Mandel v. Limbach - Ohio Supreme Court Opinion - Ohio Supreme Court Decision

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OPINIONS OF THE SUPREME COURT OF OHIO
The full texts of the opinions of the Supreme Court of
Ohio are being transmitted electronically beginning May 27,
1992, pursuant to a pilot project implemented by Chief Justice
Thomas J. Moyer.
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Mandel et al., Appellants, v. Limbach, Tax Commr., Appellee.
[Cite as Mandel v. Limbach (1994), Ohio St.3d .]
Taxation -- Income tax -- R.C. 5747.01 allows exclusion of
interest on obligations of the United States as netted
with the expense incurred to earn the interest income --
Phrase "to the extent includible" in R.C. 5747.01(A)
interpreted to limit the interest income exclusion to the
amount actually included in federal adjusted gross income.
(No. 93-1405 -- Submitted May 24, 1994 -- Decided July 27,
1994.)
Appeal from the Board of Tax Appeals, No. 90-M-462.
Jack N. and Lilyan Mandel, husband and wife, appellants
herein, contest the allowance for a deduction in their 1986
Ohio income tax return of only the net income they received
from federal obligations. They contend they may deduct the
full amount of federal obligation income.1
During calendar year 1986, Jack was a limited and general
partner in Courtland Associates, while Lilyan was a limited
partner. Courtland was a limited partner in Princeton/Newport
Partners, L.P., and Odyssey Partners. Princeton and Odyssey
invested in, and directly owned, United States Treasury
obligations. Princeton and Odyssey received interest income
and incurred investment interest expense, which they passed on
to Courtland as reflected in Internal Revenue Service Schedule
K-1s.
Courtland then passed on the interest income and interest
expense to the Mandels. The Schedule K-1 Courtland filed for
Jack stated that he received $1,030,497 in "interest on U.S.
government obligations included in ordinary income" and
identified $638,910 as "expenses related to interest on U.S.
government obligations included in ordinary income."
Courtland's Schedule K-1 for Lilyan indicates that she received
$42,860 as "interest on U.S. government obligations included in
ordinary income" and identified $40,483 as "expenses related to
interest on U.S. Government obligations included in ordinary
income."
The Mandels jointly filed their 1986 Ohio Individual
Income Tax Return and deducted from Ohio adjusted gross income

$1,073,357 as "U.S. Obligation interest thru partnerships,"
which equals Jack's and Lilyan's total interest income without
deducting interest expense. The Mandels claimed an overpayment
of tax of $213,262.12. They requested the Tax Commissioner,
appellee, credit $90,000 of this amount as an estimated payment
of their 1987 income tax liability and refund the remaining
amount, $123,262.12, to them.
On review, the commissioner noted that Jack had ordinary
income of $51,220 reflected on his Schedule K-1, and that
Lilyan had an ordinary loss of $16,094. The commissioner
netted these two amounts and reduced the Mandels' federal
interest deduction to $35,126.2 This action reduced the
overpayment to $103,179.14. The commissioner applied $90,000
of this amount to the Mandels 1987 Ohio income tax liability
and refunded the remaining amount, $13,179.14, to the Mandels.
On appeal, the Board of Tax Appeals ("BTA") modified the
commissioner's order. It ruled that R.C. 5747.01 allowed the
Mandels to exclude interest on obligations of the United States
as netted with the expense incurred to earn the interest
income. Accordingly, the BTA concluded that the deduction was
$393,964, namely $1,073,357 in interest income less $679,393 in
interest expense.
This cause is now before this court upon an appeal as of
right.

Jones, Day, Reavis & Pogue and John C. Duffy, Jr., for
appellants.
Lee Fisher, Attorney General, and Steven L. Zisser,
Assistant Attorney General, for appellee.

Per Curiam. R.C. 5747.01(A), for the tax year at issue,
defined "adjusted gross income" as:
"* * * adjusted gross income as that term is defined and
used in the Internal Revenue Code * * *, and excludes interest
or dividends on obligations of the United States and its
territories and possessions or of any authority, commission, or
instrumentality of the United States to the extent includible
in gross income for federal income tax purposes but exempt from
state income taxes under the laws of the United States * * *."
(Emphasis added.)
The Mandels admit that Ohio may lawfully net interest
income with interest expense to determine the exclusion, see
First Natl. Bank of Atlanta v. Bartow Cty. Tax Assessors
(1985), 470 U.S. 583, 105 S.Ct. 1516, 84 L. Ed.2d 535, but
claim that R.C. 5747.01(A) does not, in clear terms, do this.
They claim that this statute provides that the full amount of
interest income is to be excluded.
We interpret the phrase in R.C. 5747.01(A) "to the extent
includible" to limit the exclusion to the amount actually
included in federal adjusted gross income. The Mandels do not
seriously argue that federal adjusted gross income included the
unnetted amount; indeed, it is undisputed federal adjusted
gross income included only the net amount. Thus, the exclusion
is limited to the amount of income actually included in federal
adjusted gross income, $393,964.
This result agrees with our consistent application of
these exclusions from income. In Eaton v. Limbach (1992), 65

Ohio St.3d 305, 603 N.E. 2d 992, we limited the exclusion from
Ohio adjusted gross income of Subchapter S corporation income
to income as netted with losses from Subchapter S
corporations. See Westinghouse Elec. Corp. v. Lindley (1979),
58 Ohio St.2d 137, 140-142, 12 O.O. 3d 158, 160-161, 389 N.E.2d
473, 475-476 (taxpayer may only deduct net royalties from
franchise tax income because only this amount was included in
federal net income), and Pancake House, Inc. v. Lindley (1980),
61 Ohio St.2d 151, 15 O.O. 3d 180, 399 N.E.2d 1249 (taxpayer
may only deduct net technical assistance fees from franchise
tax income because only this amount was included in federal net
income).
Accordingly, we affirm the BTA's decision because it is
reasonable and lawful.
Decision affirmed.
Moyer, C.J., A.W. Sweeney, Douglas, Wright, Resnick, F.E.
Sweeney and Pfeifer, JJ., concur.

FOOTNOTES
1 According to their attorney, Lilyan has died, and Jack is
executor of her estate.
2 The commissioner apparently does not now maintain this
position.