In its October 7, 2016 8:00 AM EDT update, the presumably nonpartisan National Hurricane Center forecasted that Florida, Georgia, and South Carolina had all dodged the major threat posed by Hurricane Matthew. Glued to the TV screen that night, flipping between major news providers, my wife and I were surprised to see the different perspectives of hurricane preparedness and recovery presented. While one such provider suggested that had we just built a wall along the coast we wouldn’t be worrying about the storm, another suggested the solution was to give all Americans earning under $200,000 a year a $500,000 tax credit whenever a state of emergency is declared.
While this obviously didn’t happen, I created this timely fiction to illustrate my surprise with an October 7, 2016 Income Tax – Information Release from the Ohio Department of Taxation. The Release purports to provide guidance to Ohio nonresident individual taxpayers in light of the Department’s recent loss in the Ohio Supreme Court. In my opinion, the guidance is more of a warning, that despite the taxpayer’s victory in the Corrigan decision, the Department intends to fight you every step of the way if you are seeking a refund and to those planning transactions on a going forward basis.
The issue revolves around the classic pull between a buyer and seller of a business. Typically, the seller would like to sell the interest in the business, while the buyer would instead prefer to purchase the assets. In most cases, a nonresident individual seller of an interest in the business is treated as having sold an intangible and pays tax on any gain only to their resident state. When assets are sold, the seller will recognize gain in one or more jurisdictions based on the presence or apportionment factors of the business selling the assets.
Ohio (still) has a somewhat unique statute which attempts to link the sale of the intangible business interest to the State by directing nonresidents to pay Ohio tax according to the businesses apportionment percentage in Ohio. While other states (New York, for one) will “look through” the intangible when the business has real property located in the state, Ohio’s statute does not rely on this critical distinction.
The Department is correct in noting that the Ohio Supreme Court found the statute unconstitutional only as it applied to Mr. Corrigan. However, the Department failed to mention that the Court points out in a footnote “. . . the tax commissioner has consistently argued that the unitary-business doctrine is irrelevant . . .” In the body of the opinion the Court says “[b]ecause there is at least a possibility that the statute could be applied when the unitary-business situation is present, we reject the facial challenge.”
It seems to me that the Court wants to go further and goes out of its way to point out that it simply cannot because the Department didn’t raise the issue. It also seems to me that the Information Release is more of a warning to taxpayers, that despite the decision, we are going to fight you every step of the way. Talk about different perspectives!
Wayne Berkowitz, a tax partner and head of the State and Local Tax Group at Berdon LLP, New York Accountants, advises clients on the unique requirements of governments and municipalities across the nation.
 IT 2016-01 – Guidance Relating to an Equity Investor’s Apportionment of a Gain from the Sale of a Closely-Held Business (R.C. 5747.212)
 Corrigan v. Testa, Slip Opinion No. 2016-Ohio-2805.