lack sufficient connection with Ohio to permit the imposition of the tax.

As for equal protection, the trust points to the different treatment accorded to a

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nonresident trust based on whether it owns S-corporation shares or C-corporation

shares.

{¶ 55} Before considering the constitutional points, however, we address

the BTA’s finding that the subject trust should be taxed as a resident trust. This

issue has bearing on the trust’s and its income’s contacts with Ohio for due-process

purposes. Additionally, the tax commissioner’s contrary finding that the trust is a

nonresident is the predicate for the equal-protection issue raised by the trust.

1. The BTA’s finding of trust residency contravenes the tax commissioner’s

determination, is facially defective, and must therefore be vacated

{¶ 56} The tax commissioner’s final determination stated that the trust was

a nonresident trust pursuant to R.C. 5747.01(I)(3). The commissioner specifically

proceeded on that premise when considering, as an alternative to his finding that

the income was a “qualifying trust amount,” the proper treatment of the income as

“modified nonbusiness income.” Thus, the tax commissioner relied on a finding

favorable to the trust: that the trust was a nonresident. For obvious reasons, the

trust did not contest this finding, nor did the tax commissioner change his position

before the BTA.

{¶ 57} Yet the BTA made a contrary finding in its decision. BTA No. 2013-

1469, 2015 WL 2169402, at *4. Under R.C. 5747.01(I)(3)(a), the residency of a

trust depends on whether the assets were transferred into the trust by an Ohio

domiciliary/resident and whether a “qualifying beneficiary” is an Ohio resident.

The BTA found that Legg was an Ohio resident at the relevant times and that he

was also a beneficiary of the trust in 2006; that sufficed, according to the BTA, to

support the conclusion that the trust was a resident trust.

{¶ 58} But the trust has pointed out that the BTA’s analysis skips one

crucial element necessary for a finding of resident status. The BTA ignored the

requirement that the resident beneficiary be a qualifying beneficiary, meaning that

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January Term, 2016

the beneficiary had to be a “potential current beneficiary” under Internal Revenue

Code 1361(e)(2), R.C. 5747.01(I)(3)(c). We agree with the trust on that point.

{¶ 59} The federal provision states:

For purposes of this section, the term “potential current beneficiary”

means, with respect to any period, any person who at any time

during such period is entitled to, or at the discretion of any person

may receive, a distribution from the principal or income of the trust

(determined without regard to any power of appointment to the

extent such power remains unexercised at the end of such period).

If a trust disposes of all of the stock which it holds in an S

corporation, then, with respect to such corporation, the term

“potential current beneficiary” does not include any person who first

met the requirements of the preceding sentence during the 1-year

period ending on the date of such disposition.

26 U.S.C. 361(e)(2).

{¶ 60} The BTA correctly found that Legg was an Ohio resident when he

transferred the Logistics shares to the trust, and he was an Ohio resident and a

beneficiary during 2006. But the BTA failed to consider the additional requirement

that some person qualify as a “potential current beneficiary.” This would require

the trust terms to have permitted a distribution to a beneficiary during 2006, which

under the trust terms was part of the “initial period.” At the BTA and again before

this court, the trust points to section 2.1(a)(1) of the trust agreement, which required

the trustee to accumulate income during the initial period, that is, during all of 2006.

The tax commissioner’s brief argued in support of the BTA’s residency finding

without responding to the trust on this point.

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{¶ 61} At oral argument before us, the tax commissioner’s counsel pointed

to two trust provisions that purportedly permitted distributions during 2006: section

3.1(n), which confers upon the trustee the power to “make any distribution or

division of trust property in cash or in kind or both, at any time and from time to

time,” and section 2.1(c)(ii), which speaks of “mak[ing] all principal distributions”

to the grantor or other beneficiaries, with the timing of these discretionary acts

being “before the initial funding of the Family Trust or thereafter at any time prior

to the termination of the Family Trust.” We decline to accept, however, the tax

commissioner’s belated arguments on this point, submitted for the first time at oral

argument and never properly briefed or considered below.

{¶ 62} Moreover, we confront a BTA finding contrary to the tax

commissioner’s final determination that the trust was a nonresident. Absent a

finding that the tax commissioner’s conclusion was “clearly unreasonable or

unlawful,” the findings in the final determination are “presumptively valid.” See

Hatchadorian v. Lindley, 21 Ohio St.3d 66, 488 N.E.2d 145 (1986), paragraph one

of the syllabus. See also Alcan Aluminum, 42 Ohio St.3d at 123, 537 N.E.2d 1302

(“it is error for the BTA to reverse the commissioner’s determination when no

competent and probative evidence is presented to show that the commissioner’s

determination is factually incorrect”).

{¶ 63} We therefore conclude that the trust should be taxed as a nonresident

trust and that the tax commissioner’s original determination of the trust’s residency

was presumptively valid. Accordingly, we must vacate the BTA’s residency

finding, with the result that the tax commissioner’s finding that the trust is a

nonresident is reinstated as the basis on which we decide this appeal.

2. The assessment does not violate the trust’s due-process rights

{¶ 64} The Due Process Clause of the Fourteenth Amendment guards

against a state’s exceeding its jurisdiction to tax by establishing a twofold test.

First, there must be a definite link or a minimum connection between the state and

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January Term, 2016

the person, property or transaction that Ohio seeks to tax; second, the income

attributed to the state for tax purposes must rationally relate to values connected

with the taxing state. Hillenmeyer v. Cleveland Bd. of Rev., 144 Ohio St.3d 165,

2015-Ohio-1623, 41 N.E.3d 1164, ¶ 40, citing Moorman Mfg. Co. v. Bair, 437 U.S.

267, 272-273, 98 S.Ct. 2340, 57 L.Ed.2d 197 (1978), and Quill Corp. v. North

Dakota, 504 U.S. 298, 306, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992).

{¶ 65} In Corrigan v. Testa, ___ Ohio St.3d ___, 2016-Ohio-2805, ___

N.E.3d ___, we held that the tax imposed by R.C. 5747.212 could not be sustained

as applied to Corrigan for two reasons: first, because the link between Ohio and

the capital gain of a nonresident who did not engage in the underlying business was

attenuated and second, because there was no showing that attributing the gain to

Ohio as if it were business income actually related to the values giving rise to the

gain. See Corrigan at ¶ 36, 48, 68-69.

{¶ 66} We decided Corrigan after the briefing in this case, but the trust’s

counsel relied on it at oral argument. To be sure, there are two strong parallels

between this case and Corrigan. The tax commissioner found that the trust was a

nonresident here, just as Corrigan was a nonresident individual. And the tax

commissioner here apportioned to Ohio the capital gain from the sale of the pass-

through entity as if it were business income and did so in the very manner

prescribed by R.C. 5747.212, the statute that the tax commissioner applied to

Corrigan’s capital gains from the sale of his ownership interest in Mansfield

Plumbing, L.L.C., a pass-through entity.

{¶ 67} A more comprehensive look at the situation, however, persuades us

that the differences are more important than the similarities. Although the trust was

a nonresident under the statute, it is undisputed that the grantor of the trust and

contributor of the Logistics shares, T. Ryan Legg, was an Ohio resident in 2005 and

for at least part of 2006. Moreover, unlike Corrigan, Legg was a founder and

manager of the business of the pass-through entity—a material distinction, see

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Corrigan at ¶ 68 (finding the tax unconstitutional as applied to Corrigan “in light

of the absence of any assertion or finding that Corrigan’s own activities amounted

to a unitary business with that of Mansfield Plumbing”).

{¶ 68} Properly analyzed, this case involves an Ohio resident who

conducted business in significant part in Ohio through the corporate form and who

disposed of his business and corporate interest not by a personal sale but by means

of a trust that he created to accomplish his objectives for himself and his family.

Although Legg deliberately set up a Delaware trust, his Ohio contacts are still

material for constitutional purposes.

{¶ 69} In the context of upholding the imposition of inheritance taxes, the

United States Supreme Court made a statement that is equally applicable to Legg

and his trust in this case. Namely, Legg’s own “power to dispose of the intangibles

was a potential source of wealth which was property in [his] hands from which [he]

was under the highest obligation, in common with [his] fellow citizens of [Ohio],

to contribute to the support of the government whose protection [he] enjoyed.”

Curry v. McCanless, 307 U.S. 357, 370-371, 59 S.Ct. 900, 83 L.Ed. 1339 (1939).

Just as the inheritance taxes in Curry were not imposed on the deceased state

resident herself, so too is the trust income tax not directly imposed on Legg—yet

his own contacts with Ohio and with the business easily justify the imposition of

the tax on the trust from the standpoint of due process. We hold that the tax

assessment at issue did not violate the trust’s due-process rights.

3. The assessment does not violate the trust’s equal-protection rights

{¶ 70} The trust argues that the taxation of its “qualifying trust amount”

violates its equal-protection rights because no tax is imposed on a nonresident trust

when the shares at issue are C-corporation shares rather than pass-through-entity

shares. See R.C. 5747.01(BB)(5)(b). Under the trust’s equal-protection theory,

“nonresident trusts” as defined by the statute are “similarly situated” and must

therefore be treated the same under the Equal Protection Clause with respect to their

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January Term, 2016

gain from selling corporate shares. Specifically, the trust argues that state tax law

must ignore the distinction between taxpaying C corporations and pass-through

entities.

{¶ 71} A tax-law classification that “neither involves fundamental rights

nor proceeds along suspect lines” will not “run afoul of the Equal Protection Clause

if there is a rational relationship between the disparity of treatment and some

legitimate governmental purpose.” Hillenmeyer, 144 Ohio St.3d 165, 2015-Ohio-

1623, 41 N.E.3d 1164, at ¶ 30. And because the assessment of taxes is

fundamentally a legislative responsibility, the constitutional standard is especially

deferential in the context of tax-law classifications. Id.

{¶ 72} The trust’s burden as the constitutional claimant is heavy. “Under

the rational-basis standard, a state has no obligation to produce evidence to sustain

the rationality of a statutory classification. * * * Rather, a taxpayer challenging the

constitutionality of a taxation statute bears the burden of negating every

conceivable basis that might support the legislation.” Ohio Apt. Assn. v. Levin, 127

Ohio St.3d 76, 2010-Ohio-4414, 936 N.E.2d 919, ¶ 34. And we have endorsed the

pronouncement of the United States Supreme Court that “ ‘ “legislatures are

presumed to have acted within their constitutional power despite the fact that, in

practice, their laws result in some inequality” ’ ” among taxpayers. Huntington

Natl. Bank v. Limbach, 71 Ohio St.3d 261, 262, 643 N.E.2d 523 (1994), quoting

Nordinger v. Hahn, 505 U.S. 1, 10, 112 S.Ct. 2326, 120 L.Ed.2d 1, quoting

McGowan v. Maryland, 366 U.S. 420, 425-426, 81 S.Ct. 1101, 6 L.Ed.2d 393

(1961).

{¶ 73} We hold that the trust falls well short of proving a constitutional

violation in this context. “The comparison of only similarly situated entities is

integral to an equal protection analysis.” GTE N., Inc. v. Zaino, 96 Ohio St.3d 9,

2002-Ohio-2984, 770 N.E.2d 65, ¶ 22, citing Tigner v. Texas, 310 U.S. 141, 147,

60 S.Ct. 879, 84 L.Ed. 1124 (1940). Equal protection “does not require things

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which are different in fact * * * to be treated in law as though they were the same.”

Tigner at 147. Corporations that are themselves taxpayers are differently situated

with respect to state tax law than are pass-through corporations, and, by extension,

shareholders who have elected to carry the corporation’s income on their own tax

returns are differently situated from those who have not. Moreover, pass-through

corporations are more likely to be closely-held corporations in which the

shareholder is directly involved in the business, and the fact that this is not

universally the case does not defeat the rationality of the distinction overall, see

Vance v. Bradley, 440 U.S. 93, 108, 99 S.Ct. 939, 59 L.Ed.2d 171 (1979) (“Even if

the classification involved here is to some extent both underinclusive and

overinclusive, and hence the line drawn by Congress imperfect, it is nevertheless

the rule that in a case like this ‘perfection is by no means required’ ”), quoting

Phillips Chem. Co. v. Dumas Indep. School Dist., 361 U.S. 376, 385, 80 S.Ct. 474,

4 L.Ed.2d 384 (1960).

{¶ 74} Contrary to the trust’s argument, this court’s decision in Boothe Fin.

Corp. v. Lindley, 6 Ohio St.3d 247, 452 N.E.2d 1295 (1983), does not require a

different result. In Boothe, the taxpayer owned computer equipment that it leased

to customers. The equipment was manufactured by IBM, which also leased the

same type of property to other customers. Boothe reported its leased-out computers

on its personal-property-tax return, as did IBM. The computers were taxed at 70

percent of “true value.” As a manufacturer, IBM was permitted to determine the

true value of its leased-out equipment by calculating its manufacturing cost less

depreciation, whereas Boothe was required to use its acquisition cost less

depreciation, which led to a true value that was six times that of IBM’s true value

for the same type of equipment. Boothe challenged the disparity, and this court

held that it violated the guarantee of equal protection to Boothe. Id. at paragraph

two of the syllabus.

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January Term, 2016

{¶ 75} We characterized IBM’s leased-out equipment as being “grossly

undervalued,” and we held that “a taxpayer who leases equipment is denied equal

protection when a competitor, who manufactures and leases essentially identical

equipment, is allowed to grossly undervalue its property.” Id. at 249-250. Boothe

differs from the present case, however, because Boothe involved differential tax

treatment of two business competitors with respect to the valuation of equipment

directly used in their competing operations. By contrast, the distinction complained

of here treats taxpayers differently by virtue of the tax pass-through status of the

corporate entities in which they have invested. For reasons already stated, this

differential treatment is rational.

{¶ 76} We hold that the assessment at issue here does not violate the trust’s

equal-protection rights.

Conclusion

{¶ 77} For the foregoing reasons, we vacate the BTA’s rulings that the gain

at issue constituted business income and that the trust was a resident trust under the

statutes. We affirm the BTA’s finding that the gain constituted a “qualifying trust

amount” under the statute, and we vacate and remand to the tax commissioner for

a determination of the proper Ohio allocation in accordance with this opinion.

Judgment accordingly.

O’CONNOR, C.J., and PFEIFER, O’DONNELL, KENNEDY, and O’NEILL, JJ.,

concur.

LANZINGER, J., concurs, with an opinion.

_________________

LANZINGER, J., concurring.

{¶ 78} I concur in the majority’s opinion but write separately to express

concerns over its analysis of due process and reliance on our recent decision in

Corrigan v. Testa, ___ Ohio St.3d ___, 2016-Ohio-2805, ___ N.E.3d ___. Based

upon my reconsideration of that case in light of this one, and upon further reflection,

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SUPREME COURT OF OHIO

I would overrule Corrigan. I would also presume the constitutionality of the tax

assessed against the Legg Trust and hold that the presumption has not been

rebutted.

{¶ 79} The trust asserts that imposing a tax on its capital gains violates its

due-process rights. Before Corrigan, our analysis would have had a clear starting

point: the presumption that the state tax laws and the tax commissioner’s

application of them was constitutional. See State ex rel. Ohio Congress of Parents

& Teachers v. State Bd. of Edn., 111 Ohio St.3d 568, 2006-Ohio-5512, 857 N.E.2d

1148, ¶ 20 (“legislative enactments are entitled to a strong presumption of

constitutionality”). But after Corrigan, the state has the burden to justify imposing

the tax and the court must analyze each new case for fine points of distinction from

Corrigan. In my view, this change is not merely the ordinary result of applying a

recently decided case, it is a distortion of an integral tenet of proper constitutional

review—that laws are presumed to be constitutional.

Summary of Corrigan

{¶ 80} Briefly stated, Corrigan involved a nonresident individual who sold

his ownership interest in a limited-liability company that did part of its business in

Ohio. Under the version of R.C. 5747.212 that applied to the tax year at issue, the

state assessed income tax on a portion of the gain from the sale based on the

proportion of business activity that the limited-liability company had conducted in

this state over three years. We held that the tax imposed under R.C. 5747.212 could

not be sustained for two reasons: first, because of the attenuated link between Ohio

and the capital gain of a nonresident who did not engage in the underlying business

and second, because there was no showing that attributing the gain to Ohio as if it

were business income actually related to the values giving rise to the gain.

Corrigan at ¶ 36, 48, 68-69.

{¶ 81} In this case, the shareholder that earned capital gains is a trust rather

than an individual, and the majority distinguishes Corrigan on the grounds that

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January Term, 2016

Legg, the grantor of the trust, was an Ohio resident and participated in the business

before the trust sold its shares. I do not disagree with this analysis, but I believe

that it ought to be unnecessary. Our holding in Corrigan was not based on any

showing made by the taxpayer but rather on our conclusion that the state had not

controverted our constitutional concerns about the tax.

{¶ 82} After considering the facts of the instant case, I believe that

residency of the trust or the grantor or original involvement with the corporate

business should be irrelevant. It ought to be enough that the business assets are

connected to Ohio in order to tax part of the gain unless the taxpayer shows

particular circumstances that make the exercise of state jurisdiction unreasonable.

{¶ 83} Here, I am persuaded that it is the trust’s status as investor in Ohio

assets or an Ohio business that justifies the tax. Because Corrigan controverts that

view, I am convinced that we should overrule that decision.

The Galatis standard

{¶ 84} Stare decisis does not prevent us from revisiting Corrigan in this

appeal. Because judge-announced constitutional doctrine is, unlike statutory

construction, “beyond the power of the legislature to * * * ‘correct,’ ” it is

“incumbent on the court to make the necessary changes and yield to the force of

better reasoning.” Rocky River v. State Emp. Relations Bd., 43 Ohio St.3d 1, 6, 539

N.E.2d 103 (1989).

{¶ 85} I am not dissuaded by our stringent test for overruling precedent that

is set forth in Westfield Ins. Co. v. Galatis, 100 Ohio St.3d 216, 2003-Ohio-5849,

797 N.E.2d 1256, paragraph one of the syllabus. First, after Galatis, we have

“recognize[d] a considerable degree of merit” in the argument that “stare decisis

should be applied with greater flexibility in cases of constitutional adjudication.”

Kaminski v. Metal & Wire Prods. Co., 125 Ohio St.3d 250, 2010-Ohio-1027, 927

N.E.2d 1066, ¶ 90-91.

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{¶ 86} Second, in any event, the present situation satisfies the Galatis test

in that (1) Corrigan was wrongly decided at the time, (2) Corrigan defies practical

workability, and (3) abandoning Corrigan would not create an undue hardship for

those who have relied on it.

Corrigan—wrongly decided

{¶ 87} Corrigan was wrongly decided because we erroneously focused on

whether Corrigan was engaged in the business that the pass-through entity had

conducted in Ohio. Instead, we should have focused, as we do here, on the fact that

gain from selling an investment in in-state assets and activities can usually be taxed

in proper proportion—whether or not the person realizing the gain is a resident or

engages in the business.

{¶ 88} No one would dispute, for example, that a nonresident owing an

asset located in Ohio—say, real estate in Cleveland—can be taxed on the gain

derived from selling that asset. And the mere fact that Ohio assets are owned or

activities are conducted through a corporate entity does not bar imposition of the

tax. If a nonresident investor is the sole member of a limited-liability company that

owns—as its sole asset—the real estate in Cleveland, it makes no difference

whether that investor causes the company to sell the real estate, or whether the

investor sells the company itself: either way, Ohio may tax the gain because the

gain relates to property located in Ohio. We acknowledged this point in Corrigan,

when we distinguished a decision of the Louisiana Supreme Court. In that case,

the tax was justified because it prevented “avoidance of the Louisiana tax on a

capital gain from the sale of a Louisiana asset through a manipulation of corporate

forms.” Corrigan, ___ Ohio St.3d ___, 2016-Ohio-2805, ___ N.E.3d ___, at ¶ 58.

{¶ 89} The proper next step in the Corrigan analysis would have been to

conclude that because the nonresident, Corrigan, was an almost 80 percent owner

of a limited-liability company that conducted a portion of its business in Ohio, Ohio

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January Term, 2016

could properly tax that portion of the gain that related either to the Ohio business

or to its assets in Ohio.

{¶ 90} But we did not do this. First, we speculated that the gain might not

actually relate to the Ohio business, given that the business had suffered losses in

the preceding years; the possibility seemed strong that the gain might actually relate

to some specific non-Ohio assets. Corrigan at ¶ 48. Second, we read U.S. Supreme

Court precedent as distinguishing between state taxes imposed on those who

directly conducted the in-state business activity and taxes imposed on those who

merely invested in the business. Corrigan at ¶ 50-51, 69. In both respects we erred.

{¶ 91} The main error on both points was in failing to presume the

constitutionality of Ohio’s tax statutes and the validity of the tax commissioner’s

application of them, to the extent that any rebuttal of their constitutionality must

meet an enhanced evidentiary standard. See Cleveland Gear Co. v. Limbach, 35

Ohio St.3d 229, 231, 520 N.E.2d 188 (1988) (when tax legislation “is challenged

on the ground that it is unconstitutional when applied to a particular state of facts,

the burden is upon the party making the attack to present clear and convincing

evidence of a presently existing state of facts which makes the Act unconstitutional

and void when applied thereto”). More precisely, we should have required

Corrigan, the taxpayer in the earlier case, to prove that under the apportionment

prescribed by R.C. 5747.212, the income attributed to Ohio for tax purposes was

not “ ‘rationally related to “values connected with the taxing state.” ’ ” Hillenmeyer

v. Cleveland Bd. of Rev., 144 Ohio St.3d 165, 2015-Ohio-1623, 41 N.E.3d 1164,

¶ 40, quoting Moorman Mfg. Co. v. Bair, 437 U.S. 267, 272-273, 98 S.Ct. 2340, 57

L.Ed.2d 197 (1978), quoting Norfolk & W. Ry. Co. v. Missouri State Tax Comm.,

390 U.S. 317, 325, 88 S.Ct. 995, 19 L.Ed. 2d 1201 (1968). Without that showing,

which Corrigan did not even attempt to make, the tax assessment should have been

sustained—particularly in light of the fact that Corrigan’s connection to Ohio was

more than that of a minor investor: he was an 80 percent shareholder in a pass-

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through entity that did part of its business in Ohio and he claimed the benefit of

material participation in that business for federal income-tax purposes.

{¶ 92} By extension, the tax assessment against the Legg trust as a 35

percent owner of Total Quality Logistics, Inc., a pass-through entity that conducted

an Ohio business and owned Ohio-based assets, should be sustained here inasmuch

as the tax is, by statute, already limited to the portion of gain related to that

company’s Ohio business or to its physical assets located in Ohio.

{¶ 93} It should be the trust’s burden to establish a due-process violation,

not the state’s burden to justify imposing the tax in accordance with the statute. In

Corrigan, we distorted the presumption, and we should correct that error by

overruling that case now.

Corrigan—workability

{¶ 94} Because Corrigan reverses the usual burden regarding the

constitutionality of tax statutes, it will defy workability over the long haul. Quite

simply, the tax commissioner should be able to enforce state law with the burden

being on the taxpayer to prove any constitutional infirmity.

{¶ 95} I am concerned that Corrigan sets the stage for difficulty in later

cases. What if Legg had moved out of Ohio before he formed the trust? What if

he had ceased his activity in conducting the business a year or more before putting

the shares into the trust? As time goes on, the shadow cast by Corrigan will require

us to make ever finer and more hypertechnical distinctions that are not themselves

required by the statutes.

Corrigan—no reliance

{¶ 96} Finally, I believe that the immediate overruling of Corrigan is

appropriate precisely because its precedent is so recent. Our constitutional doctrine

should be repaired before the legislature has changed the statutes and private parties

have ordered their affairs in reliance on its holding.

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January Term, 2016

Conclusion

{¶ 97} I would overrule Corrigan and hold that the trust has failed to show

either that the gain to be taxed lacked a sufficient connection to Ohio or that the

statutory allocation does not fairly reflect values associated with the protections

afforded by Ohio. I would also reject the due-process challenge in this case because

the presumption of the tax’s constitutionality has not been rebutted. In all other

respects, I concur in the majority opinion.

_________________

Bingham Greenebaum Doll, L.L.P., Mark A. Loyd, Reva D. Campbell, and

Bailey Roese, for appellant.

Michael DeWine, Attorney General, Daniel W. Fausey, Barton A. Hubbard,

and Raina M. Nahra, Assistant Attorneys General, for appellee.

_________________

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