The Ohio Supreme Court ruled today that a Bedford Heights ordinance allowed the city to reject a request for a nearly $700,000 tax refund sought by New York Frozen Foods Inc. for tax years 2005 through 2007.

In a majority opinion  written by Justice Judith Ann Lanzinger, the Supreme Court voted 4-3 that the company’s filing of a consolidated amended municipal tax return – after it originally filed separate tax returns for affiliated companies – is a “change in the method of accounting” prohibited by the city’s code. The Court ruled the city was within its taxing power of local self-government to prohibit the change in filing without prior written approval.

The Ohio Board of Tax Appeals (BTA) had ruled in favor of the city on different grounds. Justice Lanzinger stated that U.S. Department of Treasury regulations regarding federal income tax filings support the conclusion that changing from filing a separate return to a consolidated return is a change in the method of accounting and that the refund request was properly denied for that reason.

In a dissenting opinion, Justice Terrence O’Donnell noted that the BTA vacated its first order rejecting the company’s challenge in an attempt to fix a typographical error. In doing so, the BTA purported to give New York Frozen Foods additional time to appeal the decision to the Supreme Court. Justice O’Donnell concluded that the BTA was not authorized to grant a party additional time to appeal, and the company therefore missed the deadline for filing its notice of appeal.

Corporation Seeks Refund Years After Original Filing
New York Frozen Foods filed its Bedford Heights tax returns on a separate-entity basis for tax years 2005, 2006, and 2007. In 2010, Frozen Foods filed a consolidated amended return for its affiliated companies operating in the city, and it claimed it was entitled to a refund of $698,294 for the three years. The Regional Income Tax Agency (RITA), which acts as the tax administrator for Bedford Heights and 245 other Ohio municipalities, denied the refund, and the company appealed to the Bedford Heights Income Tax Board of Review, which in 2011 also denied the refund.

The review board cited two Bedford Heights city ordinances regarding municipal income tax returns and the city’s adoption of a provision to follow all RITA rules and regulations unless the rule conflicts with its own laws. The review board found the city rule did not allow a taxpayer to change the method of accounting or apportionment of net profits while filing an amended return, and the RITA rule added that a taxpayer cannot change its method of filing. Frozen Foods appealed to the BTA.

The BTA agreed with Frozen Foods’ argument that switching from separate to a consolidated return was not a change in accounting or apportionment that would have violated the city code. However, the BTA did find the RITA rule prohibited a change in the method of filing applied, and thus denied the refund. Frozen Foods also argued that the city’s reliance on the RITA rules violated the company’s state constitutional rights, but the BTA indicated it had no authority to rule on constitutional questions, which must be addressed by the Supreme Court.

The company appealed to the Supreme Court, which is required to hear all BTA appeals, and the city filed a cross appeal. The city argued that its own ordinance, not the RITA rule, should determine whether to grant or reject the refund request.

Court Examines Cross-Appeal First
Contrary to its usual procedure, the Court considered the city’s cross appeal first. Justice Lanzinger explained that if the city’s claim that its code prevented the refund was correct, the Court did not have to consider any of Frozen Foods’ claims, including the argument that the city violated the state constitution. Looking at the ordinance, she noted the city code allows a corporation to choose whether to file separate or consolidated tax returns. But once it chooses, it cannot change its method for later tax years without the written approval of the city’s tax administrator. The code also states it may be necessary for a taxpayer to file an amended return to report additional income, pay additional taxes, or claim a refund if taxes were overpaid.

Although the city argued Frozen Foods changed its method of accounting by switching from separate to consolidated returns, the company argued a change in the accounting method is limited to a switch between cash versus accrual accounting. The BTA reasoned that if changing filing methods from separate to consolidated was a means of accounting, the city would not have had to adopt the RITA amendment that barred changing the method of filing to block it.

The Court rejected the BTA’s conclusion based on a close reading of the city code and federal law. Justice Lanzinger explained the ordinance allows for amendments to correct errors, but no one maintained that Frozen Foods overpaid taxes when it filed as separate companies. The city was not attempting an “illegal extraction” of taxes not owed to it. Instead, Frozen Foods was taking a new computing approach to reduce its tax assessment, which is not a reason to compel the city to provide a refund.

Justice Lanzinger rejected Frozen Foods’ argument that a change in the accounting method is limited to a cash versus accrual choice. She referred to the federal treasury regulations, stating: “Broadly, a ‘change in the method of accounting includes a change in the overall plan of accounting for gross income or deductions or a change in the treatment of any material item used in such overall plan.’ ” A review of these regulations established that the change from filing a separate return to filing a consolidated return constitutes a change in the method of accounting prohibited under the Bedford Heights ordinance.

Court Rejects State Law Preemption Claim
The company argued that even if the Bedford Heights ordinance prohibited the change in filings, the city would have to follow a 2000 state law requiring the municipalities to accept consolidated returns. The city responded with home rule arguments.

Justice Lanzinger rejected arguments that the city could not put limitations on method of filing of returns. She stated that the Ohio Constitution grants taxing authority to local government, and the state’s power to preempt local tax laws must expressly indicate what the state is attempting to preempt. Nothing in the updated state law, R.C. 718.06, expressly limits a city’s right to prevent companies from switching the way they file amended returns.

“Changing from filing a separate return to a consolidated return did not correct any tax-accounting error in the original return. The amount of tax reported and paid on the original return was perfectly permissible and legal under state as well as local law, given that the taxpayer originally exercised the right to file a separate return rather than a consolidated return. To prohibit the city from refusing the amended return would constitute an additional limit on the city’s taxing authority that was not explicitly stated in R.C. 718.06,” she wrote.

Chief Justice Maureen O’Connor and Justices Paul E. Pfeifer and William M. O’Neill joined Justice Lanzinger’s decision.

Dissent Asserts Company Filed Appeal Too Late
In his dissent, Justice O’Donnell noted that the BTA denied Frozen Foods’ appeal on March 9, 2015. Frozen Foods moved for reconsideration on March 18, and in response to that motion, the BTA not only denied reconsideration on March 20, but also it purported to vacate its decision to correct a typographical error. The BTA then republished the same opinion verbatim, adding only a statement denying reconsideration and vacating its prior order and correcting the typographical error to change the word “disagree” to “agree.”

Frozen Foods filed its appeal on April 10, which was 32 days after the original decision, but only 21 days after the republished decision. Justice O’Donnell cited R.C. 5717.03, which states that a BTA decision is “final and conclusive” unless reversed, vacated, or modified by the Supreme Court or a court of appeals, and R.C. 5717.04, which requires an appeal of a BTA decision to be filed within 30 days.

He wrote that the BTA does not have the authority to vacate its own final order and substitute it for appeal, nor can it vacate and reissue a final order to extend the time for a party to initiate an appeal. He noted that the BTA’s procedural rules state that a motion for reconsideration cannot enlarge the period of time to appeal. 

“Accordingly, the BTA entered the only final appealable order in this case on March 9, 2015, and its republished March 20, 2015 entry denying reconsideration, correcting a clerical error, and purporting to vacate the March 9 entry did not restart the time period for perfecting an appeal. Therefore, New York Frozen Food’s notice of appeal filed on April 10, 2015, is untimely and this matter should be dismissed,” he concluded.

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

2015-0575. New York Frozen Foods, Inc. v. Bedford Hts. Income Tax Bd. of Rev., Slip Opinion No. 2016-Ohio-7582.

View oral argument video of this case.

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