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Nonresident Sale of Business Appealed to Board

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A Final Determination (“FD”) was issued by the Ohio Tax Commissioner on March 28, 2024 to Garry A. Rayant and Kathy A. Fields. The taxpayers had filed a refund claim for calendar year 2018 related to the position that capital gains on the sale of their interest in the business was nonbusiness income allocable outside of Ohio. The Ohio Department of Taxation (“Department”) reviewed the refund claim and determined that the gains were business income apportionable to Ohio. The Department denied the refund claim based on the nonbusiness income assertion, but it did issue a refund for the business income deduction and lower tax rate on business income, which had not been claimed on the original return.

According to the FD, the taxpayers argued that the imposition of R.C. 5747.212 to treat the gains as business income is unconstitutional pursuant to Corrigan v. Testa, 149 Ohio St.3d 18, 73 N.E.3rd 381 (2016). The FD states that the facts are materially different than those in Corrigan in which the taxpayer was found to be a mere investor in the business with no unitary relationship with the business. According to the FD, the taxpayer did not dispute that the business had operations in Ohio or that Dr. Kathy Fields is a dermatologist that founded, developed products, and acted as a spokesperson for the company. The FD concludes that Dr. Fields was an active rather than a passive investor in the company.

The FD also states that the updated definition of “business income” in R.C. 5747.01(B) enacted in 2022 would treat the capital gains as business income. Under the new definition, if a taxpayer materially participated in the business in the five years preceding the sale as defined in Treas. Reg. section 1.469-5T, the gain on the sale of the business interest is considered business income.

The taxpayer appealed to the Ohio Board of Tax Appeals. A hearing will be held in the case and briefing will have to occur prior to the Board issuing a decision. The Board cannot consider constitutional issues unless it can read the statute in an alternative manner that it deems constitutional. The case raises interesting questions on the constitutionality of R.C. 5747.212 to taxpayers that are not mere investors in a business and whether a unitary relationship with a business can exist. It also raises a question on whether the updated “business income” definition can be applied to prior, closed tax years.

If you would like to further discuss nonresident business income, please reach out to Deb McGraw or any of our ZHF professionals.

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