Renacci v. Testa (Slip Opinion)

[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as
Renacci v. Testa, Slip Opinion No. 2016-Ohio-3394.]

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-3394
RENACCI ET AL., APPELLANTS AND CROSS-APPELLEES, v. TESTA, TAX COMMR.,
APPELLEE AND CROSS-APPELLANT.
[Until this opinion appears in the Ohio Official Reports advance sheets, it
may be cited as Renacci v. Testa, Slip Opinion No. 2016-Ohio-3394.]
Taxation—R.C. 5747.15—Taxpayers had reasonable cause to resist paying tax
based on reasonable but mistaken interpretation of federal statutes—Tax
commissioner abused his discretion in refusing to refund double-interest
penalty.
(No. 2014-1893—Submitted March 8, 2016—Decided June 15, 2016.)
APPEAL and CROSS-APPEAL from the Board of Tax Appeals, No. 2012-1850.
____________________
PFEIFER, J.
{¶ 1} In this case, appellee and cross-appellant, the tax commissioner, first
imposed, and then declined to remit, a double-interest income-tax penalty for delay
of payment. The Board of Tax Appeals (“BTA”) affirmed. The income at issue
was tax year 2000 pass-through distributive-share income from a Subchapter S
 SUPREME COURT OF OHIO

corporation whose shares were held by an “electing small business trust” (“ESBT”)
under federal law. A Subchapter S corporation is often referred to as an “S
corporation.” “Subchapter S of the Internal Revenue Code (Section 1361 et seq.,
Title 26, U.S.Code) permits the owners of qualifying corporations to elect a special
tax status under which the corporation and its shareholders receive conduit-type
taxation that is comparable to partnership taxation.” Ardire v. Tracy, 77 Ohio St.3d
409, 674 N.E.2d 1155 (1996), fn. 1. “For tax purposes, a Subchapter S corporation
differs significantly from a normal corporation in that the profits generated through
the S corporation are taxed as personal income to the shareholders. The taxable
income of an S corporation is computed essentially as if the corporation were an
individual.” Id.
{¶ 2} The delay in payment resulted from a legal dispute concerning the
taxability in Ohio of the income in question. Along with numerous other taxpayers
and their advisors, appellants and cross-appellees, James B. and Tina D. Renacci,
read the pertinent federal statutes as requiring the imposition of tax on the trust
rather than on the individual shareholder. The tax department took the contrary
position, which was ultimately vindicated through our decisions in Knust v. Wilkins,
111 Ohio St.3d 331, 2006-Ohio-5791, 856 N.E.2d 243; Lovell v. Levin, 116 Ohio
St.3d 200, 2007-Ohio-6054, 877 N.E.2d 667; and Brown v. Levin, 119 Ohio St.3d
335, 2008-Ohio-4081, 894 N.E.2d 35.
{¶ 3} The Renaccis ultimately made payment to the state and are pursuing
a refund of the double-interest penalty. The tax commissioner has discretion in his
decision whether to impose or remit the penalty, and in making that decision, he
considers whether the delay in payment was based on “reasonable cause” or
“willful neglect.” R.C. 5747.15(C). Although the statute vests broad discretion in
the tax commissioner, we conclude that in this instance, he abused his discretion in
denying the refund request. The tax commissioner appears to reject the Renaccis’
assertion that they acted in good-faith reliance on a reasonable interpretation of the

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law. The tax commissioner unaccountably exalts the pronouncements of his
information releases, which have no force of law, as though they impose binding
obligations that no taxpayer should dare to question.
{¶ 4} For these reasons, we find that the tax commissioner’s decisions to
impose and retain the double-interest penalty were arbitrary and unconscionable.
We therefore reverse the decision of the BTA and remand the cause to the tax
commissioner with instructions that the penalty be refunded, along with any interest
paid that was associated with that penalty.
BACKGROUND
{¶ 5} The issue in this case is whether the tax commissioner abused his
discretion with regard to imposing a penalty. But that question is tied to an
underlying dispute of substantive tax law that was resolved in two ways: a treasury
regulation issued by the federal government, codified at 26 C.F.R. 1.641(c)-1(k),
and decisions issued by this court in Knust, 111 Ohio St.3d 331, 2006-Ohio-5791,
856 N.E.2d 243, Lovell, 116 Ohio St.3d 200, 2007-Ohio-6054, 877 N.E.2d 667,
and Brown, 119 Ohio St.3d 335, 2008-Ohio-4081, 894 N.E.2d 35. That dispute
can be summarized with the question, Should S-corporation income be taxed to an
ESBT that holds the S-corporation shares or to the grantor of the trust?
{¶ 6} For individuals, income tax in Ohio is imposed on Ohio adjusted gross
income. R.C. 5747.02(A). That tax base is determined initially by reference to the
taxpayer’s federal adjusted gross income; certain adjustments that convert federal
adjusted gross income into Ohio adjusted gross income are then prescribed by R.C.
Chapter 5747. See R.C. 5747.01(A). Under this scheme of taxation, if an item of
income were properly omitted from federal adjusted gross income, then it would
not appear in Ohio adjusted gross income unless Ohio law required that the amount
be added back in (an “add-back”).
{¶ 7} In this case, the taxpayers read a provision of federal law, enacted in
1996, as requiring that the income be treated as income of the trust for income-tax

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purposes. That provision is 26 U.S.C. 641(c), which provides that the “portion of
any electing small business trust which consists of stock in 1 or more S corporations
shall be treated as a separate trust,” and that portion is then subjected to special
taxation rules by the statute as a trust.
{¶ 8} The tax commissioner read other provisions of the Internal Revenue
Code as superseding the requirement of separate-trust treatment when the trust at
issue qualifies as a “grantor trust.” A “grantor trust” is one in which the grantor
has retained control of the trust assets, such as the right to revoke the trust, see 26
U.S.C. 676. The grantor of a grantor trust must report and be taxed on the trust
income. 26 U.S.C. 671.
{¶ 9} Here, the tax commissioner argued that the “grantor-trust rule” of
treating trust income as income of the individual grantor would apply despite the
ESBT statutory language indicating the possibility that the portion of the trust
holding S-corporation shares should be subject to special rules of taxation. The tax
commissioner advanced his view in two information releases, one in 2000 and one
in 2002.
{¶ 10} In 2002, the United States Treasury Department promulgated 26
C.F.R. 1.641(c)-1, which states that “[t]he grantor portion of an ESBT is the portion
of the trust that is treated as owned by the grantor or another person under subpart
E [26 U.S.C. 671 et seq.],” which includes the grantor-trust provision. 26 C.F.R.
1.641(c)-1(b)(1). The taxpayers’ interpretation of the federal law is precluded by
the definition of the “S portion” of the ESBT, which is taxed to the trust. The S
portion of the trust must satisfy not just one but two conditions: it must consist of
S-corporation stock and it must not be “treated as owned by the grantor or another
person under subpart E” (including 26 U.S.C. 671). 26 C.F.R. 1.641(c)-1(b). Thus,
taxation as a separate trust occurs only when that portion of the trust is not a grantor
trust. The regulation specifically states that a “grantor * * * who is treated as the
owner of a portion of the ESBT includes in computing taxable income items of

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income, deductions, and credits against tax attributable to that portion of the ESBT
under [26 U.S.C.] 671.” 26 C.F.R. 1.641(c)-1(c).
{¶ 11} There is an important limitation on the effect of the treasury
regulation: it applies “generally” to taxable years of ESBTs “beginning on or after
May 14, 2002.” 26 C.F.R. 1.641(c)-1(k). Certain parts of the regulation (those
relevant here) are applicable only to “taxable years of ESBTs that end on and after
December 29, 2000.” Id. In this case, the Renaccis presented evidence that the
taxable year of the ESBT ended before December 29, 2000, with the result that their
situation is not controlled by the regulation.
The tax commissioner’s information releases
{¶ 12} Beginning with information release IT 2000-01 (issued Jan. 19,
2000), available at http://www.tax.ohio.gov/ohio_individual/individual/
information_releases/it200001.aspx, the Ohio Department of Taxation took the
position that the ESBT election did not change the obligation of the grantor of a
grantor trust to include the S-corporation income on his or her own individual
income tax return. The release states:

Effective for individual and estate taxable years beginning
after December 31, 1999, the Income Tax Audit Division will
require certain individuals and estates to include in their federal
adjusted gross income (“FAGI”) and Ohio taxable income all
relevant pass-through items of income, gain or loss from S
corporations when such items have been treated as reportable for
federal income tax purposes on a trust’s fiduciary income tax return
(Form 1041) because the trust has elected to be taxed as an Electing
Small Business Trust (“ESBT”) under Internal Revenue Code
(“IRC”) section 1361(e)(3). Specifically, if an individual or estate
would be treated as the owner of all or a portion of a trust pursuant

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to [26 U.S.C.] 671 et seq., then such individual or estate shall include
in his, her or its FAGI or Ohio taxable income all relevant S
corporation pass-through items as if the individual or estate were
itself the actual owner of the S corporation stock owned by the trust.
***
For taxable years beginning after December 31, 1999,
assessments for unpaid tax and all related failure-to-timely-pay and
failure-to-timely-file charges will apply (i) to such individuals and
estates who do not adjust their FAGI and Ohio taxable income (and
timely pay tax and related estimated tax thereon) in accordance with
this information release and (ii) to S corporations which do not
timely pay the 5% withholding tax and the related estimated tax with
respect to such S corporation distributive shares.

(Footnote deleted.)
{¶ 13} The discussion section states:

The Internal Revenue Code does not contain any provisions
which expressly state that an ESBT which also qualifies as and/or is
described as a grantor trust is exempt from the grantor trust
provisions. Neither does the “Blue Book” provide or address any
such exemption. In fact, the principal advocate of the ESBT
legislation has cautioned that the provisions of an ESBT’s governing
instruments “* * * should be limited so that no power would result
in the inclusion of trust assets or revenue in the trustee’s own estate
or income.” Thus, even the principal advocate of the ESBT
legislation implicitly recognizes that an ESBT which also qualifies
as and/or is described as a grantor trust is, in fact, subject to the

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grantor trust provisions for taxation rather than qualifying for the
special rules for taxation of ESBT’s under IRC section 641(c).
The Income Tax Audit Division recognizes that various tax
practitioners have differing interpretations of how the ESBT
provisions interplay with the grantor trust provisions of the Internal
Revenue Code. Some have advocated that the ESBT provisions
should take precedence over the grantor trust provisions, while
others believe that a grantor trust cannot make the ESBT election.
In light of the fact that neither the U.S. Treasury Department nor the
Internal Revenue Service has issued any guidance in this area, and
barring any change in the federal tax law or issuance of new U.S.
Treasury regulations to the contrary, the Income Tax Audit
Division’s position is that a grantor trust cannot make the ESBT
election.

(Footnotes deleted.)
{¶ 14} In 2002, the tax department took an even more forceful position in
PIT 2001-04 (issued July 3, 2002), available at
http://www.tax.ohio.gov/ohio_individual/individual/information_releases/pit2002
04.aspx, stating:

The Ohio Department of Taxation has initiated an audit
program to identify and assess individuals who are not “adding
back” to their federal adjusted gross income (“FAGI”) their
distributive shares of S corporation profit which they receive via a
trust qualifying as both an electing small business trust (“ESBT”)
and a grantor trust. This audit initiative is based upon the
Department’s January 19, 2000 information release directing

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taxpayers to make the add-back to the extent taxpayers did not
include such amounts in their FAGI. Effective for post-1999 taxable
years, the information release provides detailed authority supporting
the required add-back.
Using computer programs and IRS-supplied databases, the
Department will identify Ohio taxpayers who have not fully
complied with the requirements of that information release. Upon
identification of these taxpayers, the Department will issue
assessments for tax, interest (8% for 2000, 9% for 2001, and 7% for
2002), interest penalty (Ohio form IT-2210), and failure-to-pay
penalty.

The Renaccis’ 2000 return
{¶ 15} The Renaccis filed their joint Ohio tax return for taxable year 2000
without reporting and paying Ohio individual income tax on amounts earned by the
“James B. Renacci Tr 1998.” That trust owned shares of three S corporations,
whose combined corporate earnings in 2000, as reported on form FT 1120 S, were
over $14 million. Although the Renaccis did not report the income on their joint
return as individual taxpayers, they filed disclosures that showed that the S
corporations were owned by the James B. Renacci trust.
{¶ 16} In 2003, the tax commissioner audited and assessed the Renaccis in
relation to the unreported S-corporation income. The tax commissioner computed
the tax owed by “adding back” $13,899,960 of S-corporation income to the
Renaccis’ federal adjusted gross income. By the tax commissioner’s corrected
computation, the Ohio taxable-income figure was $13,730,440.
{¶ 17} The Renaccis filed a petition for reassessment, which was denied.
BTA No. 2006-Z-780, 2007 WL 1515135 (May 18, 2007). The Renaccis appealed

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to the Ninth District Court of Appeals. Subsequently, they dismissed that appeal,
made payment, and pursued a refund of the double-interest penalty.
From reassessment petition to refund claim
{¶ 18} In 2007, the Renaccis ceased contesting their tax liability based on
Knust, 111 Ohio St.3d 331, 2006-Ohio-5791, 856 N.E.2d 243, and Lovell, 116 Ohio
St.3d 200, 2007-Ohio-6054, 877 N.E.2d 667. They also sought a settlement
agreement with the tax commissioner, who transmitted an offer involving a
reduction of penalty if the taxpayer could pay in full within two weeks. The deal
fell apart when the Renaccis sought to pay on a longer schedule. The Renaccis then
shifted procedural gears by paying all amounts demanded by the state and pursuing
a refund claim for the penalty amount. (The details of the settlement discussions
form one of the grounds for the Renaccis’ claim that the commissioner abused his
discretion. Because we resolve this case in the Renaccis’ favor on other grounds,
we need not delve into the full details here.)
{¶ 19} In e-mail correspondence, the Renaccis sought assurance that they
could pursue the penalty remission through a refund claim. A tax-department
official expressed her belief that if a refund claim were filed, the tax commissioner
would issue a final determination that could be appealed to the BTA and thereafter
to the courts if the penalty was not abated.
{¶ 20} The Renaccis tendered payments of $140,000 on April 27, 2007;
$814,650 on August 29, 2007; $425,400 on December 20, 2007; and $359,822 on
July 15, 2008. The Renaccis dismissed their appeal from the BTA decision
addressing the reassessment petition and, on June 23, 2009, filed their refund claim,
seeking $359,822, the amount of penalty paid plus post-assessment interest. The
tax commissioner denied the refund claim on the sole ground that the Renaccis
“willfully filed their return contrary to a clear Department position.” The Renaccis
appealed to the BTA.

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Proceedings before the BTA
{¶ 21} Before the BTA hearing, the Renaccis attempted to depose former
and current tax-department personnel. Although their discovery efforts were not
entirely successful, they did subpoena former tax commissioner Thomas Zaino and
former income-tax counsel for the tax department Jeffrey Sherman to testify at the
BTA hearing.
{¶ 22} The hearing on March 3, 2014, was contentious, primarily because
the tax commissioner’s counsel insisted that evidence regarding statements of
department personnel was barred on the grounds that it was irrelevant or was
protected by the deliberative-process privilege. The BTA examiner at certain
points sustained the commissioner’s relevancy objection, and the Renaccis were
hindered in the presentation of their argument that they had acted in good faith. But
the Renaccis managed to adduce some evidence in support of their claim that they
had had reasonable cause to resist paying the tax. The record establishes the
following:
 Former income-tax counsel for the tax department Jeffrey Sherman
confirmed that he had stated at tax conferences that the tax
department—prior to the January 2000 information release—was not
taxing S-corporation pass-through income from grantor trusts that had
made the ESBT election.
 Former tax commissioner and tax-law practitioner Thomas Zaino
confirmed that the ESBT election created a possible tax strategy for S-
corporation shareholders to minimize Ohio individual income tax.
Zaino also confirmed his understanding that after he became tax
commissioner in 1999, the January 2000 information release reflected a
policy “that on a go-forward basis folks had to come forward and treat
the grantor trusts that chose to make an ESBT election as a grantor
trust.”

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 The tax department’s deputy tax commissioner was quoted by
Columbus Business First in 1998 as stating that there was “an
opportunity * * * to use this mechanism [an ESBT election for a grantor
trust] to avoid taxation.”
 The General Assembly considered legislation in 1998 that would ensure
that tax would be imposed on the S-corporation pass-through income as
a matter of state law, regardless of the proper treatment under federal
law.
{¶ 23} The tax commissioner offered the following evidence:
 An affidavit by Margaret Brewer, a tax-department employee,
indicating that the Renaccis were treated the same as similar claimants
who failed to comply with the 2000 information release or to settle their
cases.
 The two information releases quoted above.
 The testimony of an auditor to show that the tax department was
auditing the “grantor trust/ESBT device” even before the January 2000
information release. On cross-examination, however, it was revealed
that the auditor knew of only a single instance of an audit applying the
tax commissioner’s theory to a year prior to 2000 and that the audit
occurred after 2000.
The BTA decision
{¶ 24} The BTA rejected the tax commissioner’s argument that the BTA
lacked jurisdiction under R.C. 5703.60(A)(3). R.C. 5703.60 addresses the
procedure to be followed by the tax commissioner when a taxpayer files a petition
for reassessment. And R.C. 5703.60(A)(3) “clearly contemplates that the filing and
final adjudication of a petition for reassessment can be followed by the filing of an
application for refund, subject to one caveat—that objections decided on the merits

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on appeal of the petition for reassessment may not be relitigated through an
application for refund.” BTA No. 2012-1850, 2014 WL 5093565 *3 (Oct. 1, 2014).
{¶ 25} Turning to the merits, the BTA noted that the final determination
states that the Renaccis “ ‘willfully filed their return contrary to a clear Department
position.’ ” Id. at *4. Because the tax commissioner “provided clear direction as
to his change in policy regarding the taxation of income to grantors of ESBT trusts,
[the Renaccis’] failure to follow the commissioner’s clear instructions was
reasonably found by the commissioner to be willful neglect, and not action in good
faith.” Id. at *5. Thus, the BTA held, reliance on the absence of an IRS regulation
and the dissent in Knust did not suffice to establish good faith. The BTA affirmed
the denial of penalty remission, and the Renaccis appealed to this court. The tax
commissioner then filed a cross-appeal.
ANALYSIS
The Renaccis had the right to seek a refund of penalty under
the former version of R.C. 5747.11
{¶ 26} As a protective cross-appeal, the tax commissioner asserts that he
and the BTA lacked jurisdiction to grant the relief from penalty sought by the
Renaccis in these proceedings. At the time the present refund claim was initiated,
R.C. 5747.11(A) provided that the tax commissioner “shall refund to * * *
taxpayers * * * (3) Amounts in excess of one dollar paid on an illegal, erroneous,
or excessive assessment.” Am.Sub.H.B. No. 530, 151 Ohio Laws, Part IV, 6699.
In 2013, R.C. 5747.11(A) was amended to require that the tax commissioner
“refund to * * * taxpayers * * * the amount of any overpayment of such tax.” 2013
Am.Sub.H.B. No. 59. Under the amended version of the statute, the tax
commissioner has a strong argument for limiting the refund claim to the amount of
overpayment of tax. But the version in effect when the refund claim was filed
expressly authorizes a claim for refund of any payment on an “excessive”
assessment.

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{¶ 27} We see no reason to conclude that the language of the former version
does not authorize a penalty-only refund claim when, as in this case, the taxpayer
submits that the assessment of the penalty is excessive. Indeed, “excessive” is an
additional category that does not require that the amount assessed be illegal or
erroneous. The former statute thereby opens the door to a claim challenging the
penalty without challenging the tax. Because the wording of the statute appears to
broaden the scope of the relief available, we are bound to extend the statute’s
operation to its full breadth. See Phoenix Amusement Co. v. Glander, 148 Ohio St.
592, 76 N.E.2d 605 (1947), paragraph one of the syllabus (“Statutory provisions
for the refund of taxes illegally or erroneously paid or paid on an illegal or
erroneous assessment should be liberally construed in favor of the taxpayer”).
{¶ 28} The tax commissioner cites two decisions of this court that involve
the corporate franchise tax rather than the individual income tax. Neither case
addresses a claim of refund brought after full payment; instead, they both involve
a challenge to a deficiency assessment. See Internatl. Business Machines Corp. v.
Zaino, 94 Ohio St.3d 152, 761 N.E.2d 20 (2002); Lancaster Colony Corp. v
Lindley, 61 Ohio St.2d 268, 400 N.E.2d 905 (1980). Internatl. Business Machines
states, “When the tax commissioner has made an assessment under R.C. 5733.11,
the amount that may be contested and refunded under that statute is limited to the
amount paid on the deficiency assessment.” Id. at syllabus.
{¶ 29} The tax commissioner also cites sales-tax cases that were decided by
the Board of Tax Appeals. Stevens v. Tracy, BTA No. 94-H-1166, 1995 Ohio Tax
LEXIS 1265 (Oct. 20, 1995); Tenbrink v. Tracy, BTA No. 95-R-181, 1995 Ohio
Tax LEXIS 1487 (Dec. 8, 1995); and Clarkson v. Tracy, BTA No. 97-S-135, 1997
Ohio Tax LEXIS 1152 (Aug. 29, 1997). These cases provide no more guidance
than the franchise-tax cases cited above. Each of these decisions involves sales-tax
assessments during the 1990s against vendors who apparently failed to collect and
remit sales taxes to the state. The vendors apparently paid the full assessments,

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then sought refunds of the penalty amounts. Those decisions have no bearing on
this case because the sales-tax statutes of that time explicitly created separate
procedures for tax refunds and penalty remissions and the vendors had followed the
wrong procedures. See Clarkson at 6.
Determining whether a taxpayer had reasonable cause to resist paying
a tax requires considering whether the taxpayer acted in good-faith
reliance on a reasonable interpretation of the law
{¶ 30} The Renaccis’ first assignment of error is dispositive of this appeal
in their favor, so we will not address their other four arguments. The Renaccis
argue that the tax commissioner abused his discretion under R.C. 5747.15 by basing
his finding of willful neglect solely on their failure to comply with the precise
instructions of an information release.
{¶ 31} R.C. 5747.15(A)(2) provides that “a penalty may be imposed not
exceeding twice the applicable interest charged * * * for the delinquent payment.”
R.C. 5747.15(C) authorizes the tax commissioner to abate a penalty imposed under
R.C. 5747.15 “if the taxpayer * * * shows that the failure to comply with the
provisions of [the income-tax law] is due to reasonable cause and not willful
neglect.” The statute prescribes a standard for abating the penalty and entrusts the
determination whether to impose or to abate the penalty to the tax commissioner’s
ultimate discretion. The latter point is expressed by the statute’s use of the word
“may,” which we have held in similar contexts to constitute a grant of discretionary
authority. J.M. Smucker, L.L.C. v. Levin, 113 Ohio St.3d 337, 2007-Ohio-2073,
865 N.E.2d 866, ¶ 14-15.
{¶ 32} The discretionary nature of the tax commissioner’s determination
means that both the BTA and this court must review the denial of remission here to
determine whether the tax commissioner abused his discretion, not whether we
would have reached a different conclusion. Id. at ¶ 16 (“Because the Tax
Commissioner has discretion to grant or deny an abatement of a late-filing penalty,

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the BTA and the court must apply an abuse-of-discretion standard”). Abuse of
discretion connotes an unreasonable, arbitrary, or unconscionable attitude. Id.
The BTA erred by failing to acknowledge the taxpayers’
reasonable-cause argument
{¶ 33} The tax commissioner’s final determination recites only one reason
to support the finding of willful neglect, that “[t]he claimants willfully filed their
[2000] return contrary to a clear Department position.” The claimants “failed to act
in good faith,” according to the commissioner’s determination, because they were
“made aware of the Department’s change in policy” through the 2000 information
release and then failed to act in accordance with its terms.
{¶ 34} In upholding this determination, the BTA stated that the Renaccis’
challenge relied only on “the absence of IRS regulation on the issue” of their tax
obligation and on the dissenting opinion in Knust. (Emphasis sic.) 2014 WL
5093565, *5. That is a gross misstatement. The Renaccis have consistently stated
throughout these proceedings that they were relying on the interpretation of the
federal statute that the tax commissioner had abandoned, i.e., the interpretation that
the trust rather than the grantor was to report and pay tax on the distributive-share
income. That the tax commissioner changed his view of the federal statute does
not make the earlier reading unreasonable.
{¶ 35} By failing to acknowledge that federal law constituted an element of
the Renaccis’ reasonable-cause argument, the BTA acted unreasonably and
unlawfully in its review of the commissioner’s determination. That failure blinded
the BTA to the arbitrary nature of a determination that sustains a penalty without
consideration of any factor other than that the taxpayer did not abide by the tax
department’s information release.

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Equating a taxpayer’s good-faith insistence on its legal rights with willful
neglect shows an arbitrary and unconscionable attitude
{¶ 36} The tax commissioner’s insistence that any departure from his
published instructions negates the taxpayer’s good faith is arbitrary. The
reasonableness of the taxpayer’s interpretation of the federal statute is relevant to
the determination whether the taxpayer had reasonable cause to resist the tax
commissioner’s interpretation. Neither the commissioner nor the BTA even
considered whether the statute could fairly be read in favor of the Renaccis’
position. Instead, the tax commissioner’s information releases were deemed to be
fully dispositive. Moreover, it does not make sense to regard the mere publication
by the tax commissioner of his interpretation of federal law as establishing that the
taxpayer’s contrary view is unreasonable.
{¶ 37} An information release does not create legal obligations by its own
force—a fact that both the commissioner and the BTA ignore when they measure
the Renaccis’ good faith solely in terms of their willingness to abide by demands
set forth in the tax department’s pronouncements. We have repeatedly held that
when the tax commissioner seeks to exercise administrative authority in a
systematic way over a broad range of taxpayer claims, he must promulgate his
pronouncement as an administrative rule. See Progressive Plastics, Inc. v. Testa,
133 Ohio St.3d 490, 2012-Ohio-4759, 979 N.E.2d 280, ¶ 31 (tax commissioner
“ ‘cannot confer the force of law on a requirement without promulgating it as a
rule’ ”), quoting HealthSouth Corp. v. Testa, 132 Ohio St.3d 55, 2012-Ohio-1871,
969 N.E.2d 232, ¶ 33, citing McLean Trucking Co. v. Lindley, 70 Ohio St.2d 106,
114-116, 435 N.E.2d 414 (1982), and Condee v. Lindley, 12 Ohio St.3d 90, 92-92,
465 N.E.2d 450 (1984). The ambivalence of the IRS with respect to periods not
covered by the treasury regulation, coupled with the absence of Ohio statutory
authority for an add-back of the distributive share, militates strongly in favor of
requiring the tax commissioner to proceed by rulemaking in this context.

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{¶ 38} The tax commissioner also insists that the penalty is justified
because the Renaccis presented an unusually intransigent case of taxpayer
resistance to his demands. At oral argument, counsel for the tax commissioner
stated that “everybody else,” or “virtually everybody,” paid up front. Even
allowing some latitude for exaggeration, we find no support for this assertion. We
have issued no fewer than three decisions that addressed the ESBT issue: Knust,
111 Ohio St.3d 331, 2006-Ohio-5791, 856 N.E.2d 243; Lovell, 116 Ohio St.3d 200,
2007-Ohio-6054, 877 N.E.2d 667; and Brown, 119 Ohio St.3d 335, 2008-Ohio-
4081, 894 N.E.2d 35. Those three appeals presented a total of seven taxpayer
claims; of those, three sought refunds because the taxpayers had paid up front and
four involved taxpayers who had not paid up front. We conclude that the range of
taxpayer responses was much more divided than the tax commissioner
acknowledged.
{¶ 39} We hold that the BTA unreasonably and unlawfully permitted the
tax commissioner to predicate the reasonable-cause determination exclusively on
compliance with the tax department’s information releases that had no force of law.
We therefore reverse the BTA’s conclusion that the tax commissioner acted within
his discretionary authority in denying the claim for refund of the double-interest
penalty.
The Renaccis had reasonable cause to resist paying until our
2007 decision in Lovell v. Levin
{¶ 40} The tax commissioner also contends that even if the Renaccis had
reasonable cause to resist paying the tax when it was first assessed, reasonable
cause evaporated with the announcement of Knust, 111 Ohio St.3d 331, 2006-Ohio-
5791, 856 N.E.2d 243, on November 22, 2006. This argument places emphasis on
the delay of payment between that date and the Renaccis’ tender of payment in four
increments: $140,000 on April 27, 2007; $814,650 on August 29, 2007; $425,400
on December 20, 2007, and $359,822 on July 15, 2008. We find that the Renaccis

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had reasonable cause to resist paying the assessment until the announcement of
Lovell, 116 Ohio St.3d 200, 2007-Ohio-6054, 877 N.E.2d 667, on November 20,
2007, because the Renaccis argued that their situation was not controlled by the
treasury regulation, as the claim in Knust was. Only in Lovell did we address and
dispose of the claims of taxpayers who, like the Renaccis, claimed to be immune
because the federal regulation did not apply. Compare Knust, ¶ 30, with Lovell,
¶ 28.
{¶ 41} To be sure, Lovell placed little significance on the federal regulation,
citing Knust for the proposition that the regulation merely “amplifies” the statutory
basis for ruling in favor of the state’s position. Lovell, ¶ 28. But that ruling in
Lovell itself does not affect the claim of reasonable cause, because the claimants in
Lovell had a substantial argument that their cases should be treated differently than
those of the claimants in Knust.
{¶ 42} As explained earlier in this opinion, federal adjusted gross income
constitutes the starting point for determining Ohio adjusted gross income.
Arguably, if federal authorities treated the income as properly reportable by and
taxable to the trust instead of the grantor, the tax commissioner had no basis in Ohio
law for ordering an “add-back” for Ohio income-tax purposes. This was an
argument raised in Lovell. In this case, the tax commissioner has never contested
the Renaccis’ assertion that their situation is not subject to the treasury regulation.
Accordingly, we conclude that the Renaccis could reasonably have awaited the
outcome of Lovell for potential relief from the tax assessment against them.
Because Lovell was not decided until November 2007, when the Renaccis were
already in the process of paying their assessment, we hold that their claim of
reasonable cause extended into the time frame in which they were making payment.

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The taxpayers’ interpretation of the federal statutes was
reasonable even though mistaken
{¶ 43} The component of our analysis that is not yet explicit is the
reasonableness of the Renaccis’ interpretation of the federal statutes. As our
previous discussion indicates, we regard that interpretation as reasonable, even
though it proved to be mistaken. In 1996, the ESBT provision was added to the
Internal Revenue Code. Pub. L. No. 104-188, 110 Stat. 1755. Its terms prescribe
how the S-corporation portion of an ESBT is to be taxed as a trust. Namely, 26
U.S.C. 641(c) provides that the “portion of any electing small business trust which
consists of stock in 1 or more S corporations shall be treated as a separate trust,”
and that portion is then subjected to special taxation rules by the statute as a trust.
An initial reading could reasonably construe an intent to make a specific
dispensation with respect to ESBTs under subpart A (26 U.S.C. 641 et seq.) that
would exempt them from the operation of the grantor-trust rule in subpart E (26
U.S.C. 671 et seq.). In Knust, we held the contrary, construing the ESBT language
as meaning that “when an income tax is imposed on a trust, that tax is to be
calculated in a specified way.” Id., ¶ 25.
{¶ 44} The taxpayers’ alternative reading is not unreasonable. We
predicate our determination of reasonableness on our own reading of the federal
statutes plus the inferences that we draw from the tax commissioner’s information
releases when read in conjunction with our decisions in Knust, Lovell, and Brown.
CONCLUSION
{¶ 45} For the foregoing reasons, we reverse the decision of the BTA and
remand the cause to the tax commissioner with instructions that the double-interest
penalty be refunded, along with any interest paid that was associated with that
penalty.
Decision reversed
and cause remanded.

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O’DONNELL, LANZINGER, KENNEDY, FRENCH, and O’NEILL, JJ., concur.
O’CONNOR, C.J., concurs in judgment only.
_________________
Buckingham, Doolittle & Burroughs, L.L.C., Steven A. Dimengo, and
Matthew R. Duncan, for appellants and cross-appellees.
Michael DeWine, Attorney General, and Barton A. Hubbard, Assistant
Attorney General, for appellee and cross-appellant.
_________________

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