Wesnovtek Corp. v. Wilkins - Ohio Supreme Court Opinion - Ohio Supreme Court Decision

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[Cite as Wesnovtek Corp. v. Wilkins, 105 Ohio St.3d 312, 2005-Ohio-1826.]

WESNOVTEK CORPORATION, APPELLEE, v. WILKINS, TAX COMMR., APPELLANT.
[Cite as Wesnovtek Corp. v. Wilkins,
105 Ohio St.3d 312, 2005-Ohio-1826.]
Corporation-franchise tax -- Former R.C. 5733.051 -- Former R.C.
5733.05(B)(2)(d) -- Pursuant to former R.C. 5733.051, a gain or loss
from the sale of inventory must be apportioned rather than allocated --
Taxpayer seeking deviation from the statutory formula for calculating the
apportionment factor must submit request in writing pursuant to former
R.C. 5733.05(B)(2)(d).
(No. 2003-0822 -- Submitted January 18, 2005 -- Decided May 4, 2005.)
APPEAL from the Board of Tax Appeals, No. 1996-P-429.
___________________
SYLLABUS OF THE COURT
1. Pursuant to former R.C. 5733.051, a gain or loss from the sale of inventory must
be apportioned rather than allocated.
2. The Tax Commissioner is not required to consider a deviation from the statutory
formula for calculating the apportionment factor unless, pursuant to former
R.C. 5733.05(B)(2)(d), a request to deviate is submitted in writing when the
franchise tax report is filed. Cooper Tire & Rubber Co. v. Limbach (1994),
70 Ohio St.3d 347, 639 N.E.2d 27, followed.
___________________
MOYER, C.J.
{¶1} This case involves the calculation of the Ohio corporation-
franchise-tax liability of Wesnovtek Corporation ("Wesnovtek"), appellee, for the
1988 tax year. The first question we address is whether, based on former R.C.
5733.051, a loss from the bulk sale of inventory must be allocated or apportioned.

SUPREME COURT O OHIO
We then consider whether the Tax Commissioner is required to consider a
deviation from the statutory apportionment formula when a corporate taxpayer
fails to submit a request for deviation in writing at the time the franchise tax
report is filed.
Overview of the Ohio Corporation Franchise Tax
{¶2} The Ohio franchise tax is an excise tax levied upon corporations
for the privilege of doing business in the state, owning or using a part or all of its
capital or property in this state, or holding a certificate of compliance authorizing
it to do business in this state. R.C. 5733.01. The franchise tax was and still is
calculated on both a net-worth and a net-income basis. R.C. 5733.05(B) and (C);
see former R.C. 5733.05(A) and (B), Sub.H.B. No. 428, 141 Ohio Laws, Part II,
3672, 4166-4171. The calculation that produces the greater amount of tax is used
as the basis to levy the tax. R.C. 5733.06. The issues presented in this appeal
involve the calculation of the net-income basis.
{¶3} In order to fairly tax corporations that do business in more than one
state, the statutory framework measures the extent of a corporation's Ohio
business activity. R.H. Macy & Co., Inc. v. Lindley (1986), 25 Ohio St.3d 218,
219, 25 OBR 279, 495 N.E.2d 948. To determine the amount of net income to
attribute to Ohio, certain types of income are allocated, and other income is
apportioned.
{¶4} Although neither "allocation" nor "apportionment" is statutorily
defined, this court defined the terms in Harsco Corp. v. Tracy (1999), 85 Ohio
St.3d 382, 708 N.E.2d 1000. We stated that allocation "determines income based
upon the situs of property that is the source of that income." Id. at 383, 708
N.E.2d 1000. That is, allocation refers to the attribution to a particular jurisdiction
of income from a given source, usually because the asset that is the source of that
income is located in that jurisdiction. Apportionment "divides income from
interstate activity that is not allocated to a definite situs by using a formula based
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January Term, 2005
upon several factors." Id. Thus, when the source of the income cannot be
attributed to a particular asset or activity in a particular jurisdiction so as to be
allocated, it is apportioned according to an apportionment formula. R.C.
5733.05(B)(2).
Factual and Procedural Background
{¶5} Wesnovtek is successor by name change to Dura Corporation
("Dura"). Dura sold all of its assets except real estate in 1987. Included in the sale
was inventory from Dura's two automotive-equipment plants located in Ohio and
Michigan. In calculating its net-income basis, Wesnovtek allocated to Ohio the
net loss realized from its sale of inventory located in Ohio. Consequently,
Wesnovtek did not account for its inventory using the statutory method. Under
former R.C. 5733.05(B)(2), 141 Ohio Laws, Part II, 3672, 4168-4169, a
corporation adds a property factor, a payroll factor, and a sales factor that is
multiplied by two, and then divides the total by four. When Wesnovtek calculated
its apportionment factor, it did not include a factor for sales, ignoring the income
from the sale of the inventory. Therefore, when Wesnovtek calculated its
apportionment factor, it used only the property and payroll factors and divided by
two.
{¶6} Although former R.C. 5733.05(B)(2)(d) permits a corporation to
seek deviation from the standard formula in certain circumstances by submitting a
request in writing at the time the tax report is filed, Wesnovtek did not file such a
request.
{¶7} After an audit, the Tax Commissioner denied Wesnovtek's
allocation of the loss from the sale of inventory in Ohio and determined that the
sale of the inventory was subject to apportionment pursuant to former R.C.
5733.05(B)(2)(c), 141 Ohio Laws, Part II, 3672, 4170. The Tax Commissioner
also included the income from the sale of the inventory in the sales factor used to
calculate the statutory apportionment factor.
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{¶8} Wesnovtek filed a petition for reassessment with the Tax
Commissioner, who determined that the loss from the bulk sale of inventory
should be apportioned. The Tax Commissioner did not consider Wesnovtek's
request to deviate from the statutory apportionment formula because Wesnovtek
had not filed a timely written request to use a two-factor apportionment formula
as required by former R.C. 5733.05(B)(2)(d).
{¶9} The Board of Tax Appeals ("BTA") reversed the decision of the
Tax Commissioner. The BTA held that the loss from the sale of inventory sitused
in Ohio was allocable to Ohio because the sale was not in the ordinary course of
business and fell within the rule of Borden, Inc. v. Limbach (1990), 49 Ohio St.3d
240, 551 N.E.2d 1268. The BTA also held that the Tax Commissioner should
have granted Wesnovtek the right to deviate from the statutory apportionment
formula.
{¶10} The Tax Commissioner presents two propositions of law for our
review. In the first proposition, the commissioner argues that a net loss from the
bulk sale of inventory must be apportioned. In the second proposition, the
commissioner contends that a request for a deviation from the statutory
apportionment formula may not be considered or granted by the Tax
Commissioner when a corporate taxpayer has failed to make a written request for
deviation at the time it files its franchise-tax report.
Treatment of Net Income from the Bulk Sale of Inventory
{¶11} When determining whether to allocate or apportion income for the
1988 tax year, the relevant statute is former R.C. 5733.051. S.B.No. 33, 142 Ohio
Laws, Part I, 86, 87. Former R.C. 5733.051(A) to (G) provides that gains and
losses from particular sources are to be allocated. Because this case involves the
sale of tangible personal property, our focus is on divisions (D) and (H). These
provisions instruct as follows:
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January Term, 2005
{¶12} "Net income of a corporation subject to the tax imposed by this
chapter shall be allocated and apportioned to this state as follows:
{¶13} "* * *
{¶14} "(D) Capital gains and losses from the sale or other disposition of
tangible personal property are allocable to this state if the property had a situs in
this state at the time of sale and the taxpayer is otherwise subject to the tax
imposed by this chapter;
{¶15} "* * *
{¶16} "(H) Any other net income, from sources other than those
enumerated in divisions (A) to (G) of this section, is apportionable to this state on
the basis of the mechanism provided in division (B)(2) of section 5733.05 of the
Revised Code." S.B. No. 33, 142 Ohio Laws, Part I, 8687.
{¶17} Thus, to allocate a gain or loss from the sale of tangible personal
property to Ohio under division (D), there must be a capital gain or loss, and the
tangible personal property giving rise to the capital gain or loss must have been
sitused in Ohio at the time of the sale.
{¶18} The nature of the asset sold determines whether a gain or loss is a
capital gain or loss. Specifically, only the sale of a capital asset can give rise to a
capital gain or loss. Otherwise, a gain or loss from the sale of all tangible personal
property located in this state would be allocated, and "capital" in former R.C.
5377.051(D) would be rendered meaningless. Therefore, we must determine
whether the relevant asset in the instant case (i.e., inventory) was a capital asset.
{¶19} The General Assembly has not defined "capital asset." We are
guided, however, by R.C. 5733.04(J), which provides:
{¶20} "Any term used in this chapter has the same meaning as when used
in comparable context in the laws of the United States relating to federal income
taxes unless a different meaning is clearly required."
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SUPREME COURT O OHIO
{¶21} For federal tax purposes, inventory is not a capital asset. Section
1221(a)(1), Title 26, U.S.Code, provides:
{¶22} "[T]he term `capital asset' means property held by the taxpayer
(whether or not connected with his trade or business), but does not include --
{¶23} "(1) stock in trade of the taxpayer or other property of a kind
which would properly be included in the inventory of the taxpayer if on hand at
the close of the taxable year, or property held by the taxpayer primarily for sale to
customers on the ordinary course of his trade or business."
{¶24} Wesnovtek has not convinced us that a definition of capital asset
different from the definition in Section 1221, Title 26, U.S.Code, is required.
Although the BTA based its decision on the fact that the sale was part of the sale
of nearly all of Wesnovtek's assets, nothing in the Internal Revenue Code, the
Ohio Revised Code, or case law distinguishes between inventory sold in the
normal course of business and inventory sold as part of a sale of other assets. Our
decision in Borden, Inc. v. Limbach, 49 Ohio St.3d 240, 551 N.E.2d 1268, did not
state that a sale of inventory outside the ordinary course of business is a sale of
capital assets. Moreover, Wesnovtek's accountant conceded to the BTA that
Wesnovtek's inventory was not a capital asset and that the gain or loss from the
sale of the inventory would not be a capital gain or loss. Based on the foregoing, it
is clear that inventory is not a capital asset. Accordingly, we hold that, pursuant to
former R.C. 5733.051, a gain or loss from the sale of inventory must be apportioned
rather than allocated. 142 Ohio Laws, Part I, 8687.
Deviation from the Statutory Apportionment Formula
{¶25} The BTA also concluded that Wesnovtek's deviation from the
standard apportionment formula was proper. The Tax Commissioner contends
that he properly declined to consider Wesnovtek's request to deviate from the
statutory formula.
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January Term, 2005
{¶26} In Cooper Tire & Rubber Co. v. Limbach (1994), 70 Ohio St.3d
347, 349350, 639 N.E.2d 27, we held that a request for an alternative
apportionment formula must be considered only when the taxpayer has made a
request in writing and has submitted the request with its report. That holding was
based on former R.C. 5733.05(B)(2)(d), Sub.H.B. No. 428, 141 Ohio Laws, Part
II, 3672, 4171, which provides:
{¶27} "If the allocation and apportionment provisions of division (B) of
this section do not fairly represent the extent of the taxpayer's business activity in
this state, the taxpayer may request, which request must be in writing and must
accompany the report, or the tax commissioner may require, in respect to all or
any part of the taxpayer's allocated or apportioned base, if reasonable, any one or
more of the following:
{¶28} "(i) Separate accounting;
{¶29} "(ii) The exclusion of any one or more of the factors;
{¶30} "(iii) The inclusion of one or more additional factors which will
fairly represent the taxpayer's allocated or apportioned base in this state.
{¶31} "An alternative method will be effective only with approval by the
tax commissioner." (Emphasis added.)
{¶32} We are not persuaded that we should change our application of the
clear words of former R.C. 5733.05(B)(2)(d) and our holding in Cooper Tire &
Rubber Co., 70 Ohio St.3d 347, 639 N.E.2d 27. The BTA stated that strict
compliance with former R.C. 5733.05(B)(2)(d) would create a "harsh result in this
instance, since the taxpayer's omission of the four-factor formula is obvious from
inspection of the return." Former R.C. 5733.05(B)(2)(d), however, grants no
option that permits the BTA to ignore its terms because the result would be harsh.
If we applied the unambiguous words of a statute by that standard, we would
supplant the will of the legislature with our own. The General Assembly placed
the burden on the taxpayer to request in writing when the taxpayer seeks to
7

SUPREME COURT O OHIO
deviate from the statutory formula in calculating the apportionment factor.
Because Wesnovtek did not file a written request to deviate from the statutory
apportionment formula at the time it filed its report, the Tax Commissioner
properly declined to consider the deviation. Accordingly, we follow our holding
in Cooper Tire & Rubber Co. v. Limbach, 70 Ohio St.3d 347, 639 N.E.2d 27, that
the Tax Commissioner is not required to consider a deviation from the statutory
formula for calculating the apportionment factor unless, pursuant to former R.C.
5733.05(B)(2)(d), a request to deviate is submitted in writing when the franchise
tax report is filed.
{¶33} For the foregoing reasons, we reverse the decision of the Board of
Tax Appeals.
Decision reversed.

RESNICK, PFEIFER, LUNDBERG STRATTON, O'CONNOR, O'DONNELL and
LANZINGER, JJ., concur.
___________________
Leonard A. Carlson, for appellee.
Jim Petro, Attorney General, and Richard C. Farrin, Senior Deputy Attorney
General, for appellant.
______________________
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