Case Title: Corrigan v. Testa

Citation: 2016-Ohio-2805

Docket Number: 2014-1836

State: ohio

Court: Ohio Supreme Court

Date: 2016-05-04T00:00:00Z

Document:
[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as 
Corrigan v. Testa, Slip Opinion No. 2016-Ohio-2805.] 
 
 
 
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. 2016-OHIO-2805 
CORRIGAN, APPELLANT, v. TESTA, TAX COMMR., APPELLEE. 
[Until this opinion appears in the Ohio Official Reports advance sheets, it 
may be cited as Corrigan v. Testa, Slip Opinion No. 2016-Ohio-2805.] 
Income taxation—R.C. 5747.212—Statute violates Due Process Clause of 
Fourteenth Amendment as applied to nonresident taxpayer’s capital gain 
from sale of ownership in limited-liability company that conducted business 
in Ohio—Board of Tax Appeals’ decision reversed and matter remanded to 
tax commissioner for grant of refund. 
(No. 2014-1836—Submitted February 23, 2016—Decided May 4, 2016.) 
APPEAL from the Board of Tax Appeals, No. 2012-3244. 
____________________ 
O’CONNOR, C.J. 
{¶ 1} A 2002 amendment to R.C. 5747.212 broadly imposed Ohio’s income 
tax on a capital gain realized by an out-of-state investor in a pass-through entity if 
that investor held a 20 percent or greater interest in the entity during a three-year 
period including the taxable year.  The new statute apportioned the capital gain to 
SUPREME COURT OF OHIO 
 
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Ohio based on the percentage of the entity’s business conducted in this state during 
the three-year period.  In this appeal, appellant, Patton R. Corrigan, a nonresident 
taxpayer, contests R.C. 5747.212’s imposition of income tax on a portion of the 
capital gain that he realized in 2004 when he sold his ownership interest in 
Mansfield Plumbing, L.L.C., a producer of sanitary supplies. 
{¶ 2} The resolution of Corrigan’s challenge turns on a crucial distinction:   
Ohio’s taxation of Mansfield Plumbing’s income to Corrigan and Ohio’s taxation 
of Corrigan’s capital gain from the sale of Mansfield Plumbing.  It is undisputed 
that because Mansfield Plumbing constituted a pass-through entity for tax purposes, 
Ohio was able to tax Corrigan’s distributive share of the entity’s income (or in this 
case, loss) based on Mansfield Plumbing’s own business activity in Ohio.  The issue 
before us is whether Ohio may also levy income tax on Corrigan’s capital gain as 
if it were income from the business itself. 
{¶ 3} If R.C. 5747.212 were not the law, Corrigan would be subject to the 
ordinary treatment of capital gains derived from intangible property:  he would 
allocate the entire amount of the gain outside Ohio because he was not domiciled 
in Ohio.  See R.C. 5747.20(B)(2)(c).  Corrigan asserts that applying R.C. 5747.212 
to him is unconstitutional and that he should therefore be permitted to allocate the 
gain entirely outside Ohio. 
{¶ 4} In defending the imposition of R.C. 5747.212 on Corrigan, the tax 
commissioner does not contend that Corrigan himself was operating or managing 
the business of Mansfield Plumbing.  Instead, the state’s theory is that Ohio enjoys 
the constitutional prerogative of taxing the proceeds of a nonresident’s out-of-state 
sale of intangible property, based on nothing more than the fact that the entity being 
sold conducted some of its business in Ohio.  We disagree with the state’s 
contention. 
{¶ 5} We hold that R.C. 5747.212, as applied to Corrigan, violates the Due 
Process Clause of the Fourteenth Amendment to the United States Constitution.  
January Term, 2016 
 
3
We therefore reverse the decision of the Board of Tax Appeals (“BTA”) and 
remand to the tax commissioner to grant Corrigan a refund. 
RELEVANT BACKGROUND 
FACTS 
{¶ 6} In 2000, Mansfield Plumbing was an established enterprise engaged 
in producing sanitary ware, with plants in Texas and California.  It did business in 
Ohio—in fact in all 50 states—as well as in other countries. 
{¶ 7} In 2000, Corrigan, then a resident of Connecticut, acted in concert 
with business associates to acquire the assets of Mansfield Plumbing, including the 
right to use that entity’s name.  More specifically, the record demonstrates that the 
consent to use the name “Mansfield Plumbing, L.L.C.” is dated November 2000 
and that Corrigan’s share of the entity—his “membership” interest in the limited-
liability company—was 79.29 percent. 
{¶ 8} Corrigan became the main co-owner and a “manager,” i.e., a member 
of the board of managers of Mansfield Plumbing.  The day-to-day operations of the 
company were overseen by officers and managers employed by the company.  
According to Corrigan’s brief before the tax commissioner, as a manager, Corrigan 
visited the company headquarters in Perrysville, Ohio, “for board meetings and 
management presentations regarding operations, labor, finance, strategic 
positioning and other matters important to the goal of growing Mansfield’s market 
share.”  Corrigan testified that that involvement was “easily a hundred hours” per 
year.  According to Corrigan, his role and capacity was as an “investo[r] who 
bought companies with the intention of providing financing and strategic expertise 
to grow the company for an eventual exit via a sale to a third party.”  Corrigan 
specifically argued to the tax department that his role in the entity involved 
“stewardship” rather than active management of the business. 
{¶ 9} In 2004, Corrigan and his fellow investors sold their interests in 
Mansfield Plumbing to a third party, Ceramicorp, Inc., a unit of a Colombian entity 
SUPREME COURT OF OHIO 
 
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in the sanitary-wares business that wanted a foothold in North America.  As a result 
of the sale, Corrigan realized a capital gain of $27,563,977 from his share of 
Mansfield Plumbing.  In filing his returns for tax year 2004, Corrigan treated the 
entire amount of the gain as allocable outside Ohio, apparently because Corrigan 
was not domiciled in Ohio. 
PROCEDURAL HISTORY 
{¶ 10} In 2009, Ohio issued an assessment for an unpaid 2004 tax liability 
of $674,924.58, which, with interest, amounted to a total assessment of 
$847,085.19.  Corrigan paid $100,000 of the assessment, then filed a refund claim 
for that amount on March 8, 2010.  See former R.C. 5747.11(A)(3), Am.Sub.H.B. 
No. 530, 151 Ohio Laws, Part IV, 6700 (requiring the tax commissioner to refund 
amounts more than $1 “paid on an illegal, erroneous, or excessive assessment”).  
These proceedings arise from that claim. 
{¶ 11} The tax commissioner denied the refund claim through a final 
determination issued on August 20, 2012.  The final determination applied a 
straightforward reading of R.C. 5747.212 and concluded that the assessment and 
payment complied with the statute.  The final determination also rejected 
Corrigan’s constitutional arguments. 
{¶ 12} Corrigan appealed to the BTA, which held a hearing on January 15, 
2014.  Corrigan testified at the hearing. 
{¶ 13} The BTA issued its decision on September 24, 2014.  Noting the 
presumption favoring the tax commissioner’s findings and its own lack of 
jurisdiction to declare a statute unconstitutional, the BTA “acknowledge[d]” 
Corrigan’s constitutional claims but made “no findings in relation thereto.”  2014 
Ohio Tax LEXIS 4415, BTA No. 2012-3244, at 4 (Sept. 24, 2014).  The BTA also 
noted that Corrigan raised a statutory argument in his BTA brief but held that it 
January Term, 2016 
 
5
lacked jurisdiction to entertain that contention because Corrigan had not specified 
that claim in his notice of appeal to the BTA.1  Id. 
{¶ 14} The BTA affirmed the tax commissioner’s final determination, and 
Corrigan appealed to this court. 
ANALYSIS 
THE DUE PROCESS AND COMMERCE CLAUSES 
SET LIMITS ON OHIO’S TAXING AUTHORITY 
{¶ 15} “It is a venerable if trite observation that seizure of property by the 
State under pretext of taxation when there is no jurisdiction or power to tax is simple 
confiscation and a denial of due process of law. ‘* * * Jurisdiction is as necessary 
to valid legislative as to valid judicial action.’ ”  Miller Bros. Co. v. Maryland, 347 
U.S. 340, 342, 74 S.Ct. 535, 98 L.Ed. 744 (1954), quoting St. Louis v. Wiggins 
Ferry Co., 78 U.S. 423, 430, 20 L.Ed. 192 (1870).  And “[g]overnmental 
jurisdiction in matters of taxation * * * depends upon the power to enforce the 
mandate of the state by action taken within its borders, either in personam or in 
rem.”  Shaffer v. Carter, 252 U.S. 37, 49, 40 S.Ct. 221, 64 L.Ed. 445 (1920).  These 
precepts point to the importance of the Due Process Clause of the Fourteenth 
Amendment as a means of “guarding against extraterritorial taxation” by defining 
the limits of state taxing authority.  Hillenmeyer v. Cleveland Bd. of Rev., 144 Ohio 
St.3d 165, 2015-Ohio-1623, 41 N.E.3d 1164, ¶ 40.  Additionally, the United States 
Supreme Court has held that under the Due Process Clause, “the States * * * are 
subject to limitations on their taxation powers that do not apply to the Federal 
Government.”  F.W. Woolworth Co. v. New Mexico Taxation and Revenue Dept., 
458 U.S. 354, 363, 102 S.Ct. 3128, 73 L.Ed.2d 819 (1982). 
                                                 
1 Corrigan contended that the commissioner’s determination significantly overstated the amount of 
the capital gain based on intricacies of the Internal Revenue Code.  Corrigan has not raised this 
contention before this court.   
SUPREME COURT OF OHIO 
 
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{¶ 16} Similarly, the dormant Commerce Clause imposes its own 
restrictions upon state taxing power.  “By prohibiting States from discriminating 
against or imposing excessive burdens on interstate commerce without 
congressional approval, [the dormant Commerce Clause] strikes at one of the chief 
evils that led to the adoption of the Constitution, namely, state tariffs and other laws 
that burdened interstate commerce.”  Maryland Comptroller of Treasury v. Wynne, 
___ U.S. ___, 135 S.Ct. 1787, 1794, 191 L.Ed.2d 813 (2015). 
{¶ 17} “Due process centrally concerns the fundamental fairness of 
government activity,” while the Commerce Clause reflects “structural concerns 
about the effects of state regulation on the national economy.”  Quill Corp. v. North 
Dakota, 504 U.S. 298, 312, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992).  Although the 
constraints imposed by the Due Process Clause and the Commerce Clause are 
distinct, they partially overlap.  Commerce Clause restrictions may run parallel to 
Due Process Clause restrictions or be imposed in addition to Due Process Clause 
constraints.  That said, under both the Due Process Clause and the Commerce 
Clause, the bedrock principle is “that a State may not tax value earned outside its 
borders.”  Allied-Signal, Inc. v. Dir., Div. of Taxation, 504 U.S. 768, 777, 784, 112 
S.Ct. 2251, 119 L.Ed.2d 533 (1992).  “ ‘No principle is better settled,’ ” the high 
court has stated, “ ‘than that the power of a state, even its power of taxation, in 
respect to property, is limited to such as is within its jurisdiction.’ ”  Miller Bros. at 
342, quoting New York, Lake Erie & W. RR. Co. v. Pennsylvania, 153 U.S. 628, 
646, 14 S.Ct. 952, 38 L.Ed. 846 (1894). 
{¶ 18} In considering this case, we are persuaded that the assessment of a 
tax on Corrigan’s capital gain cannot be sustained under the basic due-process test 
for the exercise of proper tax jurisdiction.  Our disposition of the appeal on those 
grounds obviates the need for any separate analysis under the Commerce Clause. 
 
 
January Term, 2016 
 
7
THE OPERATION OF THE TAX STATUTES AS APPLIED TO CORRIGAN 
{¶ 19} As a general matter, Ohio imposes individual income tax on “every 
individual * * * residing in or earning or receiving income in this state.”  R.C. 
5747.02(A); Cunningham v. Testa, 144 Ohio St.3d 40, 2015-Ohio-2744, 40 N.E.3d 
1096, ¶ 9.  Corrigan is a nonresident, nondomiciliary of Ohio; as such, he is subject 
to Ohio income tax only with respect to his income earned or received in this state.  
Id. 
During his majority ownership, Corrigan was subject to Ohio income tax on a 
portion of his distributive share of Mansfield Plumbing’s “business income” 
{¶ 20} R.C. Chapter 5747 puts flesh on the bones of the concept of “earning 
or receiving income in this state.”  In acquiring his controlling interest in Mansfield 
Plumbing in 2000, Corrigan subjected himself to Ohio income taxation because of 
the pass-through nature of the entity in which he invested and by which he sought 
to profit. 
{¶ 21} Ohio’s income tax distinguishes between “business income” and 
“nonbusiness income.”  As a general matter, business income is defined as income 
from “the regular course of a trade or business” and is apportioned to Ohio 
according to the percentage of the business’s property, payroll, and receipts located 
in Ohio.  See R.C. 5747.01(B) (definition of business income) and 5747.21(B) 
(providing for apportionment of business income by reference to apportionment 
statutes of the former corporate franchise tax, R.C. Chapter 5733). 
{¶ 22} By contrast, nonbusiness income includes compensation, rents, 
royalties, and capital gains and is specifically allocated to a situs.  R.C. 5747.02(C) 
and 5747.20.  Compensation, for example, is specifically allocated to the place 
where the services were performed; rents are specially allocated to the place where 
the rental property is located.  R.C. 5747.20(B)(1) and (3).  In the case of capital 
gains from the sale of intangible personal property, the tax situs is the domicile of 
the taxpayer.  R.C. 5747.20(B)(2)(c). 
SUPREME COURT OF OHIO 
 
8
{¶ 23} As majority owner of Mansfield Plumbing for tax years 2000 
through 2004 and as a result of that entity being organized and treated as a pass-
through entity for tax purposes, Corrigan realized his distributive share of the 
income or loss that was generated by Mansfield Plumbing’s business.  Because that 
income or loss qualified under the business-income definition as business income 
or loss to the entity itself, it was deemed to be business income as to Corrigan as 
the pass-through taxpayer who included it on his return.  See Agley v. Tracy, 87 
Ohio St.3d 265, 268, 719 N.E.2d 951 (1999) (income derived from an S 
corporation’s business activity that passed through the individual taxpayer’s tax 
return was business income as to the individual taxpayer); R.C. 5747.231. 
{¶ 24} The appearance of any income from Mansfield Plumbing as part of 
Corrigan’s federal adjusted gross income would mean that the same income would 
have been included in Corrigan’s Ohio adjusted gross income.  To eliminate Ohio 
tax on income generated by business conducted outside Ohio, Corrigan would have 
had recourse to the nonresident credit, R.C. 5747.05(A); that credit would offset 
the Ohio tax on his distributive share that related to business that Mansfield 
Plumbing conducted outside Ohio. 
{¶ 25} In actuality, however, Mansfield Plumbing realized losses rather 
than profits during the years of Corrigan’s ownership, and those losses were 
reported on a composite return filed by Mansfield Plumbing on behalf of its 
members.  Corrigan personally filed Form IT 1040s in Ohio for those years, 
claiming a 100 percent nonresident credit. 
{¶ 26} Although bereft of profits from his Mansfield Plumbing investment, 
Corrigan apparently realized a different kind of financial benefit from his 
ownership of the business:  he apparently was able to use his Mansfield Plumbing 
losses to offset other income and reduce the taxes he owed to other jurisdictions.2 
                                                 
2 Both the audit remarks and Corrigan’s testimony at the BTA indicate that the hours Corrigan spent 
managing Mansfield Plumbing and other businesses that he owned satisfied a standard of 
January Term, 2016 
 
9
But for R.C. 5747.212, Corrigan would pay no Ohio tax on his capital gain 
because that gain would have its tax situs outside Ohio 
{¶ 27} In 2004, Corrigan and his fellow investors sold 100 percent of their 
membership interests in Mansfield Plumbing.  They realized capital gain from the 
transaction, and in the ordinary course, Corrigan’s capital gain would not have been 
allocated to Ohio because Ohio was not Corrigan’s residence and domicile. 
{¶ 28} Corrigan claimed a nonresident credit that eliminated all Ohio 
liability in 2004.  But in 2009, the tax department issued its assessment based on 
former R.C. 5747.212.  The operative part of the version of the statute in effect 
during tax year 2004 read as follows: 
 
A pass-through entity investor that owns, directly or 
indirectly, at least twenty per cent of the pass-through entity at any 
time during the current taxable year or either of the two preceding 
taxable years shall apportion any income, including gain or loss, 
realized from the sale, exchange, or other disposition of a debt or 
equity interest in the entity as prescribed in this section.  For such 
purposes, in lieu of using the method prescribed by sections 5747.20 
and 5747.21 of the Revised Code, the investor shall apportion the 
income using the average of the pass-through entity’s apportionment 
fractions otherwise applicable under section 5747.21 of the Revised 
Code for the current and two preceding taxable years.  If the pass-
through entity was not in business for one or more of those years, 
each year that the entity was not in business shall be excluded in 
determining the average. 
                                                 
participation under the Internal Revenue Code.  Consequently, the Mansfield losses qualified as 
nonpassive, thereby permitting Corrigan to use those losses more broadly as an offset against his 
income. 
SUPREME COURT OF OHIO 
 
10 
 
Am.Sub.S.B. No. 261, 149 Ohio Laws, Part I, 1793, 1870.3 
{¶ 29} Corrigan’s situation came within R.C. 5747.212 because he owned 
over 79 percent of Mansfield Plumbing, thereby clearing the 20 percent threshold, 
and because he realized a gain from selling his equity interest in Mansfield 
Plumbing during 2004. 
DUE PROCESS PREDICATES TAXATION OF A NONRESIDENT’S INCOME ON 
OHIO’S CONNECTION TO BOTH THE TAXPAYER AND THE TRANSACTION 
{¶ 30} Due process “ ‘requires some definite link, some minimum 
connection, between a state and the person, property or transaction it seeks to tax.’ 
”  Quill, 504 U.S. at 306, 112 S.Ct. 1904, 119 L.Ed.2d 91, quoting Miller Bros., 
347 U.S. at 344-345, 74 S.Ct. 535, 98 L.Ed.2d 744. 
{¶ 31} A state’s taxing jurisdiction may be exercised over all of a resident’s 
income based upon the state’s in personam jurisdiction over that person.  
Hillenmeyer, 144 Ohio St.3d 165, 2015-Ohio-1623, 41 N.E.3d 1164, at ¶ 41, citing 
Shaffer, 252 U.S. at 52, 40 S.Ct. 221, 64 L.Ed. 445.  By contrast, the power to tax 
nonresidents reflects the state’s in rem jurisdiction over the income-producing 
activities conducted within the state: 
 
“[J]ust as a State may impose general income taxes upon its own 
citizens and residents whose persons are subject to its control it may, 
as a necessary consequence, levy a duty of like character, and not 
more onerous in its effect, upon incomes accruing to non-residents 
                                                 
3 This was the original version of the statute, which was enacted in 2002.  The version quoted by 
the tax commissioner in his final determination reflected amendments to the statute made in 2005 
that were not in effect at the time Corrigan incurred his tax liabilities for tax year 2004.  See 
Am.Sub.H.B. No. 66, 151 Ohio Laws, Part III, 4674. 
January Term, 2016 
 
11 
from their property or business within the State, or their occupations 
carried on therein.” 
  
(Emphasis deleted.)  Hillenmeyer at ¶ 42, quoting Shaffer at 52. 
{¶ 32} Inherent in the Supreme Court’s pronouncement in Shaffer is the 
need for a link between the state and the person being taxed as well as between the 
state and the activity being taxed.  The former is expressed in terms of the 
minimum-contacts test that is familiar in the context of determining the personal 
jurisdiction that may be exercised by a court sitting in one state and issuing process 
to a person in another state.  See Quill at 307, citing Internatl. Shoe Co. v. 
Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945), and Shaffer v. Heitner, 
433 U.S. 186, 97 S.Ct. 2569, 53 L.Ed.2d 683 (1977).  Applying principles from this 
area of the law, due process requires that a person whom a state proposes to tax 
have “purposefully availed” himself of benefits within the taxing state.  Id. 
{¶ 33} In addition to the state’s connection with the person to be taxed, “in 
the case of a tax on an activity, there must be a connection to the activity itself, 
rather than a connection only to the actor the State seeks to tax.”  Allied-Signal, 504 
U.S. at 778, 112 S.Ct. 2251, 119 L.Ed.2d 533.  In Allied-Signal, New Jersey 
attempted to tax one corporation’s gain from selling its shares in another 
corporation, and the court clarified that the mere fact that the taxpayer performed 
some of its business within the taxing state did not by itself permit the taxation of 
that taxpayer’s gain from the sale of shares of another corporation.  Instead, the 
high court enforced its earlier pronouncement that “[a] State may not tax a 
nondomiciliary corporation’s income * * * if it is ‘derived from “unrelated business 
activity” which constitutes a “discrete business enterprise.” ’ ”  Id. at 773, quoting 
Exxon Corp. v. Wisconsin Dept. of Revenue, 447 U.S. 207, 224, 100 S.Ct. 2109, 65 
L.Ed.2d 66 (1980), quoting Mobil Oil Corp. v. Vermont Commr. of Taxes, 445 U.S. 
425, 442, 439, 100 S.Ct. 1223, 63 L.Ed.2d 510 (1980). 
SUPREME COURT OF OHIO 
 
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Ohio-derived income may be taxed to the person 
whose business activity generated the income 
{¶ 34} Shaffer demonstrates that the direct conduct of business subjects the 
nonresident person conducting the business to a tax on the proportionate share of 
business conducted within the taxing state.  Under Shaffer, this scenario relies on 
the state’s in rem jurisdiction over the income generated by in-state activity.  But 
the situation also entails the taxpayer’s purposeful availment of the protections and 
benefits of the state’s laws by conducting a portion of the business within that state.  
Quill, 504 U.S. at 307, 112 S.Ct. 1904, 119 L.Ed.2d 91, citing Shaffer, 433 U.S. at 
212, 97 S.Ct. 2569, 53 L.Ed.2d 683. 
Distributive share may be taxed because the income taxed is generated by Ohio 
business activity and the pass-through establishes “purposeful availment” 
{¶ 35} Do due-process protections permit Ohio to impose its individual 
income tax on the distributive-share income of a nonresident who realizes pass-
through income?  We answered affirmatively in Agley, 87 Ohio St.3d 265, 719 
N.E.2d 951:   
 
Appellants have admitted that their S corporations 
conducted business in Ohio.  Thus, it is evident that the S 
corporations have utilized the protections and benefits of Ohio by 
carrying on business here.  This income was then passed through to 
the appellants as personal income.  Thus, the appellants, through 
their S corporations, have also availed themselves of Ohio’s 
benefits, protections, and opportunities by earning income in Ohio 
through their respective S corporations.  We find that this provides 
Ohio the “minimum contacts” with the appellants to justify taxing 
appellants on their distributive share of income. 
 
January Term, 2016 
 
13 
Id. at 267.  Simply stated, even though the taxpayers in Agley were nonresidents 
who did not themselves conduct business in Ohio, we determined that their decision 
to invest using corporate structures in Ohio and making federal pass-through 
elections satisfied the purposeful-availment criterion for imposing the tax 
obligation on them personally. 
Capital gain is generated by the sale of intangible property 
rather than by Ohio business activity, 
and thus selling the shares does not involve purposeful availment 
{¶ 36} The tax at issue here differs, however, with respect to Ohio’s 
connection both to the activity and to the taxpayer.  In this case, the activity at issue 
is a transfer of intangible property by a nonresident.  Thus, Ohio’s connection is an 
indirect one, whereas in Agley the activity being taxed was the very income derived 
from business activity in Ohio.  Moreover, although Corrigan’s availment of Ohio’s 
protections and benefits is clear with respect to the pass-through of Mansfield 
Plumbing’s income to him, Corrigan’s sale of his interest in Mansfield Plumbing 
did not avail him of Ohio’s protections and benefits in any direct way. 
{¶ 37} For these reasons, we conclude that Agley does not extend to 
Corrigan’s capital gain. 
THE UNITED STATES SUPREME COURT’S PRECEDENTS DO NOT ESTABLISH 
THE CONSTITUTIONALITY OF APPLYING R.C. 5747.212 TO CORRIGAN 
{¶ 38} Corrigan and the tax commissioner rely on competing United States 
Supreme Court cases. 
{¶ 39} Corrigan emphasizes more recent cases in which the U.S. Supreme 
Court has established that a state may not tax the dividends received by a 
nonresident corporation from another corporation, or the capital gain realized from 
selling shares in another corporation, absent a unitary business relationship between 
the taxpayer and the other corporation.  See MeadWestvaco Corp. v. Illinois Dept. 
of Revenue, 553 U.S. 16, 128 S.Ct. 1498, 170 L.Ed.2d 404 (2008); Allied-Signal, 
SUPREME COURT OF OHIO 
 
14 
504 U.S. 768, 112 S.Ct. 2251, 119 L.Ed.2d 533; ASARCO, Inc. v. Idaho State Tax 
Comm., 458 U.S. 307, 102 S.Ct. 3103, 73 L.Ed.2d 787 (1982); F.W. Woolworth, 
458 U.S. at 363, 102 S.Ct. 3128, 73 L.Ed.2d 819.  By extension, Corrigan contends 
that Ohio may not tax his capital gain unless Corrigan himself has engaged in a 
business that is unitary with that of Mansfield Plumbing.  As supplemental 
authority, Corrigan points out that we have already applied ASARCO in a corporate 
franchise tax case to bar the apportionment of investment income as business 
income of the taxpayer.  See Am. Home Prods. Corp. v. Limbach, 49 Ohio St.3d 
158, 160-161, 551 N.E.2d 201 (1990), citing ASARCO. 
{¶ 40} The tax commissioner relies on a pair of older Supreme Court 
decisions addressing and upholding the imposition of Wisconsin’s “privilege 
dividend tax.”  See Internatl. Harvester, 322 U.S. 435, 64 S.Ct. 1060, 88 L.Ed. 
1373; Wisconsin v. J.C. Penney Co., 311 U.S. 435, 61 S.Ct. 246, 85 L.Ed. 267 
(1940).  Instead of being imposed directly on corporate income, the privilege 
dividend tax was imposed on the privilege of declaring and receiving dividends; in 
practical operation, the tax required corporations to withhold from the payment of 
a dividend the amount of the tax and remit the tax to the state.  See J.C. Penney at 
440, fn. 1 (quoting the underlying statute). 
{¶ 41} In both older cases, the Supreme Court upheld the measure. 
{¶ 42} In J.C. Penney, the high court hypothesized that a “supplementary 
tax on the Wisconsin earnings of [foreign] corporations” that simply “postponed 
liability for the tax until such earnings were to be paid out in dividends” was 
consistent with due process and that the characterization of the tax as being levied 
on the privilege of declaring and receiving dividends should not change the result.  
Id. at 442-444.  The court therefore reversed the Wisconsin Supreme Court’s 
holding that the privilege dividend tax was unconstitutional. 
{¶ 43} In Internatl. Harvester, the high court considered the privilege 
dividend tax anew in light of the Wisconsin Supreme Court’s clarifications that for 
January Term, 2016 
 
15 
state constitutional purposes, the tax was a privilege rather than an income tax and 
that the corporation was not entitled to deduct the privilege dividend tax because 
the burden of the tax fell upon stockholders.  Internatl. Harvester at 438-439.  The 
United States Supreme Court affirmed, adhering to its holding in J.C. Penney. 
{¶ 44} In arguing that J.C. Penney and Internatl. Harvester control here, the 
tax commissioner points to the fact that the present case involves using the 
business-income factors of Mansfield Plumbing, whereas the MeadWestvaco and 
Allied-Signal line of cases involved state taxes that attempted to use the taxpayer’s 
business-income factors to apportion the dividend or capital-gain income.  This 
distinction is one that can be characterized as the difference between the “investor 
apportionment” analysis, in which the courts look at the nexus between the 
taxpayer/investor (like Corrigan) and the jurisdiction, see, e.g., MeadWestvaco and 
Allied-Signal, and the “investee apportionment” analysis, in which the courts look 
at the nexus between the investee (like Mansfield Plumbing) and the taxing 
jurisdiction, see, e.g., J.C. Penney and Internatl. Harvester. 
{¶ 45} Seizing on this distinction, the tax commissioner asserts that the 
unitary-business doctrine, which defined the limits of constitutionality in the 
MeadWestvaco and Allied-Signal cases, is irrelevant here.  The tax commissioner 
contends that the taxpayer’s liability is determined by the business done by the 
entity in which the taxpayer has invested and that the investment income realized—
whether that income is a dividend, a capital gain from the sale of the investment, or 
the payment of a debt—may be taxed to the nonresident investor.  In this manner, 
the tax commissioner attempts to justify apportioning both the capital gain and the 
debt interest pursuant to R.C. 5747.212. 
{¶ 46} We disagree. 
{¶ 47} First and foremost, J.C. Penney and Internatl. Harvester address a 
tax law that, unlike R.C. 5747.212, never imposes tax liability on the investor.  To 
be sure, in upholding the tax, the high court accepted the proposition that the 
SUPREME COURT OF OHIO 
 
16 
economic burden of Wisconsin’s privilege dividend tax fell upon nonresident 
investors, even though it was actually paid by the corporation that declared and paid 
the dividend.  But the propriety of imposing the economic burden of a tax on a 
nonresident does not necessarily require the conclusion that the tax liability itself 
can be imposed on those nonresident investors.  The Wisconsin statute at issue did 
not do so, and the decisions upholding that statute should not be construed to 
authorize other statutes that were not under review by the high court at that time. 
{¶ 48} Second, even if J.C. Penney and Internatl. Harvester were construed 
to extend to the imposition of a state income tax on the nonresident recipient of a 
dividend, that would still not require the conclusion that the same reasoning extends 
to a capital gain from the sale of corporate ownership.  It is self-evident that the 
dividend has a more direct relationship to corporate earnings, out of which the 
dividend is paid, than does the capital gain from the sale of corporate ownership.  
Indeed, it is possible in a given situation that the purchaser of a business may be 
more interested in acquiring specific business assets than in the profits generated 
by the ongoing business.  That could, in fact, be true here inasmuch as Mansfield 
Plumbing realized losses in the years immediately preceding the sale. 
{¶ 49} Third, our reluctance to accept the tax commissioner’s expansive 
interpretation of J.C. Penney and Internatl. Harvester is consistent with 
MeadWestvaco. 
{¶ 50} In MeadWestvaco, the taxpayer had sold its Lexis-Nexis division, 
booking an intangible “goodwill” gain of about $1 billion, which the taxpayer 
treated as nonbusiness income allocable to its domicile outside Illinois.  See 371 
Ill.App.3d 108, 113, 861 N.E.2d 1131 (2007), reversed, 553 U.S. 16, 128 S.Ct. 
1498, 170 L.Ed.2d 404.  The state revenue department recharacterized the income 
as apportionable business income of the taxpayer, and the Illinois courts affirmed.  
But the United States Supreme Court reversed on the basis of the Allied-Signal line 
January Term, 2016 
 
17 
of cases and the unitary-business doctrine.  553 U.S. at 29-30, 128 S.Ct. 1498, 170 
L.Ed.2d 404. 
{¶ 51} Of special relevance here is the question that the high court declined 
to address.  As a fallback position, the state in MeadWestvaco had argued that 
Lexis-Nexis’s own business in Illinois justified the imposition of the additional tax 
on its former parent’s gain.  The Supreme Court characterized this argument as “a 
new ground for the constitutional apportionment of intangibles based on the taxing 
State’s contacts with the capital asset rather than the taxpayer.”  Id. at 30.  (Using 
the terminology we have employed in this opinion, Illinois was arguing for investee 
apportionment as an alternative to investor apportionment.)  The court then 
declined to address the “new ground” for apportionment for two reasons.  First, it 
noted that the argument had not previously been raised and passed upon.  Second, 
it recognized that the states that relied on investee apportionment, including Ohio, 
had not been notified that the constitutionality of their statutes would be 
determined.  Id. at 31.4  In other words, the United States Supreme Court regards 
the imposition of an investee-apportioned tax on the gain realized by an investor as 
an unsettled question.  Because the high court has not answered that question, we 
cannot properly regard it as settled by J.C. Penney and Internatl. Harvester. 
STATE COURT CASES DO NOT SUPPORT APPLYING R.C. 5747.212 
TO CORRIGAN’S CAPITAL GAIN 
{¶ 52} The tax commissioner also relies on state court decisions as support 
for applying R.C. 5747.212 to Corrigan’s capital gain.  Most notably, in his brief 
and at oral argument, the commissioner relied heavily on the Louisiana Supreme 
                                                 
4 The Supreme Court recognized that the Ohio corporation franchise tax contained investee-
apportionment provisions at R.C. 5733.051(E) and (F).  MeadWestvaco at 31.  Division (E) calls for 
investee apportionment of a corporate taxpayer’s capital gains, and division (F) calls for investee 
apportionment of a corporate taxpayer’s dividend income.  With the phase-out of the franchise tax 
for most businesses pursuant to the 2005 tax-reform legislation, these provisions have a greatly 
diminished significance.  See Navistar, Inc. v. Testa, 143 Ohio St.3d 460, 2015-Ohio-3283, 39 
N.E.3d 509, ¶ 1 (discussing 2005 tax-reform legislation). 
SUPREME COURT OF OHIO 
 
18 
Court’s decision in Johnson v. Collector of Revenue, 246 La. 540, 165 So.2d 466 
(1964). 
{¶ 53} In Johnson, a corporation held as its sole asset certain lands in 
Louisiana on which oil and gas production activities were conducted.  Those 
activities had led to an appreciation in the value of the land, and accordingly, when 
the corporation liquidated itself by exchanging shares for interests in the direct 
ownership of the land, the state assessed a tax on the pro rata capital gain of the 
shareholders.  As in the present case, the intangible stock-share interests were held 
and sold outside the taxing state, and the shareholders were nonresidents. 
{¶ 54} The statute decisive to the decision upholding Louisiana’s taxation 
of the capital gain read as follows: 
 
“In cases where property located in Louisiana is received by 
a shareholder in the liquidation of a corporation, the stock cancelled 
or redeemed in the liquidation shall, for purposes of determining 
taxable gain under this chapter, be deemed to have its taxable situs 
in this state to the extent that the property of the corporation 
distributed in liquidation is located in Louisiana.  If only a portion 
of the property distributed in liquidation is located in Louisiana, 
only a corresponding portion of the gain realized by a shareholder 
shall be considered to be derived from Louisiana sources.” 
 
Id. at 567, quoting La.Rev.Stat. 47:159(H). 
{¶ 55} The lower court had determined that the corporation had conducted 
no Louisiana business and that the assignment of Louisiana situs was “wholly 
fictitious and arbitrary, rendering the statute unconstitutional.”  Id. at 570.  But the 
Louisiana Supreme Court reversed, observing that had the corporation itself sold 
the lands to a third party, the corporation would have paid Louisiana tax on that 
January Term, 2016 
 
19 
gain from the disposition of in-state property.  Id. at 572.  The court explained that 
the statute quoted above was intended to prevent the use of a corporate liquidation 
and conveyance of Louisiana assets to avoid the imposition of tax on the gain 
associated with such property.  “Clearly, such a gain from oil-producing lands in 
Louisiana reflects the protection and opportunities that the state has afforded,” the 
court observed.  Id. at 573. 
{¶ 56} Counsel for the state characterizes the Louisiana statute as 
“identical” to R.C. 5747.212 and its application in this case.  We are persuaded, 
however, not only that there are differences between the two schemes but also that 
those differences are of decisive import here. 
{¶ 57} Far from broadly subjecting a nonresident’s capital gain to in-state 
apportionment as R.C. 5747.212 does, the Louisiana statute applies only when 
nonresidents receive property with a Louisiana situs in conjunction with 
redemption of their corporate shares.  Moreover, the Louisiana statute allocates the 
nonresident’s gain to Louisiana only to the extent of the gain on those Louisiana 
assets. 
{¶ 58} Quite simply, rather than broadly extending state taxing power to a 
nonresident’s capital gain, the Louisiana statute does nothing more than prevent 
avoidance of the Louisiana tax on a capital gain from the sale of a Louisiana asset 
through a manipulation of corporate forms.  We conclude that the Louisiana 
statute’s limited purpose and effect bears no resemblance to the broad scope and 
expansive purpose of R.C. 5747.212 and is of limited value in addressing the 
constitutional question before us. 
{¶ 59} One state court decision that genuinely adopts investee 
apportionment comes from the New York Court of Appeals.  In Allied-Signal, Inc. 
v. Commr. of Fin., 79 N.Y.2d 73, 580 N.Y.S.2d 696, 588 N.E.2d 731 (1991), New 
York’s highest court upheld New York City’s imposition of a tax on a nonresident 
parent corporation’s capital gain from the sale of its interest in a subsidiary, where 
SUPREME COURT OF OHIO 
 
20 
the gain was apportioned to the city based on the subsidiary’s business-income 
apportionment rather than the parent’s.  Based on its reading of the United States 
Supreme Court’s decision in Internatl. Harvester, the New York Court of Appeals 
determined that New York City could assert a nexus with the investor’s capital gain.  
Allied-Signal at 82-84. 
{¶ 60} As already discussed, however, we decline to read Internatl. 
Harvester as authorizing the imposition of a tax on the nonresident dividend 
recipient, given that the statute at issue in that case imposed tax only on the 
corporation that paid the dividends.  In this regard, we find one of the dissenting 
opinions in Allied-Signal persuasive.  Namely, in his dissent, Judge Hancock 
faulted the majority for a leap of logic, asserting that the mere fact that the burden 
of the tax in J.C. Penney and Internatl. Harvester fell on the out-of-state 
shareholders did not mean that the state had a nexus to tax those shareholders 
directly.  Allied-Signal at 102 (Hancock, J., dissenting). 
{¶ 61} And contrary to the tax commissioner’s argument, we find that our 
own decision in Couchot v. State Lottery Comm., 74 Ohio St.3d 417, 659 N.E.2d 
1225 (1996), is inapposite here.  In that case, we examined the imposition of Ohio’s 
income tax on the incremental payments to a nonresident winner of the Ohio lottery 
in light of constitutional challenges based on due-process, Commerce Clause, and 
retroactivity grounds.  With respect to the basic due-process claim, we observed 
that “[i]t is difficult to imagine a more fundamental exertion of a state’s taxing 
power than where the state taxes income on winnings from its lottery.”  Id. at 422.  
Indeed, the winning of the lottery game and the payments that ensued clearly 
constituted the enjoyment of Ohio-created benefits and protections that justified the 
imposition of the tax.  That taxpayer’s scenario, however, is quite different from 
Corrigan’s—in law and in fact. 
 
 
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21 
ENFORCING DUE-PROCESS RESTRAINTS ON STATE TAXATION 
DOES NOT ELEVATE FORM OVER SUBSTANCE 
{¶ 62} The tax commissioner argues that Ohio can tax a share of Corrigan’s 
capital gain because the sale of the ownership interest is merely one form in which 
the business could be sold and the same gain would be taxable if the business had 
been sold through an asset sale instead.  In his words, the tax commissioner 
contends that because taxation would be proper under “that economically 
equivalent situation,” it must be proper in the context with which we are presented. 
{¶ 63} This argument relies on R.C. 5747.01(B), which includes in the 
definition of business income the “gain or loss, from a partial or complete 
liquidation of a business, including, but not limited to, gain or loss from the sale or 
other disposition of goodwill.”  Thus, if Mansfield Plumbing had made a bulk 
transfer of its business assets rather than having the business transferred through a 
sale of the L.L.C. ownership itself, then the gain from the sale would have been 
realized at the L.L.C. level, and the Ohio-apportioned share would have been taxed 
to Corrigan on a pass-through basis.  The commissioner argues that because the 
gain could be taxed to Corrigan in an asset sale, it may also be taxed in the form of 
Corrigan’s individual capital gain. 
{¶ 64} Although this argument may appear plausible, the jurisdictional 
question before us presents more than merely a matter of form. 
{¶ 65} We recognize that an asset sale and a sale of ownership interest may 
be different forms involving the same economic substance to the parties, but that 
does not mean that the jurisdictional limits on Ohio’s taxing powers lack their own 
substantive importance.  Nor is it unusual that two different methods of achieving 
the same economic result could have drastically different tax implications. 
{¶ 66} Moreover, the commissioner’s “form over substance” argument can 
cut both ways.  The commissioner argues that taxing Corrigan’s personal capital 
gain is justified because Ohio law would apportion the gain from an asset sale as 
SUPREME COURT OF OHIO 
 
22 
business income.  But one could, with equal logical force, assert that because the 
sale of assets in liquidation of the business is in substance the same as the sale of 
the corporate ownership, Ohio cannot constitutionally treat the gain from the asset 
sale as apportionable “business income.” 
{¶ 67} We decline to accept the form-over-substance argument as militating 
against our conclusion, which is based on other grounds, i.e., that Corrigan’s capital 
gain may not be taxed. 
R.C. 5747.212 IS NOT FACIALLY UNCONSTITUTIONAL 
{¶ 68} Corrigan has advanced both an as-applied and a facial challenge to 
R.C. 5747.212.  Our holding of unconstitutionality today is limited to R.C. 
5747.212 as applied to Corrigan, in light of the absence of any assertion or finding 
that Corrigan’s own activities amounted to a unitary business with that of Mansfield 
Plumbing. 
{¶ 69} Conceivably, an individual taxpayer might engage in the conduct of 
a business with or through a corporate entity, and under the MeadWestvaco and 
Allied-Signal line of cases, the imposition of tax under R.C. 5747.212 could be 
sustained.  We therefore decline to hold that R.C. 5747.212 is facially 
unconstitutional because Corrigan has not demonstrated, as he must, that “there 
exists no set of circumstances under which the statute would be valid.”  Harrold v. 
Collier, 107 Ohio St.3d 44, 2005-Ohio-5334, 836 N.E.2d 1165, ¶ 37.  Because there 
is at least a possibility that the statute could be applied when the unitary-business 
situation is present,5 we reject the facial challenge. 
                                                 
5 Perhaps recognizing this possibility, Corrigan has made a distinct effort to establish that he has not 
engaged in active management here, distinguishing his efforts as merely the “stewardship” of a 
corporate director.  For his part, the tax commissioner has consistently argued that the unitary-business 
doctrine is irrelevant rather than contend that the unitary-business relationship might be present. 
January Term, 2016 
 
23 
{¶ 70} In light of our disposition of this appeal on due-process grounds, we 
need not and do not address Corrigan’s claim that R.C. 5747.212 violates the 
Commerce Clause. 
CONCLUSION 
{¶ 71} For the foregoing reasons, we reverse the decision of the BTA, and 
we remand to the tax commissioner with instructions to grant a refund to Corrigan. 
Decision reversed 
and cause remanded. 
PFEIFER, O’DONNELL, LANZINGER, KENNEDY, FRENCH, and O’NEILL, JJ., 
concur. 
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Taft, Stettinius & Hollister, L.L.P., and J. Donald Mottley, for appellant. 
 
Michael DeWine, Attorney General, and Barton A. Hubbard, David D. 
Ebersole, and Raina M. Nahra, Assistant Attorneys General, for appellee. 
 
Baker & Hostetler, L.L.P., Edward J. Bernert, Elizabeth A. McNellie, and 
Christopher J. Swift, urging reversal for amicus curiae, Ohio Chamber of 
Commerce. 
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