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Navistar, Inc. v. Testa

Supreme Court of Ohio

May 16, 2018

Navistar, Inc., Appellant,
v.
Testa, Tax Commr., Appellee.

          Submitted February 13, 2018

          Appeal from the Board of Tax Appeals, No. 2010-575.

          Maryann B. Gall; and Vorys, Sater, Seymour & Pease, L.L.P., Anthony L. Ehler, and Steven L. Smiseck, for appellant.

          Michael DeWine, Attorney General, and Barton A. Hubbard, Assistant Attorney General, for appellee.

          PER CURIAM.

         {¶ 1} This case involves the commercial-activity-tax ("CAT") credit prescribed by R.C. 5751.53, and it comes before us for a second time, following our remand in Navistar v. Testa, 143 Ohio St.3d 460, 2015-Ohio-3283, 39 N.E.3d 509 ("Navistar I"). In Navistar I, we concluded that the Board of Tax Appeals ("BTA") had "ignored the testimony of Navistar's experts, an omission that ma[de] the BTA's decision unreasonable and unlawful." Id. at ¶ 7. We vacated the decision of the BTA and remanded the cause with the instruction that the BTA "determine, based on a consideration of all the evidence in accordance with [Navistar I], whether the valuation allowance originally reported on Navistar's Amortizable Amount Report was or was not in compliance with GAAP" (generally accepted accounting principles). Id. at ¶ 40. In its decision on remand, the BTA again upheld the tax commissioner's reduction of Navistar's CAT credit to zero, and Navistar has appealed for the second time.

         {¶ 2} In Navistar I, we noted that Navistar referred to the CAT credit as part of a "grand bargain" under which Ohio franchise-tax payers such as Navistar would support the enactment of the CAT and would receive a credit that allowed them to "retain[] some portion of the value of their Ohio deferred-tax assets such as NOLs" (net operating losses), which would otherwise be lost when the CAT replaced the former Ohio corporation franchise tax. Id. at ¶ 10. The CAT credit consists of "a portion of the Ohio-apportioned NOLs on [the company's] books at the end of [the company's] 2004 fiscal year, which, when adjusted, furnished a total amount of credit that could be used to reduce CAT liabilities over a period of up to 20 years." Id. at ¶ 11. Under R.C. 5751.53(A)(9) and (B), this potential credit is referred to as the "amortizable amount." Navistar I at ¶ 12. One feature of the amortizable amount that was significant in Navistar I and is significant in the present appeal is that in determining the amortizable amount, the NOLs are reduced by a percentage called the valuation allowance, which is an "adjustment dictated by accounting principles that is made on the books from year to year to reflect the likelihood that the company will realize the tax benefit of the NOLs, " id.

         {¶ 3} The factual and procedural background set forth in Navistar I is also relevant here. Navistar timely filed its Amortizable Amount Report, and in that report, it applied a valuation allowance of 62.4 percent; the total amortizable amount reported was $27, 048, 726. Id. at ¶ 15-17. But the letter to the tax department that accompanied the Amortizable Amount Report stated that Navistar was undergoing a "restatement examination of its financial statements for the years 2002, 2003, 2004, and 2005, " that "changes [would] occur to the 2002, 2003, and 2004 financial statements as part of [the] examination, " and that such changes would impact the report. Id. at ¶ 20. In December 2007, a "massive restatement" of the financials for the earlier years was noted in Navistar's annual Form 10-K filed with the Securities and Exchange Commission. As noted in Navistar's Form 10-K, in light of the changes to the underlying financial statements, the restatement of the financials increased the applicable valuation allowance to 100 percent. Navistar I at ¶ 17. The tax commissioner adopted the 100 percent valuation allowance in his final determination, which effectively eliminated Navistar's entire CAT credit, id. at ¶ 18, and the BTA affirmed the tax commissioner's determination. Navistar appealed the BTA's decision, and in Navistar I, we clarified the applicable legal principles and, as mentioned above, we remanded the cause to the BTA for a full consideration of the evidence. Navistar now contends that the BTA failed to properly carry out our instructions on remand. For the reasons set forth below, we disagree.

         The BTA's decision on remand

         {¶ 4} In its decision on remand, the BTA took as its starting point the Form 8-K that Navistar filed with the Securities and Exchange Commission on April 6, 2006, which states that "the company's previously issued audited financial statements and the independent auditor's reports thereon for the years ended October 31, 2002 through 2004, and all quarterly financial statements for periods after November 1, 2002 should no longer be relied upon because of errors in such financial statements." The BTA noted that that filing occurred "more than 75 days before [Navistar filed] the June 2006 amortization report with the Tax Commissioner" and that therefore the Amortizable Amount Report itself was filed in the context of Navistar's own admission that the financial statements that undergirded the reported amortizable amount were unreliable. BTA No. 2010-575, 2015 Ohio Tax LEXIS 4158, *7 (Nov. 30, 2015).

         {¶ 5} The BTA found that Navistar's experts, Douglas Pinney and Beth Savage, "reviewed limited information, i.e., not all of Navistar's underlying books and records" and that the testimony of both "reflects only the perception that each valuation allowance, as reported initially and upon restatement, was properly based upon Navistar's books and records, as they existed at the time of each report's submission" (Emphasis sic.) Id. at *8. The BTA drew the conclusion that "the valuation allowance set forth in the June 2006 report could not have complied with GAAP, because the historical financial information upon which that valuation was based, was unreliable and inaccurate, i.e., not GAAP compliant." Id. at *9.

         The meaning of the term "books and records"

         {¶ 6} Before we consider Navistar's objections to the BTA's findings and its conclusion, we must clarify the term "books and records" as it is used in the BTA's decision. As Pinney, one of Navistar's experts, explained, "[financial statements are derived from the books and records of a company, but the financial statements contain * * * footnote disclosures and other information that is typically not recorded in books and records." Navistar's other expert witness, Savage, testified that "[b]ooks and records would include everything that a company has and maintains to track their transactions." When asked whether "books and records include financial statements, " she replied that "it's more accurate to state that the books and records * * * are used to prepare the financial statements."

         {¶ 7} Addressing the same subject, the tax commissioner's expert, Ray Stephens, stated that "the books are used to prepare the financial statements and include the financial statements and the records or other qualifying information that are used to prepare the financial statements." Although Stephens testified that from an accounting standpoint, the term "books and records" includes the valuation allowance, because that information is used to prepare the financial statement, the term broadly includes what Pinney characterized as "raw data" or "underlying data." And Pinney articulated the important point that the underlying data "needs to be processed to be useful."

         {¶ 8} The foregoing discussion demonstrates why it is important that we first recognize the different ways in which the term "books and records" is used. The term is sometimes used to mean the financial statements and high-level-accounting documents associated directly with preparing the financial statements, and it is sometimes used to mean the "raw data" that forms the factual foundation upon which the high-level-accounting documents and the financial statements are based. Using Pinney's terminology, we will refer to the ...


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