Case Title: Rich's Dept. Stores, Inc. v. Levin

Citation: 2010-Ohio-957

Docket Number: 20090437

State: ohio

Court: Ohio Supreme Court

Date: 2010-03-18T00:00:00Z

Document:
[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as 
Rich’s Dept. Stores, Inc. v. Levin, Slip Opinion No. 2010-Ohio-957.] 
 
 
NOTICE 
This slip opinion is subject to formal revision before it is published in 
an advance sheet of the Ohio Official Reports.  Readers are requested 
to promptly notify the Reporter of Decisions, Supreme Court of Ohio, 
65 South Front Street, Columbus, Ohio 43215, of any typographical or 
other formal errors in the opinion, in order that corrections may be 
made before the opinion is published. 
 
SLIP OPINION NO. 2010-OHIO-957 
RICH’S DEPARTMENT STORES, INC., APPELLEE, v. LEVIN, TAX COMMR., 
APPELLANT. 
[Until this opinion appears in the Ohio Official Reports advance sheets, it 
may be cited as Rich’s Dept. Stores, Inc. v. Levin,  
Slip Opinion No. 2010-Ohio-957.] 
Taxation — Ohio Adm.Code 5703-3-17 — Personal-property tax — Average 
inventory value — Vendor markdown allowances — Cost as disclosed by 
the books of the taxpayer. 
(No. 2009-0437 — Submitted December 1, 2009 — Decided March 18, 2010.) 
APPEAL from the Board of Tax Appeals, No. 2005-T-1609. 
__________________ 
MOYER, C.J. 
{¶ 1} Before the court is an appeal from a decision of the Board of Tax 
Appeals (“BTA”) in a personal-property tax case.  The BTA ordered the Tax 
Commissioner to reduce the values assigned to merchandise held in inventory by 
Rich’s Department Stores with respect to tax years 2000, 2001, and 2002.  
Specifically, the BTA ordered reductions based upon “vendor markdown 
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allowances,” i.e., allowances granted by vendors that supplied merchandise to 
Rich’s, by which those vendors compensated Rich’s for having to mark down the 
merchandise from its expected retail price. 
{¶ 2} On appeal, the commissioner primarily argues that the reductions 
ordered by the BTA violate the plain meaning of the relevant administrative rule, 
Ohio Adm.Code 5703-3-17 (“Administrative Rule 17”).  Although the BTA’s 
factual findings generally merit the deference of the court, a careful review of the 
evidence in light of the pertinent statutes and administrative rules shows that the 
BTA did err in construing and applying Administrative Rule 17.  We accordingly 
reverse the BTA’s decision and reinstate the final assessment certificates issued 
by the Tax Commissioner. 
Facts 
Background 
{¶ 3} During the fiscal years at issue, Rich’s used the retail inventory 
method (“retail method”) to account for its merchandise inventory.  Rich’s kept 
track, in the aggregate, of costs and expected retail prices for all items held in 
inventory by each retail department of the company.  Every addition of new items 
for sale led to a new computation of the cost average and retail average for each 
department. 
{¶ 4} According to Rich’s vice president of divisional accounting, the 
inventory’s value is carried at the end of an accounting period as “ending 
inventory” or “ending inventory at cost” on the books of the company.  That 
figure is generated by multiplying the ending retail figure by the cost-to-retail 
ratio.  As part of that calculation, markdowns of expected retail price reduce the 
ending retail figure.  See Larson & Miller, Fundamental Accounting Principles 
(13th Ed.1993) 502-503. 
{¶ 5} At issue in the present case is the accounting for markdown 
allowances.  Like other retailers, Rich’s engages in open-ended relationships with 
January Term, 2010 
3 
 
its vendors, who have a vested interest in the success of the department store’s 
efforts to sell the wares that they supply, and to do so at the projected profit.  The 
store buys items for its inventory from the vendor with a certain “margin 
performance,” or profit expectation, in mind.  When items sell for less than the 
expected retail price, they are marked down.  In those instances the vendor will 
often grant Rich’s an allowance, by which the vendor itself contributes to the 
margin performance.  The amount of the allowance is typically credited as an 
offset against an amount Rich’s would otherwise owe the vendor.  These 
allowances are granted by informal agreements in which Rich’s will request an 
allowance after a disappointing sales period. 
{¶ 6} The record documents two effects of a markdown allowance on 
Rich’s books.  First, the allowance affects the balance sheet by reducing the 
company’s liability in the form of accounts payable.  Second, the allowance 
affects the income or profit-and-loss statement by reducing the cost of goods sold 
and thereby increasing the profit margin. 
{¶ 7} It must be noted that the cost of goods sold, while significant in 
terms of the profit-and-loss statement, does not constitute the book value of the 
merchandise inventory.  In that regard, the testimony of accounting professor Ray 
Stephens specifically addressed the distinction between ending inventory and cost 
of goods sold, asserting that allowances from merchandise vendors “should not 
result in a reduction in ending inventory.” 
Procedural History 
{¶ 8} In assessing the property for the years at issue, the Tax 
Commissioner applied Administrative Rule 17.  That rule addresses how to value 
merchandise inventory when the merchant keeps its books using the retail 
method.  The rule states that the starting point for the value of merchandise under 
the statutes “shall prima facie be the ‘average inventory value’ at cost as disclosed 
by the books of the taxpayer.”  Under that provision, the commissioner’s 
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assessment began with the “average value of inventory” on Rich’s books; ending 
inventory figures were derived from Rich’s books to arrive at an appropriate 12-
month average for the fiscal year.  See R.C. 5711.15 (merchant ascertains value of 
inventory by computing 12-month average of inventory on hand). 
{¶ 9} The commissioner next applied the additional language of 
Administrative Rule 17, which allows adjustments based on pertinent factors 
“reflected on the books of the taxpayer for the succeeding three months following 
the close of the annual accounting period of the current tax year.”  The 
administrator of the personal property tax division testified at the BTA hearing 
that under this part of the rule, the commissioner reduced the valuation 
significantly below the inventory figure originally reflected on Rich’s books for 
the period – as much as 20 percent below.  But the commissioner denied 
reductions based on markdown allowances and issued final assessment 
certificates accordingly.  Rich’s appealed to the BTA. 
{¶ 10} At the BTA hearing, Rich’s presented the testimony of four 
employees and the tax agent who conducted the audit, along with 15 documentary 
exhibits.  The commissioner offered the testimony of the administrator of the 
property-tax division and Professor Stephens.  In the course of the BTA 
proceedings, Rich’s withdrew all claims except the claim of reduction based on 
vendor markdown allowances. 
{¶ 11} The BTA concluded that reducing the book value of inventory by 
the amount of markdown allowances constituted a valid computation of the “cost 
as disclosed by the books of the taxpayer” under Administrative Rule 17.  Rich’s 
Dept. Stores, Inc. v. Wilkins (Feb. 3, 2009), BTA No. 2005-T-1609, at 11.  The 
board specifically held that Rich’s claim involved “the factors that comprise book 
value.”  Id. at 12.  Thus, the BTA did not predicate its decision on a finding that 
Rich’s had rebutted the prima facie validity of book value; the BTA instead found 
that the adjustment Rich’s requested was consistent with a proper determination 
January Term, 2010 
5 
 
of the prima facie standard: “cost as disclosed by the books of the taxpayer” under 
Administrative Rule 17. 
{¶ 12} Based on this conclusion, the BTA ordered that the commissioner 
grant the requested reductions.  The Tax Commissioner has appealed, and we now 
reverse. 
Analysis 
The BTA Misconstrued Administrative Rule 17 
{¶ 13} It is settled that “ ‘[t]he fair market value of property for tax 
purposes is a question of fact, the determination of which is primarily within the 
province of the taxing authorities, and this court will not disturb a decision of the 
Board of Tax Appeals with respect to such valuation unless it affirmatively 
appears from the record that such decision is unreasonable and unlawful.’ ”  EOP-
BP Tower, L.L.C. v. Cuyahoga Cty. Bd. of Revision, 106 Ohio St.3d 1, 2005-
Ohio-3096, 829 N.E.2d 686, ¶ 17, quoting Cuyahoga County Bd. of Revision v. 
Fodor (1968), 15 Ohio St.2d 52, 44 O.O.2d 30, 239 N.E.2d 25, syllabus.  On the 
other hand, “ ‘we will not hesitate to reverse a BTA decision that is based on an 
incorrect legal conclusion.’ ”  Satullo v. Wilkins, 111 Ohio St.3d 399, 2006-Ohio-
5856, 856 N.E.2d 954, ¶ 14, quoting Gahanna-Jefferson Local School Dist. Bd. of 
Edn. v. Zaino (2001), 93 Ohio St.3d 231, 232, 754 N.E.2d 789. 
 
{¶ 14} The Tax Commissioner advances several arguments contending 
that the BTA’s decision is unreasonable and unlawful.  We consider one of those 
arguments dispositive, rendering the others moot. 
{¶ 15} The commissioner asserts that the BTA “misinterprets and 
misapplies the presumptively valid methodology for determining the true value 
set forth in [Administrative Rule 17].”  The rule, which prescribes the method for 
determining the value of merchandise inventory when a taxpayer uses the retail 
method of accounting, provides as follows: 
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{¶ 16} “The true ‘average inventory value of merchandise’ to be 
estimated for taxation shall prima facie be the ‘average inventory value’ at cost as 
disclosed by the books of the taxpayer, after making proper adjustments for cash 
discounts and merchandise shrinkage, less the aggregate net markdowns, at cost, 
(taking into consideration markdown cancellations and additional mark-ups at 
cost) which are reflected on the books of the taxpayer for the succeeding three 
months following the close of the annual accounting period of the current tax 
year.”  Ohio Adm.Code 5703-3-17. 
{¶ 17} The BTA specifically held that subtracting markdown allowances 
constituted a valid part of determining “cost as disclosed by the books of the 
taxpayer,” treating markdown allowances as one of the factors that comprise book 
value under the rule.  The BTA plainly misconstrued the phrase “cost as disclosed 
by the books of the taxpayer” in Administrative Rule 17.  That rule was 
promulgated to effectuate the general mandate that “depreciated book value shall 
be taken as the true value of such property, unless the assessor finds that such 
depreciated book value is greater or less than the then true value of such property 
in money.”  R.C. 5711.18.  It follows that any “cost” factor under the rule must 
relate to how the inventory is carried as a value on the books of the company 
following proper accounting principles and methods.  See Hoffman v. State Med. 
Bd. of Ohio, 113 Ohio St.3d 376, 2007-Ohio-2201, 865 N.E.2d 1259, ¶ 17, citing 
Carroll v. Dept. of Adm. Servs. (1983), 10 Ohio App.3d 108, 110, 10 OBR 132, 
460 N.E.2d 704 (“Administrative rules are designed to accomplish the ends 
sought by the legislation enacted by the General Assembly”); accord Chicago 
Pacific Corp. v. Limbach (1992), 65 Ohio St.3d 432, 435, 605 N.E.2d 8 
(administrative rule does not conflict with a statute to the extent that it provides a 
reasonable, supportable interpretation of it). 
{¶ 18} The BTA’s decision violates this plain intent.  As noted above, the 
record shows that “ending inventory” or “ending inventory at cost” is the 
January Term, 2010 
7 
 
accounting category that pertains to carrying the value of inventory on the books.  
Rich’s evidence demonstrates that markdown allowances should be subtracted 
when computing the “cost of goods sold” on the profit-and-loss statement.  But 
the evidence is uncontroverted that, as Professor Stephens adamantly stated, 
allowances from merchandise vendors “should not result in a reduction in the 
ending inventory.” 
{¶ 19} The testimony confirms that markdown allowances offset the 
amount of net markdowns, which, under the rule, are themselves subtracted from 
the retail figure when the value of inventory is computed.  Professor Stephens 
testified that a markdown allowance “really should be a reduction in the net 
markdowns in order to value inventory.”  Rich’s vice-president for divisional 
accounting likewise testified that a markdown allowance leads Rich’s to “record a 
markdown cancellation” and “a markdown cancellation, in essence, is [an] 
addition to retail.”  At oral argument, Rich’s counsel acknowledged that the 
markdown reductions explicitly authorized under the rule involved “net” 
markdowns, i.e., markdowns reduced by the amount of markdown cancellations, 
including cancellations attributable to markdown allowances.  The reduction that 
Rich’s requested and the BTA granted is thus not one that properly relates to 
carrying the inventory at its value under generally accepted accounting principles. 
{¶ 20} The BTA nonetheless construed Administrative Rule 17 to 
encompass the adjustment proposed by Rich’s.  In doing so, the board mistakenly 
construed the phrase “cost as disclosed by the books of the taxpayer” as requiring 
a “cost” determination that would include adjustments to the “cost of goods sold” 
on the profit-and-loss statement.  The proper construction of the rule ties the 
prima facie standard to the “book value” mandated by R.C. 5711.18.  As a result, 
the phrase “ ‘average inventory value’ at cost as disclosed by the books of the 
taxpayer” encompasses only those adjustments that relate to the computation of 
“ending inventory.” 
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{¶ 21} Rich’s offers an additional reason why it may import a cost-of-
goods-sold adjustment into the balance sheet:  the agents of the Tax 
Commissioner on audit sometimes do the same thing.  But a review of the 
testimony on this point persuades us that the type of adjustments described by the 
commissioner’s agent involve standardizing the accounting between taxpayers 
within the confines of accepted accounting principles.  Accord R.H. Macy Co., 
Inc. v. Schneider (1964), 176 Ohio St. 94, 26 O.O.2d 440, 197 N.E.2d 807 (tax 
assessor’s substitution of retail inventory method for last-in, first-out method of 
accounting to determine the value of inventory was affirmed on appeal).  For 
example, one of the Tax Commissioner’s agents testified that expenditures related 
to transporting inventory to a location might be expensed by one taxpayer on the 
income statement but included in the cost of inventory by another taxpayer on the 
balance sheet.  In the former circumstance, the tax agent would apply the 
transportation expenditure to increase the cost of inventory on the balance sheet in 
order to treat the taxpayers equally.  Nothing in the record suggests that this 
adjustment strays outside accepted accounting principles; by contrast, subtracting 
markdown allowances from ending inventory plainly does. 
{¶ 22} By ordering the reduction that Rich’s had requested, the BTA 
erroneously construed the “cost” concept embodied in Administrative Rule 17 and 
thereby misapplied the rule.  Because of this legal error, we must reverse the 
decision of the BTA. 
Rich’s evidence fails to rebut the prima facie standard for value 
set forth in Administrative Rule 17 
{¶ 23} Rich’s points out that under the statutes and our case law, book 
value has only a prima facie validity as establishing true value, and other factors 
may indicate a higher or lower value than book value.  See R.C. 5711.18 (in 
valuing property used in business, book value is taken to be true value “unless the 
assessor finds that such depreciated book value is greater or less than the then true 
January Term, 2010 
9 
 
value of such property in money”); R.H. Macy Co., 176 Ohio St. 94, 26 O.O.2d 
440, 197 N.E.2d 807, paragraph two of the syllabus; PPG Industries, Inc. v. 
Kosydar (1981), 65 Ohio St.2d 80, 19 O.O.3d 268, 417 N.E.2d 1385, paragraph 
one of the syllabus.  Rich’s then urges that the evidence of the effect of markdown 
allowances on “cost” constitutes evidence that the true value of its merchandise 
inventory was less than the properly computed book value of that asset.  
Accordingly, the BTA’s reliance on that evidence as rebutting the prima facie 
standard would merit the deference of this court. 
{¶ 24} We disagree.  While the BTA’s factual findings merit utmost 
deference when supported by the record, Rich’s is asking that we defer to a 
finding that the BTA did not make.  As discussed, the BTA held that subtracting 
markdown allowances constituted a valid adjustment in arriving at the prima facie 
standard articulated by Administrative Rule 17.  Because of that holding, the BTA 
had no need to address whether the prima facie standard had been rebutted, and it 
did not do so. 
{¶ 25} Our disposition of this appeal contrary to the BTA’s holding raises 
the question of whether the case should be remanded to afford the BTA the 
opportunity to determine whether Rich’s has rebutted the prima facie standard.  
We hold that the present record does not justify a remand.  The evidence that 
Rich’s presented related to the effect of markdown allowances on the cost of 
merchandise for accounting purposes.  While the concept of cost, properly 
construed, does relate to the manner in which inventory value is accounted for on 
the company’s books, Rich’s offers no reason why the evidence that it 
presented—the testimony and documentation that markdown allowances led to a 
reduction of cost of goods sold on the profit-and-loss statement—constitutes 
evidence of value apart from its significance under accounting principles. 
{¶ 26} This contrasts sharply with cases in which the court has held that a 
presumptive valuation has been rebutted.  In some cases, a recent arm’s-length 
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sale furnishes a direct indication of value that rebuts the depreciated book value.  
It is elemental that “[t]he best evidence of true value of tangible personal property 
is an arm’s-length transaction.”  Shiloh Automotive, Inc. v. Levin, 117 Ohio St.3d 
4, 2008-Ohio-68, 881 N.E.2d 227, ¶ 20, citing Tele-Media Co. of Addil v. Lindley 
(1982), 70 Ohio St.2d 284, 24 O.O.3d 367, 436 N.E.2d 1362, syllabus.  E.g., 
Grabler Mfg. Co. v. Kosydar (1975), 43 Ohio St.2d 75, 72 O.O.2d 42, 330 N.E.2d 
924 (sale price constituted value of personalty).  In the present case, Rich’s does 
not offer evidence of a recent bulk sale of inventory. 
{¶ 27} In cases when a sales price has not been offered as best evidence of 
value, other evidence might rebut the prima facie validity of book value.  For 
example, in Willard Storage Battery Co. v. Peck (1954), 161 Ohio St. 197, 53 
O.O. 89, 118 N.E.2d 514, a manufacturer sought a reduction of the value assigned 
to its inventory of lead.  The court acknowledged that a month-by-month analysis 
of market prices for the commodity could rebut the value as carried on the 
company’s books.  Id. at 201.  And in other cases, taxpayers have presented 
evidence of the specific nature of a manufacturing business to rebut the Tax 
Commissioner’s decision to add plant depreciation into the value of 
manufacturing inventory.  See PPG Industries, Inc., 65 Ohio St.2d 80, 19 O.O.3d 
268, 417 N.E.2d 1385; Youngstown Sheet & Tube Co. v. Kosydar (1975), 44 Ohio 
St.2d 96, 73 O.O.2d 353, 338 N.E.2d 366.  The evidence in these types of cases 
bears no similarity to that offered by Rich’s here. 
{¶ 28} In essence, Rich’s has proven nothing more than that its enjoyment 
of vendor markdown allowances entails a reduction of the cost of goods sold for 
accounting purposes and, more generally, can be viewed as an after-the-fact offset 
against the original acquisition cost of the merchandise.  The former does not, as 
already discussed, justify an adjustment to book value; nor does the latter more 
directly establish true value than do the accounting methods.  That is so because a 
more precise computation of the acquisition cost does not, by itself, establish what 
January Term, 2010 
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Rich’s can receive by selling the merchandise, which is the relevant figure for 
applying the retail inventory method of accounting. 
{¶ 29} Rich’s argument in effect claims that it should pay less tax, 
through a reduction in the value of its inventory, because it has received a benefit 
from its vendors in the form of a credit against monies owed.  The inventory itself 
and the expected retail price thereof do not change merely because Rich’s has 
been granted a markdown allowance.  While the need to mark down merchandise 
may indicate a reduced value for some items still held in inventory, the retail 
inventory method properly establishes a conservative valuation overall by stating 
the value of merchandise inventory at cost rather than at expected profit.  And 
while markdowns by themselves reduce profitability and thereby indicate a lower 
value of merchandise to the merchant, the grant of markdown allowances supports 
profitability; as a result, the expectation of receiving allowances stabilizes rather 
than reduces the value of the merchandise inventory.  Put in this light, the logical 
fallacy of Rich’s argument is exposed. 
{¶ 30} We hold that the record furnishes no factual basis upon which the 
BTA could predicate a reduction from book value in the amount of markdown 
allowances.  It follows that there is no need for a remand. 
Conclusion 
{¶ 31} The foregoing analysis causes us to conclude that the BTA erred in 
its construction and application of Administrative Rule 17, and our resolution of 
that issue renders the commissioner’s other arguments moot.  We therefore 
reverse the BTA’s decision and reinstate the Tax Commissioner’s final 
assessment certificates as issued. 
Decision reversed. 
 
O’CONNOR, LANZINGER, and CUPP, JJ., concur. 
 
PFEIFER, LUNDBERG STRATTON, and O’DONNELL, JJ., dissent. 
__________________ 
SUPREME COURT OF OHIO 
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O’DONNELL, J., dissenting. 
{¶ 32} I respectfully dissent. 
{¶ 33} It is difficult to comprehend how a vendor markdown allowance on 
merchandise delivered to a store for retail sale does not reduce the inventory cost 
of that merchandise, and thus that reduced inventory cost should be recognized 
for purposes of assessing personal property tax.  Every company assesses a 
certain cost to its inventory; when at some point subsequent to that assessment the 
retailer is afforded a markdown allowance on the inventory, retailers treat that as a 
reduction in the cost of inventory. 
{¶ 34} In R.H. Macy Co., Inc. v. Schneider (1964), 176 Ohio St. 94, 96, 
26 O.O.2d 440, 197 N.E.2d 807, we stated that “[t]he assessment of personal 
property requires the assessor to consider the book value as stated by the taxpayer, 
together with other statements of the taxpayer and other available evidence, and 
apply the applicable rules of valuation to arrive at the ultimate goal of the 
assessment, a determination of the true value of the property.” 
{¶ 35} With respect to merchandise in inventory, Ohio Adm.Code 5703-
3-17 (“Administrative Rule 17”) provides, “The true ‘average inventory value of 
merchandise’ to be estimated for taxation shall prima facie be the ‘average 
inventory value’ at cost as disclosed by the books of the taxpayer, after making 
proper adjustments for cash discounts and merchandise shrinkage, less the 
aggregate net markdowns, at cost, * * * which are reflected on the books of the 
taxpayer for the succeeding three months following the close of the annual 
accounting period of the current tax year.” 
{¶ 36} As stated by the Board of Tax Appeals, “Once cost is determined 
on the books of the taxpayer, [Administrative Rule 17] permits additional 
adjustments for cash discounts, merchandise shrinkage and net markdowns.  
These adjustments are made only after the cost of the inventory is determined.  As 
we have previously discussed, cost, as disclosed on Rich’s books, includes 
January Term, 2010 
13 
 
[markdown allowances].”  Rich’s Dept. Stores, Inc. v. Wilkins (Feb. 3, 2009), 
BTA No. 2005-T-1609, at 11. 
{¶ 37} The board found, “Here, Rich’s provided through numerous 
witnesses and documents evidence indicating the amount of MDAs applied, how 
the MDAs are tracked through its accounts payable system, how the MDAs are 
applied to reduce cost, how that reduction in cost is shown on its profit and loss 
statements, and how margin is tracked on Rich’s ledgers.  Various documents 
have been submitted showing both the MDA information and its impact on cost.”  
Id. at 14-15. 
{¶ 38} After considering the foregoing evidence and other evidence that 
was competent and probative, including expert witness testimony in support of the 
Tax Commissioner, the board held that markdown allowances “are indeed a 
reduction in inventory cost” and that subtracting such allowances from inventory 
value constituted a valid adjustment in arriving at the prima facie book value of 
inventory pursuant to Administrative Rule 17.  Id. at 8, 11.  Consequently, the 
board ordered the Tax Commissioner to grant Rich’s requested claim for a 
reduction in its 2000, 2001, and 2002 inventory value. 
{¶ 39} This is compelling analysis in my view.  “ ‘ The fair market value 
of property for tax purposes is a question of fact, the determination of which is 
primarily within the province of the taxing authorities, and this court will not 
disturb a decision of the Board of Tax Appeals with respect to such valuation 
unless it affirmatively appears from the record that such decision is unreasonable 
and unlawful.’ ”  EOP-BP Tower, L.L.C. v. Cuyahoga Cty. Bd. of Revision, 106 
Ohio St.3d 1, 2005-Ohio-3096, 829 N.E.2d 686, ¶ 17, quoting Cuyahoga Bd. of 
Revision v. Fodor (1968), 15 Ohio St.2d 52, 44 O.O.2d 30, 239 N.E.2d 25, 
syllabus.  Accordingly, I respectfully dissent and would affirm the decision of the 
Board of Tax Appeals in this instance. 
 
PFEIFER and LUNDBERG STRATTON, JJ., concur in the foregoing opinion. 
SUPREME COURT OF OHIO 
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__________________ 
 
Bricker & Eckler, L.L.P., and Mark A. Engel, for appellee. 
 
Richard Cordray, Attorney General, and Barton A. Hubbard, Assistant 
Attorney General, for appellant. 
______________________