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Ohio Tax Major Developments within the Ohio Supreme Court & - PDF document

Sep 30, 2023 •208 likes •2k views

26th Annual Tuesday & Wednesday, January 2425, 2017 Hya Regency Columbus, Columbus, Ohio Workshop W Ohio Tax Major Developments within the Ohio Supreme Court & Ohio Board of Tax Appeals Regarding Ohio & Municipal Income

  1. CORRIGAN V. TESTA • General Rule • States generally situs income from the sale of an intangible to owner’s legal or commercial domicile • R.C. 5747.20(B)(2)(c), for example, allocates nonbusiness income to non-Ohio resident’s home state • Ohio General Assembly enacts exception to general rule through R.C. 5747.212 • Non-Ohio residents must apportion Ohio’s share of the income/gain from the sale of a pass-through entity for which non-Ohio residents own 20 percent or more equity • R.C. 5747.212 also applies to closely held businesses with five or fewer investors or where one owner owns at least 50% of equity interests with voting rights 10

  2. CORRIGAN V. TESTA • Ohio Supreme holds that R.C. 5747.212 violates Due Process as-applied to Mr. Corrigan in this case • Due Process requires nexus with the activity being taxed and the person • Shaffe r v. He itne r , 433 U.S. 186 (1977) • The activity at issue in the case is “transfer of intangible property by a nonresident” • No purposeful availment or sufficient connection to Ohio • Court does not address Commerce Clause 11

  3. CORRIGAN V. TESTA • Prof. Walter Hellerstein commentary: • Sub stanc e and F o rm in Jurisdic tio nal Analysis , Corrigan v. Testa, State Tax Notes, 849-858 (Jun. 13, 2016) “ If one sc r atc he s be ne ath the sur fac e of the [Cor r igan] de c ision, howe ve r , and e xamine s the opinion that pur por te dly suppor ts it, one finds a for malistic , poor ly r e asone d, and inde fe nsible analysis that flie s in the fac e of e stablishe d c onstitutional doc tr ine . One c an only hope that othe r c our ts will r e c ognize Cor r igan for the r ogue opinion that it is.” 12

  4. CORRIGAN V. TESTA • Form Over Substance • Why is an asset sale treated differently than a stock sale? • Tax Commissioner and Hellerstein: Look through the form of the transaction to the substance • Ohio is the source of “benefits, protections, and opportunities” to Corrigan nt’ l Harve ste r v. Wis. De pt. o f Re v. , 322 U.S. 345 (1944) • I • Wisconsin withholding tax on nonresident shareholders for the privilege of receiving corporate dividends does not offend Due Process due to benefits that Wisconsin provides shareholders • Hellerstein: Ohio Supreme Court committed “plain error” through statement that the tax at issue in I nt’ l Harve ste r “ never imposes tax liability on the investor.” 13

  5. CORRIGAN V. TESTA • Unitary business principle • The unitary business principle addresses whether a state tax “fairly apportions” to the taxing state the combined income of separate legal entities or divisions of the same entity • Does not address separate “nexus” inquiry • Applies when taxing authority attempts to combine taxpayer income and apply apportionment fraction • The Tax Commissioner did not combine income; he applied Mansfield Plumbing’s property, payroll, and sales to determine apportionment • Ohio Supreme Court: Unitary Business Principle is Relevant • “ The U.S. Supreme Court regards the imposition of an investee- apportioned tax on the gain realized by an investor as an unsettled question.” Co rrig an , ¶ 51, citing Me adWe stvac o v. I ll. De pt. o f Re v. , 553 U.S. 16 (2008). • Income tax on nonresident capital gain ≠ income tax on regular earnings. • OSC distinguishes Ag le y v. T rac y , 87 Ohio St.3d 265, 267 (1999) 14

  6. CORRIGAN V. TESTA • “Investee apportionment” • The Ohio Supreme Court holds that Me adWe stvac o is “consistent” with holding • However, U.S. Supreme Court in Me adWe stvac o stated “constitutionally sufficient link between the State and the value it wishes to tax” may be “founded” on State’s contacts with investee. 553 U.S. 16, 31, footnote 4. • Potential for Appellate Review? • Hellerstein: New York Court of Appeals decision in Allie d-Sig nal, inanc e , 588 N.E.2d 731 (N.Y. 1991) I nc . v. Co mmissio ne r o f F upholds investee apportionment tax regime • Co rrig an is the first state supreme court decision holding that a state does not have constitutional “nexus” tax a nonresident’s capital gain income from the sale of an in-state business. • Fair apportionment issue is distinct from “nexus” issue 15

  7. CORRIGAN V. TESTA • Tax Commissioner does not petition the U.S. Supreme Court for a writ of certiorari • As-Applied Holding in Co rrig an • Ohio Supreme Court did not facially invalidate • According to the Ohio court, if taxpayer and investee activities “unitary,” R.C. 5747.212 may be applied • But is the unitary business principle applicable here? See, Justice Lanzinger concurrence in T e sta . . Ryan L e g g I rre vo c ab le T rust v. T • Tax Commissioner: Information Release IT 2016-01 • If taxpayer believes that Co rrig an creates right to refund for tax paid under R.C 5747.212, then taxpayer should submit factual and legal reasons that Co rrig an applies 16

  8. LEGG TRUST V. TESTA FACTS • T. Ryan Legg Irrevocable Trust (“Legg Trust”) • Organized under Delaware law in November 2005 • Ohio Supreme Court finds that Legg Trust is non-Ohio resident • T. Ryan Legg • Ohio resident in 2005 and 2006 • Grantor and Beneficiary of the Legg Trust • Manager and 50% Owner of Total Quality Logistics, an Ohio S Corporation • Sale of Total Quality Logistics in 2006 • Legg sells 32.5% of his TQL shares to the Legg Trust and then, in effect, to his co-manager and 50% co-owner, Ken Oaks 17

  9. LEGG TRUST V. TESTA • Ohio Tax Commissioner apportions the Legg Trust’s gain from the sale of the TQL shares to Ohio • R.C. 5747.01(BB)(2) apportions a trust’s “Qualifying Trust Amount” to Ohio • “Qualifying Trust Amount” includes capital gains realized “from the sale, exchange, or other disposition of equity” in a pass- through entity such as TQL • Two Conditions • Must have 5% or greater interest in the entity sold; and • 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.” 18

  10. LEGG TRUST V. TESTA • Ohio Supreme Court holds Legg’s Trusts sale of TQL shares is a “Qualifying Trust Amount” taxable in Ohio • The Legg Trust held greater than 5% interest: 32.5% • The book value of TQL’s physical assets in Ohio and everywhere were “available” to the Legg Trust • R.C. 5747.01(BB)(6) defines “available” essentially as “ascertainable” • Ohio Tax Commissioner errs in applying three-factor apportionment formula under R.C. 5747.212 • Remand because Tax Commissioner and BTA should have apportioned based upon single factor physical asset formula, Ohio versus everywhere, rather than three factor formula 19

  11. LEGG TRUST V. TESTA • Ohio Supreme Court holds that Ohio tax on Qualifying Trust Amount does not violate Due Process • Ohio Supreme Court distinguishes Co rrig an • Even though the Court found that the Legg Trust is a non-Ohio resident trust, its grantor, T. Ryan Legg, is an Ohio resident • Patton Corrigan, by contrast to Legg, was a non-Ohio resident • “Unlike Corrigan, Legg was a founder and manager of the business of the pass-through entity.” • Substance Over Form • Court holds: “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 objective for himself and his family. Although Legg deliberately set up a Delaware trust, his contacts are still material for constitutional purposes.” 20

  12. LEGG TRUST V. TESTA • Why did the Ohio Supreme Court disregard the trust form in L e sta but not e g g T rust v. T disregard the corporate form in Co rrig an v. T e sta ? • Both Decisions Unanimously Decided • Justice Lanzinger Concurrence in L e g g T rust • Would overrule Co rrig an just eight months after she voted with the unanimous Court in Co rrig an • Substance Over Form • “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 [taxation] unreasonable.” • “Residency of the trust or the grantor or original involvement with the corporate business should be irrelevant.” 21

  13. NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW • Ne w Yor k F r oze n F oods, Inc . v. Be dfor d Hts. Inc ome T ax Bd. of Re v., Slip Opinion No. 2016-Ohio-7582. • Issue – May a taxpaye r that initially file d a se par ate ne t profits ta x re turn with the City of Be dford He ig hts ame nd the ne t pr ofits tax r e tur n to file a c onsolidate d ne t pr ofits tax r e tur n and c laim a r e fund of tax ove r paid so long as the ame nde d r e tur n is file d within the sta tute of limita tions? • Ove ra ll inc ome wa s g re a te r, but the ove ra ll a pportionme nt wa s lowe r, re sulting in ne t re fund due . 22

  14. NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW • BACKGROUND ON L OCAL T AXAT ION IN OHIO –Ohio Constitution • City taxing author ity is one of the “powe r s of loc al se lf gove r nme nt,” Ohio Constitution, Ar tic le XVIII, Se c tion 3, e njoye d by Ohio’s c har te r e d subdivisions. • Ar tic le XVIII, Se c tion 13, pr ovidie s that “[l]aws may be passe d to limit the powe r of munic ipalitie s to le vy taxe s and inc ur de bts,” (Unde r lining adde d) • Ar tic le XIII, Se c tion 6, pr ovide s that the Ge ne r al Asse mbly “shall pr ovide for the or ganization of c itie s, and inc or por ate d village s, by ge ne r al laws, and r e str ic t the ir powe r of taxation.” (Unde r lining adde d) 23

  15. NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW • F ac ts: • T axpaye r file d a se par ate r e tur n in Be dfor d He ights for 2005, 2006, 2007 tax ye ar s. • T axpaye r the n time ly file d ame nde d r e tur ns on a c onsolidate d basis with the City of Be dfor d He ights. 24

  16. NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW • L a w: • Ohio Re vise d Code 718.06 – On and afte r Januar y 1, 2003, all Ohio munic ipalitie s shall ac c e pt c onsolidate d r e tur ns if the same gr oup file d that way for fe de r al inc ome tax pur pose s. • BHO Se c tion 173.15 – T axpaye r “may not c hange the me thod of ac c ounting or appor tionme nt of ne t pr ofits afte r the due date for filing the or iginal r e tur n.” • Doe s not disc uss c hanging “me thod of filing.” 25

  17. NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW • Administr ative Rule adopte d by RIT A: • RIT A Re gulation 5:06(A) T axpaye r “may not c hange the me thod of ac c ounting or appor tionme nt of ne t pr ofits, nor the me thod of filing afte r the due date for filing the or iginal r e tur n.” • T he unde r line d phr ase was adde d by RIT A in 2009 afte r tax ye ar s had e nde d. • No appr oval by Be dfor d He ights City Counc il. Be dford ha s a “pic k- up” or dinanc e . 26

  18. NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW • L e gal Conc e pts : • Me thod of appor tionme nt, me thod of ac c ounting, me thod of filing . T hre e (3) diffe re nt thing s. • Re gulation may not e xc e e d the or dinanc e . • T he City is the le gislative author ity, not RIT A, and the City may not make standar dle ss de le gation of le gislative author ity to RIT A • Is R.C. 718.06 an e xpr e ss limitation or r e str ic tion suc h that all c itie s must allow the ame nde d r e tur ns? 27

  19. NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW • T ’s De c ision : ax Administr ator • T ax Administr ator for Be dfor d He ights de nie d the ame nde d r e tur ns stating that the “r ule s and r e gulations adopte d by the c ity of Be dfor d He ights pr ohibite d the filing of ame nde d r e tur ns to c hange the me thod of filing.” (e mphasis adde d). • E ffe c tive ly the T A is asse r ting that RIT A’s Rule is the r e ason for the de nial. 28

  20. NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW • Be dfor d He ights Boar d of Re vie w’s De c ision • BHO Se c tion 173.15 – T axpaye r “may not c hange me thod of a c c ounting or apportionme nt of ne t pr ofits afte r the due date for filing the or iginal r e tur n.” • RIT A Re gulation 5:06(A) T axpaye r “may not c hange the me thod of ac c ounting or a pportionme nt of ne t profits, nor the me thod of filing afte r the due date for filing the or iginal r e tur n.” • E ffe c tive ly saying “T ake n toge the r … ” you c annot do this, you must have done it on the or iginal r e tur n. 29

  21. NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW • Ohio Boar d of T ax Appe als De c ision (star t) • BT A agr e e s with taxpaye r that filing an ame nde d c onsolidate d r e tur n is NOT a “c hange in the me thod of ac c ounting or appor tionme nt of ne t pr ofits.” • T hir d pr ohibition (adde d by RIT A) is diffe r e nt • Ordina nc e whic h prohibits only 2 of the 3 d – the “me thod of ohibit the 3 r doe s not pr filing.” 30

  22. NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW • Ohio Boar d of T ax Appe als de c ision (c on’t) • But, the BT A holds that the RIT A Rule 5:06(A) d – the c hange in the disallowe d the 3 r “me thod of filing.” • BT A doe s not addr e ss the “r e gulation may not e xc e e d the or dinanc e ” issue . • BT A doe s not addr e ss the “de le gation of om Gill. le gislative author ity” issue fr 31

  23. NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW • Ohio Boar d of T ax Appe als de c ision (c on’t) • T axpaye r : T he Or dinanc e must be le gislative ly c hange d and RIT A may not c hange the law in Be dfor d He ights without City Counc il appr oval. • City: Our or dinanc e has a “we adopt all futur e RIT A r ule s” pr ovision that pic ke d up the RIT A c hange without ne e d for le gislative ac tion by City Counc il. 32

  24. NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW • Ohio Boar d of T ax Appe als de c ision (c on’t) • BT A: T he RIT A Rule is pic ke d up, and BT A doe s not have ability to de c ide c onstitutional issue s • “De le gation of author ity” is c onstitutional issue . • “L imitation or r e str ic tion” of R.C. 718.06 is a c onstitutional issue . 33

  25. NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW • Ohio Boar d of T ax Appe als de c ision (c on’t) • T axpaye r appe als to Ohio Supr e me Cour t. • City of Be dford He ights c ross- appe als • And its Brie fs c ite to a provision of Be dfor d Or dinanc e s ne ve r c ite d be for e nor addr e sse d by T A, MBOA, or the BT A. BHO 173.14. 34

  26. NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW • Ohio Supr e me Cour t – ove r vie w of de c ision • City wins and the taxpaye r is de nie d the r e fund. • Ove r vie w of Analysis fr om the Cour t: • T he ame nde d r e tur n involve d a “c hange in the me thod of ac c ounting.” • T he tax was not “ove r paid” be c ause the taxpaye r had two c hoic e s and both we r e c or r e c t. • RIT A Rule c ould be c onstr ue d as a c lar ific ation. • R.C. 718.06 doe s not he lp the taxpaye r . 35

  27. NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW • Ohio Supr e me Cour t –me thod of ac c ounting • “We hold tha t the BT A e rre d by fa iling to find tha t the c hange fr om filing a se par ate r e tur n to filing a c onsolidate d r e tur n was a “c hange in me thod of ac c ounting” pr ohibite d by the c ity or dinanc e in pur suing a r e fund c laim. We the r e for e affir m the BT A’s de nia l of the re fund c la im on the alte rnate gr ound that the c hange c onstitute d a c hange in the me thod of ac c ounting pr ohibite d by the c ity or dinanc e .” 36

  28. NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW • Ohio Supr e me Cour t –me thod of ac c ounting • “* * * c hange in the me thod of ac c ounting inc lude s a c hange in the ove r all plan of ac c ounting for gr oss inc ome or de duc tions or a c hange in the tr e atme nt of any mate r ial ite m use d in suc h ove r all plan.” 26 C.F .R. 1.446- 1(e )(2)(ii)(a). *** inc lude s “c ha ng e [s] involving the adoption, use or disc ontinuanc e of any othe r spe c ialize d me thod of c omputing taxable inc ome , suc h as the c r op me thod” and “c hange [s] whe r e the Inte r nal Re ve nue Code and r e gulations unde r the Inte r nal Re ve nue Code spe c ific ally r e quir e that the c onse nt of the Commissione r [of Inte r nal Re ve nue ] must be obtaine d be for e adopting suc h a c hange .” 37

  29. NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW • Ohio Supr e me Cour t – no “ove r paid” tax • “F r oze n F oods’ ame nde d r e tur n doe s not c laim a r e fund of ove r paid taxe s. No one ar gue s that its or iginal se par ate filing was anything but both le gally pr ope r and fac tually c or r e c t as to the amount of tax owe d and duly paid. T he ame nde d r e tur n doe s not c laim a de duc tion or c r e dit that the c ompany for got to c laim and doe s not se e k a tax be ne fit that it was e ntitle d to that was omitte d on the se par ate r e tur n.” 38

  30. NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW • Ohio Supr e me Cour t – RIT A Rule c ould be c onstr ue d as “c lar ific ation” • “ the r e is no impe dime nt to c onstr uing the 2009 ame ndme nt of the RIT A r ule as a c lar ific ation r athe r than a substantive c hange .” 39

  31. NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW • Ohio Supr e me Cour t – 718.06 is not e xpr e ss • “Onc e the or iginal r e tur n was file d, the mandate of R.C. 718.06 e xpir e d; the statute did not pur por t to addr e ss whe the r a the [sic ] taxpaye r c ould c hange to a c onsolidate d me thod by filing an ame nde d r e tur n, an issue that involve d polic y de c isions at the loc al le ve l that the Ge ne r al Asse mbly did not addr e ss.” 40

  32. NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW • Ohio Supr e me Cour t – 718.06 is not e xpr e ss (c on’t). • “T he amount of tax r e por te d and paid on the or iginal r e tur n was pe r fe c tly pe r missible and le gal unde r state as we ll as loc al law, give n that the taxpaye r or iginally e xe r c ise d the r ight to file a se par ate r e tur n r athe r than a c onsolidate d r e tur n. T o pr ohibit the c ity fr om r e fusing the ame nde d r e tur n would c onstitute an additional limit on the c ity’s taxing author ity that was not e xplic itly state d in R.C. 718.06.” 41

  33. NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW • Ohio Supr e me Cour t – Don’t ne e d to addr e ss othe r issue s • T he taxpaye r has r aise d c onstitutional c halle nge s to this r uling, inc luding a c laim of unc onstitutional r e tr oac tivity and impr ope r de le gation of author ity. Be c ause we r e solve this c ase on the basis of Be dfor d He ights’ limitation pr ohibiting a c hange in the me thod of a c c ounting , we ne e d not c onside r the the or y on whic h the BT A base d its disposition of the c a se . 42

  34. NEW YORK FROZEN FOODS V. BEDFORD HEIGHTS INCOME TAX BOARD OF REVIEW • Que stions to ponde r • What is a “me thod of ac c ounting”? • Wha t a bout a typo tha t is c orre c te d on the appor tionme nt fr ac tion? • Whe n “c la rific a tion,” doe s it have to say so? • What is “tax ove r paid”? • Compar e MF S to MF J r ule . • What is impac t afte r H.B. 5? • What is an “e xpr e ss limitation or r e str ic tion”? 43

  35. CUNNINGHAM V. TESTA FACTS • Kent and Sue Cunningham admit they are common law domiciliaries of Ohio for 2008 tax year at issue • Long-Time Ohioans • Both spouses born, raised, educated in Ohio • Raised a family in the Cincinnati area • Mail delivered to Cincinnati home • Voted in Ohio in 2008 and Several Years Prior • Ohio Drivers’ Licenses and Vehicle Registrations 44

  36. CUNNINGHAM V. TESTA MORE FACTS • Cunninghams Own Tennessee vacation home • Identified as “vacation home” on 2008 federal tax return • Attested to primary address in Ohio and <14 days in TN • Cunninghams had fewer than 182 contact periods in Ohio in 2008 • Cunninghams Sign Ohio Homestead Application For Real Property Tax Break for 2008 • Attest to Ohio home as “Principle Place of Residence” 45

  37. CUNNINGHAM V. TESTA • Cunninghams claim non-Ohio resident status under Ohio income tax law • Kent Cunningham, not Sue, files R.C. 5747.24 statement • Common Law Domicile • Legal relationship between a person and a particular place which contemplates (a) residence; and (b) intent to reside in that place permanently or indefinitely • “Bright Line” Ohio Statute: R.C. 5747.24(B)(1) • Definitions: • “Abode”: Place of Residence • “Contact Period”: (a) being away overnight from a non-Ohio abode; and (b) while away from non-Ohio abode spends a portion of two consecutive days in Ohio • Incorporates Common Law of Domicile 46

  38. CUNNINGHAM V. TESTA Former R.C. 5747.24(B)(1) reads, in pertinent part: [A]n individual who during a taxable year has no more than one hundred eight-two contact periods in this state, which need not be consecutive, and who during the entire taxable year has at least one abode outside this state, is pr e sume d to be not domic ile d in this state if [within a prescribed time], the individual file s dur ing the taxable ye ar with the tax commissioner, on the form prescribed by the commissioner, a state me nt fr om the individual ve r ifying that the individual was not domic ile d in this state unde r this division dur ing the taxable ye ar . * * * T he pr e sumption that the individual was not domic ile d in this state is ir r e buttable unle ss the individual fails to time ly file the state me nt as make s a false state me nt. If the individual fails to file the r e quir e d or statement as required or makes a false statement, the individual is presumed under division (C) of this section to have been domiciled inhis state the entire taxable year. (Emphasis added). 47

  39. CUNNINGHAM V. TESTA • F or me r R.C. 5747.24, Pr e sumptions, and Bur de n of Pr oof • Presumed to be domiciled in Ohio if 183 or more contact periods [current law: 213 contact periods]. R.C. 5747.24 (D) • Presumption may be rebutted by clear and convincing evidence. • Presumed to be domiciled in Ohio if fewer than 183 contact period [current law: 213 contact periods]. R.C. 5747.24(C) • Presumption may be rebutted by preponderance of the evidence • Presumption shifts, under R.C. 5747.24(B), if: • 182 or fewer contact periods [current law: 212 contact periods]; • Out-of-state abode; and • Taxpayer files statement attesting to non-Ohio domicile and non-Ohio abode 48

  40. CUNNINGHAM V. TESTA • “Ir r e buttable Pr e sumption” • “The pre sumption that the individual was not domiciled in this state is irre butta ble unle ss the individua l fails to timely file the statement as required or make s a fa lse sta te me nt .” (Emphasis added). t : Cunninghams have Ohio domicile • Ohio Supr e me Cour • Tax Commissioner overcomes “irrebutable presumption” if he has specific evidence of a false statement and sets it forth in his final determination • The Cunninghams homestead application attesting to Ohio home as “principle place of residence” is false statement • Cunninghams may still prove non-Ohio domicile by preponderance of the evidence but failed to do so here 49

  41. GIDDENS V. TESTA FACTS • Redneck, Inc. is a wholesale supplier of equipment for trailer parks, including running gear, axles, springs, hitches, and jacks. • Earnest and Louann Giddens are non-Ohio residents who resided in Missouri and owned 100% of Redneck, Inc. through shares held in grantor trusts. • Redneck, Inc. changes federal tax election in 2004 • C corporation for FYE1993 through 2004 • S corporation for FYE 2005 through present 50

  42. GIDDENS V. TESTA • Issue: Is dividend distribution of income earned in the regular course of business during Redneck, Inc.’s C corp years business or nonbusiness income? • $74,099,830 dividend distribution to the Giddenses • Giddenses admit that the income is earned in the regular course of Redneck’s trade or business during C corp years • Apportionment; not double taxation issue pe r se • If the dividend is characterized as allocable nonbusiness income, then entire dividend amount allocated to Missouri • If the dividend is characterized as apportionable business income in Ohio, then dividend is apportionable to Ohio and Giddenses are entitled to dollar-for-dollar resident credit in their home state of Missouri for tax paid to Ohio 51

  43. GIDDENS V. TESTA rac y , 87 Ohio St.3d 265, 268 (1999) • Ag le y v. T • In Ag le y , the Ohio Supreme Court held that the character of distributive share income to investors, as business income or nonbusiness income, is determined at the entity level • “[T]he character of the item distributed to a shareholder is to be determined as if the item were realized from the source from which the corporation realized the item. Thus, business income generated by an S corporation retains its status as business income as it passes through to the shareholders.” • Accord: Dupe e v. T rac y , 85 Ohio St.3d 350, 352 (1999); T e tlak v. Brate nahl , 92 Ohio St.3d 46, 49 (2001); aino , 91 Ohio St.3d 420, 421 (2001) Ke mppe l v. Z 52

  44. GIDDENS V. TESTA • The Ohio General Assembly codified the principle of the Ag le y line of cases in 2002 through R.C. 5747.231 [E ]ac h pe r son shall inc lude in that pe r son's ite ms of busine ss inc ome , no nb usine ss inc o me , adjuste d q ualifying amo unts, allo c ab le inc o me o r lo ss, appo rtio nab le inc o me o r lo ss, pro pe rty, c o mpe nsatio n, and sale s , the pe r son's e ntir e distr ibutive shar e or pr opor tionate shar e of the ite ms of busine ss inc ome , no nb usine ss inc o me , adjuste d q ualifying amo unts, allo c ab le inc o me o r lo ss, appo rtio nab le inc o me o r lo ss, pro pe rty, c o mpe nsatio n, and sale s o f any pass-thro ug h e ntity in whic h the pe rso n has a dire c t o r indire c t o wne rship inte re st at any time during the pe rso n's taxab le ye ar. * * * T he se ite ms shall be in the same for m as was r e c ognize d by ough e ntity. (Emphasis added) the pass-thr 53

  45. GIDDENS V. TESTA • Ohio Supreme Court holds that the Giddenses’ dividend is allocable nonbusiness income not taxable in Ohio • Ag le y and its progeny is limited to distributive share income • Court: Ag le y “misstated” that its principle applies to any “item distributed • The dividend distribution at issue in Gidde ns is materially distinct from distributive share income at issue in Ag le y • The dividend declaration is the taxable event that triggered the income tax liability to the Giddens personally • Contrast with distributive share income recognized by the shareholder when earned by the S corporation • Court: R.C. 5747.231 does not apply because the $74 million dividend is not a “proportionate share” of Redneck’s “business income” under the statute 54

  46. QUESTIONS • Da vid E be rsole • Associate, McDonald Hopkins, LLC • Phone: (614) 484-0716 • Email: debersole@mcdonaldhopkins.com • Ste phe n Hall • Member, Zaino Hall & Farrin • Phone: (614) 349-4812 • Email: shall@zhftaxlaw.com • Danie l F ause y • Assistant Section Chief, Ohio Attorney General’s Office • Daniel.Fausey@OhioAttorneyGeneral.gov 55

  47. [Cite as Hillenmeyer v. Cleveland Bd. of Rev., 144 Ohio St.3d 165, 2015-Ohio-1623.] H ILLENMEYER , A PPELLANT , v . C LEVELAND B OARD OF R EVIEW ET AL ., A PPELLEES . [Cite as Hillenmeyer v. Cleveland Bd. of Rev., 144 Ohio St.3d 165, 2015-Ohio-1623.] Taxation—Municipal income tax—Application of “games played” method of allocating nonresident professional athlete’s income to city, resulting in taxation of income from work performed outside of city, violated NFL player’s right to due process—“Games played” allocation method did not violate municipal ordinance or R.C. Chapter 718—Exclusion of professional athletes from occasional-entrants rule’s 12-day grace period did not violate equal protection. (No. 2014-0235—Submitted January 14, 2015—Decided April 30, 2015.) A PPEAL from the Board of Tax Appeals, No. 2009-3688. ____________________ L ANZINGER , J. INTRODUCTION {¶ 1} Appellant, Hunter T. Hillenmeyer, a former linebacker for the Chicago Bears of the National Football League (“NFL”), challenges the method by which Cleveland’s municipal income tax was imposed on his earnings during tax years 2004, 2005, and 2006. In each of those seasons, the Bears played one game in Cleveland, for which Hillenmeyer was present in Cleveland two days. And for each of those years, the Bears withheld and then paid the municipal tax from his compensation according to Cleveland’s allocation method known as “games played,” under which the taxable portion of a professional athlete’s

  48. S UPREME C OURT OF O HIO income is based on the number of games the athlete played in Cleveland in relation to the total number of games played that year. {¶ 2} As a nonresident of Cleveland, Hillenmeyer asserts that Cleveland has adopted an unlawful method of computing the amount of his compensation that is subject to its city income tax. The games-played method, he argues, dramatically overstates his Cleveland income, because his compensation as an NFL player includes earnings not only for the games he played, but also for the training, practices, strategy sessions, and promotional activities he engaged in. {¶ 3} On December 19, 2007, Hillenmeyer filed timely applications for refunds of income taxes paid to Cleveland for tax years 2004 through 2006. He appealed the denial of his applications for tax refunds to the city of Cleveland Board of Review, the Board of Tax Appeals (“BTA”), and now this court. The issues outstanding {¶ 4} Both constitutional and nonconstitutional challenges are levied against the municipal tax: that former R.C. 718.011(B), Am.Sub.S.B. No. 287, 148 Ohio Laws, Part V, 11536, 1 the “occasional entrants” statute, violates both the Ohio Constitution and the Equal Protection Clause of the Fourteenth Amendment to the United States Constitution (proposition of law No. 4); that Cleveland’s method of income-tax allocation is contrary to former R.C. 718.01(H), 2007 Am.Sub.H.B. No. 24, and former R.C. 718.03, Am.Sub.H.B. No. 95, 150 Ohio Laws, Part I, 396, this court’s decision in Hume v. Limbach , 61 Ohio St.3d 387, 575 N.E.2d 150 (1991), and Cleveland Codified Ordinances 191.0501(b)(1) (proposition of law No. 1); that the city’s method of allocation violates the Due Process Clause of the United States Constitution (proposition of law No. 2); and that it violates the Commerce Clause of the United States Constitution (proposition of law No. 3). 1 In 2014, R.C. Chapter 718 was extensively revised. 2014 Sub.H.B. No. 5. Those revisions became effective March 23, 2015. 2

  49. January Term, 2015 {¶ 5} We now hold that although Cleveland has the right to tax the compensation earned by a nonresident professional athlete for work performed in Cleveland, the city’s application of its games-played method of allocating income violates the due-process rights of NFL players such as Hillenmeyer. We reverse and remand for calculation of the tax refund and interest due him. FACTUAL BACKGROUND Previous proceedings {¶ 6} Hillenmeyer filed claims for refunds of Cleveland taxes withheld and remitted for tax years 2004, 2005, and 2006. In his refund applications, he argued that the allocation ratio used by Cleveland was “illegal, erroneous, and unconstitutional” and taxed amounts for services that he performed outside the city. {¶ 7} The Central Collection Agency (“CCA”), Cleveland’s tax administration authority, responded to Hillenmeyer’s refund applications by issuing a notice dated January 22, 2008, for each of the tax years, indicating that “[y]our employer withheld the tax correctly.” Hillenmeyer then requested that the CCA issue a final, appealable order. On February 19, 2009, the CCA issued a 29- page final dispositional order upholding its imposition of tax using the games- played method of allocation. {¶ 8} Hillenmeyer appealed the CCA’s order to the city’s board of review, Cleveland’s duly established board for income-tax appeals pursuant to former R.C. 718.11, Am.Sub.H.B. No. 95, 150 Ohio Laws, Part I, 396. 2 A hearing was held on July 2, 2009. Thomas DePaso, associate general counsel of the NFL Players’ Association and a former player in the league, testified about Hillenmeyer’s employment and compensation, and Hillenmeyer offered into 2 In Cleveland, the board of review comprises the city’s director of public utilities or delegate, the city law director or delegate, and one member of city council elected to the board by the council. Cleveland Codified Ordinances 191.2501. 3

  50. S UPREME C OURT OF O HIO evidence the NFL collective-bargaining agreement and two of his player contracts, the later of which was dated June 29, 2006, and was a six-year contract extending through 2011. {¶ 9} On September 29, 2009, the board of review issued a nine-page decision deferring to and upholding the CCA’s position. Hillenmeyer then appealed to the BTA. The parties waived a hearing before the BTA and submitted the case on the notice of appeal, the briefs filed, and the record transmitted by the board of review. BTA No. 2009-3688, 2014 WL 351128, *1 (Jan. 14, 2014). {¶ 10} On January 14, 2014, the BTA issued a decision upholding the board of review’s determination. The BTA declined to address Hillenmeyer’s constitutional challenges because of its limitations as an administrative tribunal, relying on Cleveland Gear Co. v. Limbach , 35 Ohio St.3d 229, 520 N.E.2d 188 (1988), and MCI Telecommunications Corp. v. Limbach , 68 Ohio St.3d 195, 625 N.E.2d 597 (1994). BTA No. 2009-3688, 2014 WL 351128, *3. The BTA found that Cleveland’s ordinances “do not operate in contravention of any state statute regarding municipal income taxes or Ohio case precedent.” (Footnote omitted.) Id . But the BTA made “no finding regarding the propriety of the allocation methodology” on the theory that that issue lay outside its jurisdiction. Id . Hillenmeyer appealed the BTA’s decision to this court. Evidence of Hillenmeyer’s compensation {¶ 11} Because it is necessary to look at Hillenmeyer’s total compensation before analyzing the legal issues in this case, we turn to the record, which explains his compensation. Hillenmeyer states in his affidavit to the board of review that he had “been required to provide services to [his] employer from the beginning of the pre-season through the end of the post-season.” He had at least 157 work days in 2004, 165 days in 2005, and 168 days in 2006. The affidavit also establishes that in each of those years, “the Chicago Bears played one game 4

  51. January Term, 2015 in Cleveland, Ohio, traveling to the City the day before the game and leaving the City the same day on which the game was played.” Hillenmeyer himself “was present in and rendered services to [his] employer in Cleveland on those two days during each of these years.” {¶ 12} Hillenmeyer’s statements were corroborated by the affidavit testimony of Cliff Stein, senior director of football administration and general counsel for the Chicago Bears. Stein confirmed that under the NFL standard player contract and from the time that Hillenmeyer joined the Bears in 2003, he was required to “provide services to his employer from the beginning of the pre- season through the end of the post-season, including mandatory mini-camps, official preseason training camp, meetings, practice sessions, and all pre-season, regular season, and post-season games.” Stein also stated that “[t]he compensation Hillenmeyer receives from the Bears is paid for all of these services and not only for games played” and that “[f]ailure to comply with these contractual requirements would subject Hillenmeyer to termination pursuant to Paragraph 12 of his NFL Player Contract and/or fines under Article VIII of the Collective Bargaining Agreement.” {¶ 13} Thomas DePaso testified about Hillenmeyer’s contracts, duties, and elements of compensation at the July 2, 2009 hearing. DePaso described the four distinct phases of an NFL player’s work year. First, players have the mini camp, a mandatory multiple-day event involving a physical exam, meetings, and practices, which takes place after the NFL draft. Second, the preseason training camp typically lasts about six weeks. Players report two weeks in advance of the first of four preseason games, and days are filled with meetings, practices, reviewing films of previous games, and practicing the plays for upcoming games. The regular season is the third phase, which consists of seventeen weeks—sixteen games with one week off—along with the weekly game-preparation schedule. Usually, players come to work on a Monday, when the injured are treated and 5

  52. S UPREME C OURT OF O HIO others view game films from the weekend. Tuesday is a day off, followed by heavy work days on Wednesday, Thursday, and Friday. Saturday, typically the day before game day, involves a relatively light practice with refinement of game strategy and plays. Finally, the team usually travels on Saturday (if the game is away) and plays on Sunday (unless it is an off week). In a successful year, the team may qualify to play postseason games. {¶ 14} DePaso also testified about Hillenmeyer’s employment contract. Under paragraphs 5 and 6 of the standard player contract, entitled “COMPENSATION” and “PAYMENT,” respectively, a certain stated yearly base salary is furnished to the player, paid in weekly or biweekly installments during the regular season. According to DePaso, about 40 percent of the player’s compensation is in addition to that baseline amount. Beyond paragraph 5 compensation, players can receive—based on their specific contracts— performance bonuses based on either individual or team performance, signing bonuses, and roster bonuses, which are paid for being a member of the roster on a certain date. Players can be fined for missing mandatory events, and fines may be deducted from their paragraph 5 compensation, but the collective-bargaining agreement imposes caps on the fines. Termination of a player during the season would lead to the prorated forfeiture of the paragraph 5 compensation, but already-earned bonuses such as roster bonuses are fully owed upon termination even if not yet fully paid out. {¶ 15} Hillenmeyer’s June 29, 2006 contract provided for a term covering the 2006, 2007, 2008, 2009, 2010, and 2011 seasons. His paragraph 5 salary began at $585,000 for 2006 and escalated year by year to $1.8 million for 2011. An addendum provided a roster bonus of $4.5 million for 2006, to be paid out in four increments by September 2007. This bonus compensated Hillenmeyer solely for being “a member of the 80-man roster on July 10, 2006,” and under the 6

  53. January Term, 2015 collective-bargaining agreement the amount was owed and was not forfeitable once earned on that date. Games played vs. duty days {¶ 16} At the heart of the dispute before us is the method that Cleveland has chosen to allocate the taxable income of nonresident professional athletes. Cleveland imposes a 2 percent tax on the income that is allocable to Cleveland. See Cleveland Codified Ordinances 191.0501. CCA Regulation 8:02(E)(6) sets forth a games-played method to allocate the income of a nonresident professional athlete such as Hillenmeyer. This means that Cleveland taxes the one game that Hillenmeyer played in Cleveland each year in proportion to the total number of games the Bears played during the year (approximately 20 preseason and regular- season games in a non-playoff year). Under this methodology, a visiting football player who travels to Cleveland for a single game out of a 20-game season will have one twentieth (5 percent) of his income allocated to Cleveland and then taxed at 2 percent. The Cleveland tax administrator asserts that the games-played method “properly apportions player salaries since the plain language of both [the CBA and the standard player contract] ties a player’s contract salary to one thing—games played.” {¶ 17} Nevertheless, except for Cleveland, municipalities that have chosen to tax professional athletes do so on the basis of the allocation offered by Hillenmeyer—the “duty days” approach. In this approach, the numerator represents the number of days spent in the taxing city: in this case, two days for one game. The record shows that Hillenmeyer had 157 duty days in 2004, 165 in 2005, and 168 in 2006. When these numbers are used as the denominators to represent the total number of work days, Cleveland would have been allocated approximately 1.27 percent of Hillenmeyer’s income in 2004, 1.21 percent in 2005, and 1.19 percent in 2006. Under the duty-days method, Hillenmeyer claims he is entitled to refunds of $253 for 2004, $359 for 2005, and $4,450 for 2006. 7

  54. S UPREME C OURT OF O HIO LEGAL ANALYSIS Cleveland’s allocation method not prohibited by law {¶ 18} Hillenmeyer argues that the method chosen by Cleveland to allocate to itself the income of a nonresident like himself, which is set forth in the CCA Rules and Regulations, conflicts with the underlying tax ordinance passed by the Cleveland City Council. {¶ 19} Cleveland Codified Ordinances 191.0318 defines “taxable income” as “all qualifying wages, net profits and all other income from whatever source derived set forth in Section 191.0501, and the Rules and Regulations as taxable.” The taxing ordinance expressly imposes tax on “all qualifying wages, earned and/or received * * * by nonresidents of the City for work done or services performed or rendered within the City or attributable to the City,” Cleveland Codified Ordinances 191.0501, and it confers authority on the tax administrator to “adopt and promulgate and to enforce and interpret rules and regulations relating to any matter or thing pertaining to the collection of taxes and the administration and enforcement of [the municipal-income-tax ordinances],” subject to approval by the board of review, Cleveland Codified Ordinances 191.2303. {¶ 20} Thus, the ordinances countenance that regulations will spell out how to apply the standard for taxing nonresidents’ income. The ordinances do not restrict how Cleveland’s tax administrator may choose to determine the “work done and services performed or rendered within the City or attributable to the City” when, as here, the taxpayer’s compensation derives from services performed both within and outside of Cleveland. {¶ 21} Hillenmeyer also argues that the games-played method violates state law. Former R.C. 718.01(H)(10), 2007 Am.Sub.H.B. No. 24, prohibits municipal taxation of any wages that are not “qualifying wages,” which according to former R.C. 718.03(A)(2), Am.Sub.H.B. No. 95, 150 Ohio Laws, Part I, 396, 638, means, as relevant here, “wages, as defined in section 3121(a) of the Internal 8

  55. January Term, 2015 Revenue Code.” The Internal Revenue Code provision defines “wages” generally as “all remuneration for employment,” while “employment” in turn is defined as “any service, of whatever nature, performed * * * by an employee for the person employing him.” 26 U.S.C. 3121(a), (b). {¶ 22} From these definitions, Hillenmeyer concludes that Ohio law “requires that employee wages be treated as having been earned for all services performed by an employee for his or her employer.” (Emphasis sic.) He argues that because the undisputed record established that he performed services for the Bears other than playing in football games, Cleveland’s attempt to treat him as being paid only to play in games is contrary to the Revised Code. {¶ 23} This point has surface appeal. But, just as in the case of the ordinance, R.C. Chapter 718 and the federal definition of wages do not specifically address how to apportion or allocate wage income among the various jurisdictions in which the income has been earned. Municipal home-rule authority to impose taxes may be limited only by a provision of state law that expressly imposes the restriction. Cincinnati Bell Tel. Co. v. Cincinnati , 81 Ohio St.3d 599, 605, 693 N.E.2d 212 (1998). The cited statutes do not satisfy this clear-statement rule. {¶ 24} Nonetheless, although Cleveland’s allocation method may not be prohibited by law, we turn to the arguments that it has been unconstitutionally applied to Hillenmeyer. No waiver of constitutional claims {¶ 25} As a preliminary matter, we resolve the issue of waiver of the constitutional claims. Cleveland faults Hillenmeyer for having appealed to the BTA rather than the common pleas court, where his constitutional issues could have been decided. But Cleveland cites no authority for the supposed obligation to use one appeal avenue as opposed to another. R.C. 5717.011 sets forth an appellant’s right to choose the forum and imposes no restrictions on its doing so. 9

  56. S UPREME C OURT OF O HIO We have held that constitutional issues may be raised before the BTA for later determination by the courts on appeal. In such cases, the BTA serves as the forum for presentation of evidence so that a record is available for the court deciding those issues on appeal. Cleveland Gear Co. , 35 Ohio St.3d at 232, 520 N.E.2d 188. We therefore reject Cleveland’s contention that Hillenmeyer’s election of appellate avenues has waived his constitutional claims. {¶ 26} Cleveland also suggests that Hillenmeyer should have raised some hypothetical nonconstitutional argument regarding the apportionment of income as a condition precedent to his being able to raise his constitutional arguments. But Hillenmeyer did argue that the CCA’s regulation conflicts with the city ordinance and that the games-played method is preempted by R.C. Chapter 718. Because there is no basis for concluding that Hillenmeyer has ignored statutory grounds for relief in order to present a constitutional argument, we reject Cleveland’s waiver arguments. Occasional-entrants rule—former R.C. 718.011(B) {¶ 27} Before discussing the method of allocation chosen by Cleveland, we first examine Hillenmeyer’s equal-protection argument that he is entitled to an exemption from the tax because other taxpayers to whom he claims he is similarly situated are so entitled. Hillenmeyer asserts that a statutory 12-day grace period should apply to him because he was in Cleveland for only two days during each of the taxable years. {¶ 28} Former R.C. 718.011, Am.Sub.S.B. No. 287, 148 Ohio Laws, Part V, 11536, 11538, provided: [A] municipal corporation shall not tax the compensation paid to a nonresident individual for personal services performed by the individual in the municipal corporation on twelve or fewer days in a calendar year unless one of the following applies: 10

  57. January Term, 2015 * * * (B) The individual is a professional entertainer or professional athlete, the promoter of a professional entertainment or sports event, or an employee of such a promoter, all as may be reasonably defined by the municipal corporation. 3 {¶ 29} This provision, sometimes referred to as the occasional-entrants rule, applies to nonresidents who perform some but not all of their work within the taxing municipality. Hillenmeyer asserts that professional entertainers and in particular, athletes, are similarly situated to other occasional entrants and should therefore enjoy the statutory 12-day grace period during which their activities within Cleveland are exempt from local income tax. Tax-law distinctions reviewed deferentially on a rational basis {¶ 30} The classification of professional entertainers or athletes as distinct from other occasional entrants, which neither involves fundamental rights nor proceeds along suspect lines, cannot run afoul of the Equal Protection Clause if there is a rational relationship between the disparity of treatment and some legitimate governmental purpose. See Heller v. Doe , 509 U.S. 312, 319-320, 113 S.Ct. 2637, 125 L.Ed.2d 257 (1993). Under this standard, tax distinctions need not be drawn perfectly. See Phillips Chem. Co. v. Dumas School Dist ., 361 U.S. 376, 385, 80 S.Ct. 474, 4 L.Ed.2d 384 (1960). Moreover, the assessment of taxes is fundamentally a legislative responsibility, with the result that “ ‘[t]his already deferential standard “is especially deferential” in the context of classifications arising out of complex taxation law.’ ” Ohio Apt. Assn. v. Levin , 127 Ohio St.3d 76, 2010-Ohio-4414, 936 N.E.2d 919 at ¶ 35, quoting Park Corp. v. Brook Park , 3 The Cleveland ordinances do not directly address the occasional-entrants rule, but CCA’s regulations incorporate it by excluding income “the taxation of which is prohibited by * * * any act of the Ohio General Assembly.” CCA Regulation 6:11. 11

  58. S UPREME C OURT OF O HIO 102 Ohio St.3d 166, 2004-Ohio-2237, 807 N.E.2d 913, ¶ 23, quoting Nordlinger v. Hahn , 505 U.S. 1, 11, 112 S.Ct. 2326, 120 L.Ed.2d 1 (1992). No equal-protection violation {¶ 31} Excluding entertainers and athletes such as Hillenmeyer from the 12-day grace rule does not violate the equal-protection guarantee. {¶ 32} First, professional athletes are typically highly paid, and their work is easy to find, so that a city could earn significant revenue with comparative ease. Second, the legislature could rationally find that professional athletes and entertainers and their events incur much larger public burdens relating to police protection and traffic and crowd control, among other public services, than do other occasional entrants. We conclude that these two factors, in addition to the reliance interest of municipalities in the continued levy of existing taxes, are sufficient to justify the exclusion of a professional athlete such as Hillenmeyer from the 12-day grace period. 4 {¶ 33} Municipal nonresident-income-tax regulations originally applied predominantly to rock stars, but a new focus on athletes developed once their salaries started to escalate. See Ekmekjian, The Jock Tax: State and Local Income Taxation of Professional Athletes , 4 Seton Hall J.Sport L. 229, 234 (1994). Cleveland’s regulations for taxing athletes were adopted in the early 1990s. {¶ 34} In 2000, the General Assembly added the 12-day grace period to former R.C. 718.01(F)(8), Sub.H.B. 477, 148 Ohio Laws 5120, 5122, later recodifying the provision at R.C. 718.011. We believe it was reasonable for the General Assembly to have restricted the further expansion of municipal taxation of nonresidents by creating the 12-day grace period without rolling back the taxes already imposed by Ohio municipalities. 4 Because we reject the equal-protection claim, we need not address the remedial question whether the entertainer/athlete exclusion should be severed and the 12-day rule extended to Hillenmeyer or whether unconstitutionality leads to invalidating the 12-day grace period more broadly. 12

  59. January Term, 2015 {¶ 35} In addition, Ohio cities had already been imposing local taxes on entertainers and athletes when the 12-day grace period was enacted. Protection of reliance interests constitutes a valid basis for legislative line drawing. Nordlinger v. Hahn , 505 U.S. at 12-14, 112 S.Ct. 2326, 120 L.Ed.2d 1; see also United States RR. Retirement Bd. v. Fritz , 449 U.S. 166, 178, 101 S.Ct. 453, 66 L.Ed.2d 368 (1980). Imposing a limit on local taxation while protecting the cities’ interest in collecting existing taxes constituted an adequate rational basis for the General Assembly’s actions. {¶ 36} The United States Supreme Court has recognized that certain taxpayers such as Hillenmeyer may be caught between conflicting rationales: [T]he Constitution grants legislators, not courts, broad authority (within the bounds of rationality) to decide whom they wish to help with their tax laws and how much help those laws ought to provide. “The ‘task of classifying persons for * * * benefits * * * inevitably requires that some persons who have an almost equally strong claim to favored treatment be placed on different sides of the line,’ and the fact the line might have been drawn differently at some points is a matter for legislative, rather than judicial, consideration.” Fitzgerald v. Racing Assn. of Cent. Iowa , 539 U.S. 103, 108, 123 S.Ct. 2156, 156 L.Ed.2d 97 (2003), quoting Fritz at 179, quoting Mathews v. Diaz , 426 U.S. 67, 83-84, 96 S.Ct. 1883, 48 L.Ed.2d 478 (1976). {¶ 37} We hold that the exclusion of Hillenmeyer from the 12-day grace period does not violate the Equal Protection Clause. 13

  60. S UPREME C OURT OF O HIO Due-process violation {¶ 38} Although we decide that Cleveland has the power to tax nonresident professional athletes without allowing them the benefit of the 12-day grace period, we hold that the games-played method of determining the tax base fails to afford due process when applied to NFL players like Hillenmeyer. {¶ 39} The Due Process Clause of the Fourteenth Amendment to the U.S. Constitution states that “[no] State [shall] deprive any person of life, liberty, or property, without due process of law.” Cleveland’s power to tax reaches only that portion of a nonresident’s compensation that was earned by work performed in Cleveland. The games-played method reaches income that was performed outside of Cleveland, and thus Cleveland’s income tax as applied is extraterritorial. {¶ 40} In guarding against extraterritorial taxation, “[t]he Due Process Clause places two restrictions on a State’s power to tax income generated by the activities of an interstate business.” Moorman Mfg. Co. v. Bair , 437 U.S. 267, 272-273, 98 S.Ct. 2340, 57 L.Ed.2d 197 (1978). The first is to require “ ‘some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.’ ” Quill Corp. v. North Dakota , 504 U.S. 298, 306, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992), quoting Miller Bros. Co. v. Maryland , 347 U.S. 340, 344-345, 74 S.Ct 535, 98 L.Ed. 744 (1954). The second restriction is that “the income attributed to the State for tax purposes must be rationally related to ‘values connected with the taxing State.’ ” Moorman Mfg. Co. at 272- 273, quoting Norfolk & W. Ry. Co. v. Missouri State Tax Comm. , 390 U.S. 317, 325, 88 S.Ct. 995, 19 L.Ed.2d 1201. {¶ 41} When it first addressed the power of states to impose income taxes, the United States Supreme Court stated that “[g]overnmental jurisdiction in matters of taxation * * * depends upon the power to enforce the mandate of the state by action taken within its borders, either in personam or in rem .” Shaffer v. Carter , 252 U.S. 37, 49, 40 S.Ct. 221, 64 L.Ed. 445 (1920). Extending a state or 14

  61. January Term, 2015 local income tax to all the elements of income realized by city residents rests upon the authority to legislate in personam in relation to those residents and domiciliaries. See id . at 52. {¶ 42} Beyond in personam taxing jurisdiction over residents, local authorities may tax nonresidents only if theirs is the jurisdiction “within which the income actually arises and whose authority over it operates in rem .” Id . at 55. The Shaffer court reasoned: [J]ust as a State may impose general income taxes upon its own citizens and residents whose persons are subject to its control, it may, as a necessary consequence, levy a duty of like character, and not more onerous in its effect, upon incomes accruing to non- residents from their property or business within the State, or their occupations carried on therein * * *. (Emphasis added.) Id . at 52. {¶ 43} Under Shaffer ’s principle, the income of a nonresident is the “res,” or thing, that lies within the taxing jurisdiction by virtue of the activity being performed within that jurisdiction. Thus, local taxation of a nonresident’s compensation for services must be based on the location of the taxpayer when the services were performed. See Thompson v. Cincinnati , 2 Ohio St.2d 292, 208 N.E.2d 747 (1965), paragraphs one and two of the syllabus. {¶ 44} Two main approaches have been recognized for dividing up a nonresident’s income among taxing jurisdictions. Income derived from the conduct of a unitary trade or business may be apportioned by a general formula, while nonbusiness income must usually be more specifically allocated to that place where the particular increment of income is earned. See Peters & Miller, 15

  62. S UPREME C OURT OF O HIO Apportionability in State Income Taxation: The Uniform Division of Income for Tax Purposes Act and Allied-Signal, 60 Tax Lawyer 57 (2006). {¶ 45} Cleveland relies on cases involving the apportionment of business income. By stark contrast with compensation, income from a trade or business may be apportioned according to a general formula among jurisdictions in which the business has operations. The cases Cleveland relies on involve the particular difficulties of apportioning business income, and to that extent they are inapposite. Compensation invokes a simpler rule: compensation must be allocated to the place where the employee performed the work. Cleveland’s case citations do not support the use of the games-played method. {¶ 46} Due process requires an allocation that reasonably associates the amount of compensation taxed with work the taxpayer performed within the city. The games-played method results in Cleveland allocating approximately 5 percent of Hillenmeyer’s income to itself on the basis of two days spent in Cleveland. By using the duty-days method, however, Cleveland is allocated approximately 1.25 percent based on the same two days. By using the games-played method, Cleveland has reached extraterritorially, beyond its power to tax. Cleveland’s power to tax reaches only that portion of a nonresident’s compensation that was earned by work performed in Cleveland. The games-played method reaches income for work that was performed outside of Cleveland, and thus Cleveland’s income tax violates due process as applied to NFL players such as Hillenmeyer. Hume v. Limbach {¶ 47} Our decision that Cleveland’s application of the games-played method violates the Due Process Clause as it is applied to Hillenmeyer corresponds with an analogous case construing and applying the state income tax. Hume v. Limbach , 61 Ohio St.3d at 387, 575 N.E.2d 150. In that case, the taxpayer, Thomas Hume, a pitcher employed by the Cincinnati Reds, petitioned against a state income-tax deficiency assessment issued against him. The Reds 16

  63. January Term, 2015 employed Hume under a contract requiring him to participate in spring training, preseason exhibition games, regular-season games, and the League Championship and World Series, if necessary, and paying him for these services an annual salary that he received in installments during the regular playing season. As a nonresident of Ohio, Hume claimed a credit on his state-income-tax returns for the number of days he attended spring training and exhibition games played outside Ohio, in addition to regular-season away games. The tax commissioner asserted that Hume could allocate to other states only the income received for the regular-season away games, not the spring training and preseason exhibition games. As in Hillenmeyer’s case, the tax commissioner’s allocation method led to a significantly higher percentage of Hume’s compensation being subjected to Ohio income tax. The BTA affirmed, but we reversed. {¶ 48} We held that Hume “was compensated for the training season and exhibition games, despite receiving payment only during the playing season.” Id . at 389. In other words, all compensation received for services was to be included as part of a ratio when allocating Ohio and non-Ohio income. Contrary to the BTA’s finding in the present case, Hume did involve a dispute about how the allocation ratio should be constructed in terms of which activities were counted, just as the present case does. {¶ 49} Cleveland’s games-played method imposes an extraterritorial tax in violation of due process, because it foreseeably imposes Cleveland income tax on compensation earned while Hillenmeyer was working outside Cleveland. Consistent with the rule that the taxing authority may not collect tax on a nonresident’s compensation earned outside its jurisdiction, the duty-days method properly includes as taxable income only that compensation earned in Cleveland by accounting for all the work for which an NFL player such as Hillenmeyer is paid, rather than merely the football games he plays each year. This method 17

  64. S UPREME C OURT OF O HIO therefore comports with due process and ensures that the tax collected is not disproportionate to the income received for work in Cleveland. Commerce Clause claims not reached {¶ 50} A state tax measure conforms to the requirements of the Commerce Clause, U.S. Constitution, Article I, Section 8, cl. 3, if “ ‘the tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State.’ ” Internatl. Thomson Publishing, Inc. v. Tracy , 79 Ohio St.3d 415, 418, 683 N.E.2d 1091 (1997), quoting Complete Auto Transit, Inc. v. Brady , 430 U.S. 274, 279, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977). This standard is understood to be a four-prong test. See Norandex, Inc. v. Limbach , 69 Ohio St.3d 26, 27, 630 N.E.2d 329 (1994). {¶ 51} Hillenmeyer raises a claim that the games-played method violates the fair-apportionment prong of the Complete Auto test. He also contends in his brief that the games-played method fails under two other portions—the fairly- related and antidiscrimination prongs of the test. But because the notice of appeal to this court specifies only fair-apportionment, we lack jurisdiction to entertain the other two claims. Norandex, Inc. at 31, fn. 1. {¶ 52} Furthermore, Hillenmeyer’s Commerce Clause claim under the fair-apportionment prong seeks no relief other than what we have already deemed appropriate pursuant to due process. Because the due-process analysis is dispositive, we decline to address the Commerce Clause challenge. CONCLUSION {¶ 53} We hold that Cleveland’s use of the games-played method violates due process as applied to NFL players such as Hillenmeyer. Under the duty-days method, which provides due process and satisfies Cleveland’s municipal-income- tax ordinance, Hillenmeyer is entitled to a partial refund of the tax paid. While 18

  65. January Term, 2015 other computation methods might also provide due process, Cleveland has not suggested any method of alternative relief. {¶ 54} We therefore reverse the decision of the BTA, and we remand with the instruction that tax refunds be awarded on the basis of Hillenmeyer’s duty- days calculation, together with interest as appropriate, in accordance with this opinion. Judgment reversed and cause remanded. O’C ONNOR , C.J., and P FEIFER , O’D ONNELL , K ENNEDY , F RENCH , and O’N EILL , JJ., concur. _________________________ Hemenway & Barnes, L.L.P, Stephen W. Kidder, and Ryan P. McManus; and Zaino, Hall & Farrin, L.L.C., and Richard C. Farrin, for appellant. Barbara A. Langhenry, Cleveland Director of Law, and Linda L. Bickerstaff, Assistant Director of Law, for appellees. Michael DeWine, Attorney General, Eric E. Murphy, State Solicitor, Michael J. Hendershot, Chief Deputy Solicitor, Stephen P. Carney, Deputy Solicitor, and Daniel W. Fausey and David D. Ebersole, Assistant Attorneys General, urging affirmance for amicus curiae state of Ohio. Zaino, Hall & Farrin, L.L.C., and Thomas M. Zaino, urging reversal for amici curiae National Football League Players Association, Major League Baseball Players Association, National Hockey League Players Association, and National Basketball League Players Association. _________________________ 19

  66. [Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as Corrigan v. Testa, Slip Opinion No. 2016-Ohio-2805.] 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. S LIP O PINION N O . 2016-O HIO -2805 C ORRIGAN , A PPELLANT , v . T ESTA , T AX C OMMR ., A PPELLEE . [Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as Corrigan v. Testa, Slip Opinion No. 2016-Ohio-2805.] Income taxation—R.C. 5747.212—Statute violates Due Process Clause of Fourteenth Amendment as applied to nonresident taxpayer’s capital gain from sale of ownership in limited-liability company that conducted business in Ohio—Board of Tax Appeals’ decision reversed and matter remanded to tax commissioner for grant of refund. (No. 2014-1836—Submitted February 23, 2016—Decided May 4, 2016.) A PPEAL from the Board of Tax Appeals, No. 2012-3244. ____________________ O’C ONNOR , C.J. {¶ 1} A 2002 amendment to R.C. 5747.212 broadly imposed Ohio’s income tax on a capital gain realized by an out-of-state investor in a pass-through entity if that investor held a 20 percent or greater interest in the entity during a three-year period including the taxable year. The new statute apportioned the capital gain to

  67. S UPREME C OURT OF O HIO Ohio based on the percentage of the entity’s business conducted in this state during the three-year period. In this appeal, appellant, Patton R. Corrigan, a nonresident taxpayer, contests R.C. 5747.212’s imposition of income tax on a portion of the capital gain that he realized in 2004 when he sold his ownership interest in Mansfield Plumbing, L.L.C., a producer of sanitary supplies. {¶ 2} The resolution of Corrigan’s challenge turns on a crucial distinction: Ohio’s taxation of Mansfield Plumbing’s income to Corrigan and Ohio’s taxation of Corrigan’s capital gain from the sale of Mansfield Plumbing. It is undisputed that because Mansfield Plumbing constituted a pass-through entity for tax purposes, Ohio was able to tax Corrigan’s distributive share of the entity’s income (or in this case, loss) based on Mansfield Plumbing’s own business activity in Ohio. The issue before us is whether Ohio may also levy income tax on Corrigan’s capital gain as if it were income from the business itself. {¶ 3} If R.C. 5747.212 were not the law, Corrigan would be subject to the ordinary treatment of capital gains derived from intangible property: he would allocate the entire amount of the gain outside Ohio because he was not domiciled in Ohio. See R.C. 5747.20(B)(2)(c). Corrigan asserts that applying R.C. 5747.212 to him is unconstitutional and that he should therefore be permitted to allocate the gain entirely outside Ohio. {¶ 4} In defending the imposition of R.C. 5747.212 on Corrigan, the tax commissioner does not contend that Corrigan himself was operating or managing the business of Mansfield Plumbing. Instead, the state’s theory is that Ohio enjoys the constitutional prerogative of taxing the proceeds of a nonresident’s out-of-state sale of intangible property, based on nothing more than the fact that the entity being sold conducted some of its business in Ohio. We disagree with the state’s contention. {¶ 5} We hold that R.C. 5747.212, as applied to Corrigan, violates the Due Process Clause of the Fourteenth Amendment to the United States Constitution. 2

  68. January Term, 2016 We therefore reverse the decision of the Board of Tax Appeals (“BTA”) and remand to the tax commissioner to grant Corrigan a refund. RELEVANT BACKGROUND F ACTS {¶ 6} In 2000, Mansfield Plumbing was an established enterprise engaged in producing sanitary ware, with plants in Texas and California. It did business in Ohio—in fact in all 50 states—as well as in other countries. {¶ 7} In 2000, Corrigan, then a resident of Connecticut, acted in concert with business associates to acquire the assets of Mansfield Plumbing, including the right to use that entity’s name. More specifically, the record demonstrates that the consent to use the name “Mansfield Plumbing, L.L.C.” is dated November 2000 and that Corrigan’s share of the entity—his “membership” interest in the limited- liability company—was 79.29 percent. {¶ 8} Corrigan became the main co-owner and a “manager,” i.e., a member of the board of managers of Mansfield Plumbing. The day-to-day operations of the company were overseen by officers and managers employed by the company. According to Corrigan’s brief before the tax commissioner, as a manager, Corrigan visited the company headquarters in Perrysville, Ohio, “for board meetings and management presentations regarding operations, labor, finance, strategic positioning and other matters important to the goal of growing Mansfield’s market share.” Corrigan testified that that involvement was “easily a hundred hours” per year. According to Corrigan, his role and capacity was as an “investo[r] who bought companies with the intention of providing financing and strategic expertise to grow the company for an eventual exit via a sale to a third party.” Corrigan specifically argued to the tax department that his role in the entity involved “stewardship” rather than active management of the business. {¶ 9} In 2004, Corrigan and his fellow investors sold their interests in Mansfield Plumbing to a third party, Ceramicorp, Inc., a unit of a Colombian entity 3

  69. S UPREME C OURT OF O HIO in the sanitary-wares business that wanted a foothold in North America. As a result of the sale, Corrigan realized a capital gain of $27,563,977 from his share of Mansfield Plumbing. In filing his returns for tax year 2004, Corrigan treated the entire amount of the gain as allocable outside Ohio, apparently because Corrigan was not domiciled in Ohio. P ROCEDURAL H ISTORY {¶ 10} In 2009, Ohio issued an assessment for an unpaid 2004 tax liability of $674,924.58, which, with interest, amounted to a total assessment of $847,085.19. Corrigan paid $100,000 of the assessment, then filed a refund claim for that amount on March 8, 2010. See former R.C. 5747.11(A)(3), Am.Sub.H.B. No. 530, 151 Ohio Laws, Part IV, 6700 (requiring the tax commissioner to refund amounts more than $1 “paid on an illegal, erroneous, or excessive assessment”). These proceedings arise from that claim. {¶ 11} The tax commissioner denied the refund claim through a final determination issued on August 20, 2012. The final determination applied a straightforward reading of R.C. 5747.212 and concluded that the assessment and payment complied with the statute. The final determination also rejected Corrigan’s constitutional arguments. {¶ 12} Corrigan appealed to the BTA, which held a hearing on January 15, 2014. Corrigan testified at the hearing. {¶ 13} The BTA issued its decision on September 24, 2014. Noting the presumption favoring the tax commissioner’s findings and its own lack of jurisdiction to declare a statute unconstitutional, the BTA “acknowledge[d]” Corrigan’s constitutional claims but made “no findings in relation thereto.” 2014 Ohio Tax LEXIS 4415, BTA No. 2012-3244, at 4 (Sept. 24, 2014). The BTA also noted that Corrigan raised a statutory argument in his BTA brief but held that it 4

  70. January Term, 2016 lacked jurisdiction to entertain that contention because Corrigan had not specified that claim in his notice of appeal to the BTA. 1 Id. {¶ 14} The BTA affirmed the tax commissioner’s final determination, and Corrigan appealed to this court. ANALYSIS T HE D UE P ROCESS AND C OMMERCE C LAUSES S ET L IMITS ON O HIO ’ S T AXING A UTHORITY {¶ 15} “It is a venerable if trite observation that seizure of property by the State under pretext of taxation when there is no jurisdiction or power to tax is simple confiscation and a denial of due process of law. ‘* * * Jurisdiction is as necessary to valid legislative as to valid judicial action.’ ” Miller Bros. Co. v. Maryland , 347 U.S. 340, 342, 74 S.Ct. 535, 98 L.Ed. 744 (1954), quoting St. Louis v. Wiggins Ferry Co. , 78 U.S. 423, 430, 20 L.Ed. 192 (1870). And “[g]overnmental jurisdiction in matters of taxation * * * depends upon the power to enforce the mandate of the state by action taken within its borders, either in personam or in rem .” Shaffer v. Carter , 252 U.S. 37, 49, 40 S.Ct. 221, 64 L.Ed. 445 (1920). These precepts point to the importance of the Due Process Clause of the Fourteenth Amendment as a means of “guarding against extraterritorial taxation” by defining the limits of state taxing authority. Hillenmeyer v. Cleveland Bd. of Rev ., 144 Ohio St.3d 165, 2015-Ohio-1623, 41 N.E.3d 1164, ¶ 40. Additionally, the United States Supreme Court has held that under the Due Process Clause, “the States * * * are subject to limitations on their taxation powers that do not apply to the Federal Government.” F.W. Woolworth Co. v. New Mexico Taxation and Revenue Dept. , 458 U.S. 354, 363, 102 S.Ct. 3128, 73 L.Ed.2d 819 (1982). 1 Corrigan contended that the commissioner’s determination significantly overstated the amount of the capital gain based on intricacies of the Internal Revenue Code. Corrigan has not raised this contention before this court. 5

  71. S UPREME C OURT OF O HIO {¶ 16} Similarly, the dormant Commerce Clause imposes its own restrictions upon state taxing power. “By prohibiting States from discriminating against or imposing excessive burdens on interstate commerce without congressional approval, [the dormant Commerce Clause] strikes at one of the chief evils that led to the adoption of the Constitution, namely, state tariffs and other laws that burdened interstate commerce.” Maryland Comptroller of Treasury v. Wynne , ___ U.S. ___, 135 S.Ct. 1787, 1794, 191 L.Ed.2d 813 (2015). {¶ 17} “Due process centrally concerns the fundamental fairness of government activity,” while the Commerce Clause reflects “structural concerns about the effects of state regulation on the national economy.” Quill Corp. v. North Dakota , 504 U.S. 298, 312, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992). Although the constraints imposed by the Due Process Clause and the Commerce Clause are distinct, they partially overlap. Commerce Clause restrictions may run parallel to Due Process Clause restrictions or be imposed in addition to Due Process Clause constraints. That said, under both the Due Process Clause and the Commerce Clause, the bedrock principle is “that a State may not tax value earned outside its borders.” Allied-Signal, Inc. v. Dir., Div. of Taxation , 504 U.S. 768, 777, 784, 112 S.Ct. 2251, 119 L.Ed.2d 533 (1992). “ ‘No principle is better settled,’ ” the high court has stated, “ ‘than that the power of a state, even its power of taxation, in respect to property, is limited to such as is within its jurisdiction.’ ” Miller Bros. at 342, quoting New York, Lake Erie & W. RR. Co. v. Pennsylvania , 153 U.S. 628, 646, 14 S.Ct. 952, 38 L.Ed. 846 (1894). {¶ 18} In considering this case, we are persuaded that the assessment of a tax on Corrigan’s capital gain cannot be sustained under the basic due-process test for the exercise of proper tax jurisdiction. Our disposition of the appeal on those grounds obviates the need for any separate analysis under the Commerce Clause. 6

  72. January Term, 2016 T HE O PERATION OF THE T AX S TATUTES AS A PPLIED TO C ORRIGAN {¶ 19} As a general matter, Ohio imposes individual income tax on “every individual * * * residing in or earning or receiving income in this state.” R.C. 5747.02(A); Cunningham v. Testa , 144 Ohio St.3d 40, 2015-Ohio-2744, 40 N.E.3d 1096, ¶ 9. Corrigan is a nonresident, nondomiciliary of Ohio; as such, he is subject to Ohio income tax only with respect to his income earned or received in this state. Id . During his majority ownership, Corrigan was subject to Ohio income tax on a portion of his distributive share of Mansfield Plumbing’s “business income” {¶ 20} R.C. Chapter 5747 puts flesh on the bones of the concept of “earning or receiving income in this state.” In acquiring his controlling interest in Mansfield Plumbing in 2000, Corrigan subjected himself to Ohio income taxation because of the pass-through nature of the entity in which he invested and by which he sought to profit. {¶ 21} Ohio’s income tax distinguishes between “business income” and “nonbusiness income.” As a general matter, business income is defined as income from “the regular course of a trade or business” and is apportioned to Ohio according to the percentage of the business’s property, payroll, and receipts located in Ohio. See R.C. 5747.01(B) (definition of business income) and 5747.21(B) (providing for apportionment of business income by reference to apportionment statutes of the former corporate franchise tax, R.C. Chapter 5733). {¶ 22} By contrast, nonbusiness income includes compensation, rents, royalties, and capital gains and is specifically allocated to a situs. R.C. 5747.02(C) and 5747.20. Compensation, for example, is specifically allocated to the place where the services were performed; rents are specially allocated to the place where the rental property is located. R.C. 5747.20(B)(1) and (3). In the case of capital gains from the sale of intangible personal property, the tax situs is the domicile of the taxpayer. R.C. 5747.20(B)(2)(c). 7

  73. S UPREME C OURT OF O HIO {¶ 23} As majority owner of Mansfield Plumbing for tax years 2000 through 2004 and as a result of that entity being organized and treated as a pass- through entity for tax purposes, Corrigan realized his distributive share of the income or loss that was generated by Mansfield Plumbing’s business. Because that income or loss qualified under the business-income definition as business income or loss to the entity itself, it was deemed to be business income as to Corrigan as the pass-through taxpayer who included it on his return. See Agley v. Tracy , 87 Ohio St.3d 265, 268, 719 N.E.2d 951 (1999) (income derived from an S corporation’s business activity that passed through the individual taxpayer’s tax return was business income as to the individual taxpayer); R.C. 5747.231. {¶ 24} The appearance of any income from Mansfield Plumbing as part of Corrigan’s federal adjusted gross income would mean that the same income would have been included in Corrigan’s Ohio adjusted gross income. To eliminate Ohio tax on income generated by business conducted outside Ohio, Corrigan would have had recourse to the nonresident credit, R.C. 5747.05(A); that credit would offset the Ohio tax on his distributive share that related to business that Mansfield Plumbing conducted outside Ohio. {¶ 25} In actuality, however, Mansfield Plumbing realized losses rather than profits during the years of Corrigan’s ownership, and those losses were reported on a composite return filed by Mansfield Plumbing on behalf of its members. Corrigan personally filed Form IT 1040s in Ohio for those years, claiming a 100 percent nonresident credit. {¶ 26} Although bereft of profits from his Mansfield Plumbing investment, Corrigan apparently realized a different kind of financial benefit from his ownership of the business: he apparently was able to use his Mansfield Plumbing losses to offset other income and reduce the taxes he owed to other jurisdictions. 2 2 Both the audit remarks and Corrigan’s testimony at the BTA indicate that the hours Corrigan spent managing Mansfield Plumbing and other businesses that he owned satisfied a standard of 8

  74. January Term, 2016 But for R.C. 5747.212, Corrigan would pay no Ohio tax on his capital gain because that gain would have its tax situs outside Ohio {¶ 27} In 2004, Corrigan and his fellow investors sold 100 percent of their membership interests in Mansfield Plumbing. They realized capital gain from the transaction, and in the ordinary course, Corrigan’s capital gain would not have been allocated to Ohio because Ohio was not Corrigan’s residence and domicile. {¶ 28} Corrigan claimed a nonresident credit that eliminated all Ohio liability in 2004. But in 2009, the tax department issued its assessment based on former R.C. 5747.212. The operative part of the version of the statute in effect during tax year 2004 read as follows: A pass-through entity investor that owns, directly or indirectly, at least twenty per cent of the pass-through entity at any time during the current taxable year or either of the two preceding taxable years shall apportion any income, including gain or loss, realized from the sale, exchange, or other disposition of a debt or equity interest in the entity as prescribed in this section. For such purposes, in lieu of using the method prescribed by sections 5747.20 and 5747.21 of the Revised Code, the investor shall apportion the income using the average of the pass-through entity’s apportionment fractions otherwise applicable under section 5747.21 of the Revised Code for the current and two preceding taxable years. If the pass- through entity was not in business for one or more of those years, each year that the entity was not in business shall be excluded in determining the average. participation under the Internal Revenue Code. Consequently, the Mansfield losses qualified as nonpassive, thereby permitting Corrigan to use those losses more broadly as an offset against his income. 9

  75. S UPREME C OURT OF O HIO Am.Sub.S.B. No. 261, 149 Ohio Laws, Part I, 1793, 1870. 3 {¶ 29} Corrigan’s situation came within R.C. 5747.212 because he owned over 79 percent of Mansfield Plumbing, thereby clearing the 20 percent threshold, and because he realized a gain from selling his equity interest in Mansfield Plumbing during 2004. D UE P ROCESS P REDICATES T AXATION OF A N ONRESIDENT ’ S I NCOME ON O HIO ’ S C ONNECTION TO B OTH THE T AXPAYER AND THE T RANSACTION {¶ 30} Due process “ ‘requires some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.’ ” Quill , 504 U.S. at 306, 112 S.Ct. 1904, 119 L.Ed.2d 91, quoting Miller Bros. , 347 U.S. at 344-345, 74 S.Ct. 535, 98 L.Ed.2d 744. {¶ 31} A state’s taxing jurisdiction may be exercised over all of a resident’s income based upon the state’s in personam jurisdiction over that person. Hillenmeyer , 144 Ohio St.3d 165, 2015-Ohio-1623, 41 N.E.3d 1164, at ¶ 41, citing Shaffer , 252 U.S. at 52, 40 S.Ct. 221, 64 L.Ed. 445. By contrast, the power to tax nonresidents reflects the state’s in rem jurisdiction over the income-producing activities conducted within the state: “[J]ust as a State may impose general income taxes upon its own citizens and residents whose persons are subject to its control it may, as a necessary consequence, levy a duty of like character, and not more onerous in its effect, upon incomes accruing to non-residents 3 This was the original version of the statute, which was enacted in 2002. The version quoted by the tax commissioner in his final determination reflected amendments to the statute made in 2005 that were not in effect at the time Corrigan incurred his tax liabilities for tax year 2004. See Am.Sub.H.B. No. 66, 151 Ohio Laws, Part III, 4674. 10

  76. January Term, 2016 from their property or business within the State, or their occupations carried on therein.” (Emphasis deleted.) Hillenmeyer at ¶ 42, quoting Shaffer at 52. {¶ 32} Inherent in the Supreme Court’s pronouncement in Shaffer is the need for a link between the state and the person being taxed as well as between the state and the activity being taxed. The former is expressed in terms of the minimum-contacts test that is familiar in the context of determining the personal jurisdiction that may be exercised by a court sitting in one state and issuing process to a person in another state. See Quill at 307, citing Internatl. Shoe Co. v. Washington , 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945), and Shaffer v. Heitner , 433 U.S. 186, 97 S.Ct. 2569, 53 L.Ed.2d 683 (1977). Applying principles from this area of the law, due process requires that a person whom a state proposes to tax have “purposefully availed” himself of benefits within the taxing state. Id . {¶ 33} In addition to the state’s connection with the person to be taxed, “in the case of a tax on an activity, there must be a connection to the activity itself, rather than a connection only to the actor the State seeks to tax.” Allied-Signal , 504 U.S. at 778, 112 S.Ct. 2251, 119 L.Ed.2d 533. In Allied-Signal , New Jersey attempted to tax one corporation’s gain from selling its shares in another corporation, and the court clarified that the mere fact that the taxpayer performed some of its business within the taxing state did not by itself permit the taxation of that taxpayer’s gain from the sale of shares of another corporation. Instead, the high court enforced its earlier pronouncement that “[a] State may not tax a nondomiciliary corporation’s income * * * if it is ‘derived from “unrelated business activity” which constitutes a “discrete business enterprise.” ’ ” Id . at 773, quoting Exxon Corp. v. Wisconsin Dept. of Revenue , 447 U.S. 207, 224, 100 S.Ct. 2109, 65 L.Ed.2d 66 (1980), quoting Mobil Oil Corp. v. Vermont Commr. of Taxes , 445 U.S. 425, 442, 439, 100 S.Ct. 1223, 63 L.Ed.2d 510 (1980). 11

  77. S UPREME C OURT OF O HIO Ohio-derived income may be taxed to the person whose business activity generated the income {¶ 34} Shaffer v. Carter demonstrates that the direct conduct of business subjects the nonresident person conducting the business to a tax on the proportionate share of business conducted within the taxing state. This scenario relies on the state’s in rem jurisdiction over the income generated by in-state activity. But the situation also entails the taxpayer’s purposeful availment of the protections and benefits of the state’s laws by conducting a portion of the business within that state. Quill , 504 U.S. at 307, 112 S.Ct. 1904, 119 L.Ed.2d 91, citing Shaffer v. Heitner , 433 U.S. at 212, 97 S.Ct. 2569, 53 L.Ed.2d 683. Distributive share may be taxed because the income taxed is generated by Ohio business activity and the pass-through establishes “purposeful availment” {¶ 35} Do due-process protections permit Ohio to impose its individual income tax on the distributive-share income of a nonresident who realizes pass- through income? We answered affirmatively in Agley , 87 Ohio St.3d 265, 719 N.E.2d 951: Appellants have admitted that their S corporations conducted business in Ohio. Thus, it is evident that the S corporations have utilized the protections and benefits of Ohio by carrying on business here. This income was then passed through to the appellants as personal income. Thus, the appellants, through their S corporations, have also availed themselves of Ohio’s benefits, protections, and opportunities by earning income in Ohio through their respective S corporations. We find that this provides Ohio the “minimum contacts” with the appellants to justify taxing appellants on their distributive share of income. 12

  78. January Term, 2016 Id. at 267. Simply stated, even though the taxpayers in Agley were nonresidents who did not themselves conduct business in Ohio, we determined that their decision to invest using corporate structures in Ohio and making federal pass-through elections satisfied the purposeful-availment criterion for imposing the tax obligation on them personally. Capital gain is generated by the sale of intangible property rather than by Ohio business activity, and thus selling the shares does not involve purposeful availment {¶ 36} The tax at issue here differs, however, with respect to Ohio’s connection both to the activity and to the taxpayer. In this case, the activity at issue is a transfer of intangible property by a nonresident. Thus, Ohio’s connection is an indirect one, whereas in Agley the activity being taxed was the very income derived from business activity in Ohio. Moreover, although Corrigan’s availment of Ohio’s protections and benefits is clear with respect to the pass-through of Mansfield Plumbing’s income to him, Corrigan’s sale of his interest in Mansfield Plumbing did not avail him of Ohio’s protections and benefits in any direct way. {¶ 37} For these reasons, we conclude that Agley does not extend to Corrigan’s capital gain. T HE U NITED S TATES S UPREME C OURT ’ S P RECEDENTS D O N OT E STABLISH THE C ONSTITUTIONALITY OF A PPLYING R.C. 5747.212 TO C ORRIGAN {¶ 38} Corrigan and the tax commissioner rely on competing United States Supreme Court cases. {¶ 39} Corrigan emphasizes more recent cases in which the U.S. Supreme Court has established that a state may not tax the dividends received by a nonresident corporation from another corporation, or the capital gain realized from selling shares in another corporation, absent a unitary business relationship between the taxpayer and the other corporation. See MeadWestvaco Corp. v. Illinois Dept. of Revenue , 553 U.S. 16, 128 S.Ct. 1498, 170 L.Ed.2d 404 (2008); Allied-Signal , 13

  79. S UPREME C OURT OF O HIO 504 U.S. 768, 112 S.Ct. 2251, 119 L.Ed.2d 533; ASARCO, Inc. v. Idaho State Tax Comm. , 458 U.S. 307, 102 S.Ct. 3103, 73 L.Ed.2d 787 (1982); F.W. Woolworth , 458 U.S. at 363, 102 S.Ct. 3128, 73 L.Ed.2d 819. By extension, Corrigan contends that Ohio may not tax his capital gain unless Corrigan himself has engaged in a business that is unitary with that of Mansfield Plumbing. As supplemental authority, Corrigan points out that we have already applied ASARCO in a corporate franchise tax case to bar the apportionment of investment income as business income of the taxpayer. See Am. Home Prods. Corp. v. Limbach , 49 Ohio St.3d 158, 160-161, 551 N.E.2d 201 (1990), citing ASARCO . {¶ 40} The tax commissioner relies on a pair of older Supreme Court decisions addressing and upholding the imposition of Wisconsin’s “privilege dividend tax.” See Internatl. Harvester , 322 U.S. 435, 64 S.Ct. 1060, 88 L.Ed. 1373; Wisconsin v. J.C. Penney Co ., 311 U.S. 435, 61 S.Ct. 246, 85 L.Ed. 267 (1940). Instead of being imposed directly on corporate income, the privilege dividend tax was imposed on the privilege of declaring and receiving dividends; in practical operation, the tax required corporations to withhold from the payment of a dividend the amount of the tax and remit the tax to the state. See J.C. Penney at 440, fn. 1 (quoting the underlying statute). {¶ 41} In both older cases, the Supreme Court upheld the measure. {¶ 42} In J.C. Penney , the high court hypothesized that a “supplementary tax on the Wisconsin earnings of [foreign] corporations” that simply “postponed liability for the tax until such earnings were to be paid out in dividends” was consistent with due process and that the characterization of the tax as being levied on the privilege of declaring and receiving dividends should not change the result. Id. at 442-444. The court therefore reversed the Wisconsin Supreme Court’s holding that the privilege dividend tax was unconstitutional. {¶ 43} In Internatl. Harvester , the high court considered the privilege dividend tax anew in light of the Wisconsin Supreme Court’s clarifications that for 14

  80. January Term, 2016 state constitutional purposes, the tax was a privilege rather than an income tax and that the corporation was not entitled to deduct the privilege dividend tax because the burden of the tax fell upon stockholders. Internatl. Harvester at 438-439. The United States Supreme Court affirmed, adhering to its holding in J.C. Penney . {¶ 44} In arguing that J.C. Penney and Internatl. Harvester control here, the tax commissioner points to the fact that the present case involves using the business-income factors of Mansfield Plumbing, whereas the MeadWestvaco and Allied-Signal line of cases involved state taxes that attempted to use the taxpayer’s business-income factors to apportion the dividend or capital-gain income. This distinction is one that can be characterized as the difference between the “investor apportionment” analysis, in which the courts look at the nexus between the taxpayer/investor (like Corrigan) and the jurisdiction, see, e.g. , MeadWestvaco and Allied-Signal , and the “investee apportionment” analysis, in which the courts look at the nexus between the investee (like Mansfield Plumbing) and the taxing jurisdiction, see, e.g. , J.C. Penney and Internatl. Harvester . {¶ 45} Seizing on this distinction, the tax commissioner asserts that the unitary-business doctrine, which defined the limits of constitutionality in the MeadWestvaco and Allied-Signal cases, is irrelevant here. The tax commissioner contends that the taxpayer’s liability is determined by the business done by the entity in which the taxpayer has invested and that the investment income realized— whether that income is a dividend, a capital gain from the sale of the investment, or the payment of a debt—may be taxed to the nonresident investor . In this manner, the tax commissioner attempts to justify apportioning both the capital gain and the debt interest pursuant to R.C. 5747.212. {¶ 46} We disagree. {¶ 47} First and foremost, J.C. Penney and Internatl. Harvester address a tax law that, unlike R.C. 5747.212, never imposes tax liability on the investor . To be sure, in upholding the tax, the high court accepted the proposition that the 15

  81. S UPREME C OURT OF O HIO economic burden of Wisconsin’s privilege dividend tax fell upon nonresident investors, even though it was actually paid by the corporation that declared and paid the dividend. But the propriety of imposing the economic burden of a tax on a nonresident does not necessarily require the conclusion that the tax liability itself can be imposed on those nonresident investors. The Wisconsin statute at issue did not do so, and the decisions upholding that statute should not be construed to authorize other statutes that were not under review by the high court at that time. {¶ 48} Second, even if J.C. Penney and Internatl. Harvester were construed to extend to the imposition of a state income tax on the nonresident recipient of a dividend , that would still not require the conclusion that the same reasoning extends to a capital gain from the sale of corporate ownership. It is self-evident that the dividend has a more direct relationship to corporate earnings, out of which the dividend is paid, than does the capital gain from the sale of corporate ownership. Indeed, it is possible in a given situation that the purchaser of a business may be more interested in acquiring specific business assets than in the profits generated by the ongoing business. That could, in fact, be true here inasmuch as Mansfield Plumbing realized losses in the years immediately preceding the sale. {¶ 49} Third, our reluctance to accept the tax commissioner’s expansive interpretation of J.C. Penney and Internatl. Harvester is consistent with MeadWestvaco . {¶ 50} In MeadWestvaco , the taxpayer had sold its Lexis-Nexis division, booking an intangible “goodwill” gain of about $1 billion, which the taxpayer treated as nonbusiness income allocable to its domicile outside Illinois. See 371 Ill.App.3d 108, 113, 861 N.E.2d 1131 (2007), reversed , 553 U.S. 16, 128 S.Ct. 1498, 170 L.Ed.2d 404. The state revenue department recharacterized the income as apportionable business income of the taxpayer, and the Illinois courts affirmed. But the United States Supreme Court reversed on the basis of the Allied-Signal line 16

  82. January Term, 2016 of cases and the unitary-business doctrine. 553 U.S. at 29-30, 128 S.Ct. 1498, 170 L.Ed.2d 404. {¶ 51} Of special relevance here is the question that the high court declined to address. As a fallback position, the state in MeadWestvaco had argued that Lexis-Nexis’s own business in Illinois justified the imposition of the additional tax on its former parent’s gain. The Supreme Court characterized this argument as “a new ground for the constitutional apportionment of intangibles based on the taxing State’s contacts with the capital asset rather than the taxpayer.” Id. at 30. (Using the terminology we have employed in this opinion, Illinois was arguing for investee apportionment as an alternative to investor apportionment.) The court then declined to address the “new ground” for apportionment for two reasons. First, it noted that the argument had not previously been raised and passed upon. Second, it recognized that the states that relied on investee apportionment, including Ohio, had not been notified that the constitutionality of their statutes would be determined. Id. at 31. 4 In other words, the United States Supreme Court regards the imposition of an investee-apportioned tax on the gain realized by an investor as an unsettled question. Because the high court has not answered that question, we cannot properly regard it as settled by J.C. Penney and Internatl. Harvester . S TATE C OURT C ASES D O N OT S UPPORT A PPLYING R.C. 5747.212 TO C ORRIGAN ’ S C APITAL G AIN {¶ 52} The tax commissioner also relies on state court decisions as support for applying R.C. 5747.212 to Corrigan’s capital gain. Most notably, in his brief and at oral argument, the commissioner relied heavily on the Louisiana Supreme 4 The Supreme Court recognized that the Ohio corporation franchise tax contained investee- apportionment provisions at R.C. 5733.051(E) and (F). MeadWestvaco at 31. Division (E) calls for investee apportionment of a corporate taxpayer’s capital gains, and division (F) calls for investee apportionment of a corporate taxpayer’s dividend income. With the phase-out of the franchise tax for most businesses pursuant to the 2005 tax-reform legislation, these provisions have a greatly diminished significance. See Navistar, Inc. v. Testa , 143 Ohio St.3d 460, 2015-Ohio-3283, 39 N.E.3d 509, ¶ 1 (discussing 2005 tax-reform legislation). 17

  83. S UPREME C OURT OF O HIO Court’s decision in Johnson v. Collector of Revenue , 246 La. 540, 165 So.2d 466 (1964). {¶ 53} In Johnson , a corporation held as its sole asset certain lands in Louisiana on which oil and gas production activities were conducted. Those activities had led to an appreciation in the value of the land, and accordingly, when the corporation liquidated itself by exchanging shares for interests in the direct ownership of the land, the state assessed a tax on the pro rata capital gain of the shareholders. As in the present case, the intangible stock-share interests were held and sold outside the taxing state, and the shareholders were nonresidents. {¶ 54} The statute decisive to the decision upholding Louisiana’s taxation of the capital gain read as follows: “In cases where property located in Louisiana is received by a shareholder in the liquidation of a corporation, the stock cancelled or redeemed in the liquidation shall, for purposes of determining taxable gain under this chapter, be deemed to have its taxable situs in this state to the extent that the property of the corporation distributed in liquidation is located in Louisiana. If only a portion of the property distributed in liquidation is located in Louisiana, only a corresponding portion of the gain realized by a shareholder shall be considered to be derived from Louisiana sources.” Id. at 567, quoting La.Rev.Stat. 47:159(H). {¶ 55} The lower court had determined that the corporation had conducted no Louisiana business and that the assignment of Louisiana situs was “wholly fictitious and arbitrary, rendering the statute unconstitutional.” Id. at 570. But the Louisiana Supreme Court reversed, observing that had the corporation itself sold the lands to a third party, the corporation would have paid Louisiana tax on that 18

  84. January Term, 2016 gain from the disposition of in-state property. Id. at 572. The court explained that the statute quoted above was intended to prevent the use of a corporate liquidation and conveyance of Louisiana assets to avoid the imposition of tax on the gain associated with such property. “Clearly, such a gain from oil-producing lands in Louisiana reflects the protection and opportunities that the state has afforded,” the court observed. Id. at 573. {¶ 56} Counsel for the state characterizes the Louisiana statute as “identical” to R.C. 5747.212 and its application in this case. We are persuaded, however, not only that there are differences between the two schemes but also that those differences are of decisive import here. {¶ 57} Far from broadly subjecting a nonresident’s capital gain to in-state apportionment as R.C. 5747.212 does, the Louisiana statute applies only when nonresidents receive property with a Louisiana situs in conjunction with redemption of their corporate shares. Moreover, the Louisiana statute allocates the nonresident’s gain to Louisiana only to the extent of the gain on those Louisiana assets. {¶ 58} Quite simply, rather than broadly extending state taxing power to a nonresident’s capital gain, the Louisiana statute does nothing more than prevent avoidance of the Louisiana tax on a capital gain from the sale of a Louisiana asset through a manipulation of corporate forms. We conclude that the Louisiana statute’s limited purpose and effect bears no resemblance to the broad scope and expansive purpose of R.C. 5747.212 and is of limited value in addressing the constitutional question before us. {¶ 59} One state court decision that genuinely adopts investee apportionment comes from the New York Court of Appeals. In Allied-Signal, Inc. v. Commr. of Fin. , 79 N.Y.2d 73, 580 N.Y.S.2d 696, 588 N.E.2d 731 (1991), New York’s highest court upheld New York City’s imposition of a tax on a nonresident parent corporation’s capital gain from the sale of its interest in a subsidiary, where 19

  85. S UPREME C OURT OF O HIO the gain was apportioned to the city based on the subsidiary’s business-income apportionment rather than the parent’s. Based on its reading of the United States Supreme Court’s decision in Internatl. Harvester , the New York Court of Appeals determined that New York City could assert a nexus with the investor’s capital gain. Allied-Signal at 82-84. {¶ 60} As already discussed, however, we decline to read Internatl. Harvester as authorizing the imposition of a tax on the nonresident dividend recipient , given that the statute at issue in that case imposed tax only on the corporation that paid the dividends. In this regard, we find one of the dissenting opinions in Allied-Signal persuasive. Namely, in his dissent, Judge Hancock faulted the majority for a leap of logic, asserting that the mere fact that the burden of the tax in J.C. Penney and Internatl. Harvester fell on the out-of-state shareholders did not mean that the state had a nexus to tax those shareholders directly. Allied-Signal at 102 (Hancock, J., dissenting). {¶ 61} And contrary to the tax commissioner’s argument, we find that our own decision in Couchot v. State Lottery Comm. , 74 Ohio St.3d 417, 659 N.E.2d 1225 (1996), is inapposite here. In that case, we examined the imposition of Ohio’s income tax on the incremental payments to a nonresident winner of the Ohio lottery in light of constitutional challenges based on due-process, Commerce Clause, and retroactivity grounds. With respect to the basic due-process claim, we observed that “[i]t is difficult to imagine a more fundamental exertion of a state’s taxing power than where the state taxes income on winnings from its lottery.” Id. at 422. Indeed, the winning of the lottery game and the payments that ensued clearly constituted the enjoyment of Ohio-created benefits and protections that justified the imposition of the tax. That taxpayer’s scenario, however, is quite different from Corrigan’s—in law and in fact. 20

  86. January Term, 2016 E NFORCING D UE -P ROCESS R ESTRAINTS ON S TATE T AXATION D OES N OT E LEVATE F ORM OVER S UBSTANCE {¶ 62} The tax commissioner argues that Ohio can tax a share of Corrigan’s capital gain because the sale of the ownership interest is merely one form in which the business could be sold and the same gain would be taxable if the business had been sold through an asset sale instead. In his words, the tax commissioner contends that because taxation would be proper under “that economically equivalent situation,” it must be proper in the context with which we are presented. {¶ 63} This argument relies on R.C. 5747.01(B), which includes in the definition of business income the “gain or loss, from a partial or complete liquidation of a business, including, but not limited to, gain or loss from the sale or other disposition of goodwill.” Thus, if Mansfield Plumbing had made a bulk transfer of its business assets rather than having the business transferred through a sale of the L.L.C. ownership itself, then the gain from the sale would have been realized at the L.L.C. level, and the Ohio-apportioned share would have been taxed to Corrigan on a pass-through basis. The commissioner argues that because the gain could be taxed to Corrigan in an asset sale, it may also be taxed in the form of Corrigan’s individual capital gain. {¶ 64} Although this argument may appear plausible, the jurisdictional question before us presents more than merely a matter of form. {¶ 65} We recognize that an asset sale and a sale of ownership interest may be different forms involving the same economic substance to the parties, but that does not mean that the jurisdictional limits on Ohio’s taxing powers lack their own substantive importance. Nor is it unusual that two different methods of achieving the same economic result could have drastically different tax implications. {¶ 66} Moreover, the commissioner’s “form over substance” argument can cut both ways. The commissioner argues that taxing Corrigan’s personal capital gain is justified because Ohio law would apportion the gain from an asset sale as 21

  87. S UPREME C OURT OF O HIO business income. But one could, with equal logical force, assert that because the sale of assets in liquidation of the business is in substance the same as the sale of the corporate ownership , Ohio cannot constitutionally treat the gain from the asset sale as apportionable “business income.” {¶ 67} We decline to accept the form-over-substance argument as militating against our conclusion, which is based on other grounds, i.e., that Corrigan’s capital gain may not be taxed. R.C. 5747.212 I S N OT F ACIALLY U NCONSTITUTIONAL {¶ 68} Corrigan has advanced both an as-applied and a facial challenge to R.C. 5747.212. Our holding of unconstitutionality today is limited to R.C. 5747.212 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. {¶ 69} Conceivably, an individual taxpayer might engage in the conduct of a business with or through a corporate entity, and under the MeadWestvaco and Allied-Signal line of cases, the imposition of tax under R.C. 5747.212 could be sustained. We therefore decline to hold that R.C. 5747.212 is facially unconstitutional because Corrigan has not demonstrated, as he must, that “there exists no set of circumstances under which the statute would be valid.” Harrold v. Collier , 107 Ohio St.3d 44, 2005-Ohio-5334, 836 N.E.2d 1165, ¶ 37. Because there is at least a possibility that the statute could be applied when the unitary-business situation is present, 5 we reject the facial challenge. 5 Perhaps recognizing this possibility, Corrigan has made a distinct effort to establish that he has not engaged in active management here, distinguishing his efforts as merely the “stewardship” of a corporate director. For his part, the tax commissioner has consistently argued that the unitary-business doctrine is irrelevant rather than contend that the unitary-business relationship might be present. 22

  88. January Term, 2016 {¶ 70} In light of our disposition of this appeal on due-process grounds, we need not and do not address Corrigan’s claim that R.C. 5747.212 violates the Commerce Clause. CONCLUSION {¶ 71} For the foregoing reasons, we reverse the decision of the BTA, and we remand to the tax commissioner with instructions to grant a refund to Corrigan. Decision reversed and cause remanded. P FEIFER , O’D ONNELL , L ANZINGER , K ENNEDY , F RENCH , and O’N EILL , JJ., concur. _________________ Taft, Stettinius & Hollister, L.L.P., and J. Donald Mottley, for appellant. Michael DeWine, Attorney General, and Barton A. Hubbard, David D. Ebersole, and Raina M. Nahra, Assistant Attorneys General, for appellee. Baker & Hostetler, L.L.P., Edward J. Bernert, Elizabeth A. McNellie, and Christopher J. Swift, urging reversal for amicus curiae, Ohio Chamber of Commerce. _________________ 23

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