For unemployment tax payment purposes, a new company does not inherit an old company’s tax rate unless it is under “common ownership, management, or control” at the time of the legal transfer, the Ohio Supreme Court ruled today.

The Supreme Court unanimously reversed a decision of the Tenth District Court of Appeals, which ruled the state appropriately imposed the experience rating of multinational auto parts maker  Delphi Corp. on the new owners -- two hedge funds that bought parts of the company, including production plants in Ohio.

Writing for the Court, Justice R. Patrick DeWine explained the state argued it could impose the old rating because, within weeks of changing ownership, the new owners formally hired the old management team and two-thirds of the workers who were displaced by Delphi Corp., which had declared bankruptcy. Justice DeWine stated that when read in context with the rest of R.C. 4141.24(G)(1), the law requires the two companies to share common ownership, management, or control at the exact time that the business assets are transferred in order to impose the existing unemployment tax rate.

Chief Justice Maureen O’Connor and Justices Sharon L. Kennedy, Patrick F. Fischer, Michael P. Donnelly, and Melody J. Stewart joined the majority opinion. Ninth District Court of Appeals Judge Donna J. Carr also joined the opinion, sitting for Justice Judith L. French, who did not participate in the case. Justice Fischer also issued a separate concurring opinion.

Law Adopted to Avoid ‘Tax Dumping’
Ohio employers pay into a state unemployment compensation fund. The Ohio Department of Job and Family Services then maintains a separate account for each employer and determines an “experience rating” based in part on the amount of unemployment-compensation benefits paid to its former employees.

Employers who lay off high numbers of employees typically have higher experience ratings and pay more tax. New employers, which do not have an extensive enough history to have an experience rating, are assigned a standard new-employer rate.

States had become concerned about a new tax-evasion practice in which some employers artificially reduced their experience rating by shifting employees to a new or different corporate entity.  The practice became known as State Unemployment Tax Act (SUTA) dumping.  In 2004, Congress passed the SUTA Dumping Prevention Act, which required states to take steps to ensure that when an employer transfers positions to a new employer under the same ownership and management, the new business inherits the old business’ experience rating.

Ohio lawmakers amended the state’s unemployment-compensation laws in 2005 to bring them into compliance with the new federal act. The new state law included R.C. 4141.24(G)(1), which provides that an employer must take a prior employer’s experience rating if “at the time of transfer, both employers are under substantially common ownership, management, or control.”

New Owners Challenge Tax Rate
As part of bankruptcy proceedings in 2005, two hedge funds, Elliot Association and Silver Point Capital, acquired certain assets of Delphi Corp., including Delphi Automotive Systems Services, which had operations in Ohio. The new owners set up a company called Delphi Automotive Systems, which is identified in court documents as “New Delphi,” while the former operation is identified as “Old Delphi.”

In October 2009, Old Delphi transferred portions of its assets to New Delphi. At the time of the transfer on Oct. 6, 2009, New Delphi did not have any Ohio employees and was owned, managed, and controlled by the hedge funds. New Delphi named a board of directors that did not include any former directors of Old Delphi. But New Delphi issued a press release at that time declaring that Old Delphi’s president and chief executive officer as well as the current leadership would continue to manage the company’s global operations.

The newly announced leaders were not employed byNew Delphi on the transfer date, but were given offers of employment by the new company. At a meeting 17 days later, Old Delphi’s leaders were officially hired to their positions with New Delphi. New Delphi also hired two-thirds of Old Delphi’s Ohio employees.

In June 2011, the Ohio Department of Job and Family Services notified New Delphi that it would inherit Old Delphi’s unemployment experience rating for tax years 2009 through 2011. The company challenged the department’s decision, which was affirmed by the Ohio Unemployment Compensation Review Commission.

New Delphi appealed to the Franklin County Common Pleas Court, which reversed the commission’s decision and found New Delphi was not under the same ownership, management, or control “at the time of the transfer on October 6.” 

Job and Family Services appealed the decision to the Tenth District, arguing the “time of transfer” was not an exact date, but included the period of time it takes for one company to transition its assets and workforce to another. The Tenth District agreed with the state and reversed the trial court’s decision. The appeals court concluded that New Delphi and Old Delphi were under the same management at the time of the transfer, applying the state’s expansive interpretation of “time of transfer” to incorporate the entire transition period up to the point that New Delphi formally hired Old Delphi’s management group. New Delphi appealed the Tenth District’s decision, and the Supreme Court agreed to hear the case.

Court Turns to Other Provisions in Same Law
Justice DeWine noted that the Tenth District made an analogy using the phrase “at the time of the American Revolution,” to explain that the phrase “at the time” refers to a span of time, not a discrete event. The Court’s opinion explained that “at the time” can refer to a span of time, but also can mean a specific point in time.

“‘At the time of the American Revolution’ may mean a period of time spanning a number of years, but if we were to say, ‘Thomas Jefferson was napping at the time of John Hancock’s signing of the Declaration of Independence,’ we would almost certainly be referring to a precise point in time on August 2, 1776,” the opinion stated.

The Court noted that the second sentence of R.C. 4141.24(G)(1) states the applicable tax rate takes effect “immediately upon the date of the transfer of the trade or business.” That indicated the legislature understood transfers of business assets to occur at a precise time, rather than over a period of weeks, the opinion stated.

The law also mandates that the prior owner’s rate is to be imposed if both employers “are under substantially common ownership, management and control,” the Court noted. The use of the present tense indicates the employers must be simultaneously under the same ownership, management or control on the legal date of transfer. Because New Delphi was not, the company does not inherit Old Delphi’s experience rating, the Court concluded.

Concurrence Finds Assets Transferred at Another Date
Justice Fischer’s separate concurrence stated that “common sense” would lead the Court to conclude that New Delphi should not inherit Old Delphi’s experience rating.

Justice Fischer noted New Delphi acquired parts of Old Delphi through bankruptcy. The relevant agreement, the “master disposition agreement,” indicated New Delphi and Old Delphi were not under common management, control, or ownership at the time of transfer.

He also noted that the bankruptcy court’s approval confirmed that New Delphi was not a “mere continuation” of the company and there was not “continuity of ownership” between the purchasers and the debtors.

2017-0553. Delphi Automotive Sys. LLC v. Ohio Dept. of Job & Family Servs., Slip Opinion No. 2020-Ohio-2793.

View oral argument video of this case.

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