Case Title: Wesnovtek Corp. v. Wilkins

Citation: 2005-Ohio-1826

Docket Number: 

State: ohio

Court: Ohio Supreme Court

Date: 2005-05-04T00:00:00Z

Document:
[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. 
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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 
January Term, 2005 
3 
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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{¶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, 86–87. 
{¶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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{¶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, 86–87. 
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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{¶26} In Cooper Tire & Rubber Co. v. Limbach (1994), 70 Ohio St.3d 
347, 349–350, 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 
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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. 
______________________