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Ohio Supreme Court rejects amortizable amount reduction of CAT NOL credit in tax-free reorganization

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On April 24, 2018, the Ohio Supreme Court held that the Ohio Tax Commissioner should not have reduced the amortizable amount of the taxpayer’s net operating loss (NOL) credit against the commercial activity tax (CAT) to reflect the amount of cancellation-of-debt income (CODI) from the taxpayer’s bankruptcy.1 A provision of the NOL credit statute addressing tax-free reorganizations does not authorize an adjustment of the amortizable amount. The statute first permits the credit to transfer in tax-free reorganizations and then prescribes apportionment of the credit among successors that obtain only a portion of the predecessor’s NOLs.

Background As part of its 2005 tax reform, Ohio transitioned from a corporation franchise tax to the CAT. The CAT legislation included an amortizable credit to allow corporations to realize the value of the NOLs that they incurred before the CAT was enacted.2 To receive the credit, a company was required to file a report with the Tax Commissioner by June 30, 2006, that calculated the statutory amount to be applied gradually over a period of 20 years against the CAT. This amount was based on the NOL carryforwards and other deferred tax assets that the corporation had for the fiscal year ending in 2004. The Tax Commissioner could audit and modify the amortizable amount by issuing a final determination by June 30, 2010.

In this case, the taxpayer was a consolidated group of affiliated corporations that filed a report on June 30, 2006, that listed an amortizable amount of approximately $12.5 million. Near the same time, the taxpayer filed for Chapter 11 bankruptcy and reorganized. On June 31, 2008, the reorganized taxpayer emerged from bankruptcy and retained all of the existing NOLs, subject to reductions from the realization of CODI. The Tax Commissioner audited the taxpayer’s amortizable credit report and reduced the amortizable amount for two reasons. First, the Tax Commissioner reduced the amortizable amount to $10.9 million based on the amended tax reports filed by the taxpayer. The taxpayer accepted this adjustment. Second, the Tax Commissioner further reduced the amortizable amount to $4.7 million based on the percentage reduction of the taxpayer’s federal NOLs by CODI that the taxpayer realized from the bankruptcy. The taxpayer appealed this determination and sought to return the amortizable amount to $10.9 million. The Ohio Board of Tax Appeals (BTA) affirmed the amortizable amount of $4.7 million and rejected the Tax Commissioner’s attempt to further reduce the amount to zero. The taxpayer and the Tax Commissioner both appealed the BTA’s decision.

Amortizable amount not reduced In reversing the BTA, the Ohio Supreme Court thoroughly considered the language of the NOL credit statute that addresses corporate reorganizations. The contested statute provides:

If one entity transfers all or a portion of its assets and equity to another entity as part of an entity organization or reorganization or subsequent entity organization or reorganization for which no gain or loss is recognized in whole or in part for federal income tax purposes under the Internal Revenue Code, the credits allowed by this section shall be computed in a manner consistent with that used to compute the portion, if any, of federal net operating losses allowed to the respective entities under the Internal Revenue Code.3


The Court carefully examined the highlighted statutory language. The Tax Commissioner argued that the statutory language means that the successor entities after a tax-free reorganization should reduce the amortizable amount to the same extent that the NOLs are offset by CODI. The BTA agreed with this position. In contrast, the taxpayer argued that the statute does not authorize a recalculation of the amortizable amount if there is a reorganization. Under the taxpayer’s argument, the statute requires that the NOL credit “be allocated to the reorganized entities in the same proportion that the federal NOLs are allocated to the respective entities.” The taxpayer contended that the highlighted statutory language would require an additional adjustment only in situations in which a successor entity acquires only a portion of the assets of the entity that filed the amortizable-amount report. The division of the assets would change, but the overall amortizable amount would remain the same.

The taxpayer also argued that the Ohio statute did not incorporate the Internal Revenue Code (IRC) provisions that relate to offsetting CODI against NOLs. In rejecting the taxpayer’s argument, the Court explained that the offset of CODI against NOLs is a routine computation under federal law. However, the Court determined that the BTA’s holding that all provisions of the IRC applied to the contested statute was “inconsequential” because the statute does not authorize an adjustment of the amortizable amount.

    Statutory ambiguity Prior to determining that the contested statute does not authorize an adjustment of the amortizable amount, the Court acknowledged that the statutory language was ambiguous. The Tax Commissioner could reasonably argue that the statutory language highlighted above refers to the reduced amount of NOLs resulting from the CODI offset. The taxpayer could plausibly argue that the highlighted statutory language referred to the percentage of the amortizable amount claimed by a successor that only has an interest in a portion of the assets. Due to the ambiguity, the Court was required to interpret the statute. Because the question concerned the computation rather than the applicability of the credit, the Court considered the general guidance for construing ambiguous statutes used to construe allocation and apportionment provisions.

    Five reasons supporting taxpayer’s statutory interpretation Based on case law, the Court construed the computation required under the statute in light of the “object sought to be attained” and the “consequences of a particular construction.”4 The Court determined that five reasons supported the taxpayer’s interpretation of the statute. First, the parallelism between the statutory provision allowing the credit5 and the contested provision implies that the contested provision describes how to compute the credit. Second, the procedure for claiming the credit generally militates against reading the contested statutory provision to require a reduction of the amortizable amount. Third, this interpretation is consistent with the Court’s decision in Navistar, Inc. v. Testa,6 in which the Court “acknowledged that the CAT credit was intended to reflect the deferred tax assets and valuation allowance of a company as of a specific point in time, as reported on the amortizable-amount report, subject only to corrections of errors or inaccuracies.” Fourth, the contested provision’s reference to computing in terms of federal rather than Ohio NOLs supports interpreting the statute against an adjustment of the amortizable amount. Finally, the disputed statutory language uses the word “portion,” which means “[a] share or allotted part.”7

The Court concluded that the statute does not authorize an adjustment of the amortizable amount because of a tax-free reorganization. The statute allows the credit to transfer if there is a tax-free reorganization and then prescribes the apportionment of the credit among the successors to the extent that they only receive a portion of their predecessor’s NOLs.

Commentary This decision highlights a relief mechanism that states often provide to taxpayers when a significant shift from one corporate-level tax regime to another is made. In order to account for substantial changes in how the corporate-level tax is computed and mitigate potential adverse financial statement impact due to the loss of deferred tax assets, the relief is often provided through the use of a credit or deduction taken over a lengthy amount of time. The continuing vitality of the CAT credit is evident, as many companies continue to reflect the benefits of this provision on their CAT returns, long after the transition from Ohio’s corporate franchise tax to the CAT.

In this case, the statutory language adopted by Ohio governing how to treat tax-free reorganizations for purposes of the CAT credit, and the lack of additional guidance on how to interpret such language left substantial room for the Court to decide how to proceed. By preventing the Tax Commissioner from substantially reducing the taxpayer’s amortizable amount, the Ohio Supreme Court expressly disagreed with much of the BTA’s analysis and provided a very patient taxpayer with a restored tax attribute that can continue to be applied as a credit to future CAT periods.

The specific facts of the case involve how to determine the amortizable amount under a fact pattern that included a complex CODI adjustment following a bankruptcy. However, this decision may be viewed as providing a level of certainty for the determination of the amortizable amount under other fact patterns involving tax-free reorganizations. This is sensible given the purpose of setting a strict amortizable amount at the beginning of the transition from the corporation franchise tax to the CAT, and the care taken by taxpayers in setting forth an amortizable amount that they considered to be binding and final. One would expect that to the extent the Tax Commissioner is still trying to challenge amortizable amount declarations through the audit process and litigation, such effort would now be less likely to succeed.




1 Dana Corp. v. Testa, Ohio Supreme Court, No. 2018-Ohio-1561, April 24, 2018.
2 OHIO REV. CODE ANN. § 5751.53.
3 OHIO REV. CODE ANN. § 5751.53(F) (emphasis added).
4 International Paper Co. v. Testa, 81 N.E.3d 1225 (Ohio 2016), quoting OHIO REV. CODE ANN. § 1.49(A), (E).
5 See OHIO REV. CODE ANN. § 5751.53(B).
6 39 N.E.3d 509 (Ohio 2015).
7 BLACK’S LAW DICTIONARY 1349 (10th Ed. 2014).



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