[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as Giddens v. Testa, Slip Opinion No. 2016-Ohio-8412.]

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 De cisions, 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.

S LIP O PINION N O . 2016-O HIO -8412
G IDDENS ET AL ., A PPELLANTS , v. T ESTA , T AX C OMMR ., A PPELLEE . [Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as Giddens v. Testa, Slip Opinion No. 2016-Ohio-8412.] Taxation—Treatment of distribution of C co rporation earnings generated before S corporation pass-through selecti on—Tax commissioner’s denial of
nonresident tax credit reversed. (No. 2014-2012—Submitted August 16, 2016—Decided December 28, 2016.)
A PPEAL from the Board of Tax Appeals, No. 2012-359.

____________________ Per Curiam. {¶ 1} This is an appeal from a deci sion of the Board of Tax Appeals (“BTA”), which affirmed the assessment of the appellee, tax commissioner, of Ohio individual income tax agains t appellants, Ernest and Louann Giddens, for tax year
2008. The Giddenses resided in Missouri but paid Ohio income tax as owners, through grantor trusts, of shares in a cor poration that did some of its business inS UPREME C OURT OF O HIO

2 Ohio. In 2008, that corporation was an “S corporation,” meaning that its income passed through for tax purposes. {¶ 2} The part of the assessment at issue here involves the tax
commissioner’s reduction of the amount of a tax credit, the “nonresident credit,”
that relates to a distribution from the co rporation. The Giddenses allocated the distribution outside Ohio on the grounds that it constituted a dividend that was
“nonbusiness income” allocable to Missouri, their place of domicile. {¶ 3} The tax commissioner, however, proceeded on the theory that the
distribution should be treated as “business income,” and he deemed a portion of it to be taxable by Ohio based on the proporti on of the corporation’s business in Ohio. The BTA affirmed the assessment, and the Giddenses have appealed. {¶ 4} We conclude that the taxpayers properly treated the income at issue
as nonbusiness income rather than busine ss income. We therefore reverse the decision of the BTA with respect to dividend allocation.
FACTUAL BACKGROUND {¶ 5} Redneck, Inc. is a wholesale supplie r of equipment for trailer parks, including running gear, axles, springs, hitches, and jacks. In 2008, Redneck’s shareholders, Ernest and Louann Giddens , paid income tax to Ohio on the operational income generated by Redneck because Redneck was a pass-through Subchapter S corporation. See Ardire v. Tracy , 77 Ohio St.3d 409, 674 N.E.2d 1155 (1997), fn. 1 (“For tax purposes, a Subchapter S corporation differs significantly from a normal corporation in that the profits generated through the S corporation are taxed as pers onal income to the shareholders”). Each had a grantor trust (i.e., a trust over which the grantor retained extensive power, such as complete revocability) that owned one-half of Redneck, and because the trust in each instance was a “grantor trust” for federal tax purposes, the trust itself—as well as the S corporation—was a pass-through for income-tax purposes. See Knust v. Wilkins
, 111 Ohio St.3d 331, 2006-Ohio-5791, 856 N.E.2d 243, ¶ 23 (“ ‘Basically, therefore,January Term, 2016

3 [a grantor] trust is completely ignored for income tax purposes’ ”), quoting Ferguson, Freeland & Ascher, Federal Income Taxation of Estates, Trusts, and Beneficiaries Section 10.05[C], at 10-25 to 1-26 (3d Ed.2000). (Brackets sic.) Thus, in 2008, Redneck income would be reflected on the joint return of the
Giddenses. {¶ 6} However, during 2008, Redneck distributed $74,099,830 to its two shareholders through their trusts. This distribution was of earnings and profitsrecorded when Redneck was a C corporation—before the Giddenses elected passthrough treatment for Redneck. Septembe r 1, 2004, was the effective date of the pass-through election. {¶ 7} The Giddenses treated the dist ribution as a dividend, and as nonresidents of Ohio, they allocated the dividend entirely outside this state by claiming a full nonresident credit to offset a ll Ohio income tax associated with the dividend. On audit, the tax commissione r amended the return and assessed a deficiency. {¶ 8} The main item in the assessment, and the only item at issue in this appeal, is the dividend. 1 The tax commissioner treated the dividend as business income rather than as nonbusiness income, and as a result, the commissioner applied Redneck’s apportionment factors to the dividend—that is, 3.9 percent of
the dividend was treated as Ohio income . The total amount of tax deficiency assessed was $182,809.89, most of which was attributable to the apportionment of
the dividend. {¶ 9} When the Giddenses petitioned for reassessment, the tax
commissioner’s final determina tion upheld the assessment, relying with respect to

1 The other adjustments consisted of treating interest income and certain wages as business income. The Giddenses’ merit brief unequivocally states that the “sole issue in this case is the Tax Commissioner’s improper characterization of a divide nd * * *.” Accordingly, the Giddenses have waived or abandoned their objections to any other aspect of the assessment. E. Liverpool v. Columbiana Cty. Budget Comm ., 116 Ohio St.3d 1201, 2007-Ohio-5505, 876 N.E.2d 575, ¶ 3.S UPREME C OURT OF O HIO

4 the dividend issue on this court’s pronouncement in Agley v. Tracy , 87 Ohio St.3d 265, 268, 719 N.E.2d 951 (1999) that “the char acter of the item distributed to a shareholder [of an S corporation] is to be determined as if the item were realized from the source from which the corporation realized the item.” {¶ 10} The Giddenses appealed to the BTA, which held a hearing at which Ernest Giddens testified. The tax commissioner called a supervising tax agent as a witness, and both parties submitted exhibits. {¶ 11} In its decision, the BTA relied on the same Agley pronouncement that the tax commissioner had cited. BTA No. 2012-359, 2014 Ohio Tax LEXIS 4783, 5 (Oct. 20, 2014). The BTA held that because the S election was in place in 2008, the 2008 dividend was to be treated as business income.
ANALYSIS {¶ 12} In this appeal, we confront a ques tion of how to apply the statutory provisions relating to the income taxation of dividends and business income to the Giddens’s 2008 distribution. Because this pr esents primarily a question of statutory construction, we review the BTA’s de cision de novo, without deference. Akron Centre Plaza, L.L.C. v. Summit Cty. Bd. of Revision , 128 Ohio St.3d 145, 2010- Ohio-5035, 942 N.E.2d 1054, ¶ 10.
1. The Giddenses followed the usual trea tment of dividends and distributions as nonbusiness income that is allocated entirely to their Missouri
residence {¶ 13} R.C. 5747.02(A) imposes Ohio income tax on “every individual * * * residing in or earning or receiving income in this state.” As a general matter,
all income of Ohio residents is taxable wherever earned or received, subject to a “resident credit” at R.C. 5747.05(A) for amount s of state income tax paid to another
state in which the income was earned or received. Cunningham v. Testa , 144 Ohio St.3d 40, 2015-Ohio-2744, 40 N.E.3d 1096, ¶ 10. As for nonresidents, only that portion of their income that is “earned or received in this state” is taxable. Id. TheJanuary Term, 2016

5 nonresident credit, R.C. 5747.05(A), allows th e nonresident who must file an Ohio return to remove all Ohio income tax that is associated with any income that was
not earned or received in this state. See Krehnbrink v. Testa , __ Ohio St.3d __, 2016-Ohio-3391, __ N.E.3d __, ¶ 21, 23. {¶ 14} Against this legal backdrop, the Giddenses’ joint return for 2008
reflected a nonresident credit that subtracted all Ohio tax pertaining to the Redneck dividend. In doing so, they relied on R.C. 5747.05(A)(1)’s provision of a credit equal to the “tax otherwise due * * * on such portion of the combined adjusted gross income and business income of any nonr esident taxpayer that is not allocable or apportionable to this state pursuant to sections 5747.20 to 5747.23 of the Revised Code.” Next, the Giddenses looked to R.C. 5747.20(B)(6), which provides that, among other types of income, a nonresident ’s “dividends and distributions * * * shall not be allocated to this state unless the taxpayer’s domicile was in this state at the time such income was paid or accr ued.” In opposing the tax commissioner’s assessment, the Giddenses contend that th e dividend at issue here falls squarely under R.C. 5747.20(B)(6).
2. The tax commissioner treated the divi dend as though it were a distributive share of Redneck’s current income {¶ 15} The tax commissioner does not contest the general validity of the proposition that dividends and distributions are nonbusiness income. Instead, the tax commissioner asserts that because Redneck was an S corporation when the dividend was declared, the dividend need s to be treated as though it were distributive-share income of the S corpora tion. To explain the point, it is necessary
to discuss the difference between S corporations and C corporations. {¶ 16} Under the conventional tax structure, a corporation pays income tax on its earnings; later, if retained earnings are paid out as a dividend, the shareholder must pay tax on the dividend. That arrangem ent can be referred to as the “C corp” situation, after Subchapt er C of the Internal Revenue Code (“IRC”).S UPREME C OURT OF O HIO

6 {¶ 17} By electing pass-through treatme nt under IRC Subchapter S, however, shareholders can avoid the tw o levels of taxation. The “largest
differentiator between an S co rporation and a C corporation is the fact that income of the S corporation is gene rally not taxed at the corporate level.” Bloomberg BNA Tax and Accounting Center, U.S. Inco me Portfolios (“BNA”) 732-1st, S Corporations: Shareholder Ta x Issues, Section I.A. Instead, “all items of income, deduction, loss and credit recognized at th e corporate level are passed through to the S corporation shareholders,” who are “taxed on their allocable share of the income even if the corporation does not make distributions.” Id

. {¶ 18} The income from an S corporation passed through to the individual
shareholder is often referred to as the sh areholder’s “distributive share” of the corporate income, even though it is taxed as pass-through income and the associated tax liability does not depend on any actu al distribution of the income to the taxpayer. See Dupee v. Tracy , 85 Ohio St.3d 350, 351, 708 N.E.2d 698 (1999) (deciding that “the distribu tive share income nonresident shareholders of an Ohio S corporation receive and report as part of their federal adjusted gross income is subject to Ohio personal income tax”). After corporate earnings have accrued and
have been taxed to the shareholder as his or her distributive share, “for the most part, S corporations can distribute S corpor ation earnings tax free. The taxation of S corporation distributions can differ if the S corporation has accumulated earnings and profits (E&P).” BNA 731-3d: S Corpor ations: Corporate Tax Issues, Section
II. {¶ 19} As already noted, we have recognized and endorsed the pass-through
of distributive-share income under the Ohio income tax for both Ohio residents and nonresidents, noting that an S corporation’ s “profits * * * are taxed as personal
income to the shareholders.” Ardire , 77 Ohio St.3d 409, 674 N.E.2d 1155, fn. 1, (Ohio residents); Dupee at 352 (the “character of a shareholder’s S corporation
income remains the same for residents and nonresidents”). We have also endorsedJanuary Term, 2016

7 for Ohio tax-law purposes the propositi on derived from federal law that the
character of the distributive-share in come as business or nonbusiness income depends upon viewing how the income arose from the standpoint of the corporation itself, rather than the shareholder. That is, the business versus nonbusiness
character “is to be determined as if the item were realized from the source from which the corporation realized the item.” Agley , 87 Ohio St.3d at 268, 719 N.E.2d 951; see also Kemppel v. Zaino , 91 Ohio St.3d 420, 421, 746 N.E.2d 1073 (2001) (“Because the Kemppels are shareholders in a subchapter S corporation, the character of the income attributed to them from [the S corporation] is determined as though they had received it directly from the same source as [the S corporation]”). {¶ 20} What the tax commissioner did in this case is apply the proposition just quoted to the dividend income received by the Giddenses here. He apportioned the income to Ohio based on the Ohio apportionment factor of Redneck itself, which was 3.9 percent. We disagree with th is approach for the reasons that follow.
3. For tax purposes, a distribution paid out of accumulated C corp earnings
is a dividend rather than distributive share {¶ 21} As discussed, when the Subcha pter S election applies, the shareholder pays income tax when the income accrues to the corporation; the subsequent distribution is an event that usually does not trigger its own tax liability. What happens instead is an adjustment to the shareholder’s basis in the shares of the corporation, and the income that arose as corporate earnings is held, for tax purposes, in what is called an “accumu lated adjustments account,” which is “generally the accumulation of previously taxed, but undistributed, earnings of the S corporation.” BNA 731-3d: S Corporations: Corporate Tax Issues, Section
II.C.1. {¶ 22} By contrast, a distribution of earnings and profits that accrued to a C corporation that later became an S corporation is subject to the rule that “[a]nyS UPREME C OURT OF O HIO

8 amount distributed in excess of the [accumulated adjustments account] will generally be treated as a dividend to the extent of the corporation's accumulated E & P” from its C corporation days. Id . at II.B.3 {¶ 23} That is what occurred here. Th e Giddenses through their trusts received a dividend from Redneck traceable to earnings that accrued before the S
election in 2004. That dividend was taxa ble as a dividend at the federal and potentially the state level. {¶ 24} In disputing the tax commissioner’s treatment of the dividend as business income, the Giddenses do not disa gree that the ultimate source of their dividend income (though once removed) lay in accumulated earnings of Redneck. Nor does their argument contradict the proposition that any 2008 distributive-share income derived from Redneck’s operations that year should be apportioned to Ohio as business income. Instead, the Gidde nses insist on a distinction between
distributive-share income that is taxed on a pass-through basis, and a later dividend paid out of “accumulated earnings and profits” that is subjected to income taxation. The latter, according the Giddenses, is not business income but is taxed to them solely by virtue of its having been distributed by the corporation. {¶ 25} We agree with the Giddenses’ inte rpretation and conclude that the dividend was nonbusiness income subject to allocation under R.C. 5747.20(B)(6). Crucial to the analysis is the nature of the event that triggered the income-tax liability—here, the declaration of the dividend. That contrasts to the liability of the Giddenses as S-corporation shareholders when they report their distributive share of the corporation’s current income on their individual income-tax return—in that situation, the event that triggers the tax liability is the accrual of income to the corporation by virtue of its business activity.January Term, 2016

9 4. Neither the principle of Agley regarding the characterization of income, nor its codification at R.C. 5747.213, applies in this situation {¶ 26} In Agley , 87 Ohio St.3d 265, 719 N.E.2d 951, we confronted the taxpayers’ contention that an S corpor ation’s income that passed through to
nonresident shareholders should be classifi ed as nonbusiness income by analogy to
a dividend or distribution. We held that “t he character of the item distributed to a shareholder [of an S corporation] is to be determined as if the item were realized from the source from which the corporation realized the item.” Id . at 268. {¶ 27} The tax commissioner focuses on “ite m distributed,” contends that
the dividend issued to the Giddenses’ trusts by Redneck is an “item distributed,” and then points to the origin of that dividend in Redneck’s earnings during earlier years. Because those original earnings were business income to the corporation when earned, the dividend paid out of such earnings must also be business income, according to the tax commissioner. {¶ 28} Although this argument may appear plausible, that appearance arises
from our misstatement in Agley . We used the term “item distributed” in Agley
, even though no actual distribution of corpor ate earnings was at issue because the
income was a distributive share. Id . at 268. We should have said that the character of the S corporation shareholder’s distributive share of the corporation’s own income is to be determined as if that income had been realized by the shareholder from the source from which the corporation realized the income. {¶ 29} Once the correction is made, the tax commissioner’s argument evaporates, because the income at issue in this case is not the Giddenses’ distributive share of Redneck’s current income. Instead, the income subject to taxation here is a dividend paid out of earnings that accrued to the corporation during earlier years. {¶ 30} The tax commissioner also cites R.C. 5747.231, a statute enacted in 2002 that essentially codifies the Agley holding. R.C. 5747.231 states:S UPREME C OURT OF O HIO

10 [E]ach person shall include in that person’s items of business income, nonbusiness income, adjusted qualifying amounts, allocable income or loss, apporti onable income or loss, property, compensation, and sales, the pers on’s entire distributive share or proportionate share of the items of business income, nonbusiness income, adjusted qualifying amounts, allocable income or loss, apportionable income or loss, prope rty, compensation, and sales of any pass-through entity in which the person has a direct or indirect ownership interest at any time during the person’s taxable year. * * * These items shall be in the same form as was recognized by the pass-through entity.

{¶ 31} The commissioner interprets this statute to apply to the Giddenses’ 2008 dividend by highlighting the taxpayer’s “proportionate share of the items of business income of the pass-through entity,” asserting that the dividend somehow qualifies as a “proportionate sh are” of Redneck’s “busine ss income.” But contrary to the commissioner’s theory, the income being taxed in this case is not a “proportionate share” of Redneck’s own “ business income.” Instead, the income at issue here is a dividend paid out to the Giddenses from previously accumulated corporate earnings. {¶ 32} It is worth reiterating that the material distinction is the event that triggers a tax liability for the individual income taxpayer: it is not Redneck’s business activity that made the dividend a ppear as a taxable item on the Giddenses’
return. It was the declaration of the dividend that did so. {¶ 33} Because the Agley principle does not apply, the dividend constitutes
nonbusiness income to be allocated entirel y outside Ohio. The assessment mustJanuary Term, 2016

11 therefore be overturned to the extent that it reflects the tax commissioner’s denial
of nonresident tax credit in re lation to the dividend income.
CONCLUSION {¶ 34} For the foregoing reasons, we reverse the decision of the BTA to the extent that it upheld the tax commissioner’s assessment in relati on to the amount of credit associated with the dividend income. In all other respects, the BTA decision
remains in force. We remand this cause to the tax commissioner with instruction that he take appropriate steps to effectuate this decision. Judgment accordingly.
O’C ONNOR , C.J., and P FEIFER , O’D ONNELL , L ANZINGER , K ENNEDY , F RENCH , and O’N EILL , JJ., concur.

_________________ Baker & Hostetler, L.L.P., and Ed ward J. Bernert, for appellant. Michael DeWine, Attorney General, and Barton A. Hubbard, Assistant Attorney General, for appellee.

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