In the Supreme Court of Ohio

Transcription

1 Supreme Court of Ohio Clerk of Court - Filed February 17, Case No In the Supreme Court of Ohio Patton R. Corrigan, : Case No : Appellant, : On Appeal from the Ohio : Board of Tax Appeals v. : : BTA Case No Joseph W. Testa, Tax Commissioner of Ohio, : : Appellee. : BRIEF AMICUS CURIAE OF THE OHIO CHAMBER OF COMMERCE IN SUPPORT OF APPELLANT PATTON R. CORRIGAN J. Donald Mottley ( ) Michael DeWine ( ) Taft Stettinius & Hollister LLP Attorney General of Ohio 65 East State Street, Suite 1000 Barton A. Hubbard ( ) Columbus, Ohio Assistant Attorney General Telephone: (614) East Broad Street, 25th Floor Facsimile: (614) Columbus, Ohio mottley@taftlaw.com Telephone: (614) Facsimile: (866) Attorney for Appellant, barton.hubbard@ohioattorneygeneral.gov Patton R. Corrigan Attorneys for Appellee, Joseph W. Testa, Tax Commissioner of Ohio Edward J. Bernert ( ) COUNSEL OF RECORD Elizabeth A. McNellie ( ) Baker & Hostetler LLP 65 East State Street, Suite 2100 Columbus, Ohio Telephone: (614) Facsimile: (614) ebernert@bakerlaw.com emcnellie@bakerlaw.com

2 Christopher J. Swift ( ) Baker & Hostetler LLP 1900 East Ninth Street Cleveland, Ohio Telephone: (216) Facsimile: (216) Attorneys for Amicus Curiae, Ohio Chamber of Commerce

3 TABLE OF CONTENTS Page(s) I. STATEMENT OF INTEREST OF AMICUS CURIAE...1 II. LAW AND ARGUMENT...2 A. Introduction...2 B. The Activities Of Mansfield Plumbing Are Not Attributed To Mr. Corrigan When Sourcing The Sale Of His Investment...3 C. The Sale Of The Entity By The Investor Is Gain Earned Outside The Entity, And The In-State Activities Of The Entity Cannot Be Used To Source Such Gain From The Sale Of The Entity By Its Owner...6 D. The Interaction Of R.C And State Resident Credits Creates Actual Double Taxation...7 E. The Tax Commissioner s Application Of R.C Violates The Commerce Clause Of The United States Constitution And The Due Process Clause Of The Fourteenth Amendment Nexus Prong Fair Apportionment Prong Discrimination Prong Due Process Violation...11 F. The General Assembly Could Not Have Intended To Stifle Investment...11 G. The Court Should Fashion A Remedy That Addresses The Unconstitutional Sweep Of R.C III. CONCLUSION...14 IV. CERTIFICATE OF SERVICE...15 V. APPENDIX a. Excerpt of VentureOhio, Ohio VentureReport Appx. 1 i

4 TABLE OF AUTHORITIES Cases Page(s) Agley v. Tracy, 87 Ohio St.3d 265, 719 N.E.2d 951 (1999)...3, 5, 10 Bd. of Edn. of the Whitehall City School Dist. v. Franklin Cty. Bd. of Revision, 10th Dist. Franklin Nos. 01AP-878, 01 AP-879, 2002 WL (Mar. 19, 2002)...4 Belvedere Condominium Unit Owners Assoc. v. R.C. Roark Cos., Inc., 67 Ohio St.3d 274, 617 N.E.2d 1075 (1993)...4 Commr. of Revenue v. Dupee, 423 Mass. 617, 670 N.E.2d 173 (1996)...6 Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977)...9, 10 Daimler AG v. Bauman, U.S., 134 S.Ct. 746, 187 L.Ed.2d 624 (2014)...5, 11 Dombrowski v. WellPoint, Inc., 119 Ohio St.3d 506, 2008-Ohio-4827, 895 N.E.2d Dupee v. Tracy, 85 Ohio St.3d 350, 708 N.E.2d 698 (1999)...5, 10 New York ex rel. Cohn v. Graves, 300 U.S. 308, 57 S.Ct. 466, 81 L.Ed. 666 (1937)...7 Quill Corp. v. North Dakota, 504 U.S. 298, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992)...10 Shaffer v. Heitner, 433 U.S. 186, 97 S.Ct. 2569, 53 L.Ed.2d 683 (1977)...4 Wisconsin v. J.C. Penney Co., 311 U.S. 435, 61 S.Ct. 246, 85 L.Ed. 267 (1940)...5 Statutes R.C (D)(2)(e)...3 R.C passim ii

5 TABLE OF AUTHORITIES (cont d) Other Authorities Page(s) Regs. Conn. State Agencies (a)-4(a)(3)...8, 9 U.S. Constitution, Article 1, Section 8...9, 13, 14 U.S. Constitution, Fourteenth Amendment...11, 13, 14 iii

6 I. STATEMENT OF INTEREST OF AMICUS CURIAE Founded in 1893, the Chamber of Commerce is Ohio s largest and most diverse statewide business advocacy organization. The Chamber works to promote and protect the interests of its more than 8,000 business members and the thousands of Ohioans they employ while building a more favorable Ohio business climate. The advocacy efforts of the Chamber are dedicated to the creation of a strong pro-jobs environment an Ohio business climate responsive to expansion and growth. As part of its mission, the Chamber has always advocated for a competitive tax system in Ohio, and the Tax Commissioner s application of the statute at issue in this case is anti-competitive. R.C generally requires a nonresident owner of 20% or more of the voting interests in a pass-through entity ( PTE ) or certain closely-held C corporations at any time within the last three taxable years to source gains from the sale of any interest in the entity according to the average of the entity s apportionment fractions for the prior three taxable years. Thus, the gain from the sale of the entity is apportioned to the seller based on the activities of the entity being sold and not the activities of the seller. This taxation scheme ensures that non-ohio investors investing in closely-held entities operating in Ohio will pay taxes on their investments both in Ohio and in their states of residence. Conversely, the same investment in another state would be taxed only in the owner s state of residence. That doubling up of the tax is a very significant disincentive to investing in Ohio. According to a widely-cited report, the Ohio VentureReport 2013, published by VentureOhio, a gap exists between the capital needed by expanding Ohio companies and the capital that Ohio entrepreneurs and investors can provide. See Appendix at 2-3 VentureOhio,

7 Ohio VentureReport 2013, at 10-11, available at / (accessed Feb. 16, 2015). Thus, Ohio s growing businesses will be reliant upon capital provided by non-ohio equity investors. The Tax Commissioner s application of the statute will present a serious detriment to the raising of capital from nonresidents. Those non-ohio investors simply will not invest in Ohio when the Ohio Tax Commissioner imposes an unfair and constitutionally-prohibited tax on the gains from the investments. II. LAW AND ARGUMENT A. Introduction An investor s gain upon the sale of an investment is subject to personal income taxation based on the activities of the investor, and not on the activities of the investee entity. As addressed below, the rule for taxing gains from the sale of a business for personal income tax is different than the taxation of the ongoing income from the in-state operation of the business. Ohio, like other states, appropriately assigns gains from the sale of an entity to Ohio for tax purposes when the investor is an Ohio resident. No one disputes the right of Ohio to tax that gain to its own residents. The problem identified by this appeal is that the Ohio Tax Commissioner cites R.C for the position that he can also tax nonresidents for this type of gain. In other words, the Tax Commissioner seeks to have it both ways: Ohio residents pay tax on the gain based on their Ohio residency while nonresidents pay the tax as well. Two elements relevant to the taxation of investments must be addressed upfront. First, investors fully expect to pay tax on the earnings of the PTE in which they invest irrespective of the investor s state of residency. In the present case, Mr. Corrigan paid Ohio income tax on his share of the annual earnings from Mansfield Plumbing Products LLC ( Mansfield Plumbing ) and presents no objection to that result. Mr. Corrigan, however, never expected to pay tax on the 2

8 gain from his investment, i.e., when he sold his interest in Mansfield Plumbing. His expectation in that respect was reasonable. The sale of the entity is no different than selling a share in a publicly-traded company an event that has never been subject to tax based solely on the location of the company. It cannot be seriously doubted that other non-ohio investors would respond negatively to a claim by the Ohio Tax Commissioner that gains from the sale of an investment can be taxed in Ohio even though the investor is a nonresident. Other such potential investors invariably will be discouraged from investing in Ohio companies and be advised to invest elsewhere. B. The Activities Of Mansfield Plumbing Are Not Attributed To Mr. Corrigan When Sourcing The Sale Of His Investment. The essence of the Tax Commissioner s application of R.C is that the activities of Mansfield Plumbing are attributed directly to Mr. Corrigan as if he directly owned the assets of the entity and directly conducted the business of Mansfield Plumbing. The Tax Commissioner proceeds under the statute as if Mr. Corrigan operated as a sole proprietor and not as an owner of a separate legal entity. This Court has held that [a] corporation is an entity separate and apart from the individuals who compose it. (Citation omitted.) Agley v. Tracy, 87 Ohio St.3d 265, 268, 719 N.E.2d 951 (1999) (upholding Ohio income tax on distributive shares to nonresident shareholders while recognizing the separateness of the corporation from the shareholders). It is likewise improper to disregard the existence of Mansfield Plumbing, a closely-held legal entity operating as a limited liability company ( LLC ), unless some reason exists to pierce the entity veil. An LLC is recognized as an entity distinct from its owners. See R.C (D)(2)(e). An LLC should be accorded the same status as a corporation. 3

9 In Bd. of Edn. of the Whitehall City School Dist. v. Franklin Cty. Bd. of Revision, the Tenth District Court of Appeals addressed whether a member of an LLC can prosecute a tax appeal on behalf of the LLC. 10th Dist. Franklin Nos. 01AP-878, 01AP-879, 2002 WL (Mar. 19, 2002). The School Board objected to the representation by the member on the basis that the LLC was a separate person from the member and thus the individual non-attorney could not prosecute the tax appeal without engaging in the unauthorized practice of law. The Court of Appeals found that a LLC, like a corporation, was a separate legal entity apart from its members, the investment in the LLC was intangible property, and the entity could not appear by its members unless those members were Ohio attorneys. An entity is distinct from the owners. The Ohio common law as to personal liability of investors is that a court will disregard a corporate legal entity only when (1) control over the corporation by those to be held liable is so complete that the corporation has no separate mind, will, or existence of its own, (2) control over the entity exists in such a manner as to commit fraud, an illegal act, or a similarly unlawful act and not simply unjust or inequitable conduct, and (3) injury or unjust loss resulted to the one seeking to disregard the entity. See Belvedere Condominium Unit Owners Assoc. v. R.C. Roark Cos., Inc., 67 Ohio St.3d 274, 617 N.E.2d 1075 (1993); Dombrowski v. WellPoint, Inc., 119 Ohio St.3d 506, 2008-Ohio-4827, 895 N.E.2d 538. The issues arising in piercing the entity veil for tort, contract, or long-arm jurisdiction are similar to the analysis of determining whether to respect a separate legal entity for tax purposes. Under Ohio statutory and case law, an investor is distinct from an entity in which the investment is made. For long-arm purposes, the investor does not have nexus with the state simply because of the ownership of an entity. See Shaffer v. Heitner, 433 U.S. 186, 97 S.Ct. 2569, 53 L.Ed.2d 683 (1977) (ownership of stock does not create nexus for long-arm statute for 4

10 the shareholder although corporation incorporated in the state); Daimler AG v. Bauman, U.S., 134 S.Ct. 746, 187 L.Ed.2d 624 (2014) (nexus is not created for a foreign affiliate of a domestic corporation based on the in-state activities of the domestic corporation conducting business in the state). The rule that the owner is distinct from the entity that is owned is not undermined by the conclusion that nexus exists over the income earned in-state by an entity when that income is taxed not at the PTE level but directly to the investor. See Agley, 87 Ohio St.3d at 268; Dupee v. Tracy, 85 Ohio St.3d 350, 708 N.E.2d 698 (1999) (distributive share is subject to tax in the hands of the nonresident). Nexus over the earnings applicable to the owner of a PTE, however, does not create nexus in Ohio for the sale of the membership interest in an LLC by a nonresident individual. The Court s discussions in Agley and Dupee focused solely on the relationship of the income to Ohio in determining that it should be taxed in Ohio in the hands of the investor. While the ongoing income is sourced to Ohio because it could have been taxed to the entity, the entity is distinct from the investor for purposes of the sale of the entity unless a valid basis exists to pierce the entity veil similar to the piercing of the corporate veil. This Court s decisions in Agley and Dupee found support in Wisconsin v. J.C. Penney Co., 311 U.S. 435, 61 S.Ct. 246, 85 L.Ed. 267 (1940), in which the United States Supreme Court upheld the taxation of dividends from a C corporation to nonresident individuals on the basis that Wisconsin could have taxed the income in the hands of the corporation but chose to delay the imposition of the tax until the declaration of dividends. The J.C. Penney decision does not support taxation by Wisconsin of a sale of the J.C. Penney stock by the Wisconsin nonresidents. The crucial relationship is between the income earned in the state by the entity and the taxation 5

11 of that income to the investor when the income could have been, but was not, taxed in the hands of the entity. Ohio law also does not support the conclusion that an LLC is an agent for jurisdictional purposes for its members unless the investee LLC is the member s alter ego. Unlike the activities resulting in the recognition of income from a distributive share, which arise from activities in the states in which the investee entity operates, the sale of the investment by the nonresident investor is not conducted in the states in which the investee does business simply because the investee entity operates in the state. Jurisdiction does not exist vicariously over the nonresident investor because of in-state activities of the investee, absent a finding that the investee entity is the alter ego of the nonresident investor or is otherwise acting in a manner that the PTE or C corporation should not be respected. C. The Sale Of The Entity By The Investor Is Gain Earned Outside The Entity, And The In-State Activities Of The Entity Cannot Be Used To Source Such Gain From The Sale Of The Entity By Its Owner. The leading case nationally on the taxation of the sales of PTEs is Commr. of Revenue v. Dupee, 423 Mass. 617, 670 N.E.2d 173 (1996). 1 In that case, Dupee owned the Boston Celtics through Boston Celtics, Inc. ( BCI ) and sold that interest. The Massachusetts Commissioner of Revenue argued that the gain was taxable because BCI was a PTE. The highest Court in Massachusetts disagreed. The Court analyzed the source of gain as follows: The gain was not the corporation s gain. The gain inured to Dupee outside the S corporation, rather than passing through BCI to him as a distributive share of a gain to the S corporation. Id. at 623. The Massachusetts Supreme Court recognized that a gain from the sale of the ownership interest in the PTE is distinct from the income received from the operations of the PTE itself. 1 The Dupee in the Massachusetts case appears not to be related to the Dupee in the Ohio case. 6

12 Mansfield Plumbing did not earn the income being taxed by the Tax Commissioner in this case. The income that Mansfield Plumbing earned in Ohio already has been taxed. This case concerns the Ohio Tax Commissioner s effort to tax the outside income from the gain from the sale of the ownership of the entity that was separate and apart from the inside income earned by Mansfield Plumbing. D. The Interaction Of R.C And State Resident Credits Creates Actual Double Taxation. The claim that a state of residency has on the gain from the sale of investments is based on residency alone. The state of residency needs no other claim to the income. New York ex rel. Cohn v. Graves, 300 U.S. 308, 57 S.Ct. 466, 81 L.Ed. 666 (1937). The claim of the resident state reflects the amounts of contacts of the resident in the state, the services provided to the resident, and the claims by the resident to special rights including recognized incentives available only to residents such as reduced education costs. While the state where the income is earned by a business has a claim on the taxation of that income, that same claim does not exist on the gain from the sale of the investment. Otherwise, Ohio could subject the gain from the sale of Ford Motor Company ( FMC ) stock even by nonresidents because FMC does business in Ohio. 2 Whatever the Tax Commissioner disavows with respect to the taxation of widely-held stock like FMC and other entities, the principles for taxing the investment remain the same as the sale of any other investment unless the entity being sold is not to be respected. 2 In fact, R.C purports to tax the gain on the sale by nonresidents of widely-held stock. For example, assume that William Clay Ford, Jr., a Michigan resident, repurchased 51% of FMC voting stock with the remainder held by millions of shareholders. Despite the fact that FMC is a C corporation, widely-held by millions of shareholders and even if Mr. Ford refrained from participating in FMC s management, FMC would be treated as a closely-held C corporation for purposes of R.C Whenever Mr. Ford sells FMC stock, Ohio would assert the ability to tax the gain on the sale of the stock. 7

13 Further, because the state of residency has the undisputed claim to the income from the sale of its residents investments, double taxation will occur when the state of residence of the investor taxes the entire gain to the investor while Ohio also taxes the gain based on the Ohio activities of the investee. The double taxation can be avoided by means of the resident credit applicable only in the state of residency whereby a credit against the tax payable in the state of residency is given only when gain is properly sourced to the state where earned. The credit works correctly in the case of the income earned by the PTE and included in the income of the investor. In the case of his distributive share from Mansfield Plumbing, Mr. Corrigan received a resident credit on his Connecticut return because the distributive share income was earned in Ohio. As a result of the Connecticut resident credit, Mr. Corrigan was not taxed twice on his distributive share taxed in Ohio. Tellingly, and in contrast, the resident credit in Connecticut and other states will not operate to prevent double taxation when confronting R.C In the case of Mr. Corrigan, the State of Connecticut uses Connecticut law to determine whether the gain from the sale of Mansfield Plumbing is deemed earned in Ohio. See Regs. Conn. State Agencies (a)-4(a)(3). Connecticut s regulations make the point clear that investment income earned by a nonresident will not be deemed sourced to Ohio for purposes of Connecticut law as follows: Income derived from or connected with sources within a qualifying jurisdiction is to be construed so as to accord with the definition of the term derived from or connected with sources within this state set forth in Part II [nonresident individuals] in relation to the adjusted gross income of a nonresident individual. Thus, the credit against Connecticut income tax is allowed for income tax imposed by another jurisdiction upon compensation for personal services performed in the other jurisdiction, income from a business, trade or profession carried on in the other jurisdiction, and income from real or tangible personal property situated in the other jurisdiction. On the other hand, the credit is not allowed for tax imposed by another jurisdiction upon income from intangibles, 8

14 except where such income is from property employed in a business, trade or profession carried on in the other jurisdiction. For example, no credit is allowed for an income tax of another jurisdiction on dividend income not derived from property employed in a business, trade or profession carried on in such jurisdiction. (Emphasis added.) Id. There is no allegation that Mr. Corrigan was using the gain from the sale of Mansfield Plumbing in the conduct of an Ohio business. Because the gain from the sale of the investment would not be treated as Ohio-source income under Connecticut law, Mr. Corrigan could not and did not qualify for a Connecticut resident tax credit. Examples of other states that limit the credit only to the type of income sourced to the state under that state s law, i.e., not gains from investments, include New York and California, among others. E. The Tax Commissioner s Application Of R.C Violates The Commerce Clause Of The United States Constitution And The Due Process Clause Of The Fourteenth Amendment. The Tax Commissioner s attempt to tax Mr. Corrigan on the gains from the sale of his LLC, which does business in Ohio, based on the activities of the LLC, violates the tests of Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977). Specifically, the Tax Commissioner s application of the statute runs afoul of the required nexus, fair apportionment, and avoidance of discrimination prongs. These tests must be met to conform to the requirements of the Commerce Clause. U.S. Constitution, Article 1, Section Nexus Prong Under the nexus prong of Complete Auto Transit, nexus in the form of a connection with the state must be present before an obligation exists for an individual to pay a state income tax. Two types of nexus are relevant: (1) nexus over Mr. Corrigan and (2) nexus with respect to the transaction that creates the income from the gain. Mr. Corrigan has nexus with Ohio with respect to the income earned by Mansfield Plumbing, based on the nexus that Ohio has with 9

15 respect to such income earned. In Agley and Dupee, the Court focused on the gain and the right that Ohio has to tax that gain. In contrast, the gain on the sale of Mansfield Plumbing is taxable only under principles of general nexus and then only to the residence of Mr. Corrigan. The Massachusetts Supreme Court decision applicable to the sale of the Boston Celtics expressed the difference between these two types of gains and also expressed a distinction inherent in the United States Constitution. That distinction allows Ohio to assert tax on the ongoing net revenues but not the wholly-separate and distinct gains from the sale of the intangible ownership interest taxable only in Connecticut. 2. Fair Apportionment Prong The taxation of the gain from the sale of the LLC membership interest also fails the fair apportionment prong of Complete Auto Transit when, as here, the income must be assigned to the state of residency and is not apportionable income arising from the operation of the business. There is no allegation in this case that Mr. Corrigan used the gain in his business in Ohio (as distinct from the business conducted by Mansfield Plumbing). Any attempt to apportion the income either by reference to the investor or the investee cannot comply with the fair apportionment standard which demands allocation (i.e., sole assignment) to the state of residency rather than apportionment. 3. Discrimination Prong The Tax Commissioner s application of R.C discriminates against interstate commerce by imposing burdens on interstate commerce by requiring an investor to file returns in every state in which a closely-held investment is doing business when selling that investment. In Quill Corp. v. North Dakota, 504 U.S. 298, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992), the United States Supreme Court struck down a system requiring collection of tax in multiple jurisdictions 10

16 by remote sellers when that requirement burdens interstate commerce and does not apply to the entity involved only in intrastate commerce. Likewise, the proposal to tax investors in multistate PTEs in every state where the PTEs do business is overly burdensome for investors in interstate businesses while posing no burdens for in-state businesses and their investors. The gains from the sale of the investment are fundamentally different than the obligation of investors in PTEs to report and pay tax on the ongoing income from the PTE. Investors normally do not file in every state in which the businesses are doing business. Instead, the PTEs file composite returns in the states on behalf of the investors. That composite return filing relieves the investors from the obligation of reporting the income from the PTE. The composite return requirements do not apply in the case of the sale of the entity because the entity cannot file a return with respect to the sale of the entity itself, in contrast to income earned by the entity, thereby creating hardships for interstate investors. 4. Due Process Violation The effort to tax Mr. Corrigan on his gain by attributing the in-state activities of Mansfield Plumbing to Mr. Corrigan also violates the Due Process Clause. Due Process is violated when jurisdiction is claimed based not on Mr. Corrigan s activities but instead based on the activities of Mansfield Plumbing when the entity is not an alter ego or agent of Mr. Corrigan. Daimler AG v. Bauman, U.S., 134 S.Ct. 746, 187 L.Ed.2d 624 (2014); see also Fourteenth Amendment to the U.S. Constitution. F. The General Assembly Could Not Have Intended To Stifle Investment. R.C discourages PTEs and closely-held corporations from investing in Ohio. Moreover, R.C discourages nonresidents from investing in PTEs or closely-held 11

17 C corporations that engage in business in Ohio. Besides being unconstitutional, R.C is simply bad for business in Ohio, as illustrated in the following examples. Example 1. Nonresident PTEs Are Discouraged From Investing In Ohio. Two Florida entrepreneurs form an LLC (a PTE) to operate a Florida restaurant. The restaurant is very successful. If the LLC were to open a second store in Ohio, R.C would require the entrepreneurs to pay Ohio income tax on 50% of their gains from the sale of their LLC interests. Conversely, if the LLC opened the second store in a state other than Ohio, the entrepreneurs would not pay any state tax on the gain from the sale of this LLC. Consequently, nonresident PTEs are discouraged from investing in Ohio. Example 2. Nonresidents Are Discouraged From Passively Investing In Ohio PTEs. Two Ohio entrepreneurs form an LLC (a PTE) to operate an Ohio restaurant. The restaurant is very successful. To open two new Ohio stores, the LLC needs to sell a 30% investment interest in the LLC for cash. If a nonresident investor acquired a 30% interest, 100% of the gain from the sale of this 30% investment interest would be taxed by Ohio under R.C (even though the nonresident was a completely passive investor). If the nonresident were to invest in a similar PTE operating in any other state, this tax would not be applicable. Consequently, a nonresident would be discouraged from investing in a PTE engaged in business in Ohio. Example 3. Non-Ohio Closely-Held C Corporations Are Discouraged From Investing In Ohio. Assume that in the early years of Ford Motor Company ( FMC ), Henry Ford owned 51% of the voting stock of FMC with the remaining 49% held by thousands of shareholders. Despite the fact that FMC was a publicly-traded C corporation, FMC would have been treated as a closely-held corporation for purposes of R.C All of FMC s manufacturing facilities 12

18 were in Michigan. If FMC were to open a significant manufacturing facility in Ohio, FMC s Ohio apportionment ratio would increase from 0% to 33%. If Henry Ford were then to sell shares of FMC, 33% of his gain would be taxed by Ohio. Consequently, FMC, as controlled by Henry Ford, would be discouraged from investing in Ohio. Example 4. Nonresidents Are Discouraged From Investing In A Closely-Held C Corporation Operating In Ohio. An Ohio C corporation needs funds to expand operations in Ohio. A nonresident venture capitalist is willing to invest in exchange for a 51% interest, leaving the management to the prior operators. The objective of the venture capitalist is to sell the 51% interest in two years for a significant gain. Under R.C , Ohio would tax 100% of the gain from the sale of the C corporation stock by the nonresident investor. Again, a nonresident investor would be discouraged from acquiring a majority interest in an Ohio C corporation. G. The Court Should Fashion A Remedy That Addresses The Unconstitutional Sweep Of R.C For the reasons expressed above, the Tax Commissioner is asserting R.C in a manner that violates Commerce Clause and Due Process restraints. The issue then becomes the proper remedy to deal with the fundamental problems arising from the application of R.C Entities, including closely-held C corporations, S corporations, and LLCs, are distinct from their shareholders and members. The Tax Commissioner s effort to apply R.C as if the factors of the entity are attributed to the investor cannot be countenanced. The Court, however, can construe the statute narrowly so as to avoid the Constitutional problem. The statute on its face appears to be an effort to disregard the entity by permitting certain sales of certain entities to be based on the activities and property of the entity and not just for one year but for three years looking back. 13

19 It is appropriate, therefore, that the statute be limited to the circumstance when the investor and investee entity are alter egos such that the entity should not be respected as lacking substance. By limiting the statute to this common sense application, the Constitution is not violated. In the alternative, R.C should be struck down as unconstitutional in violation of the United States Constitution s Commerce Clause and the Due Process Clause of the Fourteenth Amendment. III. CONCLUSION For the reasons set forth above, the Tax Commissioner s application of R.C violates principles of the Commerce Clause and Due Process. The decision of the Ohio Board of Tax Appeals should be reversed. Respectfully submitted, s/ Edward J. Bernert Edward J. Bernert ( ) COUNSEL OF RECORD Elizabeth A. McNellie ( ) Baker & Hostetler LLP 65 East State Street, Suite 2100 Columbus, Ohio Telephone: (614) Facsimile: (614) ebernert@bakerlaw.com emcnellie@bakerlaw.com Christopher J. Swift ( ) Baker & Hostetler LLP 1900 East Ninth Street Cleveland, OH Telephone: (216) Facsimile: (216) cswift@bakerlaw.com Attorneys for Amicus Curiae, Ohio Chamber of Commerce 14

20 CERTIFICATE OF SERVICE I hereby certify that on this 17th day of February, 2015 a true copy of the foregoing Brief Amicus Curiae was served by electronic and ordinary mail upon J. Donald Mottley, Taft Stettinius & Hollister LLP, 65 East State Street, Suite 1000, Columbus, Ohio 43215, Counsel for Appellant and Michael DeWine, Attorney General of Ohio, c/o Barton A. Hubbard, Assistant Attorney General, 30 East Broad Street, 25th Floor, Columbus, Ohio 43215, Counsel for Appellee, Joseph W. Testa, Tax Commissioner of Ohio. s/ Edward J. Bernert Edward J. Bernert 15

21 APPENDIX 0 io VentureReport VentureD i ADVANCING OHIO ENTREPRENEURSHIP APPX.-1

22 APPENDIX Primary Investment Focus, by of Investment ~~A total of $260 million is available for all new and follow on investments at the seed/start up and early stages. The need at those stages is $523 million before the end of 2015." Ill Seed/Start-up 1111 Early II'Growth l:~icl Mature A key question for Ohio's seed/start up and early stage companies and their investors is: where will they find the capital to fund continued growth? At any given time, an active venture investor has funds available for further investing, both to make follow-on investments in portfolio companies that they have already backed and to make investments in new companies. The balance between these two purposes is not fixed and will vary over the life of an investment fund. For example, in the early years of a venture capital fund, a large portion of its capital will be available for new investments. As the fund ages, a greater percentage will be devoted to follow-on investments in existing portfolio companies. Toward the end of a fund's life <typically after the 5th yearl, no funds will be available for investments in new companies; any remaining capital will be reserved for follow-on funding of the existing portfolio. The following chart contrasts the capital needed by Ohio's seed/start up and early stage companies and the total capital available for further investing at those stages. 0 '" The difference means that there is a substantial capital gap facing Ohio's entrepreneurs and their investors. 0.L 0 APPX.-2

23 APPENDIX Capital Needs and Availability for Seed/Start up and Early Stage Companies $6DDM -~ Ohio Headquartered Firms - Amount Available for New Investment Ill CajJildl Needed by End of 2015 II Ci'!pltal Avallabl~ for Follow on' nnrl New Investment <] VentureOhio's respondents report that they have $67. 6 million available for further investing at the seed and start-up phase, $192.1 million available for the early stage, and $562.5 million for the growth stage, as depicted in the chart to the left. II Seed/Starl-up II Early II Growlh Several comments should be made about these numbers. First of all, as noted above, these totals must cover both follow-on funding for existing portfolio companies and investments in companies new to the portfolio. Furthermore, although these totals are reported by firms that are headquartered in Ohio, not all of the new investments or follow-on investments will be made in Ohio-based companies. Most Ohio headquartered early and growth-stage firms have a regional (i.e., Midwest> or national investment strategy. As a result, it is likely that less than half of the $260 million of capital available for follow on and new investments at the seed/start-up and early stages will be available for investment in Ohio-based companies. Based on the reported amount of capital available for further investments in seed/start-up and early stage companies in Ohio, Ohio's entrepreneurial ecosystem is facing a severe shortage of capital. In a capital needs survey conducted in April/May of 2014, VentureOhio found that $523 million was needed by the end of 2015 to fund 176 seed/start up and early stage Ohio companies. Even if all of the $260 million of capital available for further investment were available for Ohio investments before the end of which is clearly not the case - it would fall short of the need by over $263 million. M I In shoa, thece is o substantial capitol gop when supply is compo,ed to need: over $263 million. A realistic number is probably substantially higher. Bridging this gop is one of the most pressing challenges facing Ohio's earlyentrepreneurs ond venture investors. 0 N APPX.-3