United States: Supreme Court Of Ohio Decision Provides A Cautionary Tale For Taxpayers, And Highlights Opportunities For Future Statutory Interpretation

In a Commercial Activity Tax ("CAT") case involving several interesting procedural issues, the Supreme Court of Ohio yesterday reversed a Board of Tax Appeals ("BTA") decision and held that the tax commissioner's adjustments to a taxpayer's net operating losses ("NOLs") were timely, even though the taxpayer was not provided with notice of the adjustments prior to the statutory deadline for adjustments.1


In 2005, when the Ohio General Assembly enacted the phase-in of the CAT and the simultaneous phase-out of the corporate franchise tax,2 a "grand bargain" was struck between taxpayers and the commissioner, allowing taxpayers to retain the value of NOLs and other deferred tax assets that accrued under the corporate franchise tax as a credit usable to offset liability under the CAT, a gross receipts tax. Under the credit provision, taxpayers that had at least $50 million of Ohio NOLs available in 2006 were allowed to convert those NOLs into a credit that could be used to offset their CAT liability, subject to certain limitations, during the period 2010 through 2029.3

To qualify for the credit, a taxpayer was required to report to the commissioner its amortizable NOL carryforward amount by June 30, 2006.4 Thereafter, the commissioner had until June 30, 2010, to "audit the accuracy of the amortizable amount available to each taxpayer that will claim the credit, and adjust the amortizable amount or, if appropriate, issue any assessment or final determination, as applicable, necessary to correct any errors found upon audit."5

The Court's Decision

In International Paper Company v. Testa, the taxpayer timely reported its amortizable NOL carryforward of $17 million. The commissioner subsequently reduced the taxpayer's amortizable NOL carryforward to $927,513 in a final determination, which was "journalized"6 June 8, 2010—22 days before the statutory deadline. However, the commissioner did not mail notice of the final determination to the taxpayer until July 12, 2010—12 days after the deadline. The BTA held that the final determination was not timely and vacated the determination. On appeal, the Supreme Court of Ohio faced three issues:

  • Whether the commissioner had to issue notice of the final determination by the June 30, 2010, statutory deadline;
  • Whether the commissioner's "journalized" entry of a final determination constituted timely "issuance" of notice of the determination to the taxpayer; and
  • Whether the taxpayer was required to file a cross-appeal to preserve its substantive challenge to the commissioner's reduction of its NOL carryforward.

The court dispatched the first issue quickly by holding that the statute required the commissioner to issue a final determination, and that the commissioner must "afford taxpayer[s] an opportunity to contest any reduction" and allow taxpayers to account for their tax assets.7

Nonetheless, the court resolved the second issue by finding that the commissioner met his obligation of "issuing" a final determination by the statutory deadline. The court rejected dicta from a sales tax case that equated issuance of a notice of assessment with mailing the notice.8 Instead, the court found that the statute was a remedial statute that required the court to liberally construe the statutory language in favor of the tax assessor. Thus, the commissioner's journalized entry of the final determination was deemed to be sufficient to meet the statutory deadline for "issuing" a final determination.

Finally, the court determined that the taxpayer did not need to file a cross-appeal to preserve a substantive challenge to the commissioner's reduction of its NOL carryforward, because the BTA's decision did not address the substantive issue of the commissioner's reduction.

The case was remanded to the BTA to address the taxpayer's substantive challenge to the commissioner's reduction to the NOL credit. Currently, two other cases are pending at the Ohio Supreme Court that involve the commissioner's ability to adjust a taxpayer's NOL credit amount. The Supreme Court's handling of these cases may shed light on how the BTA will handle the substantive challenges in this case on remand.9


The Supreme Court of Ohio's decision in this case is a reminder that Ohio's procedural rules must be strictly followed. Although the court held that International Paper was not required to file a cross-appeal, taxpayers that win at the BTA should make sure to raise any and all alternative issues on cross appeal to the Supreme Court. Further, while the court liberally construed the statute to hold that the commissioner's adjustment to International Paper's NOL credit was timely issued, this does not mean that procedural rules will also be liberally construed in favor of taxpayers. For example, the BTA recently issued a fairly harsh decision against a taxpayer, dismissing its BTA appeal for improper service because the appeal was served on the commissioner's legal counsel, not the commissioner's main office address.10

Finally, taxpayers should consider parallels between the language in the CAT and sales tax statutes. In this case, the Supreme Court of Ohio rejected dicta from a decision in a sales tax case in which it had interpreted the word "issue" to mean "mailing date" for a sales-tax statute. While the court determined that the "specific legislative purposes" of the CAT and sales-tax statutes differed in this case, there may be other instances where those purposes are consistent. In those instances, it may benefit CAT taxpayers to seek guidance in the case law interpreting the sales-tax statute.

If you have questions about the court's decision in International Paper or about Reed Smith's Ohio Tax practice, please contact one of the authors of this Alert or the Reed Smith attorney with whom you usually work.


1International Paper Company v. Testa, Slip Opinion No. 2016-Ohio-7454 (Ohio Oct. 26, 2016).

2 See H.B. 66, 126th Gen. Assembly (Ohio 2005).

3 See O.R.C. § 5751.53(B). In tax year 2030, the taxpayer is entitled to a refundable credit "for any portion of the qualifying taxpayer's amortizable amount" that it did not use in the previous years. O.R.C. § 5751.53(C).

4 See O.R.C. § 5751.53(D).

5 Id.

6 The commissioner entered the determination in its journal, which is available for public review.

7 O.R.C. § 5751.53(D).

8 See Carstab Corp. v. Limbach, 532 N.E.2d 102, 104 (Ohio 1988) ("We hold that the commissioner both "made" and "issued" the assessment prior to the deadline . . . , since she placed it . . . in the United States mails, certified service" before the deadline date).

9 Navistar Inc. v. Testa, Case No. 2015-2055, and Dana Corporation v. Testa, Case No. 2015-0460.

10 Reet Inc. v. Testa, Case No. 2016-770 (BTA, October 25, 2016).ote1

This article is presented for informational purposes only and is not intended to constitute legal advice.

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