Ohio has issued guidance regarding apportioning the gain from a taxpayer’s ownership interest in a “closely held” investment. The guidance applies to certain nonresident personal income taxpayers who were taxed on a capital gain from the sale of an ownership interest. In Corrigan v. Testa, the Ohio Supreme Court held that Ohio violated the Due Process Clause of the Fourteenth Amendment to the U.S. Constitution when taxing the sale of an ownership interest.
What did the Ohio Supreme Court Decide?
Ohio summarized the Court’s findings as:
– the analysis and holding were confined to R.C. 5747.212 and did not expand to any other statute;
– the statute was unconstitutional as applied, not on its face; and
– the Court found an ownership interest in a business is an “intangible asset” and that neither the taxpayer nor the sale of the asset had a taxable link to Ohio.
The Court followed the general rule of law that a capital gain derived from the sale of an intangible asset is allocable to the taxpayer’s state of domicile as nonbusiness income.
What Should a Taxpayer Impacted by the Decision do?
Taxpayers who believe they are entitled to a refund, based on the holding in Corrigan, should file amended tax returns. When filing an amended return taxpayers should:
– cite Corrigan v. Testa as the basis for the amended return on the “Reasons and Explanation of Corrections” page accompanying the amended return;
– provide a detailed statement outlining the factual and legal reasons why the Corrigan decision is applicable to the R.C. 5747.212 adjustment reported on their original return or determined to be applicable via an audit;
– ensure the refund request is for payments made within four years of the date the refund is requested; and
– ensure the payments/ tax years the taxpayer is requesting a refund are not the subject of a Settlement Agreement.
Taxpayers who already filed a refund application or petitioned an assessment relating to the applicability of R.C. 5747.212 do not need to take any further action. Ohio will automatically review those cases because of the Corrigan decision. If a taxpayer has additional information that, after reading the Corrigan decision, further supports the taxpayer’s position, that information should be sent to the taxpayer’s point of contact in the Department of Revenue as soon as possible.
Income Tax Information Release IT 2016-01, Ohio Department of Taxation, February 1, 2019, ¶404-767