The Ohio Supreme Court today affirmed the ruling of the state tax commissioner and the Board of Tax Appeals (BTA) that heavy-vehicle maker Navistar is not entitled to $27 million in commercial activity tax credits.

The credits related to the state’s switch from the corporate franchise tax — that was usually based on corporate income — to the commercial activity tax (CAT), which is imposed at a lower rate on the corporation’s gross receipts.

The Court’s 5-2 per curiam opinion found the BTA’s decision to affirm the tax commissioner’s denial of the CAT credit was not “unreasonable or unlawful,” thereby upholding the BTA’s factual finding that the original “valuation allowance” was not reasonable in light of the company’s restatement of the underlying financials.

The decision marked the second time the high court considered Navistar’s objection to the tax credit denial. In 2015, the Court ruled the BTA did not fully consider the expert testimony of Navistar’s expert witnesses and remanded the case for further proceedings.

Manufacturers Sought Credits for Transition
Navistar manufacturers commercial trucks, buses, military vehicles, and other products, mostly from its plant in Springfield. Before enactment of the CAT, Navistar was a franchise-tax payer in Ohio and was among the group of large companies that would lose the benefit of its net operating losses because of the change from a corporate income tax to a gross receipts tax, which would not permit the deduction of those losses.

State lawmakers devised a plan where large companies could use their deferred tax assets as of the end of the fiscal year during 2004 as the basis for a CAT credit. The companies had to report to the tax commissioner the amount of deferred tax assets, which were offset by the “valuation allowance,” by mid-2006. This amount would be the basis for claiming CAT credits over a period of years as provided by law. Navistar calculated its “CAT credits” at just more than $27 million, and under the new law, the company could use those credits between calendar years 2010 and 2030 to reduce the amount they owed under the CAT.

In 2007, the company completed a “massive restatement” of its finances for earlier years, including 2002, 2003, and 2004. The tax commissioner examined a form Navistar filed with the federal Securities and Exchange Commission, in which Navistar reported a 100 percent “valuation allowance” which fully offset its deferred tax assets. The tax commissioner determined on that basis that Navistar was not entitled to any credits. The commissioner issued his final decision on the matter in 2010, and Navistar appealed to the BTA.

Company Failed to Meet Requirements
The BTA initially upheld the tax commissioner’s determination, and Navistar appealed to the Supreme Court. In its decision in the first appeal, the Court held that the amount of CAT credit had to be based on books and records that were in compliance with GAAP (generally accepted accounting principles.) But the Court ruled that the BTA did not adequately consider the expert testimony provided by two Navistar witnesses who offered opinions on the reasonableness of the original valuation allowance.  On remand, the BTA was instructed to consider those opinions and decide the case. The BTA again ruled the company failed to prove it was entitled to the credits and Navistar appealed again.

In today’s ruling the Court examined the BTA’s handling of the matter that now included the board’s evaluation of the opinions of the company’s experts. The Court ruled that the BTA did explain why the original calculation made by Navistar was not GAAP compliant, and affirmed the board’s decision.

Chief Justice Maureen O’Connor and Justices Terrence O’Donnell, Judith L. French, R. Patrick DeWine, and Mary DeGenaro joined the majority opinion.

Justices Sharon L. Kennedy and Patrick F. Fischer dissented without a written opinion.

2015-2055. Navistar Inc. v. Testa, Slip Opinion No. 2018-Ohio-1895.

Listen to oral argument video of this case.

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