[Cite as Country Pure Springwater, Inc. v. McClain, 2019-Ohio-3989.]

IN THE COURT OF APPEALS 

ELEVENTH APPELLATE DISTRICT 

GEAUGA COUNTY, OHIO 

COUNTRY PURE SPRINGWATER, INC., : O P I N I O N 

 Appellant, : 

 CASE NO. 2018-G-0185

 - vs - : 

JEFF McCLAIN, TAX COMMISSIONER, 

OHIO DEPARTMENT OF TAXATION, 

: 

: 

 Appellee. 

Appeal from the Ohio Board of Tax Appeals, Case No. 2017-928. 

Judgment: Affirmed in part and reversed in part; remanded. 

Gino Pulito and Christopher J. Caffarel, Pulito & Associates, LLC, 230 Third Street, Elyria,

OH 44035 (For Appellant). 

Dave Yost, Ohio Attorney General, and Daniel G. Kim, Assistant Attorney General, 30 

East Broad Street, 25th Floor, Columbus, OH 43215 (For Appellee). 

TIMOTHY P. CANNON, J. 

{¶1} Appellant, Country Pure Springwater, Inc. (“CPS”), appeals the decision of 

the Ohio Board of Tax Appeals (“BTA”), which affirmed the final determination of the Tax 

Commissioner (“the Commissioner”) to issue three assessments for employer withholding 

tax for the period ranging from 1988 to 2008. We reverse and remand the judgment of 

the BTA with regard to the calculation of the assessment. In all other respects, the BTA’s 

decision is affirmed. 
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{¶2} CPS was an Ohio corporation in the business of selling spring water and 

related goods and services. Felix Warner (“Warner”) was, at all times in which the audit 

examined, the sole owner and President of CPS. Although the parties dispute exactly 

when CPS ceased to operate, they agree that CPS did not operate as a business in Ohio 

after 2008. 

{¶3} According to the testimony of audit agent Elizabeth Werner (“Elizabeth”), 

she discovered CPS as an appropriate candidate for audit through numerous recorded 

941 liens for federal withholding tax liability from 1988 through 2005. Elizabeth made 

several attempts through letters and phone calls to contact CPS for additional information 

on the state withholding taxes; however, at no point during her audit was she able to 

obtain any documentation from CPS. After completing the audit, Elizabeth sent another 

letter to CPS, through counsel, which contained the audit results and requested a 

response. CPS did not respond with any documentation or other evidence related to the 

withholding taxes, but counsel for CPS did request a meeting with Elizabeth to review the 

matter. After several unsuccessful attempts to schedule a meeting, Elizabeth forwarded 

the audit results to the Commissioner for assessment. CPS was assessed outstanding 

withholding taxes in the total amount of approximately $401,541.96, including outstanding 

interest and penalties of 50% imposed on each of the three assessments. Upon a request 

for reassessment, the Commissioner upheld all three of the assessments. 

{¶4} Thereafter, CPS appealed the Commissioner’s decision to the BTA. On 

April 30, 2018, a hearing was held on the appeal. Warner was called as a witness on 

behalf of CPS, and Elizabeth was called as a witness on behalf of the Commissioner. 
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{¶5} Warner testified that a member of his office staff (“E.C.”) was responsible 

for all the financial responsibilities, including fulfillment of the tax obligations. Shortly 

before CPS allegedly ceased operating, Warner discovered that E.C. had been engaged 

for many years in embezzling and stealing from CPS. Because of E.C.’s fraudulent 

conduct, Warner testified he had no way of knowing that the withholding taxes had not 

been paid. Warner stated his belief that the taxes had been paid. He testified, however, 

that the documentation establishing the payments had not been maintained by himself or 

his accountant due to the substantial number of years related to the audit and Warner’s 

practice of purging paperwork after several years of storage. CPS offered as evidence 

the first page of federal IRS form 1120S for each of the tax years in dispute from 1995 to 

2008, which contained wage numbers differing significantly from the estimates Elizabeth 

used during the audit. CPS also offered as an exhibit a settlement agreement between 

CPS (d/b/a Cherry Knoll Spring Water) and E.C. evidencing the embezzlement and theft, 

which was admitted without objection. 

{¶6} Elizabeth testified regarding her experience conducting between 30 and 50 

audits per year since 2007. Although she testified that during her audit she did not have 

the 1120S forms submitted by CPS at the hearing, the income figures from those forms 

were listed in Elizabeth’s audit spreadsheet and are part of the record. It is unclear when 

these figures were first available to her, but it appears it was sometime prior to the BTA 

hearing. Elizabeth stated that it is not her common practice to use the wage figures on 

those federal forms because the numbers “are often inflated.” There was no explanation 

offered for why she believed this. In addition, if the numbers were inflated, it would result 

in a higher tax than what the taxpayer would owe. She stated that her preferred practice 
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is to compare the W-2s for employees to the 941 federal tax liens, but she was not 

provided with any W-2 information for CPS. 

{¶7} Elizabeth explained she relied on estimations because she had not received 

any response, paperwork, or other documentation from CPS after several requests, 

including after the correspondence informing CPS of her findings. These estimations 

included two methods germane to the present dispute: (1) regarding withholding amounts 

for income tax figures discovered in the department’s internal database, Elizabeth took 

the number discovered and multiplied it by 2; and (2) where income information was not 

available through the database, Elizabeth took the federal 941 lien information—averaged 

by quarter—and divided the total figure by 3. Elizabeth explained that the multiplier in the 

former instance was to account for incomplete information contained in the database, and 

the divider in the latter instance was in consideration of the federal lien numbers 

containing various additional amounts not related to income tax, such as additional taxes, 

interest, and penalties. Elizabeth confirmed multiple times that these are the typical 

methods used when conducting an audit; however, she conceded that no written policy 

existed establishing the practices and that no studies, data, or other evidence existed 

supporting the department’s unwritten estimation policy. 

{¶8} The Commissioner offered as evidence a spreadsheet created by Elizabeth 

evidencing the federal 941 lien amounts and estimations for each quarter, as well as five 

letters of correspondence sent by her to both CPS and counsel for CPS during the course 

of the audit. All of these were admitted without objection. 

{¶9} On November 14, 2018, the BTA affirmed the decision of the 

Commissioner, determining that CPS had failed to meet its burden to prove either that 
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the methodologies used in calculating the withholding tax assessments were not 

performed in good faith and with sound judgment, or that the penalties assessed by the 

Commissioner were an abuse of discretion. 

{¶10} CPS has timely filed four assignments of error for our review. For clarity 

and convenience, we combine and consider the first three assignments: 

[1.] The board of tax appeal’s decision was unreasonable and 

unlawful by finding that the information contained on the federal tax 

returns provided by Appellant were unreliable and that the numbers 

contained therein were inflated. 

[2.] The Board of Tax Appeals committed error by agreeing to the 

Tax Commissioner’s formula of applying a one-third (1/3) factor to 

the federal tax liens filed with the Lorain County Recorder’s office 

and a multiplier of 2 to the internal “COGNOS” database information, 

in estimating the taxes owed by Appellant, even though there exists 

no study, data, or reasonable basis to support the accuracy of those 

computations. 

[3.] The Board of Tax Appeals committed error by finding that there 

was an absence of evidence supporting better estimates of liability 

than those implemented by the Tax Commissioner in this case. 

{¶11} R.C. 5717.04 provides for an appeal from a Board of Tax Appeals’ decision 

to the Supreme Court of Ohio or the court of appeals and explains the standard of review: 

If upon hearing and consideration of such record and evidence the 

court decides that the decision of the board appealed from is 

reasonable and lawful it shall affirm the same, but if the court decides 

that such decision of the board is unreasonable or unlawful, the court 

shall reverse and vacate the decision or modify it and enter final 

judgment in accordance with such modification. 

{¶12} Stated differently, the Board of Tax Appeals “‘is responsible for determining 

factual issues and, if the record contains reliable and probative support for these BTA 

determinations,’ this court will affirm them.” Satullo v. Wilkins, 111 Ohio St.3d 399, 2006-

Ohio-5856, ¶14, quoting Am. Natl. Can Co. v. Tracy, 72 Ohio St.3d 150, 152 (1995). 
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Conversely, we “‘will not hesitate to reverse a [Board of Tax Appeals] decision that is 

based on an incorrect legal conclusion.’” Id., quoting Gahanna-Jefferson Local School 

Dist. Bd. of Edn. v. Zaino, Tax Commr., 93 Ohio St.3d 231, 232 (2001). 

{¶13} “It does not matter whether we [as a reviewing court] might have weighed 

the evidence differently from the board had this court been making the original 

determination. As long as there is evidence which reasonably supports the conclusion 

reached by the board, its decision must stand.” Highlights for Children, Inc. v. Collins, 

Tax Commr., 50 Ohio St.2d 186, 187-188 (1977), citing Jewel Cos. v. Porterfield, 21 Ohio 

St.2d 97, 99 (1970). “‘The Court of Appeals is bound by the record that was before the 

Board of Tax Appeals and may not substitute its judgment for that of the board.’” Kister 

v. Ashtabula Cty. Bd. of Revision, 11th Dist. Ashtabula No. 2007-A-0050, 2007-Ohio6943, ¶12, quoting Mobile Instrument Serv. & Repair, Inc. v. Tax Commr. of Ohio, 3d Dist. 

Logan No. 8-2000-20, 2000 WL 1783574, *2 (Dec. 6, 2000) citing Denis Copy Co. v. 

Limbach, 76 Ohio App.3d 768 (8th Dist. 1992). 

{¶14} [E]very employer, including the state and its political subdivisions, 

maintaining an office or transacting business within this state and making 

payment of any compensation to an employee who is a taxpayer shall 

deduct and withhold from such compensation for each payroll period a tax 

computed in such manner as to result, as far as practicable, in withholding 

from the employee’s compensation during each calendar year an amount 

substantially equivalent to the tax reasonably estimated to be due from the 

employee * * *. The employer shall deduct and withhold the tax on the date 

that the employer directly, indirectly, or constructively pays the 

compensation to, or credits the compensation to the benefit of, the 

employee. 

R.C. 5747.06(A). “The method of determining the amount to be withheld shall be 

prescribed by rule of the tax commissioner.” Id. “[E]very employer required to deduct 
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and withhold any amount under section 5747.06 of the Revised Code shall file a return 

and shall pay the amount required by law[.]” R.C. 5747.07(B). 

{¶15} The rule is well settled that a taxpayer challenging the assessment has the 

burden to show in what manner and to what extent the commissioner’s investigation and 

audit, and the findings and assessments based thereon, were faulty and incorrect. See, 

e.g., Krehnbrink v. Testa, 148 Ohio St.3d 129, 2016-Ohio-3391, ¶30, quoting Maxxim 

Med., Inc. v. Tracy, 87 Ohio St.3d 337, 339 (1999) (quotations omitted). See also Kister,

supra, at ¶12. 

{¶16} CPS does not dispute that it had a duty to collect withholding taxes from its 

employees and that it had a duty to pay those taxes to the department of taxation. 

Further, CPS does not dispute that it no longer possesses the documentation and 

evidence to establish that the taxes were paid. Thus, CPS concedes that a tax 

assessment is appropriate, and the sole contention on appeal in the first three 

assignments of error concern the manner in which the Commissioner calculated and 

determined the amount to assess in unpaid taxes. 

{¶17} The Commissioner presented testimony evidence from Elizabeth, the 

conductor of the audit on CPS, that no documentation was provided from which she could 

determine accurate wage numbers. Because of CPS’s lack of response to 

correspondence and inability to provide the wage information, Elizabeth testified that she 

utilized commonly accepted department methods for calculating an estimate of the 

required withholding. Although the 1120S information provided by CPS at the appeal 

hearing was not made available to Elizabeth by CPS prior to her final determinations, it 

appears she did have the information at some point prior to the BTA hearing. She testified 
 8

from her knowledge and experience that she does not typically utilize the information on 

those forms in determining wage figures because she believes it is not accurate. Without 

any explanation, her basis for this belief—as noted earlier—was that these figures are 

often inflated. However, these figures represent actual wage information filed with CPS’s 

federal tax filings for each year. If they are inaccurate because they are inflated, this will 

result in a higher tax. The multiplier/divider estimation efforts utilized by Elizabeth 

resulted in a substantially more inflated assessment figure than if she had utilized the 

information from the 1120S forms. 

{¶18} The statute specifically states that an assessment shall be made “based 

upon any information in the commissioner’s possession.” R.C. 5747.13(A) (emphasis 

added). It certainly appears the 1120S information was in the Commissioner’s 

possession at some point prior to the BTA hearing, as it appears in Elizabeth’s 

spreadsheet that is part of the record from the BTA hearing. 

{¶19} A large part of the problem in this case is the length of time it took the state 

to discover the alleged non-compliance. It is understandable that the taxpayer would lack 

documentation going back 25 years. It is not reasonable to expect retention of 

documentation for that length of time. 

{¶20} Given the specific facts of this case, we hold that it was unreasonable to 

allow calculation of the assessments using Elizabeth’s estimates for the years 1995 

through 2008. As noted, she testified there are no studies, data, or other evidence that 

support the department’s unwritten methodology in computing the assessment. The most 

reliable information concerning the tax liability was contained in the 1120S information for 

the years 1995 through 2008. 
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{¶21} The BTA’s affirmance of the assessment total is therefore reversed, and the 

matter is remanded for a more accurate assessment of the amount of withholding tax 

owed by CPS utilizing the 1120S income and wage figures for the years 1995 through 

2008. 

{¶22} CPS’s first, second, and third assignments of error have merit. 

{¶23} CPS’s fourth assignment of error states: 

[4.] The Board of Tax Appeals committed error by refusing to 

eliminate the penalty and finding that the Tax Commissioner did not 

abuse its discretion regarding the imposition of the penalties in this 

matter. 

{¶24} Pursuant to R.C. 5747.15(A)(4)(a), “[i]f an employer withholds from 

employees the tax imposed by section 5747.02 of the Revised Code and fails to remit the 

tax withheld to the state as required by this chapter on or before the dates prescribed for 

payment, a penalty may be imposed not exceeding fifty per cent of the delinquent 

payment.” However, “[a]ll or part of any penalty imposed under this section may be 

abated by the commissioner if the taxpayer, qualifying entity, or employer shows that the 

failure to comply with the provisions of this chapter is due to reasonable cause and not 

willful neglect.” R.C. 5747.15(C). 

{¶25} Remission of this penalty is discretionary. Jennings & Churella Constr. Co. 

v. Lindley, Tax Commr., 10 Ohio St.3d 67, 70 (1984). Likewise, “[a]ppellate review of this 

discretionary power is limited to a determination of whether an abuse has occurred.” Id. 

(emphasis sic.); see also Interstate Motor Freight Sys. v. Bowers, Tax Commr., 170 Ohio 

St. 483, 484 (1960). “An abuse of discretion connotes a decision that is unreasonable, 

arbitrary or unconscionable.” Id., citing State v. Adams, 62 Ohio St.2d 151, 157 (1980) 

and Chester Twp. v. Geauga Cty. Budget Comm., 48 Ohio St.2d 372, 373 (1976). “‘Abuse 
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of discretion’ is a term of art, describing a judgment neither comporting with the record, 

nor reason. * * * Further, an abuse of discretion may be found when the trial court ‘applies 

the wrong legal standard, misapplies the correct legal standard, or relies on clearly 

erroneous findings of fact.’” Carson v. Holmes, 11th Dist. Portage No. 2010-P-0007, 

2010-Ohio-4199, ¶23, quoting Thomas v. Cleveland, 176 App.3d 401, 2008-Ohio-1720, 

¶15 (8th Dist.). 

{¶26} CPS argues that the penalties imposed by the Commissioner should be 

reduced because it was the victim of embezzlement by a former employee, and also 

because the Commissioner was unable to produce evidence that the withholding taxes 

were not, in fact, paid by CPS each year. We are not persuaded that the imposition of a 

penalty in these circumstances constitutes an unreasonable, arbitrary or unconscionable 

action. 

{¶27} The BTA found that CPS failed to prove that the Commissioner abused its 

discretion in refusing to remit the penalty because CPS did not take action to pay the 

assessments upon learning of its liabilities. CPS does not dispute failing to take any 

action with regard to the tax liability following the discovery of E.C.’s fraudulent acts in 

2008. Therefore, the BTA correctly considered the argument set forth by CPS and 

determined the circumstances in this matter demonstrate that the Commissioner did not 

abuse its discretion with regard to the imposition of penalties. 

{¶28} Finally, as discussed above relating to evidence of tax payments, it is not 

the burden of the Commissioner to produce evidence that CPS did not pay the withholding 

taxes. CPS bears the burden of demonstrating that the taxes were paid, and it was unable 

to produce any evidence to sustain that burden. 
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{¶29} CPS’s fourth assignment of error is without merit. 

{¶30} The decision of the Board of Tax Appeals is affirmed with regard to the 

imposition of a penalty and reversed with regard to the calculation of withholding tax 

owed. The matter is remanded to the Board of Tax Appeals for further determination 

consistent with this opinion. 

CYNTHIA WESTCOTT RICE, J., 

MARY JANE TRAPP, J. 

concur.