Corrigan v. Testa (Slip Opinion)

[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.

SLIP OPINION NO. 2016-OHIO-2805
CORRIGAN, APPELLANT, v. TESTA, TAX COMMR., APPELLEE.
[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.)
APPEAL from the Board of Tax Appeals, No. 2012-3244.
____________________
O’CONNOR, 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
 SUPREME COURT OF OHIO

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.

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 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
FACTS
{¶ 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

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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.
PROCEDURAL HISTORY
{¶ 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

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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
THE DUE PROCESS AND COMMERCE CLAUSES
SET LIMITS ON OHIO’S TAXING AUTHORITY
{¶ 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.

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 SUPREME COURT OF OHIO

{¶ 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.

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 January Term, 2016

THE OPERATION OF THE TAX STATUTES AS APPLIED TO CORRIGAN
{¶ 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).

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{¶ 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

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 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.

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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.
DUE PROCESS PREDICATES TAXATION OF A NONRESIDENT’S INCOME ON
OHIO’S CONNECTION TO BOTH THE TAXPAYER AND THE TRANSACTION
{¶ 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.

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 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).

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 SUPREME COURT OF OHIO

Ohio-derived income may be taxed to the person
whose business activity generated the income
{¶ 34} Shaffer 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. Under Shaffer, 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, 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.

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 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.
THE UNITED STATES SUPREME COURT’S PRECEDENTS DO NOT ESTABLISH
THE CONSTITUTIONALITY OF APPLYING R.C. 5747.212 TO CORRIGAN

{¶ 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,

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 SUPREME COURT OF OHIO

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

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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

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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

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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.
STATE COURT CASES DO NOT SUPPORT APPLYING R.C. 5747.212
TO CORRIGAN’S CAPITAL GAIN

{¶ 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).

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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

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 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

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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.

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 January Term, 2016

ENFORCING DUE-PROCESS RESTRAINTS ON STATE TAXATION
DOES NOT ELEVATE FORM OVER SUBSTANCE
{¶ 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

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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 IS NOT FACIALLY UNCONSTITUTIONAL
{¶ 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.

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 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.
PFEIFER, O’DONNELL, LANZINGER, KENNEDY, FRENCH, and O’NEILL, 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.
_________________

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