The Ohio Supreme Court today reversed an Ohio Board of Tax Appeals (BTA) decision that allowed for $17 million in corporate tax credits -- because the tax commissioner had mailed an order reducing the amount too late.

The Supreme Court ruled 4-3 that the Ohio tax commissioner timely ”issued” his determination of International Paper Company’s tax credit by entering it on his official journal before the June 30, 2010, deadline. The Court also ruled that the delayed mailing of the order to the company did not void it.

However, the majority per curiam opinion only addressed the timing dispute. The Court returned the case to the BTA to determine if International Paper can claim $17 million in tax credits it seeks, or is allowed only about $972,000, which is the amount the state tax commissioner approved.

The dispute arises from Ohio’s tax overhaul in 2005 that replaced the corporate franchise tax with the commercial activity tax (CAT).

In a dissenting opinion, Justice Judith L. French wrote the commissioner missed the deadline and International Paper is entitled to the $17 million credit.

Amount of Credit Based On Net Operating Losses Disputed
A company’s net operating losses (NOLs) were a potential tax deduction under Ohio’s corporate franchise tax and were carried on corporate books as tax-deferral assets. When the franchise tax was replaced with the CAT, the NOLs lost their value in Ohio. The General Assembly enacted a CAT/NOL credit, R.C. 5751.53, to prevent companies that accumulated NOLs from losing them.

The first step to claim the credit required a company to file a report with the state that proposed an “amortizable amount” of credit to spread over a 10-to-20-year period. The report had to be filed with the tax commissioner by June 30, 2006, and International Paper mailed a report the day before the deadline seeking approximately $17 million in credits. The tax commissioner’s initial audit led to the calculation that International Paper should receive no credit. After reconsideration based on new information, the tax commissioner adjusted the amount from zero to $927,513.

The tax commissioner journalized his final determination on June 8, 2010. The law gave the commissioner until June 30, 2010, to complete the work. The commissioner mailed his determination to International Paper on July 12, and the company appealed to the BTA.

BTA Finds Deadline Missed
In August 2014, the BTA ruled the deadline set in R.C. 5751.53(D) required the commissioner to “issue” its final determination by June 30. It relied on the Ohio Supreme Court’s 1988 Carstab Corp. v. Limbach decision, which defined “issue” as the date of mailing a determination and not the date of journalizing it. The BTA instructed the tax commissioner to vacate its determination and approve International Paper’s proposed $17 million amortizable amount.

The tax commissioner appealed to the Ohio Supreme Court, which by law is required to hear appeals of BTA decisions. The Court today addressed three procedural issues, including the commissioner’s argument that the date on which the final determination was journalized was the date it was “issued,” meaning that the order satisfied the June 30 deadline. The Court also addressed the commissioner’s argument that his determination should stand because the deadline in the law was not mandatory, and his claim that if the Court agreed with his position, then International Paper cannot challenge his finding because it did not file a cross appeal.

Notice to Taxpayer Not Optional
The tax commissioner maintained that the issuing of an assessment is optional. R.C. 5751.53(D) reads: “Unless extended by mutual consent, the tax commissioner may, until June 30, 2010, audit the accuracy of the amortizable amount available to each taxpayer that will claim the credit, and adjust the amortizable amount or, if appropriate, issue any assessment or final determination, as applicable, necessary to correct any errors found upon audit.”

The Court’s opinion noted the sentence “falls short of the ideal of good draftsmanship” and the first appearance of the “or” led the commissioner to contend the issuance of an assessment or final determination was optional. The commissioner maintained this is an audit process and any communication with the taxpayer in relation to the audit is sufficient to reduce the CAT credit.

The Court rejected the argument, pointing to the phrase “necessary to correct any errors found upon audit,” and ruled the use of “necessary” implies a final determination is required if the commissioner is going to reduce the credit.

“The necessity arises for two reasons: first, a need to definitively inform the taxpayer as to how much credit the commissioner concludes is available, and second, a need to afford the taxpayer an opportunity to contest any reduction by appealing the assessment or final determination to the BTA under R.C. 5717.02,” the opinion stated.

Not only is the final determination mandatory, but the Court also ruled the June 30, 2010, deadline was mandatory, rejecting the commissioner’s contention that it was not because the report was not required. The Court concluded the law had a hard deadline for credit claimers to file reports, which was June 30, 2006, and a hard deadline for the commissioner to complete audits of those reports four years later.

Determination Issued by Deadline
The Court determined the BTA’s reliance on the Carstab opinion was misplaced. The Court noted the Carstab case dealt with sales- and use-tax assessments, where the terms “making,” “issuing,” and “serving” an assessment each had a defined meaning within the context of the sales tax statute. The commissioner pointed to cases in which the Court used “issue” to define journalization of a determination, most notably its 2015 Navistar, Inc. v. Testa opinion. The Court concluded the commissioner met the deadline.

While the Court adopted the commissioner’s argument that he met the deadline, it rejected his contention that if he did comply with the law, then International Paper cannot challenge his finding. The opinion explained that International Paper did not have to file a cross-appeal to preserve its right to challenge the determination because the BTA has not yet ruled on the substantive issue of whether the credit should be $17 million or less than $1 million.

“International Paper did not have to file a cross-appeal because there was no ruling on its substantive issue from the BTA, so there is no need for us to exercise jurisdiction to decide the issue, in whole or in part,” the Court wrote. “Nor does International Paper seek our pronouncement on the issue in the first instance. It follows that no cross-appeal was necessary.”

The Court remanded  the case to consider the company’s substantive challenge to the commissioner’s reduction of its available credit.

Chief Justice Maureen O’Connor and Justices Paul E. Pfeifer, Judith Ann Lanzinger, and William M. O’Neill joined the Court’s opinion.

Dissent Maintains No Notice Without Mailing
In her dissent, Justice French noted that R.C. 5703.05(L) requires the tax commissioner to maintain a journal of final determinations and that it is “open to public inspection.” Although open to inspection, Justice French wrote the journal is not accessible to the public through the Department of Taxation’s website and that it was issued when the commissioner mailed it, which was after the deadline.

In the Carstab case, the commissioner made the assessment through a journal entry and mailed the finding to the taxpayer by the deadline. The taxpayer received it after the deadline and argued the commissioner missed the deadline. Justice French noted that while the Carstab decision is not binding authority that the Court had to follow in this case, it is persuasive. The General Assembly has twice revised the sales tax law since the Carstab case without changing the meaning of “issue,” she observed, and the legislature was aware of the language when it created the CAT credit.

“In my view, ‘issue’—here, as in Carstab—relates to the mailing of the tax commissioner’s final determination, so as to give the taxpayer notice of the determination,” she wrote.

She also referenced the majority opinion’s position that an ambiguous statute should be liberally construed to promote the intended goal of the law, and that a liberal construction of this law should be read to the benefit of the taxpayer. A liberal construction would have required the commissioner to mail the determination by June 30, she concluded.

Justices Terrence O’Donnell and Sharon L. Kennedy joined Justice French’s opinion.

2014-1614. Internatl. Paper Co. v. Testa, Slip Opinion No. 2016-Ohio-7454.

Hear the oral argument audio of this case.

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