Dana Corporation, n.k.a. Dana Holding Corporation, Appellant and Cross-Appellee,
Testa, Tax Commr., Appellee and Cross-Appellant.
Submitted December 5, 2017
and Cross-Appeal from the Board of Tax Appeals, No.
Hall & Farrin, L.L.C., Richard C. Farrin, Debora D.
McGraw, and Thomas M. Zaino, for appellant and
Michael DeWine, Attorney General, Barton A. Hubbard,
Assistant Attorney General, for appellee and cross-appellant.
1} In this appeal we confront an issue arising out
of the special credit against the commercial-activity tax
("CAT") set forth at R.C. 5751.53 (the "CAT
credit"). One factor in calculating the CAT credit is
the net operating losses ("NOLs") that were
incurred by the corporation before the enactment of the CAT.
To take the credit, a company was required to file a report
with appellee and cross- appellant, the tax commissioner,
that calculated, based on a formula set forth in R.C.
5751.53(A)(9), an amount that would be applied gradually over
a period of up to 20 years ("amortizable amount")
against the CAT. Appellant and cross-appellee, Dana
Corporation, now known as Dana Holding Corporation, filed its
report indicating that its amortizable amount was $12, 493,
003. Based on his audit of Dana Corporation's
amortizable-amount report, the tax commissioner ordered two
reductions that decreased the amortizable amount to $4, 728,
051. Dana agreed with the first of the two adjustments, which
reduced the amortizable amount to $10, 935, 324, but
contested the second reduction from $10, 935, 324 to $4, 728,
051. Dana argues that the second adjustment, a percentage
reduction consistent with the percentage reduction of
Dana's federal NOLs on account of its
cancellation-of-debt income ("CODI") that resulted
from its bankruptcy, was not authorized by R.C. 5751.53(F).
The Board of Tax Appeals ("BTA") disagreed with
Dana's position and affirmed the tax commissioner's
full reduction. This issue forms the principal basis for
Dana's appeal to this court. In the alternative, Dana
argues that even if it was proper for the tax commissioner to
reduce the amortizable amount, his calculation of the
reduction was erroneous.
2} On cross-appeal, the tax commissioner faults the
BTA for rejecting his post-final-determination calculation of
the amortizable amount that relies on the testimony of the
tax commissioner's expert witness, who opined that the
amortizable amount ought to be zero. Additionally, the tax
commissioner contends that the BTA ought to have entertained
his alternative theory, raised for the first time shortly
before the hearing at the BTA, that Dana's NOLs were
fully offset by a properly recomputed valuation allowance.
3} We agree with Dana's main contention on
appeal, and we reject the arguments advanced by the tax
commissioner on cross-appeal. We therefore reverse the
decision of the BTA and, pursuant to R.C. 5717.04, order
modification of the amortizable amount to $10, 935, 324.
I. Nature of the CAT Credit
4} Ohio's 2005 tax reform provided for a phase
out of the corporation franchise tax and a phase in of the
CAT. We discussed the relationship between the
two in Navistar, Inc. v. Testa, 143 Ohio
St.3d 460, 2015-Ohio-3283, 39 N.E.3d 509.
5} Ohio's corporation-franchise-tax law
permitted a carryforward of NOLs, so that those losses could
constitute a tax benefit by offsetting otherwise taxable
income in later years. See R.C. 5733.04(I)(1)(b);
Navistar at ¶ 9. And because the potential tax
benefit of NOLs constitutes a type of corporate asset, NOLs
are reflected as deferred tax assets on a corporation's
books and records. Navistar at ¶ 10. However,
because the CAT is a gross-receipts tax under which the tax
rate is applied to gross revenues rather than net income, the
Ohio-related NOL asset on the corporate books would lose its
value as the 2005 tax reform was phased in. Id. . at
6} To address this concern, the General Assembly
included R.C. 5751.53, the CAT credit, in the CAT
legislation. The statute has two main features. First, an
"amortizable amount" had to be calculated and
reported to the tax commissioner by the taxpayer by June 30,
2006, R.C. 5751.53(D); that amount is based on the NOL
carryforwards and other deferred tax assets on the
company's books as of the fiscal year ending 2004 (the
last taxable year under the franchise tax before enactment of
the 2005 tax reform). R.C. 5751.53(A)(5) through (9); see
Navistar at ¶ 12. The tax commissioner was
authorized to audit and modify the amortizable amount
reported by the taxpayer by issuing a final determination no
later than June 30, 2010 (unless the deadline was extended by
consent, as it was in this case). R.C. 5751.53(D).
7} Second, R.C. 5751.53(B) sets forth how the credit
may be taken (i.e., how the "amortizable amount" is
amortized) over a 10- to 20-year period to offset CAT
liability. The amortizable amount is a factor in the
calculation that determines how much credit can be used each
year and constitutes a cap on the total amount of credit
available to the taxpayer.
Course of Proceedings
From "old Dana" to "new Dana"
8} In this case, the tax commissioner ordered a
reduction of the amortizable amount reported by Dana because
of a tax-free reorganization of the corporation that was
consummated on January 31, 2008. The parties use the term
"old Dana" when referring to the corporation before
the reorganization and "new Dana" when referring to
the corporation after the reorganization. We adopt that
9} Old Dana timely filed the amortizable-amount
report on June 30, 2006. Old Dana was a consolidated group of
affiliated corporations, meaning that the group reported
income and deductions as a single taxpayer. The total
amortizable amount reported was $12, 493, 003. Around the
same time that old Dana filed the report, the old Dana
consolidated group went into Chapter 11 bankruptcy, during
which it reorganized. It emerged from bankruptcy on January
31, 2008, as new Dana, a consolidated group that had all the
NOLs transferred from old Dana pursuant to 26 U.S.C. 381,
subject to whatever reduction occurred as a result of the
realization of CODI.
10} Like old Dana, new Dana is a consolidated group
of affiliated entities for federal income-tax purposes.
Consolidated filing "systematically affects the
computation of taxable income by aggregating transactions of
individual members of the consolidated group, " while
"eliminating] the tax effect of transactions within the
affiliate group." New York Frozen Foods, Inc. v.
Bedford Hts. Income Tax Bd. of Rev., 150 Ohio St.3d 386,
2016-Ohio-7582, 82 N.E.3d 1105, ¶ 21, citing 26 C.F.R.
1.1502-11 through 1.1502-28. Thus, "Dana's
NOLs" refers to the aggregate NOLs of the constituent
corporations. See 26 CFR 1.1502-21 and 1.1502-28.
The tax commissioner 's audit and adjustment
11} R.C. 5751.53(D) afforded the tax commissioner
until June 30, 2010, to audit and adjust the amount reported
in the amortizable-amount report. In this case, the parties
extended the audit period by one year to June 30, 2011, which
was permitted under R.C. 5751.53(D).
12} As a result of the audit, the tax commissioner
reduced the amortizable amount for two separate reasons.
First, the tax commissioner reduced the amortizable amount
from the reported $12, 493, 003 to $10, 935, 324 based on
information contained in amended tax reports filed by Dana.
Dana accepted that adjustment as appropriate. Second, the tax
commissioner reduced the amortizable amount from $10, 935,
324 to $4, 728, 051 based on a percentage reduction that
matched the percentage reduction of Dana's federal NOLs
by CODI that Dana realized as a result of the bankruptcy.
Dana appealed from the tax commissioner's final
determination and seeks a return to an amortizable amount of
$10, 935, 324.