Ohio allows taxpayer to file on federal combined basis

Ying Lee
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Jason Gajramsingh
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Sam Barnett
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Jamie C. Yesnowitz
Washington, DC
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Chuck Jones
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Lori Stolly
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On May 31, 2019, the Ohio Board of Tax Appeals (BTA) allowed a taxpayer to file a Cincinnati municipal income tax return including all entities which were part of the taxpayer’s federal combined group, rather than only those with Cincinnati nexus.1 Specifically, the BTA upheld the Ohio municipal code’s preemptive statutory authority over the Cincinnati statute and regulations.

Background The taxpayer, Time Warner Cable Inc. and Subsidiaries, originally filed its City of Cincinnati income tax return for the 2013 tax year on a nexus consolidated basis, as required by the city’s statute.2 In May 2015, the taxpayer timely filed an amended return including all entities in its federal group, as permitted by state statutes governing municipal taxation.3 Cincinnati’s Income Tax Division disallowed the inclusion of entities that were not subject to tax in the city. The Cincinnati Income Tax Board of Review sustained the Division’s decision, which considered only the statutory and regulatory language in Cincinnati’s Municipal Code and Regulations. The taxpayer appealed to the Ohio Board of Tax Appeals, arguing that Cincinnati’s Municipal Code and Regulations conflict with Ohio Revised Code Sec. 718.06, which permits the filing of a consolidated municipal return on the basis of a federal combined group.4

Ohio BTA decision Ohio municipal income taxThe Ohio Revised Code empowers Ohio municipalities to impose an income tax on companies that are doing business and deriving income from within the municipality.5 However, it has historically permitted those municipalities some discretion in the treatment of certain items, which allowed municipalities to adopt their own distinctive rules and procedures. Some municipalities’ ordinances and regulations contradict statutory requirements set forth in the Ohio Revised Code.

Cincinnati generally imposes an income tax on persons earning income within its borders.6 For the tax year at issue, the city’s municipal code allowed a taxpayer that is a member of an affiliated group of corporations to elect to file a consolidated municipal income tax return. However, only corporations subject to Cincinnati income tax were allowed to be included.7 In contrast, Ohio Revised Code Sec. 718.06 applicable to the year at issue required that municipalities imposing income taxes accept for filing a consolidated income tax return from “any affiliated group of corporations subject to the municipal corporation’s tax if that affiliated group filed for the same tax reporting period a consolidated return for federal income tax purposes.”8

DecisionIn its brief analysis, the Ohio BTA agreed with the taxpayer that the state statute preempted its municipal counterpart.9 It gave primacy to the plain meaning of the words requiring the city to accept a consolidated return from an affiliated group of corporations if the affiliated group as a whole, not each individual corporation, is subject to its municipal income tax, provided the same group filed a consolidated return for federal income tax purposes. In finding the state statute explanatory, rather than limiting, it denied the city’s assertion that its reference to entities “subject to the municipal corporation’s tax” inherently limited the filing group to match the city’s definition of includible corporations.

Commentary Ohio enacted legislation in late 2014 reforming the state’s municipal income tax system, which was required to be adopted by all municipalities levying an income tax for tax years beginning on or after Jan. 1, 2016.10 The legislation provides for a uniform tax base and other definitions, adopts a uniform five-year net operating loss (NOL) carryforward for both corporations and individuals to be phased in over a six-year period, and limits the ability of municipalities and tax administrators to adopt conflicting rules.  

Nonetheless, the BTA decision is a welcome one for Ohio taxpayers, furthering statutory attempts to bring statewide uniformity to Ohio’s system of municipal taxation. By deciding the case on the plain reading of the Ohio statute and inferring the intent of the legislators to clearly impose specific limits on Ohio cities’ power to tax, the BTA decision gives more power to taxpayers looking for clarity in a state where municipal taxation has historically been decentralized, heterogeneous and administratively burdensome.

1 Time Warner Cable Inc. v. City of Cincinnati, Ohio Board of Tax Appeals, No. 2017-1448, May 31, 2019.
2 CINCINNATI MUN. CODE § 311-11, prior to amendment. The provision specified that “[a] consolidated return may be filed by an affiliated group of corporations subject to the tax imposed by this chapter if that affiliated group filed for the same taxable year a consolidated return for federal income tax purposes pursuant to Section 1501 of the Internal Revenue Code. Only corporations subject to the tax imposed by this chapter may be included in such consolidated return filed for Municipal income tax purposes.” Further, former Regulation R11.B concurred: “[o]nly those entities doing business in the Municipality shall be included in the consolidated return.”
3 OHIO REV. CODE ANN. § 718.06, prior to amendment. Specifically, the statute provided “[a]ny municipal corporation that imposes a tax on the income or net profits of corporations shall accept for filing a consolidated income tax return from any affiliated group of corporations subject to the municipal corporation's tax if that affiliated group filed for the same tax reporting period a consolidated return for federal income tax purposes pursuant to section 1501 of the Internal Revenue Code.”
4 OHIO REV. CODE ANN. § 718.06 as applicable to the 2013 tax year.
5 OHIO REV. CODE ANN. § 718.02(D). Municipalities are referenced as municipal corporations in the statute.
6 CINCINNATI MUN. CODE § 311-1(b). “Person” is defined to include most entity types, including C corporations. See CINCINNATI MUN. CODE § 311-9-P3.
8 OHIO REV. CODE ANN. § 718.06 as applicable to the 2013 tax year.
9 Citing Panther II Transp., Inc. v. Seville Bd. of Income Tax Review, 8 N.E.3d 904 (Ohio 2014).
10 Sub. H.B. 5, Laws 2014.

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