MCI Telecommunications Corp. 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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MCI Telecommunications Corporation, Appellant and
Cross-Appellee, v. Limbach, Tax Commr., Appellee and
Cross-Appellant.
[Cite as MCI Telecommunications Corp. v. Limbach (1994),
Ohio St.3d .]
Taxation -- Personal property tax -- Facility-based
interexchange telephone message carrier's equipment taxed
at one hundren percent of true value while its
competitors' equipment is assessed at thirty-one percent
of true value -- Equal Protection Clause violated, when --
Notice of appeal to Board of Tax Appeals -- In resolving
questions regarding effectiveness of a notice of appeal,
Supreme Court not disposed to deny review by a
hypertechnical reading of the notice --
Unconstitutionality of tax statute raised -- Board of Tax
Appeals receives evidence and Supreme Court makes
constitutional finding.
(No. 92-1199 -- Submitted October 19, 1993 -- Decided
February 2, 1994.)
Appeals and Cross-Appeal from the Board of Tax Appeals,
No. 88-G-1137.
MCI Telecommunications Corporation ("MCI"), appellant and
cross-appellee, claims that the Tax Commissioner, appellee and
cross-appellant, denied it equal protection of the laws because
she assessed its equipment for personal property tax purposes
at one hundred percent of true value but assessed its
competitors' at thirty-one percent of true value. MCI projects
that this treatment resulted in its incurring an additional tax
liability of $4,659,625.
The commissioner, on the other hand, cross-appeals the
BTA's ruling apportioning MCI's wireless, microwave
transmitting equipment to the taxing districts in which MCI
operates according to MCI's wire-mile ratio, calculated on
MCI's fiber-optic cable. She asserts that the equipment should
be apportioned according to its physical location.
MCI is a facility-based, interexchange carrier of
telephone messages. It transmits telephone calls between local
telephone companies' local access transport areas ("LATAs") --

intrastate, interstate, and internationally. MCI provides
"intercity telephone services * * * primarily over its own
coast-to-coast terrestrial microwave and optical fiber
communications system and, to a far lesser extent, over
facilities leased from other common carriers and by satellite
transmission." MCI began as a reseller of long distance
service, leasing lines from other long distance carriers, but
acquired, over time, wireless, microwave equipment and, by
1987, fiber-optic cable.
Typically, MCI transmits a call by switching it from the
LATA, with MCI's switching equipment, into MCI's system or onto
a leased line. It carries the message to the destination LATA
and switches the call, again with its switching equipment, into
the destination LATA, which carries the call to the destination
telephone. If transmitting on the microwave equipment, MCI
bounces a radio signal from tower to tower until received at a
terminal. If transmitting on the fiber-optic system, MCI
converts the signal to light and transmits the light signal
over the fiber-optic transmission links to the destination
switching equipment.
For tax year 1987, the year in dispute, MCI reported its
equipment to the commissioner under R.C. 5727.08. The
commissioner depreciated the original cost of the equipment by
fifty percent to determine the equipment's true value and
assessed the equipment at one hundred percent of true value.
The commissioner then apportioned the assessed or taxable value
of the microwave equipment to the taxing district in which it
was physically located. However, she apportioned the
fiber-optic property to the taxing districts where that type of
property was located according to the ratio of miles of
fiber-optic cable in the given district to the total miles of
fiber-optic cable in the entire state.
MCI challenged these decisions. On appeal to the BTA, it
maintained that all its property, not just its fiber-optic
property, should be apportioned according to the wire-mile
ratio. It also presented evidence to the BTA in support of its
contentions that (1) it is not a telephone company, but a
general business; (2) resellers, which, instead of owning
transmission equipment, lease WATS lines from AT&T or other
inter-LATA carriers to transmit its messages, are treated as
general businesses and assessed at thirty-one percent of true
value; and (3) two facility-based competitors, Allnet
Communication Services, Inc. and Cable & Wireless Management
Services, Inc., were treated by the commissioner as general
businesses and were also assessed at thirty-one percent.
The BTA liberally received evidence but made no findings
of fact on the constitutional, equal-protection questions. As
to the apportionment question, the BTA reversed the order of
the commissioner. The BTA agreed with MCI and directed the
commissioner to apportion all the equipment according to the
wire-mile formula.
The cause is before this court upon an appeal and
cross-appeal as a matter of right.

Jones, Day, Reavis & Pogue, John C. Duffy, Jr., Beth
Heifetz, Timothy B. Dyk, Walter Nagel and Douglas A. Richards,
for appellant and cross-appellee.

Lee I. Fisher, Attorney General, Barton A. Hubbard and
James C. Sauer, Assistant Attorneys General, for appellee and
cross-appellant.

Per Curiam.

A
Specifying Error in the Notice of Appeal
In paragraph four of its notice of appeal filed with the
BTA, MCI asserted that the commissioner's application of R.C.
5727.10 to it denied it equal protection of the laws, and, in
paragraph five, that the commissioner's failure to apply the
general personal property tax statute to it, R.C. 5711.22, also
denied it equal protection. The commissioner, in her
Proposition of Law No. III, asserts the notice of appeal was
specific enough to challenge the statutes on their face but not
specific enough to challenge them as applied to MCI. MCI, in
its Proposition of Law No. V on cross-appeal, maintains that
the commissioner is hypertechnically attempting to deny it an
appeal.
According to Buckeye Internatl., Inc. v. Limbach (1992),
64 Ohio St.3d 264, 267, 595 N.E.2d 347, 350:
"Failure to include errors in the notice of appeal to the
BTA results in the BTA's lack of jurisdiction over the errors
and the court's inability to review such errors."
Citing Goodyear Tire & Rubber Co. v. Limbach (1991), 61 Ohio
St.3d 381, 383, 575 N.E. 2d 146, 147, we concluded that Buckeye
had raised an alternate argument, rather than a distinct,
separate objection, because "it specified the commissioner's
action that it questioned, cited the statute under which it
objected, and asserted the treatment it believed the
commissioner should have applied to the income." Id., 64 Ohio
St.3d at 268, 595 N.E.2d at 350. Moreover, we stated:
"In resolving questions regarding the effectiveness of a
notice of appeal, we are not disposed to deny review by a
hypertechnical reading of the notice." Id.
Here, MCI set forth the action it contested, stated that
this action denied it equal protection of the laws, and
asserted the statute under which it should have been taxed.
Under Buckeye, the notice sufficiently sets forth the claim
that the statutes were unconstitutionally applied to MCI.
B
BTA's Role in Constitutional Questions
The BTA understood its role to be a receiver of evidence
for constitutional challenges. Accordingly, it did so, giving
the parties wide latitude in presenting the evidence. The BTA
determined no facts on the constitutional questions. The
commissioner, however, in her Proposition of Law No. IV,
contends that the BTA not only receives evidence in this type
of case, but must weigh the evidence and determine the facts
necessary for the court's review of the constitutional
questions. Since the BTA did not make findings of fact, the
commissioner asserts that we should remand the case for the BTA
to comply.
In Cleveland Gear Co. v. Limbach (1988), 35 Ohio St. 3d
229, 520 N.E.2d 188, paragraph three of the syllabus, we held:
"The question of whether a tax statute is unconstitutional

when applied to a particular state of facts must be raised in
the notice of appeal to the Board of Tax Appeals, and the Board
of Tax Appeals must receive evidence concerning this question
if presented, even though the Board of Tax Appeals may not
declare the statute unconstitutional. (Bd. of Edn. of
South-Western City Schools v. Kinney [1986], 24 Ohio St.3d 184,
24 OBR 414, 494 N.E.2d 1109, construed.)"
We explained the process, at 232, 520 N.E.2d at 191-192:
"When a statute is challenged on the basis that it is
unconstitutional in its application, this court needs a record,
and the proponent of the constitutionality of the statute needs
notice and an opportunity to offer testimony supporting his or
her view.
"To accommodate this court's need for extrinsic facts and
to provide a forum where such evidence may be received and all
parties are apprised of the undertaking, it is reasonable that
the BTA be that forum. The BTA is statutorily created to
receive evidence in its role as factfinder."
Under Cleveland Gear, the BTA need only receive evidence
for us to make the constitutional finding. This is because the
BTA accepts facts but cannot rule on the question. On the
other hand, we can decide the constitutional questions but have
a limited ability to receive evidence. Thus, the BTA receives
evidence at its hearing, but we determine the facts necessary
to resolve the constitutional question.
C
Equal Protection
In Proposition of Law No. III, MCI argues that the
commissioner's assessing it for personal property tax purposes
at one hundred percent of true value while assessing resellers
at thirty-one percent violates the Equal Protection Clauses of
the federal and Ohio Constitutions. In her Proposition of Law
No. V, the commissioner responds that the record does not
support a finding that she or the General Assembly
intentionally and systematically discriminated between MCI and
similarly situated taxpayers so as to deny MCI equal protection.
According to Nordlinger v. Hahn (1992), 505 U.S. , 112
S.Ct. 2326, 2331, 120 L.Ed.2d 1, 12:
"Equal Protection Clause of the Fourteenth Amendment, { 1,
commands that no State shall 'deny to any person within its
jurisdiction the equal protection of the laws.' Of course,
most laws differentiate in some fashion between classes of
persons. The Equal Protection Clause does not forbid
classifications. It simply keeps governmental decisionmakers
from treating differently persons who are in all relevant
respects alike. F.S. Royster Guano Co. v. Virginia, 253 U.S.
412, 415 [40 S.Ct. 560, 561, 64 L.Ed. 989, 990-991] (1920).
"As a general rule, 'legislatures are presumed to have
acted within their constitutional power despite the fact that,
in practice, their laws result in some inequality.' McGowan v.
Maryland, 336 U.S. 420, 425-426 [81 S.Ct. 1101, 1105, 6 L.Ed.2d
393, 399] (1961). Accordingly, this Court's cases are clear
that, unless a classification warrants some form of heightened
review because it jeopardizes exercise of a fundamental right
or categorizes on the basis of an inherently suspect
characteristic, the Equal Protection Clause requires only that
the classification rationally further a legitimate state

interest. See, e.g., Cleburne v. Cleburne Living Center, Inc.,
473 U.S. 432, 439-441 [105 S.Ct. 3249, 3254-3255, 87 L.Ed.2d
313, 320-321] (1985); New Orleans v. Dukes, 427 U.S. 297, 303
[96 S.Ct. 2513, 2517, 49 L.Ed.2d 511, 517] (1976)."
In Allegheny Pittsburgh Coal Co. v. Webster Cty. (1989),
488 U.S. 336, 109 S.Ct. 633, 102 L.Ed.2d 688, the United States
Supreme Court upheld the power of the state to divide different
kinds of property into classes and to assign to each a
different tax burden so long as those divisions and
classifications are neither arbitrary nor capricious. However,
the court rejected the Webster County assessor's application of
the state tax law in a manner that resulted in an unreasonable
disparity in assessed value between the taxpayer's property and
similarly situated property. It held that the intentional,
systematic undervaluation of such other property unfairly
deprived the taxpayer of its rights under the Equal Protection
Clause. Finally, the court held that the offended taxpayer was
not, in attacking the discrimination, limited to seeking an
upward revision of the taxes for the other members of the
class, but could seek a downward adjustment of its own
property. Id. at 344-346, 109 S.Ct. at 638-639, 102 L.Ed.2d at
697-699.
Similarly, in Boothe Financial Corp. v. Lindley (1983), 6
Ohio St. 3d 247, 6 OBR 315, 452 N.E.2d 1295, paragraphs one and
two of the syllabus, we held:
"1. A taxpayer, although assessed at not more than true
value, may be unlawfully discriminated against by
undervaluation of property of the same class belonging to
others. (Southern Railway Co. v. Watts, 260 U.S. 519 [43 S.Ct.
192, 67 L.Ed. 375], followed.)
"2. A taxpayer who leases equipment is denied equal
protection when a competitor, who manufactures and leases
essentially identical equipment, is allowed to grossly
undervalue his property by reporting the value of his equipment
at manufacturing cost less depreciation, and the former is not
allowed to report the value of equipment in the same manner."
According to the opinion, Boothe Financial purchased
computer equipment from IBM and leased it to customers. Boothe
Financial, according to the commissioner's ruling, had to value
the equipment at acquisition cost less depreciation. IBM,
which also leased its manufactured equipment to others, based
its true value on its manufacturing cost less depreciation,
which produced a lower valuation than for Boothe Financial.
Under these facts, we concluded that Boothe Financial was
denied equal protection.1
In this case, MCI argues that it owns or leases equipment
similar to that owned or leased by resellers. This equipment
includes switches, telephone processing equipment, and general
office equipment. The only distinction between MCI and
resellers is that MCI, a facility-based carrier, owns or leases
the transmission equipment while resellers lease WATS lines
from other interexchange carriers. However, MCI urges, this is
a distinction without a difference, since resellers essentially
lease a portion of the interexchange companies' transmission
equipment in leasing WATS lines.
To counter this, the commissioner argues that resellers,
unlike "telephone companies," do not own or lease the

transmission equipment but merely buy and resell transmission
service from companies that own transmission equipment.
However, the Public Utilities Commission treats
facility-based carriers and resellers the same. The
commissioner's argument ignores the commission's April 9, 1985
order in In re Regulatory Framework for Telecommunication Serv.
in Ohio (1985), 66 P.U.R.4th 572, No. 84-944-TP-COI, which
determined that resellers transmit telephonic messages as a
"telephone company" within the meaning of that term as
contained in the Tax Code in the disputed year. Compare former
R.C. 5727.01(E)(2) with 4905.03(A)(2). Moreover, the
commission held that facility-based carriers and resellers are
in the same interexchange carrier category, and the commission
regulates both in the same manner. The commission requires
both to be certified by the commission, and both to set their
rates flexibly within the range approved by the commission.
The commission applies virtually all other oversight procedures
to both carriers.
Thus, two taxpayers within the same class owning or
leasing the same type of equipment are treated differently, and
this treatment denies MCI equal protection of the laws. As MCI
argues, it should have its equipment valued as general business
property under R.C. Chapter 5711 rather than as public utility
property under R.C. Chapter 5727. This treatment would result
in MCI's equipment being assessed at thirty-one percent of true
value, the assessment rate for 1987, and sitused according to
its physical location under R.C. Chapter 5711.
Moreover, GTE Sprint Communications Corp. v. Wisconsin
Bell, Inc. (1990), 155 Wis. 2d 184, 454 N.W.2d 797, supports
this result. In that case, the Wisconsin Supreme Court held
that a statute that imposed a retail sales tax on furnishing
local-access-carrier telephone services to an inter-LATA
carrier denied equal protection to that inter-LATA carrier
because the state did not impose the tax on furnishing the same
services to, inter alia, a reseller of the telephone services.
The court decided that "[e]qual protection requires that
because each [is] similarly situated, if the transfer of access
services to inter-LATA carriers is to be taxed, the same
transfer to local exchange carriers and resellers must be taxed
as well. See Allegheny [488 U.S. at 345], 109 S. Ct. [at]
638-39 [102 L.Ed.2d at 698]. To the extent that inter-LATA
carriers 'use or consume' access services in providing
telecommunication services to their customers, so do
interexchange carriers and resellers. The effect of the
legislation here is to treat similarly situated persons
disparately without a rational basis to support the
distinction." Id., at 198, 454 N.W.2d at 803.
Since we hold that the commissioner denied MCI equal
protection on the above basis, we will not address MCI's
remaining equal protection claims. Moreover, with this
holding, MCI's equipment will be sitused under R.C. Chapter
5711 to the taxing districts where located. Consequently, the
situsing issue is moot, and we will not address the
commissioner's cross-appeal.
Accordingly, we hold that the commissioner denied MCI
equal protection by overvaluing MCI's property vis-a-vis the
property of resellers. Therefore, we reverse the decision of

the BTA and remand the cause for further proceedings consistent
with this opinion.

Decision reversed
and cause remanded.
A.W. Sweeney, Wright, Resnick and Pfeifer, JJ., concur.
Moyer, C.J., Douglas and F.E. Sweeney, JJ., dissent.

FOOTNOTE:
1 The commissioner responded to that decision by
requiring manufacturer-lessors to record the leased equipment
at the price at which the property would be sold outright to
the lessee prior to the commencement of the lease payments.
Ohio Adm. Code 5703-3-31.