Title: Goodyear Tire & Rubber Co. v. Tracy

State: ohio

Issuer: Ohio Supreme Court

Document:

[Cite as Goodyear Tire & Rubber Co. v. Tracy, ___ Ohio St.3d ___, 1999-Ohio-325.] 
 
 
 
 
 
GOODYEAR TIRE & RUBBER COMPANY, APPELLANT, v. TRACY, TAX COMMR., 
APPELLEE. 
[Cite as Goodyear Tire & Rubber Co. v. Tracy (1999), ___ Ohio St.3d ___.] 
Taxation — Calculating franchise tax base — Net worth method of calculating the 
base upon which corporate franchise tax is to be assessed under former R.C. 
5733.05(A) for tax year 1987 — Retirement plan surplus includible in the 
numerator of the property fraction for franchise tax purposes. 
(No. 98-1010 — Submitted March 10, 1999 — Decided June 16, 1999.) 
APPEAL from the Board of Tax Appeals, No. 96-M-1149. 
 
Pursuant to R.C. 5733.01(A), a tax is levied upon domestic and foreign 
corporations for the privilege of exercising their corporate franchises in Ohio.  R.C. 
5733.051 establishes the formulas used to determine the value of a corporation (the 
value of its issued and outstanding stock) for franchise tax purposes and the base 
upon which the corporate franchise tax is to be assessed.  At issue in this case is the 
net worth method of calculating that base, as established by former R.C. 5733.05(A), 
for the tax year 1987. 
 
Pursuant to the net worth method of R.C. 5733.05(A), a preliminary step in 
calculating the franchise tax base is to divide the value of the corporation’s issued 
and outstanding shares of stock into two equal parts. One part is then multiplied by a 
business done factor (not at issue in this case).  The other part is multiplied by a 
property factor, which is expressed in terms of a fraction in which the net book value 
of the corporation’s property (including intangible property) sitused in Ohio is the 
numerator.  The denominator is the net book value of all the corporation’s property 
(including intangible property).2 
 
 
 
Taxpayer-appellant, the Goodyear Tire & Rubber Company, is a multi-
national corporation headquartered in Ohio.  Following an audit, the Tax 
Commissioner assessed Goodyear a corporate franchise tax deficiency for the tax 
year 1987.  The assessment, including interest, totaled $1.1 million and was based, in 
part, on the commissioner’s conclusion that Goodyear had understated its franchise 
tax base by applying an understated property factor to one-half of its issued and 
outstanding shares of stock. 
 
Prior to 1986, Goodyear had established and funded a trust in connection with 
a defined benefit pension plan benefiting certain Goodyear employees.  The pension 
plan agreement stated that Goodyear had no right to the trust property until all 
liabilities were paid. However, in the event all liabilities were satisfied, residual 
assets were to be returned to Goodyear. The trust agreement also provided that 
residual assets were to be returned to Goodyear. 
 
In 1986, Goodyear determined that the pension trust was overfunded in that 
the value of the assets in the pension trust exceeded the liability to pay retirement 
benefits.  To reduce the surplus, Goodyear used a portion of the pension trust assets 
to purchase annuities to fund approximately ninety percent of the total of the 
retirement plan liabilities.  It thereby reduced, but did not eliminate, the pension trust 
surplus. 
 
In accounting for these transactions in the company’s financial books, 
Goodyear recorded a pro-rata amount of the remaining surplus as a gain in intangible 
assets on the company’s balance sheet, in accord with Financial Accounting 
Standards Board (“FASB”) Statement No. 88.  Goodyear accounted for this 
intangible asset under the heading “other assets.”  The reporting of the gain in its 
financial books was not a taxable event for federal income tax purposes, because no 
funds were actually received in 1986.  However, because the actual receipt of the 
 
 
gain in the future would constitute income to the corporation, resulting in an 
anticipated corresponding increase in income tax liability, Goodyear also entered a 
related deferred tax liability reserve in its financial books in 1986. 
 
In 1988, Goodyear purchased additional annuities to benefit the remaining 
pension plan participants, thereby providing for payment of all remaining retirement 
plan liabilities.  The remainder of the pension surplus funds were actually received by 
Goodyear in 1988, after the additional annuities had been purchased to settle the 
remaining retirement plan liabilities. 
 
Thus, although Goodyear booked a gain for 1986, those funds were not 
available to it until termination of the pension plan in 1988, when Goodyear actually 
received the funds. 
 
The transactions Goodyear made in 1986 were reflected on Goodyear’s 
franchise tax return for tax year 1987.  Consistent with its own balance sheet, 
Goodyear included the value of the pension surplus in reporting the total of “other 
assets” it owned.  It did not, however, report the value of the pension surplus as an 
asset that it owned in Ohio.  Accordingly, in determining the property allocation 
ratio, Goodyear failed to include the value of the remaining surplus in the numerator 
of the property fraction. 
 
In auditing Goodyear’s 1987 tax return, the commissioner deemed the correct 
situs of the pension surplus to be Ohio and added its value to the value of Goodyear’s 
property in Ohio.  The commissioner accordingly increased the property factor (ratio 
of property owned or used in Ohio to net book value of total property wherever 
situated) that is used to apportion the value of Goodyear’s stock for purposes of 
calculating one-half the tax base for assessment of the franchise tax pursuant to the 
net worth basis.  Ultimately, these recalculations resulted in a portion of the 
deficiency assessment against Goodyear. 
 
 
 
Goodyear appealed to the Board of Tax Appeals (“BTA”) from the 
commissioner’s final determination.  The BTA affirmed, holding that the pension 
surplus should be included in the value of Goodyear’s Ohio property and included in 
the numerator of the property fraction. 
 
The cause is before this court upon an appeal as of right. 
__________________ 
 
Thompson, Hine & Flory, L.L.P., Stephen L. Buescher and James C. Koenig, 
for appellant. 
 
Betty D. Montgomery, Attorney General, and Robert C. Maier, Assistant 
Attorney General, for appellee. 
__________________ 
 
MOYER, C.J.  Goodyear posits as its sole proposition of law that “[a]n 
intangible asset representing a retirement plan surplus is not includible in the 
numerator of the property fraction set forth in R.C. 5733.05(A) and used to apportion 
net worth.” 
 
R.C. 5733.05(A) provides that the numerator of the property factor fraction 
is to be “the net book value of all the corporation’s property owned or used by it in 
this state.” Goodyear argues that, for purposes of determining this numerator in its 
1987 return, the pension surplus was not property “owned or used” by it.  It 
emphasizes that the trust assets were held for the exclusive benefit of the pension 
plan participants, and that, pursuant to the terms of the salaried plan and trust, 
Goodyear had no legal right to use any of the funds unless and until the plan 
terminated.  In so arguing, Goodyear urges incorporation of personal property 
ownership concepts into franchise tax law. 
 
R.C. 5733.03(H) provides that a corporation’s annual report for franchise tax 
purposes shall state “[t]he location and value of the property owned or used by the 
 
 
corporation as shown on its books, both within and without the state, given 
separately.”  (Emphasis added.) Goodyear’s argument is refuted by our prior 
recognition that, for franchise tax purposes, “book value” of property owned or 
used by a corporation is to be determined from “the books of a corporation which 
are generally regarded as the accounting records of such corporation and are kept 
in the ordinary course of the business of the corporation in accordance with any 
sound and generally recognized and approved accounting system.” Natl. Tube Co. 
v. Peck (1953), 159 Ohio St. 98, 50 O.O. 74, 111 N.E.2d 11, paragraph five of the 
syllabus. 
 
Goodyear was required by standard accounting practice to recognize the 
pension gain on its balance sheet and does not argue that the pension refund 
amount should not have been shown on its books.  By including the intangible asset 
representing the pension surplus on its books as an asset, it effectively acknowledged 
that, for franchise tax purposes, the surplus was an asset that it “owned or used.”  
Therefore, the pension gain was required to be sitused and valued as property 
either within or without Ohio for purposes of determining the property factor 
required by R.C. 5733.05(A). 
 
Goodyear argues that inclusion of the words “owned or used * * * in this 
state” in R.C. 5733.05(A) implies a two-step analytical process for determination 
of the property factor numerator.  It contends that determination of the situs of 
intangible property is required if, and only if, it is first separately determined that 
the property is owned or used by the taxpayer, as ownership is determined for 
personal property tax purposes. 
 
We reject Goodyear’s suggestion that R.C. 5733.05(A) requires a two-step 
process of analysis to determine the value of property “owned or used  * * * in this 
state.” Goodyear observed that references to property “owned and used  * * * in 
 
 
this state” occur twice in R.C. 5733.05(A): the language is used not only in 
connection with calculation of the property factor, but also in providing that, “[i]n 
determining the value of intangible property, including capital investments, owned 
or used in this state by either a domestic or foreign corporation, the commissioner 
shall be guided by sections 5709.02 and 5709.03 of the Revised Code.”  However, 
in both places in R.C. 5733.05(A) where reference is made to property “owned or 
used  * * * in this state,” the words incorporate the concept that all property sitused 
in Ohio is necessarily also property either owned or used by the taxpayer in Ohio.  
That is, value and situs are inextricably related for purposes of R.C. 5733.05(A).  If 
intangible property is owned or used in this state, then it must be sitused and 
valued in Ohio; and vice versa, if intangible property is sitused to Ohio, then it 
must be owned or used in Ohio and therefore it must be valued to Ohio. 
 
Moreover, for purposes of determination of franchise tax, Goodyear “used” 
the pension surplus.  R.C. 5701.08(D) provides:  “As used in Title LVII of the 
Revised Code * * * (D) [T]axable intangibles are ‘used’ when they or the avails 
thereof are being applied, or are intended to be applied, in the conduct of the 
business, whether in this state or elsewhere.”  (Emphasis added.)  Even though 
Goodyear did not receive the proceeds from the pension surplus in 1986, it owned 
the right to receive the proceeds at some time in the future, not unlike owning a 
bond due at some time in the future.  It is not disputed that Goodyear received the 
proceeds in 1988. 
 
The next question is whether Goodyear owned or used the intangible 
property in Ohio. The general theory of the taxation of intangibles is that they are 
taxed at the residence of the owner (mobilia sequuntur personam).  That general 
theory is set forth in R.C. 5709.02, wherein it states, “All money, credits, 
investments, deposits, and other intangible property of persons residing in this state 
 
 
shall be subject to taxation, except as provided in this section or as otherwise 
provided or exempted in Title LVII of the Revised Code.” 
 
For intangibles, R.C. 5733.05(A) refers a taxpayer to R.C. 5709.02 and 
5709.03 to determine whether the intangible property should be sitused in Ohio or 
elsewhere (“In determining the value of intangible property,  * * * the 
commissioner shall be guided by sections 5709.02 and 5709.03 of the Revised 
Code.”).  This reference to personal property tax statutes relating to situsing 
principles means that these statutes are to be used to determine whether an 
intangible is to be sitused to Ohio. 
 
In Bush & Cook Leasing, Inc. v. Tracy (1997), 79 Ohio St.3d 87, 90, 679 
N.E.2d 1077, 1079, a franchise tax case, this court stated, “Under R.C. 5709.02, 
intangible personal property of persons ‘residing in this state’ is taxable in Ohio 
unless sitused in another state as a receivable under R.C. 5709.03(A).”  Because 
Goodyear owned the intangible representing the pension surplus, and that 
intangible was sitused in Ohio, it was property owned or used in this state. 
 
R.C. 5709.03 designates exceptions to the general rule providing for the 
taxation of intangibles used in business.  R.C. 5709.03 provides a listing of 
circumstances wherein intangibles such as accounts receivable, prepaid items, 
accounts payable, deposits, money, and investments should be considered to arise 
out of business transacted in a state other than that in which the owner resides. 
Goodyear is an Ohio resident and has not claimed that any of the special situsing 
circumstances listed in R.C. 5709.03 is applicable to the facts of this case. 
 
Moreover, Goodyear’s position that the pension surplus should not be included 
in the property factor numerator is insupportable from a purely mathematical 
perspective.  In calculating the property factor, Goodyear included the pension 
surplus as an intangible asset in the denominator, as part of all its property, wherever 
 
 
situated.  However, Goodyear did not include any value for that intangible asset in 
the numerator of the property fraction that represents the net book value of the 
property owned or used by Goodyear in Ohio.  Goodyear assigned no value to Ohio 
for the intangible surplus representing the pension surplus. However, it is axiomatic 
that the total is equal to the sum of its parts, and, mathematically, the value of all of 
Goodyear’s property wherever situated must equal the value of its property owned or 
used in Ohio plus the value of the property outside Ohio. 
 
Goodyear has not claimed that the pension surplus should be valued as 
property sitused somewhere other than Ohio.  Goodyear merely contends that the 
pension surplus should not be valued in Ohio.  If the pension surplus is an intangible 
asset that represents part of the value of Goodyear’s property everywhere, then it 
must be sitused somewhere, and valued where it is sitused.  If the pension surplus is 
not sitused outside Ohio, then it must be valued in Ohio.  If the pension gain is 
sitused in Ohio, then it must be valued in Ohio and included in the numerator of the 
franchise tax property fraction. 
 
We conclude that the pension surplus was an intangible asset not exempt 
from being sitused in Ohio.  Goodyear owned the intangible asset representing the 
pension surplus.  The retirement plan surplus, as an intangible asset owned by an 
Ohio corporation whose principal office is in Ohio, and not falling within an 
exemption from being sitused in Ohio, is properly sitused in Ohio.  It therefore is 
includible in the numerator of the property fraction for franchise tax purposes. 
 
Accordingly, the decision of the BTA, being reasonable and lawful, is 
affirmed. 
Decision affirmed. 
 
DOUGLAS, RESNICK, F.E. SWEENEY, PFEIFER, COOK and LUNDBERG 
STRATTON, JJ., concur. 
 
 
FOOTNOTES: 
1. 
R.C. 5733.05 was significantly amended by Am.Sub.H.B. No. 215, effective 
September 29, 1997, for tax years 1998 and thereafter. 
2. 
Former R.C. 5733.05(A) provides:  “Take one part [of the value of the 
issued and outstanding shares of stock] and multiply it by a fraction whose 
numerator is the net book value of all the corporation’s property owned or used by 
it in this state, and whose denominator is the net book value of all of its property  * 
* *.”