Mut. Holding Co. v. Limbach - Ohio Supreme Court Opinion - Ohio Supreme Court Decision

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OPINIONS OF THE SUPREME COURT OF OHIO
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1992, pursuant to a pilot project implemented by Chief Justice
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Mutual Holding Company, Appellee, v. Limbach, Tax Commr.,
Appellant.
[Cite as Mut. Holding Co. v. Limbach (1994), Ohio St.3d
.]
Taxation -- Franchise tax -- Noninsurance corporation that is a
subsidiary of a domestic insurance company is not exempt
under R.C. 5725.25 from franchise tax imposed by R.C.
5725.18.
(No. 93-1167 -- Submitted September 20, 1994 -- Decided
November 30, 1994.)
Appeal from the Board of Tax Appeals, Nos. 90-H-1058,
91-B-155, 91-F-156 and 91-D-157.
Appellee, Mutual Holding Company ("MHC"), is a wholly
owned subsidiary of Blue Cross and Blue Shield Mutual of Ohio
("BCBS"), a domestic insurance company. MHC is a general Ohio
corporation that acts as a holding company. BCBS owns all the
outstanding stock of MHC. For the tax years at issue, 1986
through 1989, BCBS paid franchise taxes based upon its net
worth as a domestic insurance company pursuant to R.C.
5725.18. MHC also paid general corporate franchise taxes for
the same period.
Claiming to be an asset for BCBS, MHC filed refund
applications with appellant, Tax Commissioner of Ohio, for each
of the years 1986 through 1989, in the total amount of
$875,137. The commissioner denied the claims. On appeal, the
Board of Tax Appeals ("BTA") reversed the commissioner's final
orders and granted the applications.
The cause is now before this court upon an appeal as of
right.

Baker & Hostetler, Christopher J. Swift, Richard R.
Hollington, Jr. and Scott D. Irwin, for appellee.
Lee Fisher, Attorney General, and Richard C. Farrin,
Assistant Attorney General, for appellant.

Moyer, C.J. By this appeal we are asked to determine
whether a wholly owned noninsurance subsidiary of a domestic
insurance company is exempt under R.C. 5725.25 from paying

franchise tax if the parent pays the franchise tax on domestic
insurance companies imposed by R.C. 5725.18. We hold that a
noninsurance corporation that is a subsidiary of a domestic
insurance company is not exempt under R.C. 5725.25 from the
franchise tax imposed by R.C. Chapter 5733.
R.C. 5725.25 is an exemption statute which must be
strictly construed against the taxpayer. Celina Mut. Ins. Co.
v. Bowers (1965), 5 Ohio St.2d 12, 34 O.O.2d 7, 213 N.E.2d
175. It provides in part that the tax levied by R.C. 5725.18
is "in lieu of all other taxes on the other property and assets
of such domestic insurance company *** and of all other taxes,
charges, and excises on such domestic insurance companies."
The BTA apparently reasoned that because MHC is a wholly owned
subsidiary of BCBS, it is an asset of BCBS and therefore exempt
from taxation pursuant to R.C. 5725.25. We do not agree with
this conclusion.
Generally, a parent and subsidiary are separate and
distinct legal entities. Hoover Universal, Inc. v. Limbach
(1991), 61 Ohio St.3d 563, 575 N.E.2d 811. This is so even if
the parent owns all the outstanding shares of the subsidiary.
Shares of stock are intangible personal property. R.C.
1701.24(A). Stock ownership represents a bundle of rights
flowing from the corporation involving, inter alia, earnings,
net assets and voting power. Millar v. Mountcastle (1954), 161
Ohio St. 409, 53 O.O. 333, 119 N.E.2d 626. Stock is an asset
in itself, distinct from the asset that is the issuing
company. A tax on the shares is not a tax on the capital. Lee
v. Sturges (1889), 46 Ohio St. 153, 19 N.E. 560. In this case,
BCBS owns all the outstanding stock of MHC. The MHC stock and
not MHC, the corporate entity, is BCBS's asset. Therefore, the
other-asset exemption of R.C. 5725.25 is inapplicable because
MHC itself is not an asset of BCBS.
A franchise tax, such as that imposed by R.C. 5725.18, is
a tax on the privilege of doing business in Ohio. It is not a
tax on the property of the paying entity. Bank One, Dayton,
N.A. v. Limbach (1990), 50 Ohio St.3d 163, 553 N.E.2d 624;
Celina, supra. For the privilege of operating a domestic
insurance company, Ohio imposes a tax that may be measured
either in terms of net worth or premium value. R.C. 5725.18.
Measuring tax liability in terms of net worth does not convert
a franchise tax into a property tax. See Internatl. Harvester
Co. v. Evatt (1945), 146 Ohio St. 58, 31 O.O. 546, 64 N.E.2d
53. R.C. 5725.18 is a franchise tax measured by net worth, not
a tax on net worth.
The BTA in its decision distinguished Celina, supra.
Celina would be more appropriately cited in opposition to the
BTA's conclusion. In Celina, two domestic insurance companies
applied for exemption from the sales and use tax for manuals
they had purchased to comply with Ohio Department of Insurance
requirements. The insurance companies distributed these
manuals to their employees and agents in order that these
individuals could determine premium rates. The Celina court
held that the taxes were not imposed on the property or assets
of the two domestic insurance companies. Instead, the court
ruled that the sales and use taxes were levied on the exercise
of privileges, the rights to acquire and to use tangible
personal property. Accordingly, the court did not exempt the

purchases. The same reasoning applies here, since the
franchise taxes paid by BCBS and MHC are also privilege taxes
and not taxes on property.
Finally, we are unpersuaded that MHC may avail itself of
an exemption flowing to BCBS, a domestic insurance company.
MHC is not a domestic insurance company and, accordingly, pays
corporate franchise tax levied by R.C. Chapter 5733. BCBS, as
a domestic insurance company, pays franchise tax pursuant to
R.C. Chapter 5725. R.C. 5725.25 by its express terms applies
to domestic insurance companies and not to general
corporations. We find nothing to suggest that a general
corporation may avail itself of an exemption granted in a
separate chapter of the Revised Code to another distinct group
of corporations.
For the foregoing reasons, the decision of the Board of
Tax Appeals is reversed and the orders of the Tax Commissioner
are reinstated.
Decision reversed.
A.W. Sweeney, Douglas, Wright, Resnick, F.E. Sweeney and
Pfeifer, JJ., concur.