Title: Natl. City Bank v. Wilkins

State: ohio

Issuer: Ohio Supreme Court

Document:

[Cite as Natl. City Bank v. Wilkins, 111 Ohio St.3d 485, 2006-Ohio-6110.] 
 
 
NATIONAL CITY BANK, CLEVELAND, APPELLANT, v. WILKINS,  
TAX COMMR., APPELLEE. 
NATIONAL CITY BANK, NORTHWEST, APPELLANT, v. WILKINS,  
TAX COMMR., APPELLEE. 
NATIONAL CITY BANK, COLUMBUS, APPELLANT, v. WILKINS, 
TAX COMMR., APPELLEE. 
NATIONAL CITY BANK, NORTHEAST, APPELLANT, v. WILKINS,  
TAX COMMR., APPELLEE. 
NATIONAL CITY BANK, DAYTON, APPELLANT, v. WILKINS,  
TAX COMMR., APPELLEE. 
[Cite as Natl. City Bank v. Wilkins, 111 Ohio St.3d 485, 2006-Ohio-6110.] 
Corporate franchise tax—R.C. 5733.056(B) and former R.C.5733.05(A)(4)—
“Appreciation” construed. 
(Nos. 2005-1562, 2005-1563, 2005-1564, 2005-1565, and 2005-1566—Submitted 
June 20, 2006—Decided December 6, 2006.) 
APPEALS from the Board of Tax Appeals, Nos. 2003-A-1326, 2003-A-1327, 
2003-A-1328, 2003-A-1329, and 2003-A-1330. 
__________________ 
 
O’DONNELL, J. 
{¶ 1} The issue presented to us in this case concerns whether life-
insurance policies owned by National City Bank appreciated when the insurance 
carriers declared a dividend or made an interest payment that National City chose 
to take in the form of additions to the cash surrender value of its policies.  
Pursuant to R.C. 5733.05(A)(4) as it existed during the years in question, 
“appreciation” is excluded from a financial institution’s taxable net worth for 
Ohio franchise-tax purposes.  The bank contends that the interest and dividend 
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payments it received as additions to the cash surrender value of the policies 
should be treated as appreciation.  While it is true that the policies increased in 
value, the increase did not result from appreciation of the asset, but rather from an 
outside source of revenue added to the value of the policy as issued.  Hence, the 
increase did not result from the asset itself gaining value, and we conclude that 
the addition of interest and dividend payments did not amount to appreciation. 
Facts 
{¶ 2} The appellants in these five consolidated cases are five subsidiaries 
of National City Bank, referred to collectively as “National City.”  During the 
years 1994 through 1998, National City owned several “bank-owned life 
insurance” (“BOLI”) policies.  A BOLI policy is a whole-life insurance policy 
purchased and owned by a bank to insure the lives of its employees.  When an 
insured employee dies, the bank receives the death benefit payable under the 
policy. 
{¶ 3} Like other whole-life insurance policies, a BOLI policy has a cash 
surrender value, which is payable to the policy owner – the bank – if the policy is 
surrendered by the bank prior to the death of the insured person or persons.  When 
a BOLI policy is purchased by a bank, the cash surrender value is roughly equal 
to the premium paid by the bank for the policy.  National City paid the full 
premium for its BOLI policies at the time it purchased each policy. 
{¶ 4} Some of the BOLI policies guaranteed that the bank would receive 
a minimum monthly interest payment on the cash surrender value of the policies.  
Other BOLI policies provided for National City to receive dividends on the cash 
surrender value of the policies.  In each instance, National City decided to accept 
the interest or dividend payments on a BOLI policy in the form of additions to the 
cash surrender value of the policy, rather than receive those payments in cash. 
{¶ 5} National City treated the initial cash surrender value of each of its 
BOLI policies as an asset in its accounting records and treated any increases in 
January Term, 2006 
3 
that cash surrender value – attributable to the interest and dividend payments that 
National City received from the insurance companies – as increases in the value 
of its asset.  This was done in accordance with generally accepted accounting 
principles.  Accordingly, the cash surrender value of the bank’s BOLI policies 
increased each time an insurer declared a dividend or credited National City with 
an interest payment generated by a policy. 
{¶ 6} Further, National City never surrendered any of its BOLI policies 
during the tax years in question and therefore never received any payment for the 
cash surrender value of those policies during those years.  The only cash 
payments that National City received from the BOLI policies were death benefits 
that the insurance companies paid when an insured bank employee or former 
employee died. 
{¶ 7} R.C. Chapter 5733 describes the corporate franchise tax that Ohio 
imposes on each corporation “for the privilege of exercising its franchise during 
the calendar year.”  R.C. 5733.01(A).  The tax is based on the “value of the issued 
and outstanding shares of stock” of the company.  R.C. 5733.05. 
{¶ 8} Pursuant to former R.C. 5733.05(A)(4) – a statutory provision 
applicable to financial institutions during most of the tax years at issue – 
“appreciation” was to be excluded when a bank or other corporation determined 
the value of its stock for franchise-tax purposes.  1993 Am.Sub.H.B. No. 152, 145 
Ohio Laws, Part III, 4279-4280.  The General Assembly has since amended the 
statute, and R.C. 5733.056(B), applicable to the tax year 1998, the last tax year at 
issue, now provides the same treatment of appreciation for financial institutions 
for franchise-tax purposes.  R.C. 5733.05(A); 1997 Am.Sub.H.B. No. 215, 147 
Ohio Laws, Part I, 1723, 1735-1736. 
{¶ 9} The Tax Commissioner considered National City’s claim that the 
value added to the BOLI policies constituted appreciation and issued a final 
determination in 2003 rejecting the bank’s position.  National City then 
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challenged that decision before the Board of Tax Appeals (“BTA”), which held a 
hearing on the matter in September 2004. 
{¶ 10} The BTA affirmed the Tax Commissioner, concluding that “the 
interest and/or dividends earned by the BOLI policies according to their specific 
contract terms do not constitute ‘appreciation’ as contemplated by R.C. 
5733.05(A)(4).”  The BTA held that the cash surrender value of the BOLI policies 
“does not independently increase in value,” but instead “the increase is from the 
accumulated interest and dividends paid by the insurance company.”  The interest 
and dividend payments “are not an ‘appreciation’ of the * * * life insurance 
policy,” because “the value of the underlying life insurance policy does not 
change,” the BTA explained.  Appreciation, the BTA added, is a term that refers 
to an intrinsic increase in an asset, rather than income produced by that asset.  The 
BTA therefore affirmed the Tax Commissioner’s decision to deny National City’s 
refund claim. 
{¶ 11} National City has now appealed that decision to this court. 
Standard of Review 
{¶ 12} In reviewing a BTA decision, our standard of review is whether the 
decision is “reasonable and lawful.”  R.C. 5717.04.  The court “will not hesitate to 
reverse a BTA decision that is based on an incorrect legal conclusion.”  Gahanna-
Jefferson Local School Dist. Bd. of Edn. v. Zaino (2001), 93 Ohio St.3d 231, 232, 
754 N.E.2d 789.  But “[t]he BTA is responsible for determining factual issues 
and, if the record contains reliable and probative support for these BTA 
determinations,” this court will affirm them.  Am. Natl. Can Co. v. Tracy (1995), 
72 Ohio St.3d 150, 152, 648 N.E.2d 483. 
{¶ 13} The burden of proof rests on the taxpayer “to show the manner and 
extent of the error in the Tax Commissioner’s final determination.”  Stds. Testing 
Laboratories, Inc. v. Zaino, 100 Ohio St.3d 240, 2003-Ohio-5804, 797 N.E.2d 
1278, ¶ 30.  The Tax Commissioner’s findings “are presumptively valid, absent a 
January Term, 2006 
5 
demonstration that those findings are clearly unreasonable or unlawful.”  
Nusseibeh v. Zaino, 98 Ohio St.3d 292, 2003-Ohio-855, 784 N.E.2d 93, ¶ 10. 
Analysis 
{¶ 14} The issue here concerns whether the increases in the cash surrender 
value of National City’s BOLI policies should be treated as appreciation as 
specified in R.C. 5733.05(A)(4) and 5733.056(B) during the tax years at issue.  
National City contends that the increases it recorded in the cash surrender value of 
its BOLI policies for the years 1994 through 1998 should be treated as 
appreciation, and therefore should not be included as part of the bank’s total book 
value for corporate franchise tax purposes.  The commissioner, however, argues 
that the value of the policies did not appreciate for tax purposes, because the cash 
surrender value of the policies did not increase apart from the added value 
obtained from interest and dividend payments. 
{¶ 15} As we noted ten years ago, “[t]here is no statutory definition of 
‘appreciation.’ ”  Edwards Industries, Inc. v. Tracy (1996), 74 Ohio St.3d 643, 
645, 660 N.E.2d 1181.  In that case, the court concluded that the term 
“appreciation” as used in former R.C. 5733.05 referred to “an increase in value 
over some period of time.”  Id.  We therefore gave the term “appreciation” its 
plain meaning.  See Black’s Law Dictionary (8th Ed.2004) 111 (defining 
“appreciation” as “[a]n increase in an asset’s value, usu. because of inflation”). 
{¶ 16} As stated by the BTA in its decision, the cash-surrender-value 
aspect of a BOLI policy “is, in effect, an investment device.”  When the bank’s 
investment in its insurance policies generated interest or dividends, it asked the 
carriers to add those payments to the cash value of its policies, thereby adding to 
the base amount on which the next interest or dividend payment would be 
calculated.  The cash surrender value did not appreciate; instead, it grew larger 
solely because additional interest or dividend payments were added to it over 
time.  According to the testimony of a senior vice-president of National City, all 
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the increases in cash surrender value that the bank recorded for its BOLI policies 
came from interest or dividend payments from the insurance carrier. 
{¶ 17} National City – in conformity with generally accepted accounting 
principles – recorded the interest and dividend payments as increases in the cash 
surrender value of its BOLI policies.  Therefore, National City claims that it is 
entitled to treat the interest and dividend payments as appreciation because it did 
not record those payments in its books as interest or dividend income.  
Nonetheless, these payments represented an actual return on its investment in its 
insurance policies.  The bank paid an up-front one-time premium for each BOLI 
policy and, in return, received dividends or regular interest payments, which the 
bank chose to add to the cash value of its policies, thereby boosting the principal 
amount on which its future interest or dividend payments would be calculated. 
{¶ 18} The two cases on which National City principally relies do not 
support its claim that the cash surrender value of the policies appreciated when 
the bank reinvested its interest or dividend payments.  In Edwards Industries, 74 
Ohio St.3d 643, 660 N.E.2d 1181, we rejected the taxpayer’s claim that certain 
retained earnings should be treated as appreciation pursuant to former R.C. 
5733.05(A)(4).  And in SHV N. Am. Corp. v. Tracy (1994), 70 Ohio St.3d 395, 
639 N.E.2d 64, we ruled that the depreciation of some corporate assets did not 
affect the calculation of appreciation for other corporate assets under former R.C. 
5733.05(A)(4).  Neither decision addressed the issue presented in this case, nor 
did either define “appreciation” in the fashion that National City requests us to do 
now. 
{¶ 19} Rather, as the BTA determined, the cash surrender value of the 
BOLI policies “does not independently increase in value; the increase is from the 
accumulated interest and dividends paid by the insurance company.”  Because the 
cash surrender value of the BOLI policies did not increase separately from the 
reinvested interest and dividend payments, that value did not appreciate, and 
January Term, 2006 
7 
National City is not entitled to treat those payments as appreciation pursuant to 
R.C. 5733.056(B) and former R.C. 5733.05(A)(4) as it existed for the years in 
question. 
Conclusion 
{¶ 20} The conclusion of the BTA that the full cash surrender value of 
National City’s life-insurance policies – including any periodic increases in those 
values resulting from interest and dividend payments – should have been counted 
by the bank as part of its book value for corporate franchise-tax purposes during 
the tax years in question is both reasonable and lawful, and we therefore affirm 
that decision. 
Decision affirmed. 
 
MOYER, C.J., RESNICK, PFEIFER, LUNDBERG STRATTON and O’CONNOR JJ., 
concur. 
 
LANZINGER, J., dissents. 
__________________ 
 
Vorys, Sater, Seymour & Pease, L.L.P., Raymond D. Anderson, and 
David A. Froling, for appellants. 
 
Jim Petro, Attorney General, and Barton A. Hubbard, Assistant Attorney 
General, for appellee. 
______________________