Ohio's First District Court of Appeals Requires Cincinnati to Accept a Consolidated Return Using
The Ohio First District Court of Appeals (Hamilton County) has issued a decision in Time Warner Cable, Inc., & Subsidiaries v. City of Cincinnati, 2020-Ohio-4207, allowing the taxpayer to file its 2013 Cincinnati municipal income tax return using its federal consolidated group. The decision affirms the Board of Tax Appeals’ May 31, 2019 ruling that former Ohio Revised Code (“R.C.”) 718.06 required a municipality to accept a consolidated return from an affiliated group of corporations where the affiliated group as a whole, rather than each individual corporation, was subject to the municipality’s income tax.
The decision concerns Time Warner’s 2013 municipal income tax return and was thus decided under Chapter 718 as it existed prior to the passage of House Bill 5. House Bill 5’s revision to R.C. 718.06 has since made it abundantly clear that, beginning with 2016 tax years, cities must allow an elective consolidated filing where the taxpayer files a federal consolidated return, and that the affiliated group making up that return is defined by section 1504 of the Internal Revenue Code (“I.R.C.”).
In Time Warner, the court had to decide whether a conflict exists between former R.C. 718.06 and former Cincinnati Municipal Code (“C.M.C.”) 311-11 (and associated Regulation R11). If the state and city codes are in conflict, then pursuant to Article XVIII, Section 13 of the Ohio Constitution the state statute controls as long as it was an “express act of the General Assembly” that preempted the taxing authority of Cincinnati under the Ohio Constitution’s Home Rule Amendment (Article XVIII Section 3).
Cincinnati argued that there was no express act of the General Assembly to limit its own authority to define the nature of the consolidated group allowed to file, because former R.C. 718.06 does not conflict with former CMC 311-11. This ordinance, while allowing the filing of a consolidated return to those corporations that filed a federal consolidated return in the same tax year, limited the members of the Cincinnati consolidated return group to “only corporations subject to the tax imposed by this chapter,” i.e., only those corporations that had nexus with Cincinnati. The City argued that former R.C. 718.06 did not define the nature of the consolidated group to which it referred, leaving Cincinnati the authority to define the consolidated group as those members of the affiliated group having nexus with the City.
The Court of Appeals, however, disagreed with this reading of former R.C. 718.06, stating that “[w]hile the City imagines a multitude of ‘affiliated groups’ within a corporation structure, the statute links the affiliated group to the one that made a federal income tax filing.” The court’s reading is based on the fact that former R.C. 718.06 refers to only one affiliated group, “the one that made a federal income tax filing.” In addition to construing the grammatical structure of the statute as requiring the identity of the federal affiliated group with the one whose filing the municipality is required to accept, the court also finds support in the General Assembly’s use of the term “affiliated group” and reference to the I.R.C. While former R.C. 718.06 did not specifically define “affiliated group,” the I.R.C. does. Referring to R.C. 1.42’s directive that “[w]ords and phrases that have acquired a technical or particular meaning, whether by legislative definition or otherwise, shall be construed accordingly,” together with the reference in R.C. 718.06 to the I.R.C., the court determined that “affiliated group” as used in R.C. 718.06 is such a technical term and must be given the meaning it contains in the I.R.C.
Thus, based on its reading of the statute, the court in Time Warner found that “the General Assembly took clear and affirmative measures to limit the City’s authority to impose the income tax in the manner it sought.” These clear and affirmative measures work as the express preemption required to override a municipality’s taxation authority under the Home Rule Amendment.
The court also rejected the City’s argument that R.C. 718.06 impermissibly required the City to impose its tax on federal affiliated groups, stating that R.C. 718.06 was a limitation on the City’s power of taxation, a power which the City had already exercised. Finally, the court rejected the City’s argument that the statute required it to exercise its taxation power extraterritorially.
Ultimately, the court held that R.C. 718.06 was a proper limitation on the City’s power of taxation and that it required the City to accept Time Warner’s 2013 tax return comprised of Time Warner’s federal consolidated group. If you would like to discuss Time Warner or any appeal issues you may have, please contact Rich Farrin, Derek Heyman or any other ZHF professional.