ORIGINAL

In t4E^&tlprETtIE (fDtirt of 00iD

Appeal from the Ohio Board of Tax Appeals

HEALTHSOUTH CORPORATION, CASE NO. 2010-1916

Appellee,

V.

On Appeal from theOhio Board of Tax Appeals

Case No. 2005-A-1386WILLIAM W. WILKINS[JOSEPH W. TESTA],TAX COMMISSIONER OF OHIO,

Appellant.

APPELLANT'S MERIT BRIEF

JAY P. SIEGEL (0067701)(Counsel of Record)JAMES KIERAN JENNINGS, III (0065453)Siegel, Siegel, Johnson & Jennings, Co., LPALandmark Center Suite 21025700 Science Park DriveCleveland, Ohio 44122Telephone: (216) 763-1004Facsimile: (216) 763-1016j siegel@siegeltax.comkjennings@siegeltax.com

Counsel for AppelleeHealthSouth Corporation

MICHAEL DEWINE (0009181)Ohio Attorney General

BARTON A. HUBBARD (0023141)Assistant Attomey General(Counsel of Record)Taxation Section30 East Broad Street, 25th FloorColumbus, Ohio 43215-3428Telephone: (614) 466-5967Facsimile: (614) 466-8226barton.hubbard@ohioattorneygeneral.gov

Counsel for AppellantJoseph W. Testa,Tax Commissioner of Ohio

TABLE OF CONTENTS

Page No.

TABLE OF AUTHORITIES ........................................................................................................... v

1. INTRODUCTION/SUMMARY ...............................................................................................1

II. STATEMENT OF CASE AND FACTS ...................................................................................3

..............................................................A. Procedural Posture .................... .............................3

1. This Court's previous HealthSouth decision .................................................................3

2. The BTA's split decision on remand .............................................................................5

B. Pertinent Facts ................................................................................................................... I I

1. Introduction

2. Without any explanation for its failure to do so, and despite theCommissioner's auditing agent's request for such evidence, HealthSouthfailed to present to the Commissioner or the BTA any of the accountingjournal entries required under GAAP and SEC regulations to correct itsalleged fraudulent overstatement of Ohio asset values . .............................................. 12

3. HealthSouth failed to present any other probative or competentaccounting/business record evidence reflecting corrections of fraudulentlyoverstated Ohio asset values or even establishing the manner and extent towhich HealthSouth undertook "bag and tag" physical inventories of its Ohioassets . ...................................................................:.......................................................14

a. HealthSouth failed to provide any post-fraud-investigation balance sheetsfor its Ohio facilities to compare with the pre-fraud-investigation balancesheets for those facilities that were attached with its 2002 Ohio personalproperty tax return . ................................................................................................15

b. Again without any explanation for its failure to do so, HealthSouthlikewise failed to furnish any of the primary "investigatory" recordspertinent to its refund claim: physical inventories of its Ohio facilities thatwere allegedly conducted to ascertain the manner and extent of anyfraudulent overstatement of its Ohio assets ...........................................................17

4. At the BTA, HealthSouth relied solely on the testimony and documentidentification of Michael D. Martin, who lacked the necessary foundation ofpersonal knowledge to authenticate and testify competently or probativelyconcerning the proof necessary to establish the validity of the refund claim .............. 18

a. The BTA testimony of Michael D. Martin revealed that he had nopersonal knowledge or involvement in the preparation or filing ofHealthSouth's 2002 Ohio personal property tax return and attachmentsthereto. Instead, these materials were submitted and approved by aHealthSouth official subsequently convicted of accounting fraud ........................19

b. HealthSouth failed to adduce any probative evidence that its 2002 Ohiopersonal property tax return fully disclosed all of HealthSouth's taxablepersonal property at its correct acquisition costs and true values ..........................20

c. Mr. Martin likewise had no personal knowledge of or involvement in thecompilation or preparation of the documentation captioned "HealthSouthCorporation Tax Year 2002 Amended Fixed Assets" submitted to theCommissioner by HealthSouth's then-tax representative, Brian T. Scully,for purposes of litigation in support of the refund claim .......................................23

5. HealthSouth's BTA Exhibits constituted unauthenticated, multiple-levelhearsay that therefore lacked any probative value and plainly constitutedincompetent evidence . ................................................................................................. 24

6. For several Ohio facility locations, HealthSouth's BTA Exhibit 4 reflectssubstantially higher Ohio personal property tax acquisition costs than thecorresponding amounts set forth in HealthSouth's refund claim and otherwisecannot be reconciled with HealthSouth's refand claim. These major andunexplained discrepancies render the merits of the refund claim particularlydubious ......................................................................................................................... 27

7. HealthSouth issued hundreds of written disclaimers in state and local taxingjurisdictions concerning the accuracy of its refund claims and amendedreturns for the taxable period at issue in the present case and thereafter . ...................29

ii

III. LAW AND ARGUMENT ......................................................................................................30

Proposition of Law-

The BTA failed to follow this Court's remand instructions to reevaluate the evidence inlight of the Commissioner's objections and the taxpayer's burden of proof. The evidencebefore the BTA did not affirmatively demonstrate that the Commissioner's findingsdenying the refund claim were "clearly unreasonable or unlawful" and HealthSouthfailed to clearly establish the manner and extent of any claimed error in theCommissioner's final determination when it, among other considerations:

(1) failed to produce any of the necessary journal entries, balance sheets orother "final results" evidence that HealthSouth would have been requiredto have created and maintained under generally accepted accountingprinciples (GAAP) and SEC regulations had it overstated its Ohio assetvalues, whether in the dollar amounts claimed in its refund claim or

otherwise;

(2) presented only a multiple-level, litigation-prepared summary of its "bagand tag" inventories rather than the actual inventory records;

(3) relied solely on a multiple-level hearsay as the basis for its identifcationof alleged "fictitious" Ohio taxable assets through the testimony of a solewitness (Michael D. Martin), who lacked the requisite personal knowledgeto competently and probatively testify about that subject;

(4) left unexplained vast differences between acquisition cost figures set forthin its unsupported, multiple-level hearsay summary document (BTAExhibit 4) and its refund claim figures, which, if applied, would drasticallyreduce its refund claim amounts;

(5) conceded, through Mr. Martin's testimony, that, at best, its submittedrefund claim could be only "fairly accurate";

(6) for the taxable period at issue in the present case (2002), issued hundredsof written disclaimers in state and local taxing jurisdictions disavowing theaccuracy of its refund claims and amended returns; and

(7) adduced no evidence establishing that the HealthSouth's 2002 Ohio returnfiled by HealthSouth personnel subsequently convicted of accountingfraud (Richard Botts) correctly reported all of its Ohio taxable personalproperty at its correct value, except for those asset value listings for "AP

SUMMARY."

rrl

A. HealthSouth failed to produce any of the necessary journal entries, balance sheets orother primary and secondary accounting/business record evidence that HealthSouthwould have been required to have created and maintained under generally acceptedaccounting principles (GAAP) and SEC regulations had it overstated its Ohio assetvalues, whether in the dollar amounts claimed in its refund claim or otherwise.

The failure to provide this evidence constituted a strong admission againstHealthSouth's interest .............................................................................................................. 31

B. HealthSouth presented only a multiple-level, litigation-prepared sunnnary of its "bagand tag" inventories rather than the actual inventory records (BTA Exhibit 4).

Further exacerbating its failures of proof, HealthSouth relied solely on one witness(Michael D. Martin), who lacked the requisite personal knowledge to competentlyand probatively testify about the facts necessary to support HealthSouth's refundclaim . .. ..................................................................................................................................... 34

C. HealthSouth adduced no probative evidence establishing that the HealthSouth's 2002Ohio return filed by HealthSouth personnel subsequently convicted of accountingfraud (Richard Botts) correctly reported all of its Ohio taxable personal property at itscorrect value, except for those asset value listings for "AP SUMMARY............................... 38

D. HealthSouth's unsupported, multiple-level hearsay "bag and tag" summary document(BTA Exhibit 4) is irreconcilable with its refund claim figures, and, if applied, woulddrastically reduce its refund claim amounts . ...... .....................................................................38

E. HealthSouth concedes, through Mr. Martin's testimony, that, at best, its submittedrefund claim could be only "fairly accurate" and that, for the taxable period at issuein the present case (2002), HealthSouth issued hundreds of written disclaimers instate and local taxing jurisdictions disavowing the accuracy of its refund claims andamended returns . . ..................................................................................................................... 40

CONCLUSION .............................................................................................................................40

CERTIFICATE OF SERVICE ......................................................................................................42

APPENDIX

iv

TABLE OF AUTHORITIES

Cases Page(s)

American Dist. Tel. Co. v. Porterfield ( 1968),5 Ohio St.2d 92 .................................................... .................. ...................................... 17, 37

Anheuser-Busch Companies, Inc. v. Zaino (September 24, 2004),BTA No. 2003-K-699, unreported ........ .................................................... ........................ 34

Cincinnati Bell Telephone Company v. Zaino (June 10, 2005),BTA Nos. 2003-K-765; 2003-K-1612, unreported ...........................................................16

Dave Dennis Dodge, Inc. v. Wilkins (Oct. 27, 2006),BTA Nos. 2005-K-857, 858, unreported ...........................................................................37

Ex Parte HealthSouth Corp. (In re: HealthSouth Corporation v. Jefferson County TaxAssessor, Dan Wietrib, and Jefferson County Tax Collector, J. T. Smallwood)(2007), 978 So. 2d 745, 2007 Ala. LEXIS 174, unreported ..............................................29

Hancor v. Limbach (Jan. 11, 1991),BTA No. 89-H-443, unreported ............................................................................35, 36, 37

HealthSouth Corp. v. Levin,121 Ohio St.3d 282, 2009-Ohio-584 ..........................................................................passim

HealthSouth v. Wilkins [Levin] (Oct. 6, 2010),BTA No. 2005-A-1386, unreported ...........................................................................passim

MCI Metro Access Transmission Services, LLC, and MCI WorldCom Network Services,Inc. v. Wilkins (Apr. 13, 2007), BTA Nos. 2004-K-749, 750, unreported,

affirmed, 2008-Ohio- 5057, Franklin County Ct. of Appeals Nos. 07APH05-0398and-0399 ...............................................................................................................34, 35, 36

MCI Metro Access Transmission Services, LLC, and MCI WorldCom Network Services,Inc. v. Wilkins, 2008-Ohio- 5057, Franklin County Ct. of Appeals Nos.07APH05-0398 and -0399 ...........................................................................................34, 35

Rent-Way Inc. v. Wilkins (April 13, 2007),BTA No. 2004-A-331, unreported ..............................................................................34, 35

The Mead Corporation v. Wilkins (June 15, 2007)BTA No. 2005-T-787, unreported ........................................................................................16

Trunkline Gas Co. v. Wilkins (July 7, 2009),BTA Nos. 2005-K-578, et seq., unreported ..........................................................................11

v

United States v. Arthur Young & Co. (1984),465 U.S. 805 ..............................................................................................................................12

United Tel. Co. of Ohio v. Tracy ( 1999),84 Ohio St.3d 506 .................---..............................................................................................34

Statutes and Rules Page(s)

R.C. 5711.101 .... ............................. ............................. ................... ................................ ............... 16

R.C. 5717.04 ....................................................................................................................................1

Ohio Adm. Code 5703-3-10 ..........................................................................................................21

vi

I. INTRODUCTION/SUMMARY

This is the second time that this personal property tax refund case is before the Court.

Previously, the Court held that the Ohio Board of Tax Appeals ("BTA") granted the appellee a

refund based on an improper burden of proof and a failure to address the "significant" objections

raised by the Tax Commissioner to HealthSouth's evidentiary presentation. HealthSouth Corp.

v. Levin, 121 Ohio St.3d 282, 2009-Ohio-584 ("vacat[ing] and remand[ingj" the BTA's previous

decision and order dated November 9, 2007).

In HealthSouth, this Court directed the BTA on remand to "properly evaluate the

evidence before it in light of the commissioner's objections." Id. at ¶ 36. Further, the Court

charged the BTA with applying the strong presumption of validity given to the Commissioner's

findings, and recognizing that it is HealthSouth, not the Commissioner, who bears the burden of

demonstrating clearly the manner and extent of any alleged error in the Commissioner's final

determination. Id. at ¶ 30.

The Commissioner appeals as of right pursuant to R.C. 5717.04 because the BTA's 2-1

split decision upon remand failed to follow the HealthSouth Court's directives. HealthSouth v.

Wilkins [Levin] (Oct. 6, 2010), BTA No. 2005-A-1386, unreported (with Chairperson Margulies

dissenting) (hereafter "BTA Decision and Order"). Appx. 9-27. As we detail below,

HealthSouth failed to meet its affirmative burden of proof. HealthSouth presented the BTA with

only an untested, unverified hypothesis in support of its refund claim and failed to prove that

hypothesis. HealthSouth's "evidence" featured a sole witness who lacked any personal

knowledge relevant to the case. The sole witness acted as a "carrier pigeon" regarding the

summary, non-probative, hearsay documentation offered in support of the refund claim. Thus,

I

HealthSouth's claim that its Ohio personal property values were overstated on its 2002 Ohio

personal property tax return remains only a matter of speculative conjecture.

The BTA's failure to require HealthSouth to affirmatively demonstrate entitlement to its

refund claim is of great concerri to the Commissioner's effective administration of the tax laws.

In any personal property tax refund case, virtually all of the necessary evidentiary proof will be

in the possession and control of the tax refund claimant. Thus, to place the burden on the

Commissioner to prove that the refund is incorrect fails to recognize the asymmetry between the

documentation and knowledge held by the respective parties. Placing the burden of proof on the

"information rich" tax refund claimant, rather than on the "information poor" Commissioner,

recognizes this inherent informational asymmetry. If it were otherwise, the Commissioner would

be required to expend vast resources in obtaining information from the taxpayer refund claimant

and third parties to show the extent to which the refund claimant overstated its own filed returns.

The Commissioner's concern is exacerbated by the circumstances of this case. Here, as

this Court's previous HealthSouth decision detailed, HealthSouth's refund claim is predicated on

the assertion that HealthSouth's previous accounting personnel (involved in filing the 2002

personal property tax return at issue), at the direction of HealthSouth's CEO, Richard Scurry,

intentionally and fraudulently overstated HealthSouth's income and asset values. The need for

HealthSouth to "back up" its tax refund claim with probative evidence, in light of its previous

admitted fraud, should have been particularly apparent. Despite an evidentiary record devoid of

probative or relevant evidence, the BTA adopted a blind "just trust them" approach to this refund

claimant's unproven assertions.

2

Ii. STATEMENT OF CASE AND FACTS

A. Procedural Posture

1. This Court's previous HealthSouth decision

As held by the HealthSouth Court, the BTA's previous decision dated November 9, 2007

(attached at Appx. 73-80) failed to examine the issue of proof at all, seemingly shifting the

burden of proof onto the Commissioner. HealthSouth at ¶30 (holding that "the BTA's decision

failed to address whether HealthSouth did prove its case") and at ¶ 33 ("the BTA's statements

make it appear that the board unlawfully placed the burden on the commissioner to show why

HealthSouth's appeal should fail"). Accordingly, the Court ordered the BTA to consider the

Commissioner's objections to the evidence and to apply the proper burden of proof applicable to

the refund claim sought by HealthSouth. Id. at ¶¶ 30-36.

The Court's opinion imposed on HealthSouth the affirmative burden "`to show the

manner and extent of the error in the Tax Commissioner's final determination' and to

demonstrate the commissioner's findings are `clearly unreasonable or unlawful."' Id. at ¶ 30

(citing and quoting with approval, Shiloh Automotive, Inc. v. Levin, 17 Ohio St.3d 4, 2008-Ohio-

68, ¶ 16). As part of that inquiry, the Court expressly directed the BTA to consider

HealthSouth's unexplained failure to provide key underlying business records. HealthSouth at ¶¶

12-14, 31-36. For example, HealthSouth failed to present any probative testimony or

documentation of the accounting journal entries whereby fictitious asset values for its Ohio

property were allegedly created. Id. at ¶ 12, 31. Even more inexplicably, HealthSouth failed to

present any corrective accounting joumal entries removing or eliminating fictitious asset values.

Id. Because HealthSouth, as a publicly held company, retroactively restated its income and asset

values for financial disclosure purposes on a company-wide level, it necessarily would have

3

made corrective accounting journal entries to remove from its asset valuation accounts the

individual asset values that were, in fact, determined tobe fictitious values.

The Court emphasized that HealthSouth failed to provide corrective accounting journal

entries despite the Commissioner's auditing agent's express request for that documentation. And,

as the Court noted that, in making this request, the Commissioner's auditing agent explained that

if an overstatement of Ohio asset values truly had occurred as alleged by HealthSouth, such

con•ective journal entries would have been required under generally accepted accounting

principles ("GAAP"). Id. at ¶ 13 (citing and quoting from the Commissioner's audit findings

attached with the final assessment certificates).

The Court also expressly directed the BTA to consider the "significant" objections raised

by the Commissioner to the testimony and documentation presented by HealthSouth's sole

witness at the BTA. Id. at ¶¶ 12, 14, 16, 31-36. The Court recognized that the BTA's previous

decision ignored the Conunissioner's objections to the lack of personal knowledge of

HealthSouth's sole witness, Michael D. Martin and the consequent lack of probative value of his

testimony.

The BTA failed to exclude Mr. Martin's testimony despite the lack of a foundation of

personal knowledge. Thus, counsel for the Commissioner objected at the BTA hearing that

without that personal knowledge, Mr. Martin could not competently authenticate or testify about

the contents of any of the various documents presented by HealthSouth in support of its refund

claim, nor otherwise provide the BTA with probative or competent evidence. Id. at ¶¶ 12, 14,

31.

In sum, the HealthSouth decision required the BTA on remand to "properly evaluate the

evidence before it in light of the conunissionei's objections." Id. at ¶36. Moreover, the Court

4

directed the BTA to do so by applying the strong presumption of validity given to the

Conunissioner's findings and recognizing that it is HealthSouth, not the Commissioner, who

bears the substantial burden of demonstrating clearly the manner and extent of any alleged error

in the Commissioner's final determination. Id. at ¶30.

As a further directive to the BTA, in footnote one, ¶ 12, of its HealthSouth decision, the

Court noted that a certain portion of HealthSouth's refund claim obviously was invalid, as

follows:

The evidence submitted by HealthSouth established that the designation "APSUMMARY" with all capital letters was associated with fictitious assets. To theextent that HealthSouth also sought to remove assets designated "APSummary" (lower case letters) from the assessment, the removal of thoseassets does not appear to be justified. The BTA should address this on remand.

(Emphasis added.)

The Court recognized that HealthSouth's claim that those asset values that HealthSouth

had listed in an attachment to its 2002 Ohio personal property tax return as "AP Summary"

plainly constituted actual, i.e., non-fictitious, asset values generated by actual asset expenditures.

Id.1 Thus, even without consideration of the Commissioner's "significant objections" to

HealthSouth's evidentiary presentation, there was no need for the BTA to engage in a review of

the evidentiary record to reject the "AP Summary" portion of HealthSouth's refund claim.

2. The BTA's split decision on remand

Upon remand to the BTA, this Court's HealthSouth decision directed that the BTA

consider the matter on the "existing record" and that, accordingly, no further evidence could be

presented by the parties on remand. HealthSouth at ¶36. Following the submission of briefing,

1 See also, HealthSouth's SEC Form 8-K as of May 28, 2004, BTA Ex. I at 17, Supp. 1-96(explaining that asset valuation entries for "AP Summary" represented a temporary designationfor an actual asset expenditure that would be replaced by a more specific entry identifying thenature of the expenditure when the expenditure was posted to the general ledger) and Section B.4of this Statement of Case and Facts, infra.

5

the BTA issued a 2-1 split decision, with BTA Chairperson Margulies dissenting, granting a

partial reduction in the assessed values reported by HealthSouth on its amended 2002 Ohio

personal property tax return. Specifically, the BTA directed the Commissioner to reduce

HealthSouth's reported values by the "true value" amounts reported by HealthSouth for all asset

values listed in its attachment to the amended return as "AP SUMMARY" (all capital letters).

See BTA Decision and Order at 12. Appx. 9.

In so holding, the BTA's split decision relied heavily on a multiple-level hearsay

summary document, HealthSouth's BTA Exhibit 4, Supp. 1-127 to 156. That document purported

to list in aggregate dollars, by Ohio taxing district, the original acquisition costs of HealthSouth's

items of taxable equipment and other fixed assets. From the evidentiary record, the dates that

these so-called Ohio "bag and tag" physical inventory examinations occurred is unknown, but at

the very earliest they occurred in 2003 or 2004, i.e., well after the December 31, 2001 tax listing

date at issue here. See BTA Decision and Order at 7-10, Appx. 15-18. Further, this so-called

"bag and tag" inventory summary not only constituted an inadmissible, multiple-level hearsay

summary document for which the underlying records were never provided, it was, in itself, not

even relevant to establishing HealthSouth's refund claim.

As tacitly conceded by the majority opinion2 and detailed by BTA Chairperson

Margulies' extensive dissenting opinion, BTA Decision and Order at 12-17, Appx. 20-25, the

"bag and tag inventory" summary, BTA Exhibit 4, was merely one aspect of the forensic

evidence used by HealthSouth and its outside auditors to determine the extent of HealthSouth's

2 See BTA Decision and Order at 9-10, in which the BTA majority characterizes BTA Exhibit 4as the kind of document from which HealthSouth's restated financial statements "originated." Inthis indirect way, the BTA majority itself acknowledges that HealthSouth failed to provide theCommissioner or the BTA with restated financial statements showing HealthSouth's taxableOhio assets as of the Deeember 31, 2001 tax listing date at issue here.

6

accounting fraud. Being based on physical examinations of the Ohio assets on hand at some

unspecified time in 2003 or 2004, it did not constitute any part of any restated financial

statements of HealthSouth's Ohio assets for the December 31, 2001 tax listing date or for any

other tax listing date.

Nor did the bag and tag inventory summary provide any evidence as to what

HealthSouth's restated Ohio taxable asset valuations would have properly looked like as of the

December 31, 2001 tax listing date. Instead, even disregarding its nature as multiple-level

hearsay summary, at best, BTA Exhibit 4 provided merely a"snapshot" of HealthSouth's Ohio

physical asset holdings as of an unspecified date several years after the December 31, 2001 tax

listing date at issue.

As noted by Chairperson Margulies, the bag and tag inventory examination did not

account, for example, for any dispositions by HealthSouth of its equipment and other fixed assets

that may have occurred from the December 31, 2001 tax listing date through to the date in 2003

or 2004 when the physical inventory examinations actually took place. See BTA âecision and

Order (Margulies dissenting) at 13, fn. 5, Appx. 21.

Even more fundamentally, neither BTA Exhibit 4, nor any other documentation in the

evidentiary record, established whether HealthSouth's 2002 personal property tax return

included the correct acquisition costs and true values for all of HealthSouth's taxable personal

property as of the December 31, 2001 tax listing date. In other words, the BTA's majority

ignored the fact that granting a partial reduction in HealthSouth's reported values assumes that

HealthSouth's 2002 Ohio return correctly reported all of its Ohio taxable personal property at its

correct value, except for those asset value listings for "AP SUMMARY."

7

In her dissenting opinion, BTA Chairperson Margulies summarized this failure,

observing that "[n]either the commissioner nor this board was provided with the documentation

used by the various persons/groups involved in the development of appellant's evidence, nor can

this board effectively evaluate the validity of the methods employed by these persons and

groups." BTA Decision and Order at 17 (Margulies dissenting), Appx. 25.

By failing to require HealthSouth to establish the correctness of its 2002 Ohio personal

property tax return, the BTA's split decision effectively shifted the burden of proof to the

Conunissioner. In effect, the BTA's split decision asks the Commissioner and this Court to

blindly accept "at face value" that HealthSouth's 2002 Ohio personal property tax return was

correct in all respects, other than in reporting fictitious "AP SUMMARY" asset values as

taxable. Yet, HealthSouth's 2002 return (prepared and signed by then-property tax manager,

Richard Botts -- who was subsequently convicted of accounting fraud) was the person

responsible for the accuracy and completeness of that return.

As Chairperson Margulies concluded, the Commissioner does not act unreasonably and

unlawfully in requiring Ohio personal property tax refund claimants to substantiate the

representations made in their Ohio personal property tax returns with probative evidence, and

the BTA should not have held implicitly to the contrary. See BTA Decision and Order

(Margulies dissenting) at 17, Appx. 25 (stating that the evidentiary record clearly established that

HealthSouth "failed to meet its burden on appeal[]").

Equally important, as emphasized by Chairperson Margulies and virtually ignored by the

BTA majority, HealthSouth failed to establish the extent, if any, to which the HealthSouth's

2002 personal property tax return included fictitious asset values. Regarding that issue, both the

majority decision and Chairperson Margulies agree that HealthSouth relied exclusively on the

8

testimony of a sole witness, Michael D. Martin. Unlike the majority opinion, however,

Chairperson Margulies' dissenting opinion establishes that Mr. Martin lacked the requisite

personal knowledge to testify as the contents of these documents. By contrast to Chairperson

Margulies' extensive quotation to the BTA hearing transcript, BTA Decision and Order

(Margulies dissenting) at 13-16 the majority's opinion does not even purport to provide a basis

for Mr. Martin to have held the requisite personal knowledge.

As Chairperson Margulies' detailed citations and quotations of Mr. Martin's BTA

testimony establish, Mr. Martin was a particularly unsuited candidate for testifying concerning

the 2002 Ohio personal property tax return and HealthSouth's subsequent post-fraud

investigation. He did not even become involved in HealthSouth's personal property tax matters

until April, 2003 and thereafter avoided any contact with his predecessor, Mr. Botts. Thus, Mr.

Martin neither had the requisite personal knowledge "at the time" that the 2002 return was

prepared and filed (in 2002), nor did he acquire even attempt to obtain a second-hand,

understanding of HealthSouth's 2002 Ohio personal property tax return filing thereafter. Id.

As further detailed in BTA Chairperson Margulies' dissent, Mr. Martin's testimony in

which he distances himself from the 2002 Ohio return was perhaps understandable from a

witness credibility/reputation standpoint. Mr. Martin's testimony went to great lengths to

distance himself from any association or contact with his predecessor, Mr. Botts, or with any of

the several other HealthSouth personnel convicted of accounting fraud. In this way, he may have

sought to enhance his veracity because by not being "tarred by association" with convicted

felons.

But, as Chairperson Margulies observed, Mr. Martin's intentional distancing himself

from HealthSouth's prior accounting fraud equally rendered him uniquely unsuited as a witness

9

to testify from personal knowledge as to the nature and extent of the accounting fraud that

HealthSouth's prior personnel had perpetrated. See BTA Decision and Order (Margulies

dissenting) at 17 (emphasizing that the lack of probative value of Mr. Martin's testimony derives

from his lack of personal knowledge, rather than from a lack of veracity).

Likewise, Mr. Martin was just as unknowledgeable about HealthSouth's post-fraud

discovery investigation as he was about the 2002 Ohio personal property tax return and, thus,

could not testify from personal knowledge concerning the documentation resulting from that

post-fraud discovery investigation. In other words, the testimony of HealthSouth's sole witness,

Mr. Martin, lacked probative value not because it was not "credible," but because he lacked the

requisite foundation of personal knowledge to testify about the matters in controversy.

Compounding HealthSouth's failures of proof, the summary nature of the documentary

evidence, even if it could "speak for itself," rendered it wholly non-probative. In relying

exclusively on summary, litigation-prepared documents, HealthSouth failed to meet its burden of

proof.

In these ways, the BTA's 2-1 split decision departs from the BTA's own established

practices, as Chairperson Margulies' dissenting opinion cogently states:

Apparent from the preceding, appellant provided neither the TaxCommissioner nor this board with actual business records supporting its claim.Instead, appellant relies upon the work product of numerous entities andindividuals, none of whom appeared before this board, the testimony of asupervisor having only general familiarity with the data and methodologiesemployed, and the fact that an external audit was conducted for purposes of SECfilings, to justify its request that revised assessment certificates be issued grantinga significant reduction in the value of its property.

While there exists no reason to question the veracity of appellant's

witness, his lack of personal knowledge and involvement in the developmentof information essential to appellant's claim is no different from otherappeals in which this board has rejected the testimony of a witness whosimply refers to information relayed to him. See, e.g., MCI Metro Access

10

Transm. Servs.[v. Levin] (April 13, 2007), BTA No. 2004-K-749, affirm'd onappeal, Franklin App. Nos. 07APNos. 07AP-398, et seq. 2008-Ohi-5057] , supra;

n8 Trunkline Gas Co. v. Wilkins (July 7, 2009), BTA Nos. 2005-K-578, et seq.,unreported, at 11-12, 2009 Ohio Tax LEXIS 1145. Such a fundamentalflaw inthe competency of appellant's witness dictates rejection of the documentationoffered, which is itself so summary in nature as to have no utility. Althoughappellant insists it is undisputed that it reported and paid tax on personal propertywhich did not exist, this is not appellant's only burden. Instead, it must also provewhich assets were fraudulently reported, where such assets were reported, and thevalues attributed thereto. Neither the commissioner nor this board wasprovided with the documentation used by the various persons/groupsinvolved in the development of appellant's evidence, nor can this boardeffectively evaluate the validity of the methods employed by these

persons/groupa.

(Emphasis added.)3 BTA âecision and Order at 17 (Margulies dissenting), Appx. 25.

Following the BTA's issuance of its decision on October 6, 2010, the Commissioner filed

his appeal to this Court. See Appx. 9-27.

B. Pertinent Facts

1. Introduction

In the following sub-sections of this Section B of the Statement of Case and Facts, the

Commissioner undertakes a detailed factual examination of the evidentiary record establishing

that HealthSouth failed to meet its affirmative burden of proof. Instead of adducing probative

evidence, HealthSouth relied exclusively on non-probative, multiple-level hearsay testimony and

"documentation so summary in nature as to have no utility." HealthSouth presented the

testimony of only a sole witness who lacked any probative personal knowledge relevant to

establishing any reduction in HealthSouth's self-reported 2002 Ohio personal property tax return.

The following analysis undertakes a critical review of each item of documentation in the

evidentiary record and shows how such evidence fell far short of meeting HealthSouth's

3 For the Court's convenience, the BTA's and 10a' District Court of Appeals' decisions in MCI

Metro Access Transm. Servs. v. Levin and the BTA's decision in Trunkline Gas Co. v. Wilkins(July 7, 2009), BTA Nos. 2005-K-578, et seq., unreported, are reproduced in the Appendix atAppx. 97-111; Appx. 81-95; and Appx. 125-133, respectively.

11

affirmative burden of proof. Further, the factual analysis below details just what evidence should

have been adduced -- had HealthSouth truly over-reported its taxable Ohio personal property in

the amount asserted in its refund claim.

2. Without any explanation for its failure to do so, and despite the Commissioner'sauditing agent's request for such evidence, HealthSouth failed to present to theCommissioner or the BTA any of the accounting journal entries required underGAAP and SEC regulations to correct its alleged fraudulent overstatement ofOhio asset values.

Under generally accepted accounting principles ("GAAP"), when a business entity

discovers that fictitious assets or asset values have been falsely created, the accounting journal

entries that created the fictitious assets or asset values must be reversed, i.e., they must be

corrected by reversing entries. As noted by the HealthSouth Court, the Connnissioner expressly

so found. HealthSouth at ¶13 (quoting from the Commissioner's July 15, 2005 letter attached to

his final assessment certificates); S.T 4 37-38, Supp. VI-1520, 1521. Additionally, as a publicly

held company, HealthSouth is, and was at all times relevant here, required under federal

securities laws to maintain its accounting books and records and financial statements in

accordance with GAAP and generally accepted auditing standards ("GAAS"). See, e.g., United

States v. Arthur Young & Co. (1984), 465 U.S. 805, 810-811, fns. 5-7 (citing and summarizing

the relevant Securities and Exchange Commission ("SEC") regulations).

As applied to the present case, under GAAP and GAAS, such primary and secondary

accounting/business record evidence necessarily would have been created and maintained by

HealthSouth had its Ohio personal property, as reported on its original and amended 2002 Ohio

personal property tax returns, been overstated in the magnitude that HealthSouth claims.

4 For purposes of this brief, the statutory transcript of evidence certified by the Commissioner tothe BTA will be referenced as "S.T. _"; the transcript of the BTA evidentiary hearing will bereferenced as "R. "; and the exhibits introduced into evidence at the hearing will bereferenced as "Ex. _." Further, the materials reproduced in Appellant's Supplement will be

referenced as "Supp _".

12

Consequently, on audit of HealthSouth's refund claim for the 2002 tax year at issue, as a starting

point in his investigation and review of the refund claim, the Commissioner's auditing agent

requested HealthSouth to provide the GAAP-required "final results" evidence.

Unfortunately for the merits of HealthSouth's refund claim, it never provided that

evidence. Specifically, following the Commissioner's receipt of HealthSouth's August 4, 2004

application for final assessment (filed by Brian T. Scully of the accounting firm of KPMG, LLP,

see S.T. 49, Supp. VI-1397), the Commissioner's auditing agent, by letter dated March 11, 2005,

requested "full and detailed journal entries that are reflective of the write-off or write-down of

these assets in Ohio showing the originally reported costs have been written off the books of

HealthSouth Corporation." S.T. 45, Supp. VI-1518; HealthSouth at ¶13. Nonetheless,

HealthSouth failed to provide the requested journal entries and otherwise failed to provide any

probative evidence in support of its claim. S.T. 37-38, Supp. VI-1520, 1521; HealthSouth at ¶13.

Later, at the BTA, HealthSouth continued its apparent "stonewalling" of the

Commissioner's request for this evidence. Again, HealthSouth failed to provide any of the

corrective journal entries and offered no explanation for that failure. Instead, HealthSouth

offered only the testimony of a sole witness, Mr. Martin. But, by Mr. Martin's own admission, he

was incompetent to testify concerning the existence and significance of this GAAP-required

evidence.

Mr. Martin could not have been clearer in his disavowal of any knowledge of the

existence or significance of such key primary accounting records5. In his testimony, he candidly

5"Primary" accountinglbusiness records are those that are created at the time of the transactions,such as invoices and accounting journal entries. "Secondary" accounting/business records aregenerated from those primary records and typically aggregate such data by classification.Secondary records include general ledger entries and financial statements, such as balance sheets

and income statements.

13

admitted his lack of accounting competence, both as to his general knowledge and as relating to

the existence and significance of corrective accounting journal entries. See, particularly, R. 106,

Supp. 1-40 (Mr. Martin's testimony in response to a series of questions concerning accounting as

related to HealthSouth's accounting records: "I'm not [an accountant]"); and R. 65, Supp. 1-30

(Mr. Martin's bare statement that he was simply "not aware of any journal entries made to write

this stuff [the fictitious asset values] off' -- without stating whether, to what extent, and by what

means, if any, he attempted to inform himself of the matter).

The Commissioner's finding stands entirely unrebutted that, when fictitious asset values

have been created through fraudulent accounting journal entries, reversing entries are required

under GAAP and GAAS to correct the original fraudulent entries. Moreover, because

HealthSouth refused to provide the BTA or the Commissioner with any basis explaining why

that documentation is missing from the evidentiary record, the BTA was left with no reasonable

basis for excusing HealthSouth's omission.

3. HealthSouth failed to present any other probative or competentaccounting/business record evidence reflecting corrections of fraudulentlyoverstated Ohio asset values, or even establishing the manner and extent to whichHealthSouth undertook "bag and tag" physical inventories of its Ohio assets.

HealthSouth did not rectify its failure to have provided corrective journal entries by other

evidentiary means. Rather, its evidentiary presentation at the BTA was devoid of probative

testimony or documentation regarding primary and secondary accounting records that necessarily

would have been created and maintained by HealthSouth in the process of discovering and

correcting any fraudulent overstatement of its Ohio asset values. Under this caption, in sub-

division 3.a we discuss the evidentiary absence of another kind of key "final results" evidence:

fraud-corrected, facility-specific balance sheets for its Ohio locations. Then, in sub-division 3.b,

we discuss the evidentiary absence of key primary "investigatory" evidence: the physical, or

14

"bag and tag," inventories allegedly conducted at HealthSouth's Ohio facilities to ascertain the

existence and extent of any fraudulent overstatement of Ohio asset values.

a. HealthSouth failed to provide any post-fraud-investieation balance sheetsfor its Ohio facilities to compare with the pre-fraud-investigation balancesheets for those facilities that were attached with its 2002 Ohio personal

property tax return.

Paralleling HealthSouth's failure to furnish fraud-corrected journal entries is its failure to

provide any post-fraud-investigation balance sheets for any of HealthSouth's numerous Ohio

facility locations. This evidentiary omission applies not only to the lack of any fraud-corrected

Ohio balance sheets regarding the tax listing date at issue here (December 31, 2001), but

HealthSouth's failure to provide any post-fraud-investigation Ohio balance sheets for any

subsequent year-ends either. By contrast, the evidentiary record includes pre-fraud-investigation

Ohio balance sheets as of December 31, 2001 for each of twenty-three (23) Ohio facility

locations, which were attached by HealthSouth to its 2002 Ohio personal property tax return6.

Had HealthSouth furnished such post-fraud balance sheets, it would have provided the

Commissioner and the BTA with "after" snapshots of HealthSouth's Ohio personal property

holdings reflecting the "final results" of any fraud investigation regarding those assets. Such

"after" snapshots could then be compared with the "before" snapshots, i.e., the facility-specific

balance sheet attached to its 2002 Ohio personal property tax retum, which allegedly included

fictitious asset values. This comparison would have provided the BTA and the Commissioner

with a starting point in determining the truth of the representations made in HealthSouth's refund

claim.

6 For the Court's convenience, we provide here the statutory transcript page references andSupplement references for these twenty-three (23) facility-specific Ohio balance sheets asfollows: S.T. 867, 884, 911, 926, 942, 958, 989, 994, 998, 1017, 1051, 1065, 1081, 1100, 1109,1129, 1144, 1157, 1170, 1184, 1189, 1233, and 1241, Supp. 111-683, 700, 727, 742, 758, 774,and Supp. IV-801, 806, 810, 829, 859, 873, 889, 908, 917, 937, 952, 965, 978, 992, 997, 1031,

1049.

15

HealthSouth made no attempt to explain its failure to provide this key "final results"

evidence, nor could it reasonably have done so. The evidentiary record shows that, prior to the

fraud investigation, created and maintained facility-specific balance sheets for its Ohio locations.

It naturally follows from this established course of conduct that HealthSouth continued to create

and maintain Ohio facility-specific balance sheets for all accounting periods thereafter, including

for periods after the results of the fraud investigation were finalized. Further, generally accepted

accounting principles (GAAP) and generally accepted auditing standards (GAAS) require the

creation and on-going maintenance of such records. Finally, Ohio's personal property tax statutes

and administrative law require that taxpayers annually file Ohio balance sheets as an attachment

to their returns showing their taxable Ohio personal property book values as of the tax listing

date. See R.C. 5711.101 and the Commissioner's "Guidelines for Filing Ohio Personal Property

Tax Returns" (2002 Ed.) at, e.g., 37-38 (reproducing a model Ohio Balance Sheet on the Tax

Commissioner's prescribed Form 921). 7

There is no question that post-fraud-investigation balance sheets showing HealthSouth's

Ohio asset values most certainly existed or should have existed and most certainly were

maintained or should have been maintained. HealthSouth reasonably cannot explain its failure to

provide these key records on the ground that they never existed or were not maintained. As with

HealthSouth's failure to provide any corrective journal entries, HealthSouth's omission of this

key "final results" evidence is wholly unexcused.

7 The annual editions of the Commissioner's "Guidelines for Filing Ohio Personal Property TaxRetums" for tax years 2001 through 2008 are available on the Commissioner's official websiteand may be accessed on that website at:http://tax.ohio.gov/divisions/personal_property/index.stm. The BTA frequently has cited theCommissioner's personal property tax Guidelines as authoritative administrative law. See, e.g.,

The Mead Corporation v. Wilkins (June 15, 2007) BTA No. 2005-T-787, unreported at 2, Appx.

121-124; and Cincinnati Bell Telephone Company v. Zaino (June 10, 2005), BTA Nos. 2003-K-

765; 2003-K-1612, unreported at 23-24, Appx. 37-52.

16

b. Again without any ex_planation for its failure to do so. HealthSouthlikewise failed to furnish any of the primary "investi¢atory" recordspertinent to its refund claim•physical inventories of its Ohio facilities thatwere allegedly conducted to ascertain the manner and extent of anyfraudulent overstatement of its Ohio assets.

The evidentiary record is devoid of any probative testimony or documentation regarding

any of the primary investigatory records that necessarily would have been created and

maintained by HealthSouth if it truly had fraudulently created and corrected fictitious Ohio asset

values as asserted in its refund claim. As noted above, the only attempt made by HealthSouth

was through Mr. Martin. Yet, Mr. Martin's BTA testimony concerning the investigatory records

is hardly helpful to HealthSouth's refund claim.

Mr. Martin's BTA testimony concerning investigatory records was several degrees

removed from probative evidence, reflecting only a remote connection to the subject.

Specifically, he testified that Brian T. Scully (HealthSouth's outside personal property tax

consultant hired for purposes of its 2002 tax refund claim) utilized unspecified records created

and/or maintained by HealthSouth's asset management group, which, in turn, utilized physical

inventory ("bag and tag") records created by third-party entities tentatively identified by Mr.

Martin as Grant Thornton (an accounting firm) and, possibly, "American Appraisal." R. 66, 79,

83-84, Supp. 1-30, 33.

In other words, Mr. Martin had no personal knowledge or involvement in the preparation,

creation or verification of any investigatory evidence. In fact, his distance from the investigatory

evidence was so great that he could only speculate as to the appraisal company[ies] who may

have performed the "bag and tag" inventory examinations and the underlying records and

17

methodologies they may have used, identifying only one such company by name and none of the

actual personnel involved. R. 66, Supp. 1-30. 8

To summarize, HealthSouth provided no explanation for its failure to have presented to

the BTA: (i) any actual bag and tag physical inventory records, (ii) any probative witness

testimony concerning any such physical inventory examinations, and (iii) any explanation for its

failure to have presented such documentation and testimony. Thus, in this additional highly

material way, HealthSouth not only failed to present probative or competent evidence, it failed to

provide any reasonable basis for that failure.

4. At the BTA, HealthSouth relied solely on the testimony and documentidentifrcation of Michael D. Martin, who lacked the necessary foundation ofpersonal knowledge to authenticate and testify competently or probativelyconcerning the proof necessary to establish the validity of the refund claim.

In his questioning of HealthSouth's counsel in the Ohio Supreme Court oral argument,

when this controversy was previously before this Court, Associate Justice Paul Pfeiffer likened

the role of Michael D. Martin, HealthSouth's sole witness at the BTA, to that of a "carrier

pigeon," who "dropped" various documents on the BTA, with little or no personal knowledge of

their contents. This "carrier pigeon" characterization aptly describes just how Mr. Martin

functioned at the BTA. In the following sub-sections a. and b., we detail Mr. Martin's lack of

personal knowledge concerning the various documents submitted by HealthSouth in support of

its refund claim.

8 Similarly, as we detail in sub-section 4, infra, Mr. Martin lacked the personal knowledge toauthenticate and testify about the contents of the unsupported summary documents thatHealthSouth (BTA Exs. 3-4, Supp. 1-125 to 156) introduced into evidence which HealthSouthbaldly asserts were derived from the bag and tag inventory examinations.

18

a. The BTA testimony of Michael D . Martin revealed that he had no personalknowledge or involvement in the preparation or filing of HealthSouth's

y tax return and attachments thereto. Instead,these materials were submitted and approved by a HealthSouth officialsubsequently convicted of accounting fraud.

HealthSouth's Ohio personal property tax return for the 2002 tax year, with attachments

thereto, S.T. 661-1581, was signed under penalty of perjury by Richard E. Botts, HealthSouth's

then-Vice President of the tax department, on June 14, 2002. Following his conviction for his

role in HealthSouth's accounting fraud, Mr. Botts understandably did not testify at the BTA

evidentiary hearing. Less understandably, nor did anyone else involved in HealthSouth's

preparation or filing of that retiam. Instead, Michael D. Martin was the sole BTA witness

testifying on behalf of HealthSouth at that hearing.

Mr. Martin testified that he started his employment with HealthSouth in 1998 as a sales

and use tax supervisor and then "around April of 2003" (i.e., well after HealthSouth filed its

2002 tax year retuin) he became in charge of property tax. R. 10. Mr. Martin further testified

that, during Mr. Botts' tenure, Mr. Martin never had any communications with him concerning

personal property taxes. R. 95, Supp. 1-37.

As Mr. Martin candidly admitted, he was not "real familiar with Ohio's return." R. 23,

Supp. 1-19. This is to say the least. In fact, in his testimony conceming the Ohio personal

property tax return for the 2002 tax year and the attachments thereto, Mr. Martin clearly testified

to his complete unfamiliarity with the return and all of the supporting documentation.

Specifically, concerning the documentation attached to the 2002 return captioned

"Assessed Value Detail -Personal Property -Tax Year 2002," beginning at S.T. 855, Supp. III-

671 to 682, Mr. Martin testified only that "[it] looks like it comes from our compliance software

that was used at the time." (Emphasis added.) R. 14, Supp. I-17. Similarly, regarding the various

facility-specific balance sheets included in the attachments to the 2002 return, e.g., S.T. 881,

sonal

19

Supp. 111-697 [relating to Facility no. 04-0209] and the pages following the balance sheets, Mr.

Martin testified that "[it] looks like it is information right out of our asset management

[system]." (Emphasis added.) R. 16, Supp. 1-17.

Simply put, Mr. Martin's testimony was plainly that of a person who was looking at the

2002 return and the attachments for the very first time. Thus, through his testimony, HealthSouth

failed to present any probative evidence conceming any aspect of the return, including the nature

of the source documentation of the return and the attachments thereto and whether the return and

attachments accurately reflected such source documentation. Rather, all that the Commissioner

and BTA know for sure is that the return and the attachments thereto were prepared, signed and

filed by Mr. Botts, a convicted felon. Consequently, the Commissioner and the BTA had no basis

on which to ascertain the sources and accuracy of the return information and attachments.

b. HealthSouth failed to adduce any probative evidence that its 2002 Ohiopersonal property tax return fully disclosed all of HealthSouth's taxablepersonal property at its correct acquisition costs and true values.

HealthSouth's refund claim rests on the validity of the methodology it uses to calculate

reductions in the true value of its taxable personal property from the amounts it reported in its

originally filed 2002 Ohio personal property tax return_ In turn, the validity of that methodology

is premised on the truth of two implicit assertions, i.e., (i) that HealthSouth's originally filed

2002 Ohio return included all of HealthSouth's taxable Ohio property, reported at its correct

original acquisition costs, and subject to the appropriate Tax Comnussioner-prescribed

depreciation rates, using the correct acquisition year for each item of taxable property; and (ii)

that the amounts for "AP SUMMARY" and "AP Summary" items set forth in an unauthenticated

attachment to HealthSouth's originally filed 2002 Ohio return represented fictitious asset values.

Unfortunately for HealthSouth, it never established the truth of either assertion during the

course of the Commissioner's audit or at the BTA evidentiary hearing thereafter. Had the

20

Commissioner's audit of HealthSouth's 2002 personal property tax refund claim followed the

usual course of personal property tax audits, HealthSouth would have cooperated with the

Commissioner's reasonable requests for evidence. As a consequence, the Commissioner's

auditing staff would have reviewed thoroughly HealthSouth's pre-fraud-investigation accounting

records, as well as HealthSouth's post-fraud-investigation accounting records. Such audit review

would have been directed toward ascertaining whether HealthSouth's originally filed 2002 Ohio

return included all of HealthSouth's taxable Ohio property. Similarly, the agents' audit review

also would have determined whether HealthSouth reported that property with accurate

acquisition costs and for the correct acquisition years 9

Specifically, in reviewing HealthSouth's actual accounting records, the Commissioner's

auditing agents would have verified whether and to what extent the attachments HealthSouth

submitted with its 2002 Ohio personal property tax return and its refund claim filed thereafter

accurately and completely included all of its Ohio taxable personal property at the correct true

values. The auditing staff s review would have included examining both pre-fraud-investigation

and post-fraud investigation accounting journal entries, general ledgers and balance sheets.

HealthSouth's refusal to cooperate with the Commissioner's auditing staff resulted in no

probative evidence to support HealthSouth's implicit assertion that it reported all of its Ohio

taxable property in its 2002 Ohio personal property tax return at its proper true values. Instead,

9 At a minimum, the Commissioner's auditing agents would have ascertained whetherHealthSouth's 2002 Ohio personal property tax return correctly included all of HealthSouth'sOhio taxable personal property as of the December 31, 2001 tax listing date, and, if so, whetherHealthSouth correctly applied the Commissioner's "true value computation" methodology. Asdetailed in Ohio Adm. Code 5703-3-10, under that "prima facie" methodology, true value is

determined in two steps. First, the original acquisition costs of the taxable personal property ineach Ohio taxing district are aggregated by acquisition years. Then, those acquisition costs, asaggregated by acquisition year, are reduced by applying composite annual true value allowancesfor depreciation and obsolescence, as prescribed by the Tax Commissioner for the taxpayer'sindustry, based on the expected remaining useful lives of the property.

21

HealthSouth relies on only: (i) its unauthenticated, multiple-level hearsay attachment to its 2002

Ohio return (labeled "Assessed Value Detail--Personal Property--Tax Year 2002," beginning at

S.T. 855, Supp. 111-671); and (ii) its unauthenticated, multiple-level hearsay attachment to its

2002 Ohio refund claim (labeled "HealthSouth Corporation Tax Year 2002 Amended Fixed

Assets," S.T. 246-364, Supp. VI-1399 to 1517). In the Convnissioner's BTA merit brief, we

thoroughly detailed the lack of probative value of such inherently incompetent evidence. See

T.C. Br. 15-18. In response, HealthSouth's BTA answer brief is silent.

After the Commissioner issued his final determination denying the refund claim,

HealthSouth failed to rectify this proof deficiency at the BTA. Its presentation at the BTA

hearing was devoid of any evidence establishing that HealthSouth's 2002 return fully and

accurately reported all of HealthSouth's taxable personal property at its correct true values as of

the December 31, 2001 tax listing date. HealthSouth's sole witness at the BTA, Michael D.

Martin, disavowed any work relationship with Mr. Botts; disclaimed any involvement in the

creation, preparation, or review of the 2002 Ohio return that Mr. Botts signed and prepared; and

had no personal knowledge of the creation, preparation, or review of any of the information and

documentation contained in or attached to that return or with the refund claim submitted

thereafter.

Without expressly saying so, HealthSouth implicitly asks the Commissioner and this

Court to "just trust us" by accepting at face value the unsupported representations of convicted

felon Botts. The Court should decline the invitation. A more egregious example of misplaced

trust would be difficult to imagine.

To summarize, as a consequence of HealthSouth's stonewalling of the Commissioner's

auditing personnel at the audit level and HealthSouth's continuation of that stonewalling at the

22

BTA evidentiary hearing, none of the representations made in HealthSouth's 2002 Ohio personal

property tax return were subject to verification for truth or accuracy by the Commissioner or the

BTA. In fact, had HealthSouth provided its actual pre-fraud-investigation accounting records to

the Commissioner, review of those records by the Commissioner's auditing personnel may well

have resulted in the Commissioner's issuance of additional assessment liability for the 2002 tax

year, rather than a partial or full grant of the tax refund HealthSouth requested. We simply

have no way of knowing under this evidentiary record.

Accordingly, even disregarding HealthSouth's failure to have provided any probative

post-fraud-investigation evidence, HealthSouth's refund claim should be rejected because of

HealthSouth's refusal to furriish its pre-fraud-investigation primary and secondary accounting

records to the Commissioner or to this Board.

c. Mr. Martin likewise had no personal knowledee of, or involvement in, thecompilation or preyaration of the documentation captioned "HealthSouthCo oration Tax Year 2002 Amended Fixed Assets" submitted to the

'Commissioner by HealthSouth's then-tax representative Brian T. Scul

oses of li ation in su ort of the refund claim

As part of HealthSouth's application for final assessment for the 2002 tax year (i.e., its

refund claim), KPMG [an accounting firm] employee/property tax consultant Brian T. Scully

furriished the Commissioner with a documentation captioned "Assessed Value Detail -Personal

Property -Tax Year 2002," beginning at S.T. 855. On the bottom left side of each page of that

documentation appears the wording "KPMG confidential," strongly indicating that the

documentation was prepared and created for purposes of supporting HealthSouth's refund claim,

rather than constituting a regular-course-of-business record created and maintained by

HealthSouth. Id.

Unfortunately for HealthSouth, Mr. Scully did not testify at the BTA and Mr. Martin's

testimony concerning the documentation apparently authored by Mr. Scully manifested his lack

23

of personal knowledge about its creation, preparation, and accuracy. When asked to identify the

documentation in direct examination he explained that "[it] looks like all the asset detail for

every single location." (Emphasis added.) R. 24, Supp. 1-19. Moreover, he admitted that he did

not prepare the documentation and that he thought the documentation "came from

[HealthSouth's] asset management system." R. 27-28, Supp. 1-20. In this regard, he testified he

was "somewhat" familiar with the asset management department of HealthSouth. Similarly,

earlier in his testimony he disavowed any direct connection with the asset management

department within HealthSouth, stating that he had only a "high-level" or "general knowledge"

of the numbers generated by that department, out of which, according to Mr. Martin, the

accounting fraud was perpetrated. R. 11, Supp. I-16.

Given the hearsay nature of Mr. Martin's testimony, the Connnissioner's counsel

objected to it on the grounds that it was litigation-prepared, summary documentation for which

Mr. Martin had no personal involvement either in its creation or in reviewing or verifying its

accuracy. R. 26-31, Supp. 1-20, 21.

5. HealthSouth's BTA Exhibits constituted unauthenticated, multiple-level hearsaythat therefore lacked any probative value and plainly constituted incompetent

evidence.

The character of HealthSouth's BTA Exhibits 3 and 4 as unauthenticated hearsay was

even clearer than that of the documentation submitted earlier to the Commissioner by Mr. Botts

(the 2002 Ohio personal property tax return with attachments) and Mr. Scully (the amended 2002

Ohio personal property tax return with attachments) because of the multiple levels of hearsay

involved. At the BTA hearing, the prima.ry discussion of these exhibits centered on BTA Ex. 4,

regarding which Mr. Martin admitted that he had no involvement in preparing, creating or

verifying -- activities that he ascribed to Mr. Scully. On the bottom left-hand side each page of

Ex. 4, the words "Paradigm Tax Group Confidential" appear. Id. Consistent with this

24

designation, Mr. Martin testified that he believed Mr. Scully joined Paradigm Tax Group, which

had spun off from KPMG's property tax group, and that Mr. Scully was the preparer of BTA Ex.

4. See R. 48. Mr. Martin further testified that the documentation used to compile BTA Ex. 4

consisted of various materials from various sources, the specifics of which he simply did not

know. Namely, Mr. Martin stated his understanding to be that Mr. Scully utilized unspecified

records maintained by HealthSouth's asset management group, which, in turn, utilized physical

inventory ("bag and tag") records created by third-party entities identified by Mr. Martin as

Grant Thornton (and accounting firm) and "American Appraisal." R. 79, 83-84, Supp. 1-33, 34.

Mr. Martin testified similarly regarding BTA Ex. 3, a one-page summary of financial

figures captioned "Presentation for Balance Sheet, and having separate columns for "2003" and

"2002." Mr. Martin testified that the thought that a HealthSouth employee in the asset

management group by the name of Brent Woodall prepared that document, and that he "might

have" relied upon workpapers and other underlying documentation for his summary. R. 90-92,

Supp. 1-36. When asked a series of questions concerning the contents of BTA Ex. 3, Mr. Martin

admitted that he could only speculate as to the answers. R. 93, Supp. 1-37.

Finally, as to HealthSouth's remaining BTA exhibits, i.e., BTA Exhibits 1, 2 and 5, Supp.

1-75; 1-124, and 11-157, respectively, Mr. Martin merely identified them as SEC financial

statement excerpts or filings, for which he had no direct involvement in their preparation,

creation or review. Accordingly, his testimony was purely in the nature of identification of the

documents and not as an expert or fact witness. (As noted above, he admitted to having no

accounting expertise.)

The representation made in HealthSouth's SEC Form 8-K as of May 28, 2004, at 17,

BTA Ex.1, Supp. 1-96, that various accounting entries labeled "AP SUMMARY" (all in capital

25

letters) signified fictitious asset values is multiple-level hearsay. First, HealthSouth failed to call

any witness involved in the preparation, creation, verification or review of that document or of

any other financial statement. Thus, the Commissioner and the BTA could not even attempt to

ascertain the basis on which that representation was made or the persons involved in drawing

that conclusion. Second, the statement concerning the "AP SUMMARY," is itself "hearsay

within hearsay." That is, by its own terms, the statement is a conclusion predicated on the

personal knowledge of unidentified persons relying on unidentified source documents and

information.

Moreover, neither the Commissioner nor the BTA has had the benefit of any testimony or

documentation reflecting the analysis, investigation and review that presumably formed the basis

of that statement. Instead, HealthSouth asks that the truth of the statement be accepted at face

value, despite its character as multiple-level hearsay. By failing to call the necessary witnesses to

properly testify, HealthSouth precluded the BTA and the Commissioner from conducting any

meaningful inquiry into the basis for that statement.

Indeed, on this subject, Mr. Martin's own lack of knowledge could not have been more

obvious. When asked about the nature of the fictitious asset entries, he claimed that whether a

particular joumal entry capitalized each letter, as in "AP SUMMARY," or whether only the

"AP" and the "S" were capitalized, as in "AP Summary," did not make any difference for

purposes of its refund claim, "not to me, no." R. 105, Supp. 1-40. Rather, any reference to either

signified to Mr. Martin that the entry related to a fictitious asset value. R.105-106, Supp. 1-40.

In sum, as to the BTA exhibits, Mr. Martin's testimony was pure multi-level hearsay, and

the statements that HealthSouth relies on in those exhibits were themselves multiple-level

hearsay. Consequently, the Commissioner and the BTA could not possibly conduct any

26

meaningful examination because the sole witness, Mr. Martin, could only speculate about the

contents of the BTA Exhibits and the underlying documentation and information on which those

contents were based.

6. For several Ohio facility locations, HealthSouth's BTA Exhibit 4 reflectssubstantially higher Ohio personal property tax acquisition costs than thecorresponding amounts set forth in HealthSouth's refund claim, and otherwisecannot be reconciled with HealthSouth's refund claim. These major andunexplained discrepancies render the merits of the refund claim particularly

dubious.

HealthSouth's refund claim is predicated on the assertion that the "AP SUMMARY" and

"AP Summary" items set forth on the attachments to its 2002 Ohio personal property tax returns

represent fictitious asset values. See the "Assessed Value Detail" attachments to HealthSouth's

2002 Ohio personal property tax return. S.T. 855-1581, Supp. 111-671 through Supp. V-1387. As

an attachment to its application for final assessment (i.e., its refund claim), HealthSouth included

sheets specially prepared for that purpose captioned "HealthSouth Tax Year Amended Fixed

Assets" S.T. 246-364, Supp. VI-1399 to 1517.

As we have previously emphasized in sub-section 3, supra, HealthSouth failed to adduce

any probative or competent evidence to support that assertion. Indeed, even the basic issue of the

source documentation for the "Assessed Value Detail" is missing from the evidentiary record, so

that whether the items listed as "AP SUMMARY" or "AP Summary" accurately reflect the

actual accounting entries made by HealthSouth is a matter of speculation. Likewise, as

emphasized in Section C 3, HealthSouth's assertion is unsupported by any competent or

probative evidence because it is based solely on multiple-level hearsay.

Moreover, the dubiousness of HealthSouth's claim is dealt a further blow when the actual

summary amounts set forth in HealthSouth's BTA Exhibit 4 are reviewed. To assist the BTA, the

Commissioner has summarized that analysis in the attached charts. See Attachments A, B and C

27

to this brief, Appx. 135, Appx_ 137, and Appx. 139, respectively. The Commissioner's analysis

shows that there are fundamental discrepancies between the acquisition costs reported for each

facility location on the "Amended Fixed Asset" sheets that Mr. Scully provided to the

Commissioner versus the amounts set forth in the aggregate for each facility location in BTA

Exhibit 4.

Specifically, as shown in Attachment B, for the Ohio locations listed in BTA Exhibit 4,

the acquisition costs of the taxable personal property (i.e., original acquisition cost minus the

claimed fictitious asset values) for all locations total $16,017,911. The corresponding acquisition

cost of the taxable property for those same locations as claimed by HealthSouth in the "Amended

Fixed Asset" sheets (i.e., after reduction for the "AP SUMMARY" and "AP Summary" entries)

is only $11,863,200, for a difference of $4,141,711. Id. Appx. 137.

In other words, despite HealthSouth's claim that BTA Exhibit 4 buttresses its refand

claim figures, it does the very opposite. According to Mr. Martin's hearsay testimony, BTA

Exhibit 4 was based, at least in part, on "bag and tag" inventories of HealthSouth's Ohio

facilities. Thus, one would expect that the taxable acquisition cost figures set forth in that

summary document would be consistent with the refund claim amounts for the same locations.

Yet, the Exhibit 4 figures reflect substantially greater taxable costs than does the refund claim.

Additionally, as shown on Attachment C, HealthSouth's Exhibit 4 omits over $6 million

of acquisition costs of taxable Ohio asset values for locations that were reported on the Amended

Fixed Asset sheets, but for which no location amounts are set forth in Exhibit 4. In other words,

28

had Exhibit 4 included these omitted acquisition costs, the discrepancies between the refand

claim figures and the Exhibit 4 figures would be over $6 million greater.1o

To sununarize, not only did HealthSouth completely fail to prove its case, the

incompetent and non-probative summary documentation that it introduced into evidence is

highly detrimental to its case. The figures set forth therein are not reconcilable with the figures in

its refund claim and, if applied, would greatly reduce the amount of that claim.

7. HealthSouth issued hundreds of written disclaimers in state and local taxingjurisdictions concerning the accuracy of its refund claims and amended returnsfor the taxable period at issue in the present case and thereafter.

Finally, we note evidence that was also adduced in the Alabama trial court proceedings

on an unsuccessful personal property tax refund claim brought by HealthSouth in that case. Ex

Parte HealthSouth Corp. (In re: HealthSouth Corporation v. Jefferson County Tax Assessor,

Dan Wietrib, and Jefferson County Tax Collector, J.T. Smallwood) (2007), 978 So. 2d 745, 2007

Ala. LEXIS 174, T.C. Appx. 57-67; and BTA Ex. A (the trial transcript in the Alabama case),

Supp. 1-63 to 73.

In the Alabama trial court proceedings and at the BTA, Mr. Martin identified a written

disclaimer. That written disclaimer was marked and admitted into evidence at the BTA as Ex. B,

having previously been admitted into the Alabama trial court proceedings as Defendant's Exhibit

10 Even if these irreconcilable differences between HealthSouth's BTA Exhibit 4 and its refundclaim figures were to be completely disregarded, the refund claim seeks reductions for both its"AP SUMMARY" items and its "AP Summary" items. Notably, both the "Assessed ValueDetail" sheets attached to the 2002 tax return and the "Amended Fixed Asset" sheets submittedwith HealthSouth's refund application include many asset listings set forth as "AP Summary,"rather than as "AP SUMMARY". By HealthSouth's own account, any "AP Summary" itemssignify taxable asset values. Attached to this brief, as "Attachment A," is a table setting forth theacquisition costs for "AP Summary" and "AP SUMMARY" items, by taxing district, Appx. 135.As shown from the chart, the acquisition costs attributable to the "AP Summary" items comprise16.59% of the total acquisition costs claimed as fictitious asset costs. Id.

29

1. See Mr. Martin's Alabama trial court testimony and his BTA testimony at R. 74-75, 84-85,

Supp. I-32, I-34, 35.

As Mr. Martin admitted in his testimony at the BTA, as well as in parallel court

proceedings in Jefferson County, Alabama, on the advice of its legal counsel, HealthSouth

advised through written disclaimers "concerning virtually every property tax return, no matter

what state, *** that our returns were still being audited." R. 75, 85, Supp. 1-32, 35. Furthermore,

Mr. Martin stated that such disclaimers were issued for tax returns tbrough the 2005 tax year,

i.e., long after HealthSouth submitted its application for final assessment in the present case. Mr.

Martin stated that he believed that the substance of the disclaimer was that the "amended returns

may not be accurate," but that he would say that they would be "fairly accurate." R. 84, 85,

Supp. 1-34, 35. This is hardly a ringing endorsement of HealthSouth's 2002 tax year refund claim

by HealthSouth's sole witness and fails to meet the heavy affirmative burden of proof required

here.

Any further facts in support of affirmance will be referenced directly to the evidentiary

record in the Law and Argument Section which follows.

IILLAW AND ARGUMENT

Proposition of Law:

The BTA failed to follow this Court's remand instructions to reevaluate theevidence in light of the Commissioner's objections and the taxpayer's burden ofproof. The evidentiary record did not affirmatively demonstrate that theCommissioner's findings denying the refund claim were "clearly unreasonable orunlawful" and HealthSouth failed to clearly establish the manner and extent of anyclaimed error in the Commissioner's final determination when it, among other

considerations:

(1) failed to produce any of the necessary journal entries, balance sheets orother primary and secondary accounting/business record evidence thatHealthSouth would have been required to have created andmaintained under generally accepted accounting principles (GAAP)

30

and SEC regulations had it overstated its Ohio asset values, whether inthe dollar amounts claimed in its refund claim or otherwise;

(2) presented only a multiple-level, litigation-prepared summary of its"bag and tag" inventories taken several years after the December 31,2001 tax listing date at issue (BTA Exhibit 4), rather than the actualinventory records for that later date;

(3) relied solely on a multiple-level hearsay as the basis for itsidentification of alleged "fictitious" Ohio taxable assets through thetestimony of a sole witness (Michael D. Martin), who lacked therequisite personal knowledge to competently and probatively testify

about that subject;

(4) left unexplained vast differences between acquisition cost figures setforth in its unsupported, multiple-level hearsay summary document(BTA Exhibit 4) and its refund claim figures, which, if applied, woulddrastically reduce its refund claim amounts;

(5) conceded, through Mr. Martin's testimony, that, at best, its submittedrefund claim could be only "fairly accurate";

(6) for the taxable period at issue in the present case (2002), issuedhundreds of written disclaimers in state and local taxing jurisdictionsdisavowing the accuracy of its refund claims and amended returns; and

(7) adduced no evidence establishing that the HealthSouth's 2002 Ohioreturn filed by HealthSouth personnel subsequently convicted ofaccounting fraud (Richard Botts) correctly reported all of its Ohiotaxable personal property at its correct value, except for those asset

value listings for "AP SUMMARY."

In the previous sections of this brief, we have detailed the factual analysis supporting the

facts and circumstances enumerated in this Proposition of Law. Simply stated, HealthSouth

failed to meet its affirmative burden of proof of showing the Commissioner's findings to be

"clearly unreasonable and unlawful" and of demonstrating the manner and extent of any claimed

error in the Commissioner's final determination denying HealthSouth's refund claim. For

the Court's convenience, we divide the following Law and Argument in support of this

Proposition of Law by reference to the seven criteria enumerated in the Proposition of Law, and

31

reference the individual sub-sections of Section B of the Statement of Case and Facts to which

those factors relate.

A. HealthSouth failed to produce any of the necessary journal entries, balancesheets, or other primary and secondary primary and secondaryaccounting/business record evidence that HealthSouth would have been requiredto have created and maintained under generally accepted accounting principles

(GAAP) and SEC regulations had it overstated its Ohio asset values, whether inthe dollar amounts claimed in its refund claim or otherwise.

The failure to provide this evidence constituted a strong admission against

HealthSouth's interest.

As set forth under Section B.2 of the Statement of Case and Facts, supra, the evidentiary

record reflects that, despite the Commissioner's express request for such documentation,

HealthSouth failed to furnish to either the Commissioner or to the BTA the primary and

secondary accounting records necessary to establish the manner and extent of its asserted over-

reporting of its taxable fixed asset values. Namely, HealthSouth failed to produce any accounting

journal entries, balance sheets or other financial statement records for its Ohio facility locations

showing the removal of any alleged "fictitious" assets or asset values, as would be required

under generally accepted accounting principles (GAAP) had such overstatements actually

occurred, whether in the dollar amounts claimed in its refund claim or otherwise. In this

fundamental way, HealthSouth failed to meet its affirmative burden of proof.

At no time has HealthSouth even attempted to explain why it failed to provide this

vital evidence to the Commissioner (on audit of the refund claim) or to the BTA (at the

evidentiary hearing). By HealthSouth's silence on this entire subject in its briefing to date, it

tacitly has admitted to the truth of the following facts and the reasonable conclusions arising

from those facts, as follows:

• If, as a result of an accounting fraud investigation to ascertain the extent, if any, towhich its Ohio accounting records reflected fraudulently overstated assets or asset

32

values, HealthSouth had discovered that its accounting records included fictitiousOhio asset values, HealthSouth necessarily would have been required under GAAP tohave made corrective accounting journal entries to reverse the previous entries that

had created the fictitious asset values;

a Such corrective accounting journal entries would have constituted primary accountingrecords required to be maintained in the ordinary course of HealthSouth's business

and required under GAAP to be so maintained;

• Similarly, in addition to these primary" accounting records, in the ordinary course ofbusiness and in accordance with GAAP and Ohio personal property tax reportingrequirements, HealthSouth would have been required to create and maintainsecondary accounting records, including "fixed asset schedules" (also referred to as"general ledgers") and balance sheets, that likewise would have reflected the

elimination of such fictitious Ohio asset values;

• HealthSouth stonewalled the Commissioner's auditing agent by failing to provide anysuch primary and secondary post-fraud investigation accounting records, as wouldnecessarily have been created and maintained by HealthSouth in the ordinary courseof business following such a fraud investigation had the investigation uncovered

overstated Ohio asset values;

• At all times after HealthSouth's refusal to provide such records to theCommissioner's auditing agent, HealthSouth continued its stonewalling by failing tohave provided such post-fraud-investigation records at the BTA;

• If, as a result of an accounting fraud investigation to ascertain the extent, if any, towhich its Ohio accounting records reflected fraudulently overstated assets or assetvalues, HealthSouth had discovered that its accounting records included fictitiousOhio asset values, HealthSouth necessarily would have been required under GAAP tohave maintained its records of any physical inventory examinations of its Ohio assetsthat were conducted as part of an accounting fraud investigation, but HealthSouthfailed to present any such records to the Commissioner or to the BTA; and

• Not only did HealthSouth fail to provide any probative post-fraud investigationprimary or secondary records evidencing any fraudulent overstatement of Ohio assetsas previously reported on its 2002 Ohio personal property tax return, it likewise failedto provide any probative testimony from witnesses with relevant personal knowledgeconcerning any "final results" or "investigatory" documentary evidence.

The foregoing failures of proof give rise to a strong evidentiary inference fatal to

HealthSouth's refund claim. The absence of such post-fraud-investigation evidence creates a

compelling evidentiary inference. Namely, if the BTA or the Commissioner were to review

33

HealthSouth's actual post-fraud-investigation accounting records, that review would refute or

substantially invalidate HealthSouth's refund claim.

B. HealthSouth failed to produce any competent or probative "investigatory"evidence, including failing to provide any of the "bag and tag" physicalinventories that allegedly were undertaken in order to ascertain whether and towhat extent its Ohio assets were fraudulently overstated. Instead, it provided a

multiple-level hearsay summary document (BTA Exhibit 4).

Further exacerbating its failures of proof, HealthSouth relied solely on one

witness (Michael D. Martin), who lacked the requisite personal knowledge tocompetently and probatively testify about the facts necessary to support

HealthSouth's refund claim.

Rather than having provided such probative evidence from its post-fraud investigation,

HealthSouth instead relied solely upon hearsay testimony of a sole BTA witness regarding

summary documentation (BTA Exhibit 4) which itself constituted multiple-level hearsay. See

our detailed discussion in Section B. 3. a. and b., and B. 4 of the Statement of Case and Facts,

supra. In relying on such incompetent and non-probative testimony and documentation, the

BTA's 2-1 split decision plainly failed to apply the correct burden of proof. Moreover, the BTA

violated a long line of the Supreme Court's and the BTA's own case law rejecting such evidence.

Specifically, in order for a personal property taxpayer to meet its affrrmative burden of

proof of showing the Commissioner's determination of true value to be "clearly unreasonable or

unlawful," the taxpayer's use of summary figures to support the reductions in true value must be

accompanied by reliable and probative documentary evidence and testimony concerning the

records upon which the sumrnaries are based. United Tel. Co. of Ohio v. Tracy (1999), 84 Ohio

St.3d 506, 512; Rent-Way Inc. v. Wilkins (April 13, 2007), BTA No. 2004-A-33 1, unreported,

Appx. 113-119; Anheuser-Busch Companies, Inc. v. Zaino (September 24, 2004), BTA No.

2003-K-699, unreported, Appx. 29-3 5; MCI Metro Access Transmission Services, LLC, and MCI

WorldCom Network Services, Inc. v. Wilkins (Apr. 13, 2007), BTA Nos. 2004-K-749, 750,

34

unreported, affirmed, 2008-Ohio-5057, Franklin County Ct. of Appeals Nos. 07APH05-0398

and -0399, Appx. 97-111; and Hancor v. Limbach (Jan. 11, 1991), BTA No. 89-H-443,

unreported, Appx. 69-71.

In Rent-Way, the BTA rejected a PriceWaterhouseCooper ("PWC") disposal study

prepared by PWC employee Edward Gifford in part because PWC had been engaged by Rent-

Way on a contingency-fee basis. But this was not the only reason that the BTA found the PWC-

prepared evidence not to be probative or credible. The BTA also found that the disposal study

was not reliable and probative evidence because it was predicated on summary information,

unsupported by the underlying record:

Further, upon our review of the disposal study, we are not persuaded by itsconclusions. The study lists disposals by category, and no information onindividual items was included. No distinction is made between the different types

of Rent-Way's merchandise. No underlying records or details regarding the

disposals were provided. Especially since PWC [the PriceWaterhouseCooper

accounting firm] created the disposal study using the summary figures

supplied by Rent-Way, without reviewing any information regarding specificdisposals, supporting documentation should have been provided for the

conclusions made by Rent-Way in its summary. See United Tel. Co. v. Tracy

(1999), 84 Ohio St.3d 506; Anheuser-Busch Companies, Inc. v. Zaino (Sept. 24,

2004), BTA No. 2003-K-699, unreported.

Rent-Way, at 18-19, Appx. 117. (Emphasis added.)

Similarly, in MCI, supra, the BTA rejected the taxpayers' use of unsupported summary

figures as the basis for true value reductions to their taxable telecommunications plant property,

as follows:

Even if we were to accept appellants' claim that historical costs overstate thevalue of their assets, we still consider it necessary to critically review the basisupon which adjustments are sought to be made. In the present appeals, we cannot

undertake such a review. Instead, appellants ask that we accept at face valuean impairment analysis performed on a system-wide level which, in some

undisclosed manner, purportedly took into account issues of accounting

fraud and the overall decline experienced by WorldCom/ MCI within the

telecommunications industry. We have little before us regarding either the

35

entity which performed this analysis or, more significantly, the data reliedupon and the methodology utilized in generating the impairment estimates.Indeed, such estimates may suffer from the same deficiencies of which this board

has previously been critical. We therefore cannot conclude that appellants

have demonstrated, by competent and probative evidence, that the 2003assessed values do not accurately reflect the true value of their Ohio assets.

MCI at 14 and fn.10, Appx. I10. (Emphasis added.)

On appeal to the 1& District, the Franklin County Court of Appeals affirmed and

endorsed the BTA's decision. MCI Metro Access Transmission Services, LLC, and MCI

WorldCom Network Services, Inc. v. Wilkins, 2008-Ohio- 5057, Franklin County Ct. of Appeals

Nos. 07APH05-0398 and -0399, Appx. 81-95. The Franklin County Court of Appeals expressly

ruled that the appellant MCI subsidiaries' failed to provide "probative evidence" concerning the

impairment "write-down" of assets taken by the MCI parent/holding company entity. The Court

held that the testimony from the MCI appellants' sole witness on the subject, a Mr. Garces,

lacked "probative value," because Mr. Garces did not possess the necessary foundation of

personal knowledge to testify concerning the MCI parent's impairment write-down. Id. at ¶¶29-

30, Appx. 93-94. (see also BTA Decision and Order (Margulies dissenting) at 17, fn. 8

(discussing this holding in the 10th District's MCI decision), Appx. 25.

The BTA's and courts' rejection of unsupported summary infonnation has a long history;

the two foregoing cases are merely very recent examples of the application of well-established

law. Earlier decisions applied this same principle. For example, in Hancor, supra, the BTA

rejected the appellant intangible personal property taxpayer's assessment challenge on the basis

that its suinmary information concerning expenses was not supported by probative or competent

evidence, as follows:

The Tax Commissioner's brief argument on this subject states that Appellanthas failed to submit proof that the expenses for which credit is here soughtwere incurred at all, and, moreover, has failed to prove that they were incurred-- the goods or services provided -- in the fiscal years at issue. We must agree

36

with the Tax Commissioner on this point. The only evidence we have that

the expenses were incurred in the appropriate fiscal years is the

testimony of Mr. Haugawout and certain summaries, written after the

fact by Mr. Haugawout and co-workers, found in Appellant's Exhibit D.

At the hearing Mr. Haugawout explained that the checks and invoices hadbeen discarded due to the substantial passage of time. We understand that,

but we find that the evidence presented is not sufficiently reliable whenthe crucial factor is when expenses were incurred and all evidence

consists of summaries -- constructed from what records we do not know -

-- written after the fact.

Hancor, at 10-11, Appx. 71. (Emphasis added.)

The BTA, and the Ohio Supreme Court on appeal from the BTA, have consistently held

that sworn affidavits are of no probative value when the affiant does not appear to testify at the

BTA and subject himself or herself to cross-examination. See, American Dist. Tel. Co. v.

Porterfield (1968), 5 Ohio St.2d 92; and Dave Dennis Dodge, Inc. v. Wilkins (Oct. 27, 2006),

BTA Nos. 2005-K-857, 858, unreported, Appx. 53-56. Here, Mr. Martin's BTA testimony was

far less probative than the affidavits rejected in those cases because he lacked any foundation of

personal knowledge. At least in those cases, the affiant had averred, under oath, as having that

requisite personal knowledge.

Thus, in addition to erroneously disregarding HealthSouth's failure to adduce the

accounting records required under GAAP evidencing that any "fictitious" asset values had been

corrected on its accounting records, the BTA grossly departed from its own and the Ohio

Supreme Court's established precedent. The BTA wrongly relied exclusively on summary,

multiple-level hearsay documentation, supported only by the testimony of a sole witness with no

personal knowledge in the preparation, creation or verification of the summary documentation,

or of the underlying documentation on which the summary documentation was allegedly based.

37

C. HealthSouth adduced no probative evidence establishing that the HealthSouth's2002 Ohio return filed by HealthSouth personnel subsequently convicted of

accounting fraud (Richard Botts) correctly reported all of its Ohio taxable personalproperty at its correct value, except for those asset value listings for "AP

SUMMARY."

Even if HealthSouth had adduced probative evidence in support of its assertion that its

"AP SUMMARY" asset values constituted fictitious asset values, its refund claim would still

have failed in its entirety. See Section B. 3. c. of the Statement of Case and Facts, supra. This is

so because HealthSouth failed to present any probative evidence to substantiate that its originally

filed and amended Ohio 2002 personal property tax returns reported all of its taxable personal

property at its correct values. Instead, HealthSouth's refund claim is predicated on the

assumption that its returns were correct in all respects except the listings for "AP SUMMARY"

asset values. Because its 2002 return was filed by HealthSouth personnel (Richard Botts)

subsequently convicted of accounting fraud, such assumption is particularly unsupportable and

hardly meets the burden of proof requirement applicable here.

D. HealthSouth presented an unsupported, multiple-level hearsay "bag and tag"

summary at the BTA irreconcilable with its refund claim figures, and, which, ifapplied, would drastically reduce its refund claim amounts.

The invalidity of HealthSouth's refund claim is made even more apparent when one

properly considers HealthSouth's "bag and tag" inventory summary (BTA Exhibit 4) as an

admission against interest. See Section B. 5 of the Statement of Case and Facts, supra. The

Commissioner provided the BTA with a factual analysis detailing that HealthSouth's BTA

Exhibit 4 was unauthenticated, multiple-level hearsay, litigation-prepared, summary

documentation. See the Attachments A-C to the Commissioner's initial BTA brief upon remand,

Appx. 135; Appx. 137; and Appx. 139, respectively. As such, BTA Exhibit 4 inherently lacked

any probative value in support of HealthSouth's refund claim. However, the same does not hold

regarding its use by the Commissioner.

38

As an admission against HealthSouth's interest, BTA Exhibit 4 may be used by the

Commissioner as evidence against HealthSouth's refund claim. In fact, in the

Commissioner's BTA merit brief he did just that. See, initial T.C. BTA Br. at 21-24.

Specifically, the Commissioner provided the BTA with an analysis of BTA Ex. 4 showing

that the values set forth therein for HealthSouth's taxable Ohio personal property were

substantially greater than the valuations set forth in HealthSouth's refund claim. The

Commissioner quantified these higher values in three charts attached to his initial BTA merit

brief as Attachments A, B, and C. Appx. 135-139. Accordingly, if BTA Ex. 4 truly were to

set forth the correct valuations of HealthSouth's taxable Ohio personal property, then

HealthSouth's refund claim -- and the methodology HealthSouth used to compute that claim

-- are inherently and materially in error.

Tellingly, HealthSouth's BTA answer brief was silent in response to the

Commissioner's analysis in his BTA merit brief of BTA Exhibit 4, HeatthSouth's. Rather

than attempt to explain how the valuations of BTA Exhibit 4 possibly could be reconciled

with HealthSouth's refund claim, HealthSouth ignores the whole subject. HealthSouth did

not even try to rebut the Commissioner's analysis or his quantification of these material

discrepancies. In other words, by this silence, HealthSouth either tacitly has abandoned BTA

Exhibit 4 -- the only purported post-fraud-investigation evidence of its Ohio asset values that

HealthSouth offered in support of its refund claim at the BTA hearing -- or it tacitly has

abandoned its refund claim. In either event, the result should be fatal to HealthSouth. Thus,

for this further compelling reason, the BTA should affirm the Commissioner's denial of

HealthSouth's refund claim.

39

E. HealthSouth concedes, through Mr. Martin's testimony, that, at best, its

submitted refund claim could be only "fairly accurate" and that, for the taxable

period at issue in the present case (2002), HealthSouth issued hundreds ofwritten disclaimers in state and local taxing jurisdictions disavowing theaccuracy of its refund claims and amended returns.

Finally, HealthSouth's sole witness' admission at the BTA hearing, the best face that he

could put on HealthSouth's BTA evidentiary presentation was that, in his view, HealthSouth's

refund claim could be "fairly accurate." In fact, throughout over 300 state and local taxing

districts in the United States, HealthSouth's refund claims for the period at issue routinely

included a written disclaimer that the claims filed may not be accurate. In the present case,

HealthSouth failed to establish even that modest (and insufficient) assertion. Thus, its refund

claim properly fails for these additional reasons, as we detailed in Section B. 6 and B.7 of the

Statement of Case and Facts, supra.

IV. CONCLUSION

For all the foregoing reasons, HealthSouth failed to meet its affirmative burden of proof

of demonstrating the Commissioner's valuation findings to be "clearly unreasonable or

unlawful" and to clearly establish the manner and extent of any claimed error in the

Commissioner's final determination denying HealthSouth's refund claim. Thus, this Court

should reverse the BTA's decision granting a partial reduction in HealthSouth's taxable values of

personal property, as self-reported by HealthSouth on its 2002 Ohio personal property tax return,

and affirm the Commissioner's final assessed values in their entirety.

40

Respectfully submitted

MICHAEL DEWINEAttorney General of Ohio

BARTON A. AUBBA.KI) (00231'41)Assistant Attorney GeneralTaxation Section30 East Broad Street, 25th FloorColumbus; Ohio 43215Telephone: (614) 466-5967Facsimile: (614) 466-8226barton.hubbard@ohioatorneygeneral.gov

Counsel for AppellantJoseph W. Testa,Tax Commissioner of Ohio

41

CERTIFICATE OF SERVICE

I certify that a copy of the foregoing Appellant's Merit Brief was served by

regular U.S. mail and e-mail transmission, thi;^4day of April, 2011 upon the following

counsel:

Jay P. SiegelJames Kieran Jennings; IIISiegel, Siegel, Johnson & Jennings, Co., LPA

Landmark Center Suite 21025700 Science Park DriveCleveland, Ohio 44122jsiegel@siegeltax.comkjennings@siegeltax

42

1

IN THE SUPREME COURT OF OHIO

Appeal from the Ohio Board of Tax Appeals,

HEALTHSOUTH CORPORATIONAppellee,

V.

WILLIAM W. WILKINS [RICHARD A.LEVIN], TAX COMMISSIONER OF OHIO,

Appellant.

Case No.10- 19 16

Appeal from BTA CaseNo. 2005-A-1386

NOTICE OF APPEAL

JAY P. SIEGEL(Counsel of Record)

---'SiegatSiegai o Son emm^g^25700 Science Park DriveCleveland, Ohio 44122Telephone: (216) 763-1004Facsimile: (216) 763-1016E-mail: jsiegal@siegaltax.comATTORNEYS FOR APPELLEE

RICHARD CORDRAY (0038034)Ohio Attorney GeneralBARTON A. HUBBARD (0023141)Assistant Attorney General(Counsel of Record)30 East Broad Street, 25w FloorColumbus, Ohio 43215-3428Telephone: (614) 466-5967Facsimile: (614) 466-8226Email:

barton-hubbard@ohioattomeygeneral.gov

ATTORNEYS FOR APPELLANT

... FF'V+L^

NCV 0 5 2010

CLERK OF COURTSUPREM€COURT OF OHIO

Appx. 1

IN THE SUPREME COURT OF OHIO

Appeal from the Ohio Board of Tax Appeals,

HEALTHSOUTH CORPORATION

Appellee,

V. . Case No.

WILLIAM W. WILKINS [RICHARD A. : ApPeal from BTA CaseLEVIN], TAX COMMISSIONER OF-0HIO, ;

No-2005-A-1386

Appellant.

NOTICE OF APPEAL

Richard A. Levin, Tax Commissioner of Ohio, successor to William W. Wilkins, hereby

gives notice of his appeal as of right, pursuant to R.C. 5717.04, to the Supreme Court of Ohio

from a decision and order of the Ohio Board of Tax Appeals ("BTA"), joumalized on October 6,

2010, in Case No. 2005-A- 1386 before the BTA. A true copy of the decision and order of the

BTA being appealed from is attached hereto and incorporated herein by reference.

The errorsin the decision and order of the BTA of which the Tax Commissioner

("Commissioner") complains are as follows:

1. The BTA erred, as a matter of fact and law, in ordering the Cotnmissioner to reduce

the assessed valuations of the taxable personal property of HealthSouth Corporation

("HealthSouth") for the 2002 tax year below the valuations that had been assessed by

the Commissioner under his "acquisition cost less prescribed allowances for

depreciation" method for determining "true value," as reported by HealthSouth on its

2002 Ohio personal property tax return.

1Appx. 2

2. The BTA erred, as a matter of fact and law, in granting, in whole or in part,

HealthSouth's request for refund of personal property taxes regarding the true values

of personal property listed for taxation by HealthSouth on its 2002 tax year Ohio

personal property tax return and assessed by the Commissioner against HealthSouth

for that tax year.

3. The BTA erred, as a matter of fact and law, in determining that HealthSouth had met

its affirmative burden of demonstrating both the manner and the extent of any error in

the Commissioner's determination of the taxable true value of HealthSouth's personal

property for the 2002 tax year and in failing to find that HealthSouth had not met its

affirmative burden of demonstrating the Commissioner's findings denying the refund

claim to be "clearly unreasonable or unlawful."

4. The BTA erred, as a matter of fact and law, in determining that HealthSouth had

established by probative, competent evidence the extent, if any, to which for Ohio

personal property taxation for the 2002 tax year HealthSouth had listed "phantom" or

"fictitious" asset values that never existed or existed in acquisition expenditure

amounts less than the actual amounts HealthSouth incurred for acquiring or

producing its Ohio-located taxable assets.

5. The BTA erred, as a matter of fact and law, in admitting into evidence multiple-level

hearsay witness testimony and in solely relying, as the basis for the BTA's granting

of HealthSouth's refund claim, upon that incompetent, non-probative witness

testimony and unauthenticated, multiple-level hearsay summary documentation that

had been presented and rejected as such by the Commissioner, as well as additional

2

Appx. 3

multiple-level hearsay, summary, unauthenticated documentation that was presented

by HealthSouth for the first time in the BTA proceedings.

6. The BTA erred, as a matter of fact and law, by failing: (1) to have required

HealthSouth to have admitted into evidence, as necessary foundation documentation,

the underlying documentation supporting the unauthenticated, multiple-level hearsay

summaries relied upon by the BTA to reduce the Tax Commissioner's determination

of true value and grant HealthSouth's refund claim; and (2) to have required

HealthSouth to have presented the actual accounting books and records and joutnal

entries removing from its asset listings regarding any fictitious asset values for any of

its Ohio-located taxable personal property.

7. As found by the Commissioner upon audit, the creation and maintenance of (a)

accounting journal entries removing the various alleged fictitious asset values and (b)

revised balance sheets and fixed asset listings reflecting the removal of such fictitious

asset values is required under generally accepted accounting principles ("GAAP")

whenever such fraudulent accounting practices are discovered. Despite the

Conunissioner's auditing agent's express request for such primary and secondary

accounting records, HealthSouth failed to present to the Commissioner during the

audit and administrative review process any such GAAP- required records for

HealthSouth's Ohio-located fixed assets showing the reductions in asset values

resulting from its alleged fraudulent over-capitalization of Ohio asset values.

HealthSouth further failed to present such GAAP-required records at the BTA

hearing. HealthSouth's failure to have presented any such correcting journal entries

and revised balance sheets and fixed asset listings constituted probative evidence of

3

Appx.4

the absence of such records. HealthSouth failed to provide any post-fraud-

investigation balance sheets for its Ohio facilities to compare with the pre-fraud-

investigation balance sheets for those facilities that were attached with its 2002 Ohio

personal property tax return. Instead, HealthSouth presented summaries of alleged

"bag and tag" physical inventories conducted by unspecified entities and persons at

unspecified times in 2003 or 2004.

The BTA erred as a matter of fact and law in failed to properly consider -- and in

fact ignoring and implicitly excusing -- such basic failures of proof by HealthSouth.

Instead, the BTA should have considered HealthSouth's evidentiary failures as

strongly evidencing that HealthSouth's alleged overstatement of its fixed asset values

did not occur or occurred in amounts far less than HealthSouth alleged in its refund

claim.

8. In granting any reduction in the valuations reported by HealthSouth on its filed 2002

tax year return, the BTA erred, as a matter of fact and law, by relying on summaries

of HealthSouth's "bag and tag" inventory records of its taxable fixed assets that

allegedly resulted from physical inventory reviews conducted by unspecified entities

and persons at HealthSouth's Ohio locations at some unspecified times in 2003 or

2004. But even if such multiple-level hearsay, unauthenticated summaries were

erroneously accepted as probative, reliable evidence, such evidence would constitute

only one element of the necessary proof for HealthSouth to establish any reduction in

the assessed values of HealthSouth's taxable fixed asset property. The various

additional elements of proof that HealthSouth would have been required to

4

Appx. 5

demonstrate in order to meet its affirmative burden of proof, but which HealthSouth

failed to present to the Commissioner or to the BTA, include the following:

(A) In order to prove any such reduction in the assessed values for the 2002 tax

year, HealthSouth would be required to establish the extent to which, prior to

the dates that any such physical inventories were conducted in 2003, 2004, or

2005, but after the December 31, 2001 tax listing date at issue, HealthSouth

disposed of, sold, transferred to other locations, or otherwise removed from its

various Ohio locations fixed assets that had existed and were being held for

use in business in Ohio on the December 31, 2001 tax listing date. Such

evidentiary proof would have included testimony and documentary evidence

establishing the extent to which such asset removals occurred during such

time. Without adjustments to the summary bag and tag inventory figures to

account for such post-December 31, 2001 asset removals, no valid

conclusions concerning the summary "bag and tag" inventory amounts could

validly be drawn concetning the existence or non-existence of fictitious asset

values;

(B)Contrary to the BTA's apparent misunderstanding, but as set forth in

HealthSouth's post-fraud investigation financial statement, SEC Form 8-K as

of May 28, 2004, BTA Ex. I at 17, fiied with the Securities and Exchange

Commission, the joutnal account entries "AP Summary" [i.e., lower case] and

"AP SUMMARY," [i.e., all letters upper case] did not represent any specific

assets, but instead constituted unidentified expenditures that were to be

assigned to the proper asset at some future time when the specifics of the

5

Appx. 6

expenditure could be ascertained. To the extent that the "AP SUMMARY"

amounts were fictitious, such amounts represented fictitious asset values,

relating to existing, unidentified asset expenditures, rather than separate

fictitious assets in their own right. Thus, the conducting of physical

inventories in 2003 or 2004 at HealthSouth's Ohio locations would not, in

itself, have revealed the absence of any such "AP SUMMARY" assets.

Instead, only certain inferences could be drawn concerning whether such

fictitious asset values previously had been created. The BTA erred as a matter

of fact and law in failing to consider this central fact and, accordingly,

wrongly concluded that the summary "bag and tag" inventory documentation

presented by HealthSouth at the BTA met HealthSouth's affirmative burden

of proof;

(C) In order to prove any such reduction in the assessed values for the 2002 tax

year, HealthSouth would be required to produce probative documentary

evidence and/or testimony from those individuals personally knowledgeable

that the "AP SUMMARY" journal entries constituted "fictitious" asset values.

The BTA erred by failing to require HealthSouth to have presented any

witness testimony or any non-hearsay, reliable documentary evidence

establishing such assertion for any of HealthSouth's "AP SUMMARY"

entries, both regarding its Ohio locations and its location natinally;

(D)In order to prove any such reduction in the assessed values for the 2002 tax

year, HealthSouth would be required to reconcile the fixed asset inventory

cost infotmation set forth on the summaries of its "bag and tag" inventories

6

Appx. 7

for each Ohio taxing district with the significantly different infomtation set

forth in its Ohio 2002 tax year return and in its refund claim by taxing district.

The BTA erred by failing to require HealthSouth to reconcile such amounts

and the BTA further erred by failing to find that the significant differences in

the acquisition cost information in the "bag and tag" inventory summaries

from the cost information in its 2002 tax year return and refund claim

provided powerful additional reasons for rejecting HealthSouth's refund

claim;

(E) In order to prove any such reduction in the assessed values for the 2002 tax

year, HealthSouth would be required to establish that its 2002 tax year return

correctly reported all taxable assets at their true values and did not omit the

true value of any taxable personal property from such retum.

The BTA erred, as a matter of fact and law, by failing to properly consider

these fundamental failures of proof.

Respectfully submitted,

RICHARD CORDRAY (0038034)Ohio AttoPtey General,,.

BARTON A. HUBBARD (0023141)Assistant Attotney General30 East Broad Street 25`h FloorColumbus, Ohio 43215

7

Appx. 8

OHIO BOARD OF TAX APPEALS

tfealthSouth Corporation. CASE NO. 2005-A-1386

Appel lant,

vs.

William W. Wilkins, Tax Commissionerof Ohio,

Appellee.

APPEARANCES:

For the Appellant

(PERSONAL PROPERTYTAX)

DECISION AND ORDER

- Siegel Siegel Johnson & Jennings Co.. LPAJay P. Siegel25700 Science Park DriveCleveland, Ohio 44122

For the Appellee - Richard CordrayAttorney General of OhioBarton A. HubbardAssistant Attontey General30 East Broad Street, 25th FloorColumbus, Ohio 43215

Entered 0 C i- 6 2010Mr. Johrendt and Mr. Dunlap concur. Ms. Margulies dissents.

This cause and matter came on to be considered by the Board of "I ax Appeals

once again upon remand from the Supreme Court in HealthSouth Corp, v. Levin, 121 Ohio

St.3d 282, 2009-Ohio-584, where the court held that "the BTA's factfinding is incomplete,

and we therefore vacate its decision and return the case to the BTA. On remand, the BTA

shall complete its factfinding' based upon the existing record." Id. at ¶36. The court

concluded that °'[t1he B'CA did not *** specifically address the commissioner's objections

fhe coun went on to state that "Iblecause the panies have been afTtrrded ample opportunity to presentevidence, the BTA shall not take additional evidence on remand." Id. at ¶36.

Appx. 9

r

to HealthSouth's evidence, and it did not address the commissioner's argument that the

refund claim was legally or equitably barred."2 Id. at ¶3. Further, the court held that "the

BTA's decision failed to address whether HealthSouth did prove its case." Id. at ¶30. The

court clarified that it did not necessarily find that the BTA reached the wrong conclusion.

Id. at ¶35. Therefore, based upon the court's pronouncement, we shall revisit the record in

this matter in order to once again evaluate the personal property tax refund request made by

the taxpayer.

This cause and matter comes on to be considered again by the Board of Tax

Appeals upon the notice of appeal filed herein by the above-named appellant from final

assessment certificates of valuation issued by the Tax Commissioner. The assessment

certificates, issued under date of July 22, 2005, relate to an application for final

assessment, i.e., request for refund, filed by appellant for the 2002 personal property tax

year.

'I'he matter was originally submitted to the Board of Tax Appeals upon the

notice of appeal, the statutory transcript certified to this board by the Tax Commissioner,

the record of the hearing before this board, and the brief filed by counsel to the appellant.

' This board would like to clarify that it did not deem counsel's comments at hearing as a specific argumentby the commissioner that the taxpayer's refund claim was legally or equitably barted. Specifically,counsel's comments were not made in a closing statement, but in a statement he deemed to be an "openingstatement" that he reserved for presentation at the inception of the commissioner's case in chief, after theclose of appellant's case. H.R. at 7, 145-146. Further, counsel's comments specifically acknowledged alack of any legal support or authority, and promised further elaboration and discussion in a post-hearingbrief, which as has been established, was never filed. That being said, in its decision, the court specificallydetermined that there is "no support for the comtnissioner's first argument in the Ohio statutes and the caselaw. We hold that the property tax statutes do not authorize the commissioner or the BTA to refuse toreduce a tax assessment on the grounds that the excess taxable value was reported as part of an accountingfraud_" Id. at ¶7. 'rhe court went on to state that "the rights to have an assessment corrected and to receive arefund of property taxes do not depend on good faith by the taxpayer in filling out the original property taxreturn." Id. at ¶19. Further, the court found that "the case law does not support recognizing estoppel in thiscase even if such a doctrine were generally applicable in tax matters." Id. at 124. Accordingly, we need notaddress such argument any further.

2

Appx. 10

0

tJpon remand, the decision of the Supreme Court and the briefs filed with this board by

counsel to the Tax Commissioner' and the taxpayer have also been considered.

In reviewing appellant's appeal, we acknowledge the presumption that the

findings of the Tax Commissioner are valid. Alcan Aluminum Corp. v. Limbach (1989),

42 Ohio St.3d 121. It is therefore incumbent upon a taxpayer challenging a finding of the

Tax Commissioner to rebut the presumption and establish a right to the relief requested.

Hatchadorian v. Lindley (1986), 21 Ohio St.3d 66; Belgrade Gardens v. Kosydar (1974),

38 Ohio St.2d 135; Midwest Transfer Co. v. Porterfield (1968), 13 Ohio St.2d 138.

Moreover, the taxpayer is assigned the burden of showing in what manner and to what

extent the Tax Commissioner's determination is in error. Kern v. Tracy (1995), 72 Ohio

St.3d 347; Federated Dept. Stores, Inc. v. Lindley (1983), 5 Ohio St.3d 213. Where no

competent and probative evidence is developed before this board by the appellant to show

that the Tax Commissioner's findings are incorrect, then the Board of T'ax Appeals must

affirm ch_e__Tax Commissioner's findings. Kern, supra; Kroger Co. v. Limbach (1990), 53

Ohio St.3d 245; Alcan, supra.

At the outset, we note that every taxpayer engaged in business in Ohio must

annually file a personal property tax return with the county auditor of each county in

which property used in the taxpayer's business is located. R.C. 571 1.02. On that retum,

the taxpayer must list "all his taxable property *** as to value, ownership and taxing

districts as of the tax lien date he engages in business." R.C. 5711.03. In this instance,

appellant has filed an inter-county return. R.C. 571 1.13.

l'he commissioner and the taxpayer sought leave to file one additional brief beyond those which werepreviously ordered by this board on remand, and all such briefs have been considered herein.

3

Appx. 11

Appellant's position, as set forth in the notice of appeal, appears as follows:

"2. Appellant requests that the decision be reversed becausethe 'rax Commissioner erred in the following respects:

"A. The Tax Commissioner erred in upholding a taxassessment against property which did not exist on the tax liendate. Such property which was initially reported was the resultof accounting irregularities at the Appellant which resulted inthe listing of fictitious assets on the originally 6led return.Taxpayers has [sic] timely requested a refund of tax paid onthese fictitious assets and such refund should be granted.

"B. The Tax Commissioner also erred by denying Appellantthe right to due process of law and equal protection under theFifth and Fourteenth Amendments of the Constitution of theUnited States of America, and Article I, Section 2 of the OhioConstitution, and denying Appellant the right to due course oflaw under Article 1, § 16 of the Constitution of the State ofOhio, including but not limited to the improperdisqualification of the property, if the Tax Commissionerbelieves that it did exist, from its proper classification as notused in business."

More specifically, attached to its request for final assessment for tax year

2002, appellant HealthSouth Corporation provided the following information regarding its

claim:

In March 2003, IiealthSouth became aware of accountingirregularities. Part of the accounting irregularities, consistedof overstating property, plant and equipment by listingfictitious assets on depreciation schedules using the assetdescription "AP SUMMARY". These assets do not exist. Asa result of this, FlealthSouth has been reporting, has beenassessed and has paid personal property taxes on theseerroneous assets. Consequently, these erroneous assets havebeen included in the taxing jurisdictions certified tax roll inerror." S.T. at 73.

There appears to be no dispute that a significant accounting fraud occurred at

IlealthSouth in which its earnings were dramatically overstated. "Stated most simply, the

4

Appx. 12

fraud was accomplished by making over $2.7 billion in false or unsupported entries in the

Company's accounting systems. These improper accounting entries, made for the purpose

of inflating HealthSouth's eamings, took two principal forms: (1) exaggeration of

reported revenue, primarily through reductions to contractual adjustment accounts, and (2)

failure to properly characterize and record operating expenses." Ex. I at 13. It is

HealthSouth's claim that as a result of this fraudulent activity, its assets were overstated,

and correspondingly, the personal property taxes on such assets were overpaid.

The basis of the tax department's denial of HealthSouth's refund request was

set forth in a letter from the Ohio Department of Taxation regarding the final audit results

and indicated that:

"You requestedfinal assessment of the 2002 return on thebasis that the assets have been over reported [sic] on the 2002retum. The asset listing you submitted in regards [sic] to thisrequest show acquisition cost amounts compared to the APsummary amounts for various itett ►s of property in the State ofOhio. Under section 5711.18 of the Ohio Revised Code andSection 5703-3-10[c] of the Ohio Administrative rules,probative evidence is needed to establish true value of tangiblepersonal property. In the request letter of March 11, 2005, theauditor requested joumal entries to establish probativeevidence the items being requested to be removed from the2002 return have in fact been written off the books as well. Asthis information was not provided, there is a sufficient lack ofevidence to establish these items have fully been removedfrom the assets as required by GAAP." S.T. at 37.

It is appellant's contention that specific line items designated on its 2002

pcrsonal property tax return as "AP SUMMARY" were erroneously included as tangible

personal property. when, in fact, the items did not exist. H.R. at 7. "I'his overstatement of

assets was uncovered when HealthSouth 'hired PricewaterhouseCoopers' forensic

5

Appx. 13

auditors to come in and start reviewing *°* retums and identifying all the irregularities

and fixed asset - fictitious fixed assets, and just completely restate *** financial

statements." H.R. at 32-33. In addition, "a bag and tag inventory" physical inventory

count for virtually all of HealthSouth's facilities was used to assist in completing a

restatement of HealthSouth's assets for purposes of filing restated and/or original financial

statements for a four-year period, 2001-2004, a''super 10-K" that was filed with the SEC.

H.R. at 40-42, 57. In the course of identifying the fraudulent listings on the earlier filed

tax retums and filing refund claims in various jurisdictions throughout the country, asset

information was assembled by HealthSouth's asset management group, which, in turn,

provided it to an outside consultant in order to help him "to determine the property, plant

and equipment totals for each facility, which ties back to this schedule [Exhibit 41, and to

the 10-K." H.R. at 45.

On remand, the Supreme Court directed the BTA to address whether assets

designated "AP Summary," in lower case letters, are properly included in the refund

request. As set forth in Ex, 1, the Form 8-K tiled with the SEC by HealthSouth, it is

clearly stated that "AP SUMMARY is not to be confused with `AP Summary,' a

description normally used during the initial processing of legitimate invoices in the

Company's accounts payable system and replaced with a specific asset description when a

purchase was posted to the general ledger." ld. at 22. In its brief, the taxpayer claims that

"[tlhe description 'AP Summary' would not be transferred to the fixed asset system. The

issue before this Board focuses only on those items still identified as AP Summary on the

fixed asset schedules." Brief on Remand at 7. We. however, find nothing in the record

6

Appx. 14

before us to support counsel's characterization that any item carrying the "AP Summary"

designation (lower case), as described in Exhibit I, could not have appeared in the fixed

asset system, and thus, should be treated the same as those items designated "AP

SUMMARY." Without testimony or evidence to support such conclusion, we cannot

presume that counsel's representations are accurate; for example, if specific asset

descriptions were not posted to the general ledger and remained "AP Summary" on the

general ledger, couldn't the °'AP Summary" (lower case) designations have been carried

on to the fixed asset schedules? Thus, we are constrained to conclude that the taxpayer

has only established that those items designated "AP SUMMARY" (upper case) can be

properly considered part of the taxpayer's refund request.

We also note that counsel for the commissioner objected to the taxpayer's

witness' testimony concerning the subject refund request. He complained that much of the

witness' testimony was hearsay and that the witness was not qualified to authenticate the

exhibits that the taxpayer offered into evidence. We disagree. Appellant's witness was

the vice president of tax, overseeing the property tax department, in other words, a

supervisor, who, in his duties, had the opportunity to review and verify the infotmation

contained on the exhibits that were offered by appellant. H.R. at 10. For example, he

testified that he reviewed the original inventory counts, H.R. at 80, he reviewed the

calculations made in the application for final assessment, H.R. at 116, was responsible for

overseeing and reviewing all returns and refund requests, H.R. at 28, and was familiar

with the calculations made to calculate the refund and took steps, with his associates, to

verify the accuracy of the information provided to his section from the asset management

7

Appx.15

group. H.R. at 29, 54. While he, personally, may not have authored such documents or

contributed to them directly, in his supervisory capacity, we find he was competent to

testify to their contents. We also note that some of the records that were discussed were

kept in the ordinary course of appellant's business; contrary to the Tax Commissioner's

assertions, appellant's witness may testify regarding information which he derived from

his review of the records kept by appellant in its ordinary course of business. See Evid.R.

803(6). It remains, however, as always, this board's duty to ultimately determine the

appropriate weight to be accorded any such evidence.

Testimony before this board indicates that for purposes of preparing the

refund request in question, HealthSouth's asset management group assembled the asset

listing, which was established through "bag and tag" inventory counts at each of

HealthSouth's facilities in Ohio. H.R. at 79, 85. In completing the inventory counts,

consultants were given an asset listing of everything that should be at a particular facility.

"* **[TJhen any assets that they had at the facility that weren't on the list, that was added,

and then anything that was on the list that wasn't physically there was removed." H.R. at

86-87. 'rhe results of such inventories were then captured on the asset listings compiled

by the asset management group, which served as the basis of the detail which supported

the refund request. H.R. at 79; S.T. at 247-364. ne commissioner complains that this

"investigatory evidence" detailing the inventory count should have been produced by the

taxpayer; however, we do not believe the production of the actual paperwork associated

with the inventory is necessary to establish that it was completed accurately or done at all.

We tind that the results of such counts, i.e., the amended fixed asset listings, in

8

Appx. 16

conjunction with the testimony that such counts were completed, is sufficient to

demonstrate the source of the taxpayer's restated assets.

It appears from the record that the state's only basis for denying

HealthSouth's refund stems from HealthSouth's failure to provide the state with evidence,

e.g., journal entries, that it had properly written off the "AP SUIvIMARY" assets from its

books. When asked by counsel why those entries had not been provided. HealthSouth's

witness, Michael Martin, a vice-president of tax in charge of the sales and use tax,

property tax, and unclaimed property tax departments, stated "I'm not aware of any

journal entries to write this stuff ofE" H.R. at 65. He then went on to testify how the

restated financials were determined, indicating "for property, plant and equipment, I know

we hired American Appraisal Associates and quite a few other consulting firms to actually

go out to our facilities and do a physical inventory of equipment at each facility. And I

believe that was one of the primary tools or documents used to restate the property, plant

and equipanent accounts." H.R. at 66.

It is clear the state does not consider the methodology utilized by the

taxpayer sufficient or probative; the state's counsel, in characterizing the taxpayer's

position, stated, "you're asking the State of Ohio today in your refund claim to just take it

on faith that whatever the asset management group did was accurate and true and correct."

H.R. at 82. We disagree with the commissioner's characterization of the taxpayer's efforts

herein. On the contrary, we find that the taxpayer has supported its claim with forensic

accounting reports prepared for and submitted to the Securities and Exchange

Commission, in association with a complete restatement of the financial statements fix the

9

Appx. 17

year in question, Exs. 1, 5, which originated in the physical inventory counts of every

taxpayer location within the state. Ex. 4. Further, there is nothing in the provisions cited

by the Department of Taxation, i.e., R.C. 5711.18 and Ohio Adm. Code 5703-3-10(c), to

demonstrate that the means by which this taxpayer chose to establish its assets, and

accordingly, the associated value of those assets for personal property taxation purposes,

was improper. As counsel to the taxpayer stated in his brief:

"Unfortunately, the resolution of the accounting in this casecould not be solved by simply writing off a particular itemand, as both Exhibit I and 5 indicate, the entire resiatement ofthe Taxpayer's financial statements were [sic] necessary.Such restatement was not published in the revised 10-K,Exhibit 5 in this matter, until June 27, 2005. Eleven days afterthe flnat proposed audit results were released by theDepartment. [Sic.] Even then, the release of this informationis the result of a complete restatement of the financialstatements and not a journal entry simply writing off AP

Summary." Brief at 8.

Thus, the fraud was so encompassing, simply writing off the fictitious assets was not an

option; a complete restatement of the company's assets was necessary to most accurately

reflect what assets remained.

To further illustrate, we compare the instant circumstances to those set forth

in MCI Metro Access Transm. Servs. v. Levin (Apr. 13, 2007), BTA No. 2004-K-749,

affirm'd on appeal, Franklin App. Nos. 07AP-398, et seq., 2008-Ohio-5057. In MCI, the

taxpayer appellants argued that the subject public utility personal property tax assessments

did not fairly represent the true value of their taxable property because such amounts were

based exclusively upon historical booked costs which preceded the filing ot; and

einereence from, bankruptcy by WorldCom/MCI and its subsidiaries. To demonstrate the

io

Appx. 18

correct value of their assets, the taxpayer wanted to use "the same percentage of

impairment to their own booked costs as was found to exist at the system-wide level of

their parent company." Id. at 13. We held:

"we are presented with virtually no information to evaluate.Appellants have offered no evidence attesting to the marketvalue of their Ohio assets. Instead, they propose that theirproperty simply be reduced on a pro rata basis consistent withthe impairment write-down taken by their parent following itsemergence from bankruptcy. We have been provided with noinformation which would support our drawing the conclusionthat appellants' property, for public utility personal propertytax purposes, was impaired to the same degree as their parentcompany.

"Even if we were to accept appellants' claim that historicalcosts overstate the value of their assets, we still consider itnecessary to critically review the basis upon whichadjustments are sought to be made. In the present appeals, wecannot undertake such a review. Instead, appellants ask thatwe accept at face value an impairment analysis performed on asystem-wide level which, in some undisclosed manner,purportedly took into account issues of accounting fraud andthe overall decline experienced by WorldCom/IViCI within thetelecommunications industry." Id. at 14.

In the instant matter, HealthSouth arguably went further than simply writing

off the fictitious assets in question through joumal entries by completely restating its

financial statements. It performed an inventory count at each of its facilities to

demonstrate an accurate asset count as well as support its claim that assets listed as "AP

SUMMARY" did not, in fact, exist. While some of the numbers, as set forth in Exhibit 4

and HealthSouth's refund request, do not match with precision and others may have been

omitted, we consider Exhibit 4 to be a starting point or underlying source of information

Appx. 19

for the amended filing, and, as such, do not believe that absolute correlation must exist

between the two in order to substantiate the accuracy of the refund request.

"rherefore, by performing its inventory counts and restating its financial

statement for the year in question, we find that HealthSouth has sufficiently established

that the assets designated as "AP SUMMARY" never existed and therefore, should be

removed from the subject assessment. Further, we find that HealthSouth has met its

burden of proof with regard to establishing that the denial of its refund request was

improper. Accordingly, we find that HealthSouth has rebutted the presumption of

correctness of the Tax Commissioner's findings herein. Therefore, it is the decision and

order of the Board of Tax Appeals that the determination of the Tax Commissioner must

be, and hereby is, reversed and that the taxpayer's refund request shall be granted, with

adjustments; as set forth herein. This matter is remanded to the 'Tax Commissioner for

calculation of the refund due to the taxpayer HealthSouth.

Ms. Margulies dissenting.

[t is well settled that findings made by the Tax Commissioner are presumed

to be valid, and absent competent and probative evidence demonstrating they are clearly

unreasonable or unlawful, this board commits error in reversing a determination of the T'ax

Commissioner. See, e.g.. Alcan Aluminum Corp. v. Limbach (1989), 42 Ohio St.3d 121.

124. In light of the written arguments now before us of which we did not previously have

the benefit, and because I find the evidence presented on appellant's behalf to be

'The'iax Commissioner shall remove alt assets listed as "AP SUMMARY" (upper case) from the subject

assessment; however, those designated "AP Summary" (lower case) shall remain therein.

12

Appx. 20

insuf'ficient to sustain its affirmative burden on appeal, I must respectfully dissent from the

majority's opinion.

In support of its claim, appellant presented the testimony of only one

witness, Michael D. Martin, its vice president of property tax since April 2003, whose

responsibilities involved generally overseeing appellant's sales and use tax department,

property tax department, and unclaimed property tax. He indicated he first became aware

of appellant's overstatement of assets when the infonnation became public in March 2003,

and that following the discovery of such fraud, appellant "hired PricewaterhouseCoopers'

forensic auditors to come in and start reviewing our returns and identifying all the

irregularities and fixed asset - fictitious fixed assets, and just completely restate our

financial statements." H.R. at 32-33. Apparently contemporaneous with these auditing

efforts, sometime in 2004,' appellant also engaged American Appraisal Associates and

"quite a few other consulting firms," H.R. 66, to conduct a physical accounting of

inventory and equipment at all of appellant's facilities. Evidently, the results of these "bag

and tag" physical inventorying effortsb were provided to appellant's asset management

group, led by former employee Brent Woodall, and "w[erel one of the primary tools or

documents used to restate the property, plant and equipment accounts." Id. See Exs. 3

Highlighted during Martin's cross-examination, in the absence of a witness specifically knowledgeableabout the methods of accounting employed, it was established as possible that assets could have beendisposed of between the tax year in issue and the dates on which such inventorying occurred. See,^enerally, H.R. 86-87.

Significantly, Martin acknowledged during cross-examination that every amended tax return filed byappellant for tax years prior to 2006 included a disclaimer that they may not be accurate, despite the "bagand tag" inventory, because the property, plant, and equipment data did not "tie out" exactly by location.H. R. 84-85.

13

Appx.21 1

and 4.' Martin indicated that Woodall provided this information, and perhaps other

unspecified information, to Brian Scully, whom Martin identified as being affiliated with

Paradigm 't"ax Group, a"spin-off' of KPMG, who in tum developed the amended tixed

assets spreadsheets provided to the commissioner as support for HealthSouth's claim.

Throughout his testimony, Martin admitted he was only generally familiar

with the steps taken to support appellant's claim and that his knowledge was gained merely

through his supervisory responsibilities. He had little, if any, direct involvement in the

collection or verification of the data relied upon, or the methodologies and calculations

used. For example:

Q. To clarify, you're familiar with the steps that thecompany took to rectity the fraud?

"A. Yes.

"'Q. But as far as the day-to-day activities of those entities,and identifying the fraud, that was below your level ofknowledge?

"A. Or outside my area. Virtually all the fraud that wasbeing cleansed was in the asset management group, as far asfictitious assets go.

"There was very little cleansing in the tax department,because we get all our infotmation from asset management"H.R. at 12.

Martin admitted he did not personally prepare the documents to which he

testified and that they had instead been developed by appellant's asset management group

7F.xhibit 3 was described as having been prepared by appellant's asset management group to assist inreconciling restated assets at a facility tevel in appellant's Form 10-K. Martin indicated that Exhibit 4,designated as "restated 6nanciats as of 12/31/2003," was a"facility- level reconciliation that lists assets orfixed asset costs at each facility Ihat ties to the reconciliation schedule, which again ties to the 10-K." H.R.atd6.

14

Appx. 22

andlor Brent Woodall. Although Martin generally oversaw and reviewed materials created

by the asset management group, he was only somewhat familiar with the asset management

system, could not testify regarding the specific records relied upon or the methodologies

that group employed, and admitted that specific support for the data generated was lacking:

"Q. So - Okay. Let's maybe go back a step. What recordsdid asset management group use, to your knowledge?

"A. What records did asset management group use? It wouldbe the information they {sic] received from all the variousrestatements that Grant Thotnton did, and American Appraisaldid.

"That information was used to populate their [sic] assetlistings.

"Q. Okay. So the infortnation you're referring to were [sic]done by Grant Thornton and American Appraisal?

"A. Not necessarily appraisal, but a bag and tag type ofinventory.

"Q. So it was an inventory count?

"A. Yes, it was an inventory count.

"Q. So there were inventory - physical inventory counts thatwere done, is that your understanding?

"A. I have seen physical inventory count sheets, yes.

"Q. Okay. And that's what you think that the assetmanagement group used that then Brian Skully [sic] used; isthat correct?

"A. That's my understanding.

.•aer

"Q. Do we have in the record today any physical inventorycounts or records of those?

15

Appx. 23

"A. Say that again.

"Q. Is there anything in this record that you're aware of thatreflects the physical inventory counts?

"A. I'm not aware of anything in this record, no." H.R. at79-90.

As for the documents relied upon by Brian Scully in creating the fixed asset

schedules, Martin was equally uncertain:

"Q. And do you know whether Brian Skully [sic] used anyother records other than the - what did you call them, central- I'm losing the phraseology. Central management records, isthat what it was?

"A. The records Brian Skully [sic] were either returns thatwere prepared by property tax group, or records received fromasset management.

"Q. Asset management group. That's what I meant. So doyou know what those records consisted of from assetmanagement group?

"A. Not specifieally no.

"Q. Even generally?

"A. Yes. It was a download of all the personal property tax,property, plant and equipment, that's on HealthSouth's books.

"Q. So, basically, it's just some asset listings, if I understandit, and that's all Brian Skully [sic] used? Is that yourtestimony, or that's your understanding?

"A. That's my understanding." H.R. at 78-79.

Apparent from the preceding, appellant provided neither the "Tax

Coenmissioner nor this board with actual business records supporting its claim. Instead,

appellant relies upon the work product of numerous entities and individuals, none of

16

Appx. 24

whom appeared before this board, the testimony of a supervisor having only general

familiarity with the data and methodologies employed, and the fact that an extemal audit

was conducted for purposes of SEC filings, to justify its request that revised assessment

certificates be issued granting a significant reduction in the value of its property.

While there exists no reason to question the veracity of appellant's witness,

his lack of personal knowledge and involvement in the development of information

essential to appellant's claim is no different from other appeals in which this board has

rejected the testimony of a witness who simply refers to information relayed to him. See,

e.g., MCI Metro Access Transm. Servs., supra;` Trunkline Gas Co. v. Wilkins (July 7,

2009), BTA Nos. 2005-K-578, et seq., unreported, at 11-12. Such a fundamental flaw in

the competency of appellant's witness dictates rejection of the documentation offered,

which is itself so summary in nature as to have no utility. Although appellant insists it is

undisputed that it reported and paid tax on personal property which did not exist, this is not

appellant's only burden. Instead, it must also prove which assets were fraudulently

reported, where such assets were reported, and the values attributed thereto. Neither the

commissioner nor this board was provided with the documentation used by the various

persons/groups involved in the development of appellant's evidence, nor can this board

effectively evaluate the validity of the methods employed by these persons/groups.

Accordingly, I would find appellant has failed to meet its burden on appeal

and would affirrn the commissioner's final determination.

" In holding that this board was norrequired to accept at face value the evidence offered by the appellant,the Tenth District Court of Appeals in its decision pointed out that the appellant's witness had notpersonally performed the impairment analysis relied upon by the taxpayer, but instead merely testified as tohis "understanding" of the steps undertaken in developing the analysis. Id. at ¶¶29-30.

17

Appx. 25

ohioscarchke^bta

I hereby certify the foregoing to be a trueand complete copy of the action taken bythe Board of Tax Appeals of the State ofOhio and entered upon its journal this day,with respect to the captioned matter.

SaIF F. Van eter, Board Secretary

18

Appx. 26

CERTIFICATE OF SERVICE

The undersigned hereby certifies that he filed the Notice of Appeal with the BTA by hand

delivery and that a true copy of the Notice of Appeal was sent by certified U.S. mail to Jay P.

Seigel, Siegel, Siegel, Johnson and Jennings Co., LPA, Landmark Center, Suite 210, 25700

Science Park Drive, Cleveland, Ohio 44122, counsel for appellee and by electronic

transmission, jsiegelna siegeltax.com, on this ^day of November, 2010.

BARfiON A: HUBBAkDAssistant Attomey General

Appx. 27

Appx. 28

Anheuser-Busch Companies, Inc., Appellant, vs. Thomas M. Zaino, Tax Commissioner ofOhio, Appellee.

CASE NO. 2003-K-699 (PERSONAL PROPERTY TAX)

STATE OF OHIO -- BOARD OF TAX APPEALS

2004 Ohio Tax LEXIS 1483

September 28, 2004; September 24, 2004, Entered

COUNSEL:

[*11APPEARANCES:

For the Appellant -- Squire, Sanders & Dempsey, LLP, Stacy D. Ballin, William H. Conner, Suzanne K. Ketler,4900 Key Tower, 127 Public Square, Cleveland, Ohio 44114-1304

For the Appellee -- Jim Petro, Attorney General of Ohio, Richard C. Farrin, Assistant Attomey General, State Of-fice Tower -- I6<th> Floor, 30 East Broad Street, Columbus, Ohio 43215

OPINION:

DECISION AND ORDER

Ms. Jackson, Ms. Margulies, and Mr. Eberhart concur.

On June 6, 2003, appellant, Anheuser-Busch Companies, Inc., filed the present appeal with this board seeking re-versal of a final determination issued by the Tax Commissioner. Through his determination, the commissioner deniedappellant's petition for reassessment in which appellant had challenged previously issued personal property tax assess-ments for tax years 1995 and 1996.

This matter is now considered upon appellant's notice of appeal, the statutory transcript ("ST.") certified by the TaxCommissioner, the evidence presented at a hearing convened before this board and the post-hearing briefs of counsel.At this board's hearing, appellant presented the testimony of two witnesses: Thomas C. Ford, its senior engineeringmanager, and Carl Blough, its [*21 manager of fixed assets and property taxes.

Following the filing of appellant's inter-county personal property tax retutns for tax years 1995 and 1996, the TaxCommissioner issued amended preliminary assessment certificates which resulted in an increase in the valuation of ap-pellant's taxable Schedule 2 property located in Franklin County, Ohio. n I Appellant then filed with the Tax Commis-sioner a petition for reassessment n2 in which it asserted that costs attributable to engineering drawings had been im-properly included within the valuation of its Schedule 2 machinery and equipment.

nl The notices issued to appellant did not include the addition of any costs attributable to engineering drawingsnow at issue in this appeal. Rather, appellant raised for the first time in its petition for reassessment its claim thatcosts it initially reported in its personal property tax returns for engineering drawings be removed.n2 As noted by the Tax Commissioner in his fmal determination, although appellant initially challenged severalaspects of the preliminary assessments, it later withdrew such claims and instead elected to restrict its argumentto the one pursued through the present appeal:

"The petitioner contends that the assessments include the cost of exempt pollution control equip-ment; the improper reclassification of land and building improvements as personal property; animproper increase in the true value of Schedule 2 machinery and equipment to account for mov-ing and relocation costs; and the cost of exempt engineering drawings. However, prior to hearing,the petitioner indicated that the only issue it wished to pursue was the issue of exempt drawings.

Appx. 29

2004 Ohio Tax LEXIS 1483, *

Therefore, the only issue for consideration is whether the petitioner's machinery and equipmentcosts contain costs that should be removed as exempt drawings. Although the petitioner raised theissue of exempt drawings in its petitioner for reassessment, it was not an issue on audit and is be-ing considered here for the first time." S.T. at I.

Page 2

[*3]During the period in question, appellant undertook four separate construction projects at its Columbus, Ohio brew-

ery whereby it either built new or expanded upon existing manufacturing operations. These projects were identified asfollows: (1) Project 598-O'Douls Expansion: (2) Project 6506-Chip Upgrade; (3) Project 6241-Process Piping for IceBeer and (4) Project 418/410-Aseptic Filling for Bud Dry. n3

n3 Appellant's witness briefly described the nature of these projects: Project 598-O'Douls Expansion: "An-heuser-Busch was -- was wanting to increase the capacity of its O'Douls production [a non-alcoholic beer], sothey put forth a capital production for the Columbus brewery to increase that capacity." H.R. at 18-19. Project6506-Chip Upgrade: "We wanted to modify our -- ourprocess and we added some -- some chip separators totake yeast out of the -- out of the chips." H.R. at 31. "We at the time were trying to get -- to figure out a way toremove the yeast from our chips, you know, the beechwood chips that we put in Budweiser. And so we put inchip separators kind of like a centrifuge and they would centrifuge the chips and the yeast would come off andthen we could reuse the chips easier and dispose of the yeast." H.R. at 126. Project 6241-Process Piping for IceBeer -- "Ice beer is another product that we wanted to make it -- at Columbus. And these would -- this was amodification to the process systems to make ice beer." H.R. at 36. Project 418/410-Aseptic Filling for Bud Dry:"We wanted to make an aseptic product sort of like a draft beer in a bottle; so we had to modify a substantialamount of the plant to allow that to occur." H.R. at 39.

[*4]

In order to complete these projects, appellant engaged two outside engineering firms, i.e., MK Ferguson Corpora-tion and Holloman and Associates. As part of the'u efforts, these firms either newly created or modified a number ofengineering drawings, many of which appellant maintains in the ordinary course of its business. However, neither ofthese firms, on any invoices which could be located by appellant, separately stated the specific costs attributable to thecreation of engineering drawings. Instead, invoices simply made reference to "engineering services." In the absence ofspecifically invoiced costs for engineering drawings, yet in an effort to demonstrate that such costs had been improperlyincluded as taxable personal property, appellant provided an estimate of drawings costs to the commissioner predicatedupon an internal analysis performed by its employee, Thomas Ford.

In his final determination, the Tax Commissioner rejected appellant's claims and affumed the assessments as is-sued. In reaching this conclusion, the commissioner found that the methodology employed by appellant in calculatingthe costs of engineering drawings could neither be verified nor audited, and therefore [*5] could not be relied upon as abasis for the claimed reduction:

"In the instant case, the petitioner has provided no detailed project review that would allow verificationof the accuracy of its estimates. Furthermore, drawings costs and the results of the estimates were notsubject to Department or objective extetnal review. Without detailed and verifiable information, nomodifications can be made to these assessments." S.T. at 3.

From the proceeding determination, appellant appealed to this board, specifying the following as error:

"The Finalbetermination erroneously allowed the 1995 and 1996 tax assessments to stand as issued,even though such assessments improperly included the cost of engineering drawings in the valuation ofAppellant's Schedule 2 taxable property; drawings are excluded from the definition of personal propertyunder R.C. 5701,03(A)."

Appellant asserts that costs attributable to engineering drawings were improperly included within the 1995 and1996 personal property tax assessments issued by the commissioner. See fn. l, supra. Although R.C. 5709.01 subjects topersonal property tax all personalty located and used in business in this state, engineering [*6] drawings are expressly

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2004 Ohio Tax LEXYS 1483, *Page 3

excluded from this definition by virtue of R.C. 5701.03(A): " Personal property' does not include *** drawings that areheld for use and not for sale in the ordinary course of business ***."

It is uncontroverted that engineering drawings were created for purposes of completing the projects undertaken byappellant. However, as previously indicated, the costs specifically attributable to these drawings were not delineated oninvoices appellant received from its outside engineering firms. In the absence of such information, n4 appellant's seniorengineering manager developed a methodology, substantially similar for three of the four projects, i.e., Projects 598,6506 and 6241, by which he estimated the costs attributable to engineering drawings.

n4 Thomas Ford testified that he had been employed as an engineer with appellant for thirty years, the last fif-teen of which have been as a senior manager of engineering services. In his current position, Ford not only man-ages an internal group of professionals who create drawings, but he also generally oversees those engineeringprojects which are outsourced to private engineering firms.

For these three projects, [*7] Ford indicated that his efforts began with a review of the master drawing lists re-tained by appellant which identified the drawings used in each project. He then reviewed the drawings themselves, notonly to ensure all drawings were accounted for on the master lists, but to also ascertain whether the drawings werenewly created or modified versions of pre-existing drawings. n5

n5 In order to ascertain whether drawings were modified or newly created for a particular project, Ford reviewedthe drawings themselves and the corresponding revision numbers reflected thereon. Using what he considered tobe a"conservative approach," Ford categorized drawings which had undergone three or fewer revisions as newdrawings, while those with four or more revisions were treated as modified drawings. As indicated above, underFord's approach, "modified" drawings took less time to create and were therefore less costly.

Ford categorized the projects' drawings into one of six "disciplines," i.e., process, mechanical, structural, piping,electrical, or instrumentation. Based upon his personal experience in dealing with design and engineering drawings, heattributed an average number of hours to [*8] the creation of both new and modified drawings for each discipline. n6Ford next estimated the hourly costs attributable to the creation of engineering drawings by first noting that appellantcurrently pays its outside engineering firm, MK Ferguson, $ 90 per hour for engineering work. Relying upon his per-sonal experience, he determined that the average market rate for engineering services had increased at approximatelythree percent annually since the time the projects had been undertaken. Using this percentage, he concluded that averagemarket engineering rates for 1993 and 1992 would have been $ 67 and $ 65 per hour, respectively. However, in calcu-lating costs, Ford elected to use $ 60 per hour in order to ensure his estimate would again be conservative.

[*9]

n6 Ford stated that the use of an "average" number of hours would again result in a conservative estimate, sug-gesting that more complicated drawings would take significantly longer to prepare than simpler ones. To illus-trate his conclusions, in order to develop modified drawings, Ford indicated an average of 40 hours would be re-quired for process and mechanical drawings, 30 hours for structural and piping, 10 hours for electrical and 1hour for instrumentation drawings. In order to create new drawings for each of the preceding categories, Ford es-timated the following average number of hours for each discipline: process and mechanical -- 120 hours; struc-tural and piping -- 100 hours; electrical -- 40 hours; and instrumentation -- 4 hours.

Ford then multiplied the various disciplines of engineering drawings by the average number of hours he consideredattributable to their creation. These figures were then multiplied by the average hourly costs he attributed to the years inwhich they would have been created, resulting in the following total engineering drawings costs: Project 598 -- $917,940; Project 6506 -- $ 239,520; and Project 6241 -- $ 85,680. Ford testified, that, based upon his experience, engi-neering drawings costs typically accounted for between eight and twelve percent of total project costs. However, whenhe compared his estimated costs to each of the total project costs, Ford found the amounts he attributed to engineeringdrawings to have been extremely conservative, i.e., Project 598 -- 5.8%, Project 6506 -- 3.9%, and Project 6241 -- 3.5%.

With respect to Project 418/410, Ford indicated he was required to develop a different approach for estimatingdrawings costs. He explained that this project actually involved multi-plant construction undertaken at several of appel-lant's brewery locations, including the one located in Columbus, Ohio. He testified that, like the other three projects,invoices detailing [* 101 costs for engineering drawings were lacking. However, unlike the other three projects, appel-lant did not have a master drawings list or even the actual drawings used in the project because it had been abandonedseveral years earlier.

Appx. 31

2004 Ohio Tax LEXIS 1483, *Page 4

Therefore, Ford first reviewed appellant's business records and determined the total costs for the multi-site projectto be $ 40 million. Of that amount, approximately $ 17 million of total project costs, or 43%, was allocated to work per-formed at the Columbus brewery. Similarly, Ford's review of available records indicated that of the total capital costsfor the project, 43% was again attributable to the Columbus brewery, i.e., approximately $ 12.3 million of $ 28.5 mil-lion. From a review of appellant's records, he determined that approximately $ 3.9 million had been paid in total engi-neering fees to MK Ferguson for the entire project. n7 Using the above-referenced 43% as his benchmark, Ford appliedthat percentage to the MK Ferguson costs and concluded that $ 1,6875480 of the Columbus brewery project costs wereactually attributable to engineering drawings.

n7 In arriving at the above-referenced engineering costs, i.e., $ 3,910,375, Ford relied upon appellant's dis-bursements rather than the actual invoices themselves since he was able to locate only a portion of the invoicesrelated to the project, totaling only $ 1,108,129.

[*1l]

Appellant next called as a witness Carl Blough, who testified that he prepares and files appellant's property tax re-turns and that engineering drawings costs for all four projects would have been included as part of appellant's taxableproperty reported for the years in question. Blough explained that as costs for a project are incurred, they are recorded inappellant's "construction-in-progress" ("CIP") system. n8 As a project nears completion, appellant's engineering de-partment informs the property accounting group, and when assets are actually placed in service they are cleared fromthe CIP system and transferred to a fixed assets general ledger system. When assets are placed in service, all soft costs,such as design and engineering drawings costs, which cannot be specifically identified with a particular asset, are"spread," or allocated, among hard assets ultimately reported by appellant on its returns. Since no specific breakout ex-isted for engineering drawings costs, such costs would have been allocated among the hard assets placed in service aspart of the construction projects.

[*12]n8 The record erroneously referred to this as "construction and progress system." H.R. 145.

In order to derive the total taxable values claimed to have been erroneously reported on appellant's 1995 and 1996personal property tax returns, Blough identified total project costs, including real estate and machinery and equipment.He then determined the percentage of such costs attributable solely to machinery and equipment, i.e., Project 598 --82.87%, Project 6506 -- 95"/0, Project 6241 -- 89.3%, and Project 418/410 -- 90.36"/u. Applying these percentages toFord's analyses for the four projects,

he calculated engineering drawings costs attributable to machinery and equipment, i.e., Project 598 -- $ 760,709,Project 6506 -- $ 227,546, Project 6241 -- $ 76,514, and Project 418/410 -- $ 1,524,756. These costs were then depreci-ated by 81.8% for tax year 1996 and 88. 1% for tax year 1995 in order to identify the claimed true value of engineeringdrawings. Multiplying these figures by the statutory assessment rate of 25%, Blough concluded that for each project thefollowing taxable values would have been reported: Project 598 -- tax year 1996-$ 155,565 and tax year 19954167,546,Project 6506 -- tax year 1996-S 53,644; Project 6241 -- tax year 1996-$ 16,852 and tax year 1995418,038; and [* 13]Project 418/410 -- tax year 19964288,179 and tax year 19954311,813. Ultimately, the total taxable values attributable toengineering drawings for all four projects claimed to have been erroneously reported on appellant's retums was $514,240 for tax year 1996 and $ 497,397 for tax year 1995.

In considering an appeal from a fmal determination of the Tax Commissioner, we acknowledge the presumptionthat the Tax Commissioner's findings are valid. In Alcan Aluminum Corp. v. Limbach (1989), 42 Ohio St.3d 121, theSupreme Court held:

"Absent a demonstration that the commissioner's findings are clearly unreasonable or unlawful, they arepresumptively valid. Furthermore, it is error for the BTA to reverse the commissioner's detemlinationwhen no competent and probative evidence is presented to show that the commissioner's determination isfactually incorrect. ***" Id at 124. (Citation omitted.)

A taxpayer challenging a finding of the commissioner must therefore rebut the preceding presumption and establisha clear right to the relief requested. Midwest Transfer Co. v. Porterfield (1968), 13 Ohio St.2d 138; [* 14] Ohio FastFreight, Inc. v. Porterfreld (1968), 29 Ohio St.2d 69. Accordingly, on appeal, the taxpayer is assigned the burden of

Appx. 32

2004 Ohio Tax LEXIS 1483, *Page 5

showing in what manner and to what extent the Tax Conunissioner's determination is in error. Federated Dept. Stores,Inc. v. Lindley (1983), 5 Ohio St.3d 213.

The issue in this appeal is not whether during the course of its construction projects appellant may have incurredcosts attributable to the creation of engineering drawings to which personal property tax is inapplicable. Instead, thecritical issue is whether appellant has met its burden of demonstrating, by sufficient competent, probative and reliableevidence the costs attributable to such drawings and the extent to which such costs were included as personal propertyfor which tax was indeed paid. For the reasons which follow, we conclude that appellant has fallen far short of its bur-den in this appeal.

In reaching this conclusion, we fmd the Supreme Court's reasoning in United Tel. Co. of Ohio v. Tracy (1999), 84Ohio St.3d 506, to be dispositive regarding the sufficiency of appellant's evidence. In United [* 15] Tel. Co., the tax-payer, a provider of local and toll access telephone service, deducted from its personal property tax retums the value itattributed to property claimed not to be used in business. n9 However, because United Telephone had failed to retainaccurate records specifically delineating the amount of such property for the years in question, it extrapolated data froma random sampling of infonnation available to it for subsequent years. n 10 Although United Telephone had informationfrom which it could have ascertained the specific status of its property at particular time periods, it argued that the sheervolume of materials and the man hours required for such an undertaking rendered the exercise cost prohibitive. nl 1

n9 On its personal property tax returns for tax years 1987 through 1989, United Telephone had deducted thevalue of cable claimed not to be used in its business. This cable consisted of both "dead pairs," i.e., excess cablethat, while operable, was not yet connected, and "bad pairs," i.e., cable that was damaged and could no longer beused.n10 To illustrate, since its computerized grid maps for 1995 reflected the amount of dead pairs then in its sys-tem, United Telephone randomly selected such mapsand worked backwards, using work orders which detailedsystem modifications, to reconstruct the grid maps as they presumably would have existed for each of the taxyears in question. From these randomly selected grid maps, the taxpayer extrapolated the total amount of deadpairs on each of the tax listing dates. In an effort to support its estimate, the taxpayer presented the testimony ofa professor of statistics who confirmed the utility and statistical reliability of the approach employed and whocalculated the amount of system-wide dead pairs for the periods in question. With regard to the amount of badpairs in its system, again while actual data was available, appellant's tax manager relied upon internally createdreports and the statistical analysis performed for dead pairs in order to esthnate bad pairs.

[*16]

nl I In United Tel. Co., the court commented as follows:

"In utility cases, the dollar amounts are usually large and, therefore, small changes in the numbersused to calculate the taxes may mean large changes in the dollars paid by the utility and receivedby the taxing authorities. For instance, in this case a one-percent change in the amount of deadand bad pairs may equate to a change of over two and one-half million dollars in the value ofUnited Telephone's cable account. The goal in tax valuation cases is to achieve as much accuracyas possible. The burden of proving the amount of the dead and bad pairs and their value was im-posed upon United Telephone." Id. at 511.

Although the instant appeal involves a challenge by a general business taxpayer, the amount at stake is not in-significant and presumably the preceding rationale would apply with equal force regardless of the nature of thetaxpayer's business.

While this board accepted as reliable the methodology employed by United Telephone in estimating the amount ofits property, the Supreme Court held otherwise, stating in part:

"The commissioner next turns to United Telephone's [* 17] attempts to prove the amount and value ofits dead and bad pairs. The commissioner argues that the statistical estimates used by United Telephone

Appx. 33

2004 Ohio Tax LEXIS 1483, *

were not probative and that the BTA should not have used them to determine the amount and value of itsdead and bad pairs. We agree.

Page 6

"We are aware of the magnitude of the number of grid maps maintained by United Telephone and themagnitude of the effort required to accurately reconstruct all the grid maps. However, United Telephoneassumed this burden when it appealed the commissioner's order. Hatchadorian [v. Lindley (1986), 21Ohio St. 3d 66], paragraph one of the syllabus. The type of evidence that is acceptable to determine accu-rately the amount and value of dead and bad pairs cannot be varied from case to case depending upon thenumber of the documents involved. Statistical estimates determined from random samples cannot beused to meet the burden of proving the amount of dead and bad pairs when there are documents availablefrom which an accurate count of the number of dead and bad pairs can be obtained." ld. at 511-512.

Appellant attempts to distinguish its own facts from those in United Tel. Co. [* 181 by pointing out that, unlikeUnited Telephone, there exists no actual data detailing engineering drawings costs. Thus, appellant suggests that thecourt's holding is restricted to only those situations in which a taxpayer favors estimates over actual and available in-formation: We disagree. The decision in United Tel. Co. reaffirms the well-established proposition that a taxpayer hasthe burden of proving its allegations with reliable evidence and that statistical estimates, developed through a myriad ofsubjective determinations, fail to satisfy such a burden. See, also, RKE. Trucking, Inc. v. Tracy (May 24, 2002), BTANo. 1998-S-1316, unreported, affirmed sub nom., R.K.E. Trucking, Inc. v. Zaino, 98 Ohio St.3d 495, 2003-Ohio-2149.

Initially we note, as did the Tax Conunissioner in his fmal determination, that the essential elements of appellant'scost estimates remain unverifiable and could easily vary by discipline, complexity, individual involved, etc. Exemplify-ing the subjective nature of appellant's analysis, Ford elected to treat drawings as new or modified based solely on therevision number set forth on the master drawings lists. n12 [* 19] Although appellant repeatedly characterizes Ford'sanalysis as an overly conservative approach, a taxpayer's burden on appeal is to provide neither a conservative nor lib-eral estimation, but rather it is required to produce reliable, verifiable infonnation which permits an accurate and consis-tent accounting.

n 12 Ford also admitted that the only manner by which he could actually tell whether a drawing was new ormodified would be to look at each and every drawing in sequence, which he did not do.

Ford admitted he was not familiar with the specific engineering work performed in any of the projects. Thus, he re-lied solely upon his general experience when he made sweeping assumptions regarding the average number of hoursand hourly costs required to produce the various types of drawings. Regardless of the complexity of an individual draw-ing, the nature of the changes which may have been required or the level of engineering firm employee who may havebeen involved in its creation, Ford attributed a single creation period to each drawing within a.particular category de-spite, for example, his admission that a modified drawing may take anywhere from I to 80 hours to create. While Ford[*20] indicated his figures were premised upon an "historical average," no documentation was offered to support suchrepresentations. Likewise, projected hourly costs were nothing more than averages, not based upon actual data, but in-stead premised upon Ford's general experience. The annual depreciation figure of 3% applied to current costs andtrended back to the period in issue was based simply upon Ford's "educated guess" as to increasing engineering costsover the past decade. S.T. at 127.

With respect to Project 418/410, Ford's analysis is even more speculative. Appellant had neither the master drawinglist or any of the drawings used in the project. Thus, Ford's drawings costs estimates were derived from nothing morethan application of the ratio of total project capital costs to costs attributed to the Columbus brewery. While Ford mayhave summarily accepted that such a direct correlation exists, this board cannot.

Appellant attempts to draw comparisons between the evidence it presented and that offered by the taxpayers, andaccepted by this board, in National Distillers & Chemical Corp. v. Limbach (Mar. 5, 1993), BTA No. 1990-X-552, un-reported, affmned (1994), 71 Ohio St.3d 214, [*211 and Duquesne Light Co. v. Tracy (Nov. 6, 1998), BTA Nos. 1995-K-40, et seq., unreported. However, neither of these cases persuades us that appellant has met its burden of proof in theinstant appeal.

It is not insignificant that each of the cases relied upon by appellant was decided prior to the Supreme Court's pro-nouncement in United Tel Co. In fact, in this board's decision in United Tel. Co., National Distillers was cited as favor-able authority for our acceptance of the sampling technique employed by United Telephone, a proposition subsequentlyrejected by the court. n13 With respect to Duquesne Light Co., as recognized by the parties, the decision itself has no

Appx. 34

2004 Ohio Tax LEXIS 1483, *Page 7

precedential value as it was vacated and ultimately remanded to the Tax Commissioner following appeals to the Su-preme Court. See Duquesne Light Co. v. Tracy (2000), 88 Ohio St.3d 1459; Duquesne Light Co. v. Tracy (June 2,2000), BTA Nos. 1995-K-40, et seq., unreported (order certifying matter to the commissioner for further proceedings).Nevertheless, appellant insists that the rationale set forth within the board's decision warrants favorable consideration ofits evidence [*22] in this appeal. However, had United Tel. Co. been released prior to this board's decision irrDuquesneLight Co., it likely

would have had some impact upon our consideration of the taxpayer's evidence in that case. As pre-viously noted, the court in United Tel. Co. placed considerable emphasis upon the evidentiary burden imposed upontaxpayers to demonstrate the actual amount and value of property claimed to be exempt or deductible, indicating thatbroad-based application of estimates and sampling techniques necessarily ignores the fact that different items have dif-ferent costs. n 14 Such is the fallacy in appellant's presentation and argument in this case.

n13 In our decision in United Tel. Co. of Ohio v. Tracy (Nov. 14, 1997), BTA Nos. 1991-Z-197, et seq., unre-ported, we stated:

"We find the manner in which appellant calculated the costs attributable to its dead and bad cableto be a reasonable means by which to estimate its value for the years in question. The application,on a pro rata basis, of the percentage of appellant's dead and bad cable to its total cable costs islittle different than the situation in which we accepted a taxpayer's claim that seventy-eight per-cent of the costs charged by outside plant engineers was attributable to engineering drawings. SeeNational Distillers & Chemical Corp. v. Limbach (Mar. 5, 1993), B.T.A. No. 90-X-552, unre-ported, affnmed (1994), 71 Ohio St.3d 214. See, also, Monsanto Co, v. Limbach (Feb. 4, 1988),B.T.A. No. 85-F-151, unreported (fmding that taxpayer had established by probative evidence thecosts attributable to its scale drawings as being a percentage of the total value attributable to itsmachinery). As appellant has provided this Board with evidence which we consider reliable andprobative as to the value of its taxable property, we accept such values for purposes of determin-ing the amount appropriately deducted." Id. at 44-45.

[*23]

nl4 Even if we were persuaded that the rationale expressed by this board in Duquesne Light Co. had continuedefficacy, the extent and quality of the evidence presented in that case and this one differs significantly.

Accordingly, we find the evidence upon which appellant relies to support its claimed engineering drawing costs tobe significantly deficient, rendering it unreliable. Based upon the foregoing, appellant's specification of error is not welltaken and is overruled. It is therefore the order of this board that the final determination of the Tax Commissioner mustbe, and hereby is, affu-med.BOARD OF TAX APPEALS

RESULT OF VOTE YES NO DATE

Ms. Jackson [ILLEGIBLE WORD]Ms. Margulies [ILLEGIBLE WORD]Mr. Eberhart [ILLEGIBLE WORD]

Appx. 35

Appx. 36

Cincinnati Bell Telephone Company, Appellant, vs. Thomas M. Zaino, Tax Commis-sioner of Ohio, Appellee.

CASE NOS. 2003-K-765; 2003-K-1612 (PUBLIC UTILITY PERSONAL PROPERTYTAX)

STATE OF OHIO -- BOARD OF TAX APPEALS

2005 Ohio Tax LEXIS 753

June 10, 2005, Entered

COUNSEL:[*1]

APPEARANCES:

For the Appellant -- Frost Brown Todd LLC, Christopher DeLuca, 2200 PNC Center, 201 East Fifth Street, Cincin-

nati, Ohio 45202

For the Appellee -- Jim Petro, Attorney General of Ohio, Robert C. Maier, Assistant Attomey General, State OfficeTower-16<th> Floor, 30 East Broad Street, Columbus, Ohio 43215

OPINION:

DECISION AND ORDER

Ms. Margulies, Mr. Eberhart, and Mr. Dunlap concur.

Through separate appeals filed with this board on June 19 and October 31, 2003, appellant, Cincinnati Bell Tele-phone Company, challenges two fmal determinations issued by the Tax Contmissioner on April 23 and September 4,2003, respectively. In these determinations, the commissioner denied appellant's petitions for reassessmenfand affirmedpublic utility personal property tax assessments previously issued to appellant for tax years 2000, 2001 and 2002. Wenow proceed to consider this matter upon appellant's notices of appeal, the statutory transcripts ("S.T.") certified by the

Tax Commissioner pursuant to R.C. 5717.02, the evidence presented at a hearing convened before this board, nl and thepost-hearing briefs of counsel.

nl In addition to the documentary evidence offered at hearing by the parties, appellant presented the testimonyof several witnesses: Donald V. Daniels, appellant's vice president of marketing; Dennis P. Hinkel, senior vicepresident of appellant's network and operations organization; Lawrence K. Vanston, president of TechnologyFutures, Inc. ("TFI"); Ray L. Hodges, a senior consultant with TFI; Randy Hartman, senior manager in the taxdepartment of Cincinnati Bell, Inc., appellant's parent company; and Richard K. Ellsworth, a director in thevaluation group of Deloitte & Touche.

[*2]Appellant constitutes a "telephone company" as defined by Ohio statute n2 and for each of the tax years in issue

filed annual reports with the Ohio Department of Taxation in which it listed the value of its personal property. Subse-quently, the Tax Commissioner issued assessments for each of the years, reflecting increases in the taxable values ofappellant's property in the amounts of $ 218;442,010; $ 211,183,300, and $ 203,878,000, respectively. Appellant thenfiled petitions for reassessment through which it requested that the commissioner reassess and reduce the taxable valuesof its property. Through fmal determinations dated April 23, and September 4, 2003, appellant's petitions were deniedand the assessments were affirmed as originally issued.

n2 R.C. 5727.0](D)(2) defines a "telephone company" as any person "primarily engaged in the business of pro-viding local exchange telephone service, excluding cellular radio service, in this state[.]"

Appellant has appealed to this board, n3 specifying the following as error:

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2005 Ohio Tax LEXIS 753, *

"2.The determination of taxable values by the Commissioner denies CBT equal protection under the lawin violation of the United States Constitution and [*3] the Ohio Constitution. Under current Ohio Re-vised Code § 5727.111, CBT is required to compute the true value' of property acquired prior to 1994 at88% of its net taxable cost. In contrast, certain companies which may acquire similar or even identicalequipment in constructing and/or operating a telecommunications network are taxed at 25 percent oftheir net taxable cost. This represents a disparity of listing percentages between similarly situated taxpay-ers. The discriminatory treatment afforded in assessing CBT's public utility property value violates theEqual Protection Clauses of both the Ohio and the United States Constitutions and is therefore unconsti-tutional. All of CBT's propetty should be assessed at the 25% rate afforded its similarly situated competi-tors.

"4. The Commissioner's determination of value for CBT's general plant property does not represent thetrue value of such property. The Commissioner valued CBT's general plant property by utilizing a 7.5-year class life. The Commissioner defines general plant property as property used in the general opera-tions including such assets as garage work equipment, furniture, office equipment, general purpose com-puters, [*4] and more. For CBT, the majority of the taxable property in this category is general purposecomputers, such as personal computers. The Commissioner's determination to value these assets utilizinga 7.5-year class life and 15% residual value is erroneous because such depreciation schedule fails to con-sider the rapid decline in value inherent in such property. In order to accurately reflect the true value ofits general plant assets, CBT should be entitled to utilize a Class I true value schedule with a 15% resid-ual value. n4

"5. The Commissioner's determination that CBT must use a 7.5-year class life and 15% residual valuewhile general business taxpayers are entitled to value identical property under the Class II life scheduleviolates the equal protection requirements of the United States Constitution and the Ohio Constitution. Itis unlawful for the Commissioner to value identical property (e.g. personal computers) differently solelyby the overall activities of the business.

"6. The Commissioner erred in determining the valuation of CBT's central office and information plantassets by utilizing a 7.5-year class life and 15% residual value. The majority of CBrs assets within [*5]these categories consist of digital switching equipment and circuit equipment. The Commissioner's de-termination fails to take into account the functional obsolescence inherent in such property due to therapid technological advances occurring with respect to such telecommunications equipment. The truevalue of this property is correctly reflected through the use of the Class I true value schedule with a 15%residual value, n5

"7. The Commissioner erred in determining the valuation of CBT's cable and wire facilities by using a15-year class life true value schedule. The majority of CBT's assets within this category consists of ae-rial, underground, and buried cable. This cable consists of both copper twisted pairs and fiber optic cable.The Commissioner's determination fails to take into account the functional obsolescence with respect toboth the copper and fiber optic cabling. Rapid technological advances with respect to such cabling resultsin a decline in the true value of CBT's property at a much faster rate than reflected in the Commissioner'scalculation of true value. The true value of this property is accurately reflected through the use of theClass III true value schedule [*6] with a 15% residual value. n6

"9. The Conunissioner erred in issuing a preliminary assessment certificate for 2000 and 2001 [and 2002]with respect to various items of equipment permanently mounted to CBT's vehicles. CBT's vehicles con-tain various items of equipment that are permanently mounted. R.C. 4503.04 provides that taxes at therates set forth in that section are in lieu of all taxes on or with respect to the ownership of such motor ve-hicles. In computing the vehicle weight for purposes of assessing a license tax under R. C 4503.02, the

Page 2

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2005 Ohio Tax LEXIS 753, *

additional equipment added to the vehicle is included in the computation, and therefore an assessment islevied on this equipment as a motor vehicle. Imposing tax with respect to equipment added to motor ve-hicles under R. C. 5701, of which the same equipment is used in determining the taxable weight of vehi-cles for computation of the license tax under R.C. 4503.04 or RC. 4503.042 results in double taxation ofthe same property. This directly conflicts with the provisions of R.C. 4503.04 which states that taxes atsuch rates provided in this section are in lieu of all taxes on or with respect to the ownership of such mo-tor vehicles.' [*7] Thus, it is unlawful for the Commissioner to assess any additional tax with respect tosuch property, and CBT objects to the inclusion of motor vehicle equipment its [sic] its personal propertytax assessment."

Page 3

n3 Appellant's notices of appeal are substantially similar, with pertinent differences being noted. Because theyset forth general background information and do not, in and of themselves, claim error in the commissioner's de-terminations, we have not quoted paragraphs one, three, and eight of appellant's notice of appeal in BTA No.2003-K-765, and paragraphs one, three, and nine of appellant's notice of appeal in BTA No. 2003-K-1612.n4 In its notice of appeal in BTA No. 2003-K-1612, appellant modified its claim, asserting that: "In order to ac-curately reflect the true value of its general plant assets, CBT should be entitled to utilize the new valuationschedule for Stand-Alone computers as specified in the Ohio Department of Taxation news release dated 2-14-03." Id. at paragraph S. However, no evidence or arguments specific to this claim has been pursued by appellant.n5 In its notice of appeal in BTA No. 2003-K-1612, appellant also included the following: "The Commissioneralso errors [sic] in failing to take into consideration the declining value of equipment based upon competition inthe telecommunication industry. The true value of this property is correctly reflected through the use of an Aver-age Remaining Life of 4 years and 5 years for Circuit Equipment and Switching Equipment, respectively." Id. atparagraph 7.

n6 Again, appellant's notice of appeal in BTA No. 2003-K-1612 varied slightly, citing increased industry com-petition as a factor negatively impacting the value of its property and further that: "The true value of this prop-erty is accurately reflected through the use of an Average Remaining Life of 4.1 years for metallic cable, and 7.8years for non-metallic cable." Id. at paragraph 8.

Additionally, in BTA No. 2003-K-1612, appellant included the following specifications of error n7:

"4. The Commissioner's determination of value for CBT's equipment does not represent the true value ofsuch property. The Commissioner valued CBT's equipment as equal to [the] cost of such property lessannual allowances as prescribed by the Commissioner. The Commissioner's valuation fails to take intoaccount the technological nature of the equipment used in connection with CBT's business and the rapiddecline inherent in such property. CBT has provided a property valuation study prepared by TechnologyFutures, Inc. and Deloitte & Touche (Valuation Study). The Valuation Study sets forth competent evi-dence of probative value regarding the true value of the equipment, which takes into account the [*9]specific information regarding the taxpayer's industry, including, the technological changes and advancesoccurring in that industry and the impact those changes have on the true value of CBT's equipment.

"11. CBT owns and utilizes certain telecommunications switching equipment in connection with its busi-ness. The switching equipment is specifically designed and used to hold and process telecommunicationssignals in connection with CBT's business."

n7 In its post-hearing brief, appellant advised this board of its intention to withdraw paragraph twelve of itsspecifications of error in BTA No. 2003-K-1612. Id. at 37.

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Consistent with its notices of appeal and its post-hearing briefs, appellant's arguments may generally be separatedinto three distinct categories. First, appellant asserts that the rate at which its personal property is taxed is disproportion-ate to that of its competition, thereby resulting in violations of the Equal Protection Clauses ofboth the Ohio andUnited States Constitutions. Second, appellant argues that the method typically applied by the Tax Commissioner indetermining the value of depreciable business property reported by telephone companies [* 10] does not accurately re-flect the value of appellant's property due to increased market competition, dramatic technological advances, and anabsence of a resale market. Finally, appellant claims that the commissioner erred in taxing certain equipment attached toits motor vehicles which are used by appellant in delivering telecommunications services to the public.

We first address appellant's challenge regarding the constitutionality of the assessment rates made applicable to itby virtue of R.C. 5727.111(B). Appellant asserts that the rate at which its property is taxed results in a violation of con-stitutional rights guaranteed it becauseits property is taxed at a higher rate than that applicable to similar, or even iden-tical, property reported by other taxpayers, including those with which appellant operates in direct competition. n8However, this board is without jurisdiction to rule upon the merits of appellant's constitutional claims.

n8 Former RC. 5727.111(B) provided that telephone companies' taxable property which first became subject totax in Ohio in 1995 and thereafter would be assessed at a rate of twenty-five percent of true value, while prop-erty first subject to taxation prior to 1995 would continue to be assessed at eighty-eight percent of true value. Itis the latter property to which appellant's constitutional claims relate. Although not in issue for the years in-volved in the present appeals, it is noted that the taxable rates applicable to this category of property, as a resultof amendments effected by Am.Sub.H.B. 95, effective September 26, 2003, continues to decrease on an annualbasis for tax years 2005, 2006, and 2007 until the last year when such property, regardless of when it first be-came taxable, is assessed at a rate of twenty-five percent of true value.

[*11]

In MCI Telecommunications Corp. v. Lirnbach (1994), 68 Ohio St.3d 195, 1994 Ohio 489, 625 N.E.2d 597, the Su-preme Court of Ohio commented upon the limited nature of the board's role involving constitutional challenges:

"The BTA understood its role to be a receiver of evidence for constitutional challenges. Accordingly, itdid so, giving the parties wide latitude in presenting the evidence. The BTA determined no facts on theconstitutional questions. The commissioner, however, in her Proposition of Law No. IV, contends thatthe BTA not only receives evidence in this type of case, but must weigh the evidence and determine thefacts necessary for the court's review of the constitutional questions. Since the BTA did not make find-ings of fact, the commissioner asserts that we should remand the case for the BTA to comply.

"In Cleveland Gear Co. v. Limbach (1988), 35 Ohio St. 3d 229, 520 N.E.2d 188, * ** paragraph three ofthe syllabus, we held:

"'The question of whether a tax statute is unconstitutional when applied to a particular state of facts mustbe raised in the notice of appeal to the Board of Tax Appeals, and the Board of Tax Appeals must receiveevidence [* 12] concetning this question if presented, even though the Board of Tax Appeals may notdeclare the statute unconstitutional. (Board ofEducation v. Kinney [1986], 24 Ohio St. 3d 184, 24 OhioB. 414, 494 N.E.2d 1109, * * * construed.)'

"We explained the process, 35 Ohio St.3d at 232 ***:

"'When a statute is challenged on the basis that it is unconstitutional in its application, this court needs arecord, and the proponent of the constitutionality of the statute needs notice and an opportunity to offertestimony supporting his or her view.

"'To accommodate this court's need for extrinsic facts and to provide a forum where such evidence maybe received and all parties are apprised of the undertaking, it is reasonable that the BTA be that forum.The BTA is statutorily created to receive evidence in its role as factfinder.'

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2005 Ohio Tax LEXIS 753, *

"Under Cleveland Gear, the BTA need only receive evidence for us to make the constitutional finding.This is because the BTA accepts facts but cannot rule on the quesfion. On the other hand, we can decidethe constitutional questions but have a limited ability to receive evidence. Thus; the BTA receives evi-dence [* 13] at•its hearing, but we determine the facts necessary to resolve the constitutional question."Id at 197-198. (Parallel citations omitted)

Page 5

See, also, GTE North, Inc. v. Zaino, 96 Ohio St. 3d 9, 2002 Ohio 2984, 770 N. E. 2d 65.

While the parties were accorded an opportunity to develop the evidentiary record necessary for further appellate re-view of appellant's constitutional claims and have presented arguments relating to such claims, given our inability togrant the relief requested, we must overrule the arguments which appellant has advanced.

As we proceed to review the remainder of appellant's arguments, we note the applicable standard by which such re-view is to be conducted. In Alcan Aluminum Corp. v. Limbach (1989), 42 Ohio St.3d 121, 537 N E.2d 1302, the Su-preme Court held:

"Absent a demonstration that the commissioner's findings are clearly unreasonable or unlawful, they arepresumptively valid. Furthermore, it is error for the BTA to reverse the commissioner's determinationwhen no competent and probative evidence is presented to show that the commissioner's determination isfactually incorrect. ***" Id at 124. (Citation omitted.) [* 14]

It is therefore the burden of a taxpayer challenging a finding of the commissioner to rebut this presumption by es-tablishing a clear right to the relief requested. It must further demonstrate in what manner and to what extent the TaxCommissioner's determination is in error. Midwest Transfer Co. v. Porterfield (1968), 13 Ohio St.2d 138, 235 NE.2d511; Ohio Fast Freight, Inc. v. Porterfreld (1968), 29 Ohio St.2d 69, 278 N.E. 361; Federated Dep't Stores, Inc.,Rike-Kumler Div. v. Lindley (1983), 5 Ohio St. 3d 213, 5 Ohio B. 455, 450NE:2d 687.

Appellant maintains that the assessments issued by the commissioner for the years in issue result in an overvalua-tion of its property. In this context, appellant identified several factors negatively impacting the value of its property andoffered evidence in support of the reduced values claimed. Among the factors cited by appellant is the increased compe-tition which it has experienced since 1996 following congressional passage of the federal Telecommunications Act of1996. n9 Due to its existence in the local telephone market at the time of congressional passage of the Telecommunica-tions Act of 1996, it is [* 15] considered an incumbent local exchange carrier ("ILEC"), as opposed to a competitivelocal exchange carrier ("CLEC"). According to appellant, inherent in its designation as an ILEC are certain service obli-gations not imposed upon new entrants to its market, which has an overall effect of placing it at a competitive disadvan-tage.

n9 In AT&T Communs. v. PUC (2000), 88 Ohio St. 3d 549, 2000 Ohio 422, 2000 Ohio 423, 728 N E.2d 371, thecourt succinctly described the purpose and effect of the Telecommunications Act of 1996:

"In 1996, Congress passed the Telecommunications Act of 1996, Pub.L. No. 104-104, 110 Stat.56, 61, which was designed, in part, to erode the monopolistic nature of the local telephone ser-vice industry by obligating the current providers of local phone service to facilitate the entry ofcompeting companies into local telephone service markets across the country. Specifically, the1996 Act forces an incumbent LEC (1) to permit a requesting new entrant in the incumbent LEC'slocal market to interconnect with the incumbent LEC's existing local network and thereby use theincumbent LEC's network to compete with the incumbent LEC in providing local telephone ser-vices (interconnection); (2) to provide its competing telecommunications carriers with access toindividual elements of the incumbent LEC's own network on an unbundled basis (unbundled ac-cess); and (3) to sell to its competing telecommunications carriers, at wholesale rates, any tele-communications service that the incumbent LEC provides to its customers at retail rates in orderto allow the competing carriers to resell the service. Sections 251(c)(2), (3), and (4), Title 47, U.S.Code. The Ohio General Assembly expressly sanctioned the commission's exercise of authorityunder the 1996 Act. See R.C. 4905.04(B)." Id at SS1-552, fn. 6.

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See, also, Cincinnati Bell TeL Co. v. PUC (2001), 92 Ohio St. 3d 177, 178, 2001 Ohio 134, 749 N E.2d 262.16]

Appellant continues, noting that it has experienced direct competition in several aspects of its operations. For ex-ample, it directly competes with both "resale" companies, which purchase telephone access at wholesale rates and thenresell such services to end consumers, and "facilities-based" companies, which have built their own telephone servicefacilities within appellant's market. Exemplifying the competitive disadvantage in which it finds itself, appellant's seniorvice president of network and operations organization elaborated upon the distinction between appellant and facilities-based companies. He indicated that appellant is still required, by existing govemmental regulations, to make telephoneservice access available to all potential customers within its market. However, newer entrants to the telephone servicemarket are not subject to such regulations. In doing so, such providers can be more selective in the deployment of anetwork and build facilities in a more efficient manner, targeting specific high density users within smaller geographicareas.

Appellant also cites technological advancements as having dramatically impacted the value of its property. Asbackground, [* 17] appellant first explained the origins of its operations and the nature of its equipment. Although itnow offers voice and data access, including Intemet access and high speed broadband, appellant's network was origi-nally constructed to provide traditional voice-only communication services to residential and business customers locatedin the Cincinnati metropolitan area. With regard to the "traditional" telephone services appellant offers, the "intelli-gence" behind appellant's network remains the circuit switches which are used to provide a variety of voice-type ser-vices to its customers. These switches contain the information and logic necessary for call origination, routing, termina-tion, and custom calling features such as call-waiting, caller ID, and voice messaging. When a call is made, circuitswitches recognize the digits dialed and route the call over the network, using a dedicated path between the caller andthe recipient. That portion of appellant's network that interconnects its circuit switches is referred to as its inner officenetwork, while the connection from a circuit switch to the end user is considered the outside plant network. Appellant'soutside plant network [* 181 is comprised of a feeder network and a distribution network, the former being locatedclosest to the circuit switch, such as in a neighborhood or business park locale, and the latter providing the connectionfeeder to the end user.

Originally, all telephone calls were transmitted over twisted pairs of copper wire. However, beginning in the 1980s,appellant began deploying fiber optic cable within its network, which allowed for increased capacity. By 1997, all ofappellant's central offices, or main switches, were connected to the network by fiber optic cable, and within two yearsafter that, approximately twenty-five percent of the access lines between appellant's central offices and distribution lineswere similarly wired. While it continues to extend fiber optic cabling closer to the end user, particularly due to increasedcustomer demand for data transmission in addition to voice communications, appellant still installs copper wire pairsinto residential neighborhoods. Although appellant believes it installs more wire pairs than will be needed in the future,because such pairs are part of a larger, buried cable, any wire pairs determined to be unnecessary are simply abandonedin [* 19] place due to the excess costs which would be incurred to effect their removal.

Appellant proceeded to then compare the "foundation" of its network system to those providers with which it com-petes that have more recently entered the telecommunications industry. In doing so, appellant noted the recent shift fromthe use of circuit switching technologies to "packet-based" technologies. Unlike traditional circuit switches, which weredesigned to provide reliable voice communications and involved a dedicated line for transmissions, packet-based tech-nologies are designed to transmit "packets" of data, which results in expanded capacity. In addition, packet switches areless costly to install, replace, and upgrade than circuit switches. As a result, appellant has experienced a decline in mar-ket prices for circuit switches, with its used switches essentially being sold for scrap value.

Alternate types of technologies used in the industry have likewise impacted appellant's business operatiosn. Duringthe "infancy" of widespread consumer demand for Internet access, appellant experienced a significant growth in secon-dary telephone access lines since customers accessing the Intemet were required [*20] to commit their telephone linesfor the length of their connection. However, newer technologies, e.g., cable access, not only offered significantly in-creased connection speeds, but do not utilize a voice channel on existing telephone lines. As a result, primary telephonelines become available for use regardless of a customer's connection to the Intemet, resulting in a decline in the numberof secondary lines.

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Cable providers have also begun a"crossover" process, emerging as telephone service competitors. In doing so,they offer telephone access services comparable to those provided by appellant via cable by virtue of "Voice OverInternet Protocol" ("VOIP"), or IP telephony. Through this technology, telephone calls are transmitted over a data net-work such as the Internet. Also affecting both secondary and primary telephone line acquisitions are customer shifts towireless telephone service. Due to the increased reliability of the service and the mobility which results, appellant an-ticipates more consumers will consider using wireless telephone service exclusively.

In an effort to demonstrate the extent to which its property has been overvalued by the Tax Commissioner, appel-lant [*21] presented the testimony of and valuation study prepared by Ray L. Hodges, a senior consultant with Tech-nology Futures, Inc. ("TFI"). According to its president, Lawrence Vanston, TFI is a research and consulting firm whichspecializes in technology forecasting. TFI's efforts are typically aimed at attempting to forecast the nature of the impactnew technology will have upon a particular industry and how quickly such technology will be adopted, allowing marketparticipants, as well as governmental entities, to engage in effective strategic planning.

In the TFI study, Hodges reviewed specific categories of appellant's plant and equipment, i.e., switching equipment,circuit equipment, aerial and buried metallic cable, and non-metallic cable, n10 and concluded that they should be de-preciated at faster rates with lower floor values than applicable under the rates prescribed by the commissioner. Apply-ing the resulting rates to the net cost of assets within these categories, the TFI study ultimately expressed values for eachcategory for each of the years in issue.

n 10 The TFI study discloses that: "This report develops Percent Good Tables and provides an opinion of andvalue for major categories of telecommunications plant for Cincinnati Bell Telephone (CBT). CBT has over $1.8 billion in telecommunications plant in service. The major network categories, the subject of this report; com-prise 58% of this investment. These categories are switching (19%), circuit equipment (17%), and cable (22%)[the latter being subdivided into aerial metallic cable, buried metallic cable and non-metallic, i.e., fiber optic, ca-ble]." Ex. A at 1. The "percent good tables" set forth the percentages to be applied against the original costs ofassets in order to reflect the depreciated values of such assets.

[*22]

Before addressing the sufficiency of the evidence offered by appellant in support of its claim, it is first appropriateto review the method generally applicable in determining the value of public utility property. Pursuant to R.C. 5727.08,public utilities are required to annually file reports with the Tax Commissioner which will enable him to "make anyassessment or apportionment required under this chapter." R.C. 5727.10 imposes a duty upon the commissioner to an-nually detetmine the "true value in money" of all such property required to be assessed. n I 1 In determining the value ofa public utility's property, the conunissioner is guided not only by the inforntation contained within the utility's annualreport, but also by "such other evidence and rules as will enable him to make these determinations." Id.

nl l PertinenCin this instance, the property which is to be assessed by the commissioner pursuant to R.C.5727.10 is identified in RC. 5727.06 as follows:

"(A) Except as otherwise provided by law, the following constitutes the taxable property of apublic utility or interexchange telecommunications company that shall be assessed by the taxcommissioner:

"(3) In the case of all other public utilities and interexchange telecommunications companies, alltangible personal property that on the thirty-first day of December of the preceding year was bothlocated in this state and:

"(a) Owned by the public utility or interexchange telecommunications company; or

"(b) Leased by the public utility or interexchange telecommunications company under a sale andleaseback transaction."

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2005 Ohio Tax LEXIS 753, *Page 8

R.C. 5727.11 prescribes the specific method to be employed by the commissioner in valuing public utility property,providing in relevant part:

"(A) Except as otherwise provided in this section, the true value of all taxable property required by divi-sion (A)(2) or (3) of section 5727.06 of the Revised Code to be assessed by the tax commissioner shallbe determined by a method of valuation using cost as capitalized on the public utility's books and recordsless composite annual allowances as prescribed by the commissioner. If the commissioner finds that ap-plication of this method will not result in the determination of true value of the public utility's taxableproperty, the commissioner may use another method of valuation."

In furtherance of the preceding mandate, the commissioner has published instructions for use by public utilities infiling their annual tax reports, entitled "Guidelines for Filing Ohio Public Utility Tax Reports," which details the valua-tion procedures and assessment methods to be employed. See Ex. 4. Consistent with R C 5727.11(A), these guidelinesreiterate the legislative mandate that unless it is found that true value will not result, the commissioner [*24] is to de-termine the value of public utility property utilizing the statutorily prescribed cost-based method of valuation.

The standard process as described by the Tax Commissioner in the referenced publication is as follows:

"The valuation method applicable to most taxable property of a public utility or interexchange tele-communications company is set forth in Section 5727.11(B). n12 It is similar to the 302 computation'used by general taxpayers in determining the true value of their taxable property. Under this method, thetrue value is determined by taking the cost of the property less composite annual allowances prescribedby the Tax Commissioner. If application of this method does not result in the determination of true valueof the taxable property, the Tax Commissioner may use another method of valuation.

"A table of ten useful lives ranging from five to fifty years and the composite anaual allowances for eachis included in this publication. A letter and number has been assigned to each useful life: Class C-5 for afive-year useful life, Class C- 10 for a ten-year useful life, etc. The annual allowances are expressed aspercents good and decrease with the age of [*25] the property. The minimum percent good for taxableproperty in any class is 15%. The true value is determined by multiplying the cost of taxable property foreach year by the applicable percent good.

""'One or more property groups have been established for each public utility and interexchange tele-communications class. Each property group contains properties that have integrated functions. The TaxCommissioner has assigned a class life to each property group. The class life represents a composite ofthe various useful lives of properties in the group. In general, segregation of short-lived property forthe purpose of using a different class life is not permitted. A listing of the property groups for eachclass of public utility and interexchange telecommunications company together with a description of theproperties in each group and the class life is included in this publication.

"The property groups and class life assigned to each group as set forth in this publication reflect conclu-sions developed by the Department of Taxation in which public utilities and interexchange telecommuni-cations companies from each class participated." Id. at 2. (Emphasis sic.)

n12 Pursuant to Am.Sub.S.B. 3, 148 Ohio Laws, Part IV, 8083, the portion of fotmer R.C. 5727.1](B) previ-

[*26]ously quoted within this decision was relettered and reflected in paragraph (A) of that statute.

The valuation of property owned by telephone companies is broken down into four major categories and valued asfollows:Central Office & Information Plant 03 Class C-10 -- 10 years n14Cable & Wire Plant n15 Class C-20 -- 20 years n16General Plant n17 Class C-10 - 10 yearsOther Taxable Property Cost or net book value

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[*27]In each instance, the floor, or lowest "percent good," reflected for property which continues to be used in business atand beyond the last year for the particular class of property is fifteen percent. Id. at 8.

n 13 The commissioner's guidelines, which rely upon account references contained within the Code of FederalRegulations, Telecommunications, Title 47, Parts 20 to 39, offer the following examples of items includedwithin central office and information plant accounts: central office, analog electronic, digital electronic, electro-mechanical switching equipment, operating systems, central office transmission equipment, station apparatus,customer premises wiring, large private branch exchanges, public telephone terminal equipment, and other ter-minal equipment. Id. at 15.nt 4 Class C-10 indicates that such property has a useful life expectancy of at least 7.5 but less than 12.5 years.Id. at 8.

n 15 Cable and wire plant account examples include cable and wire facilities, poles, aerial cable, undergroundcable, buried cable, submarine cable, deep sea cable, intrabuilding network cable, aerial wire, and conduit sys-tems. Id. at 15.n 16 Class C-20 indicates that such property has a useful life expectancy of at least 17.5 but less than 22.5 years.Id. at 8.nl7 The general plant examples offered include motor vehicles, aircraft, special purpose vehicles, garage workequipment, buildings classifred as personal property, furniture, office equipment, general purpose computers,amortizable tangible assets, capital leases, leasehold improvements, and intangibles. Id. at 15.

As indicated within the introductory portion of the instructions, the composite annual allowances prescribed by thecommissioner for use by public utilities in valuing their taxable property is similar in purpose and effect to the "302computation" used by general business taxpayers. See, generally, R. C. 5711.18. In the context of the 302 computation,the Supreme Court in Snider v. Limbach (1989), 44 Ohio St. 3d 200, 201, 542 N.E.2d 647, recognized that "it is imprac-tical for the commissioner to personally value all personal property in Ohio; thus, she may resort to a predeterminedformula to ascertain value." Thus, the purpose of utilizing a "predetermined formula" for valuation is "to promote indus-try-wide uniformity in determining the true value of depreciable property used in business." Monsanto Co. v. Lindley(1978), 56 Ohio St. 2d 59, 62, 381 N. E.2d 939. In PPG Industries v. Kosydar (1981), 65 Ohio St. 2d 80, 417 N. E.2d1385, [*28] the court elaborated, stating that "this directive [i.e., the 302 computation] has been approved by this courtas a practlcal, reasonable and lawful method and device to achieve uniform valuation of plant equipment in Ohio byprescribing annual depreciation rates in lieu of book depreciation for Ohio personal property tax purposes."

In Wheeling Steel Corp. v. Evatt (1944), 143 Ohio St. 71, 54 N.E.2d 132, the Supreme Court accepted the 302 com-putation as a prima facie means by which to determine true value. While recognizing that the 302 computation providesa generally effective means for determining value, the court has repeatedly held that a valuation directive issued by thecommissioner should not be applied where it is affumatively demonstrated by a taxpayer that the true value will notresult due to the existence of "special or unusual circumstances" or because rigid application would be inappropriate.See, also, W.L. Harper Co. v. Peck (1954), 161 Ohio St. 300, 118 N.E.2d 643; Monsanto, supra; Towmotor Corp. v.Lindley (1981), 66 Ohio St.2d 53, 419 NE.2d 1086; Campbell Soup Co: v. Tracy (2000), 88 Ohio St.3d 473, 2000 Ohio389, 727 N.E.2d 1259; [*29] RPS, Inc. v. Tracy (Oct. 30, 1998), BTA No. 1996-M-1209, 1998 Ohio Tax LEXIS 1381,unreported, at 15 ("To successfully challenge the values assessed by the Commissioner, the appellant must bring forthcompetent and probative evidence of the value of its listed property. * * * There are three acceptable methods of meet-ing this burden. [An appellant] may offer direct evidence of the personalty's true value. * * * Altematively, [an appel-lant] may prove the special circumstances exist or that the use of the 302 computation produces an unjust or unreason-able result. * * *").

The preceding reasoning appears equatly applicable, in large measure, when determining the value of public utilityproperty. Recognizing the difficulty inherent in requiring the commissioner to personally value all public utility prop-erty within Ohio, it is reasonable that a predetermined fotmula be developed and applied. However, as with the 302computation, a statutorily authorized method of valuation should not be applied when true value will not result.

In Texas E. Transm. Corp. v. Tracy (1997), 78 Ohio St.3d 83, 1997 Ohio 233, 676 N.E.2d 523, the court concludedthat the appellant, a natural gas pipeline transmission company, could [*30] rely upon an appraisal in order to prove the

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2005 Ohio Tax LEXIS 753, *Page 10

value of its property. Ir, doing so, the court expressly held that a statutorily prescribed method of valuation should not beused to the exclusion of evidence which demonstrates that another method will more accurately result in true value:

"Although R. C. 5727.11 identifies the cost-based method of valuation as a means of assessing true value,the General Assembly has not restricted the commissioner's use of alternate valuation methods. In fact, inthese statutes, the General Assembly specifically states that the commissioner may use another method ofvaluation' and that he may consider other evidence'to determine true value. n18 Contrary to the commis-sioner's assertion, in deciding true value, the BTA need not adhere to the cost-based statutory method ofvaluation.

"The ultimate goal imposed by R.C. 5727.10 clearly is to determine the true value of the property taxed.R.H. Macy Co., Inc. v. Schneider (1964), 176 Ohio St. 94, 97, 197 N.E.2d 807 * **. If the statutorymethod does not yield true value, then another method of valuation may be used, whether or not there arespecial or unusual circumstances. [*311 Although a statute may provide a prima facie estimate or pre-sumption of value, where rigid application of the statute would be inappropriate, the presumption ofvalue must yield to other competent evidence reflecting true value. Monsanto Co. v. Lindley (1978), 56Ohio St.2d 59, 61, 10 0.O.3d 113, 114, 381 N. E.2d 939 * * *; W. L. Harper Co. v. Peck (1954), 161 OhioSt. 300, 118 N.E.2d 643 ***." Id at 85-86. (Emphasis sic and parallel citations omitted.)

n18 In Texas E. Transm., the taxpayer's appraiser employed a "unit-appraisal method," in which he used com-monly accepted appraisal techniques to express an opinion of value for the property in issue. In this regard, thecourt succinctly described the analysis and results as follows:

"Under this method, the value of the unit is first determined. Then, the value of the properties be-ing appraised is determined by measuring their contribution to the unit. Since TET's interstatepipeline systems operate as an integrated group of properties that work together to provide a ser-vice, Tegarden testified that the unit-appraisal method is the proper valuation procedure to be ap-plied. He explained that due to the very nature of a natural gasline property, it is more appropriateto value the property as a unit rather than to value the individual components separately. In addi-tion, he pointed out that TET's rates, earnings and accounting methods are regulated as a unit bythe Federal Energy Regulatory Commission.

"Using the unit-appraisal method, Tegarden first valued the entire transmission system as a wholeby using a cost-approach analysis, an income-approach analysis, and a stock-and-debt-approachanalysis. In giving greatest weight to the income approach, Tegarden arrived at a total systemvalue of $ 1,425,000,000. Next, Tegarden apportioned 8.14 percent of the unit value to Ohio,which resulted in a valuation of $ 115,995,000 for TET's Ohio property." Id. at 84.

[*32]See, also, MCI Telecommunications Corp. v. Limbach (Sept. 20, 1990), Franklin App. No. 89AP-870, 1990 Ohio App.LEXIS 4111, unreported ("There are two ways in which the taxpayer may contest the commissioner's valuation. Thetaxpayer may either offer direct evidence of the property's true value or the taxpayer may offer evidence that the appli-cable rate of depreciation does not accurately measure the property's true value, either because special or unusual cir-cumstances exist or because a rigid application of the directive will create an unjust or unreasonable result.").

Initially, the parties express disagreement as to whether or not appellant is first obligated to prove the existence of"special and unusual circumstances." In this context, reference is made to the following language in Texas E. Transm.:

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2005 Ohio Tax LEXIS 753, *Page I fl

"The commissioner also argues that in order to apply alternate valuation methods, there must be a show-ing of special or unusual circumstances.' The commissioner's reference to special or unusual circum-stances' stems from language found in his 302' directive for determination of depreciation rates for gen-eral personal property. However, the words special or unusual circumstances' do not [*33] appear inR.C. 5727.11 and are not a prerequisite for using an altetnate valuation method where appellees are con-testing true value rather than depreciation rates." Id. at 86.

The commissioner concedes that where "direct evidence" of value is offered, such as an appraisal like that reliedupon in Texas E. Transm., a public utility need not demonstrate the existence of special and unusual circumstances inorder to deviate from booked costs less prescribed allowances. However, the commissioner argues that the TFI studyoffered is not an "alternate valuation method" for valuing appellant's property, but instead merely proposes accelerateddepreciation rates compared to those prescribed by the commissioner. Therefore, the commissioner insists that appellantis not relieved of its obligation to prove special and unusual circumstances exist. In response, appellant asserts that thecommissioner's position overemphasizes the labeling of its evidence. It maintains that regardless of the name attributedto the analysis set forth in the TFI study, the result is the same in that it demonstrates that the true value of appellant'sproperty is other than that which results from strict application [*34] of the cost-based valuation method less the com-missioner's prescribed allowances.

Upon review of appellant's valuation study, we agree with the commissioner that it is not an alternate method ofvaluing property as was presented in Texas E. Transm. The valuation evidence presented in that case was an appraisalwhich had been prepared by an individual holding the designations of Member of the Appraisal Institute and CertifiedAssessment Evaluator from the International Assessing Officers. In order to derive the opinion of value which he ulti-mately expressed for the property in his unit-appraisal, he employed approaches often considered in the appraisal ofproperty, i.e., a cost approach, an income approach, and a stock and debt analysis. In this instance, the TFI study is notan altetnate valuation method, e.g., an appraisal, but is instead an effort to demonstrate that the depreciation schedulesgenerally applicable to appellant's property fail to adequately account for the competitive and technological changeswhich are currently impacting the telecommunications industry. Given the nature of appellant's evidence, we consider itappropriate to proceed to address whether appellant [*35] has demonstrated the existence of special and unusual cir-cumstances.

Initially, the commissioner posits that the evidence upon which appellant relies itself demonstrates that appellant isin the same position, with its property subject to the same rates, as other telephone companies in Ohio. Referring to thetestimony of appellant's witnesses and the valuation study which is based upon national trends experienced within thetelecommunications industry as a whole, the commissioner maintains special and unusual circumstances cannot befound to exist.

Although appellant argues it should not be required to show it is different from the remainder of its industry, n19such is the fundamental nature of proving the existence of "special and unusual circumstances." As previously noted,the purpose of the commissioner's prescribed allowances is to promote industry-wide uniformity in determining the truevalue of depreciable property used in business. Cf. Monsanto, supra•, Jacob B. Sweeney Equipment Trust v. Limbach(1991), 74 Ohio App.3d 82, 86, 598 NE.2d 65; Mid-Ohio Chemical Co., Inc. v. Limbach (Feb. 17, 1987), Fayette App.No. CA86-04-002, 1987 Ohio App. LEXIS 5874, unreported [*36] ("The general goal of Ohio's personal property taxscheme is to tax personal property located in this state which is used in business at established rates based on its truevalue. Since such property is subject to deterioration, depreciation is allowed. However, depreciation rates chosen byindividual taxpayers may vary, even within a single industry. In order to promote industry-wide uniformity in determin-ing the true value of depreciable property used in business, the tax commissioner established composite annual allow-ances in what is commonly kriown as his 302' directive.").

n19 Appellant also suggests that the commissioner's prescribed depreciation rates should be considered ques-tionable given the fact that several other telecommunications companies cutrently have appeals pending throughwhich similar challenges are being made. However, we are not persuaded that merely because other taxpayersmay be challenging the applicability of the commissioner's prescribed rates to their property, a blanket rejectionof the industry-wide depreciation rates developed by the commissioner is justified. Instead, consistent with ourrejection of a similar argument advanced in Philips Electronics North Am. Corp. v. Tracy (June 28, 1996), BTANo. 1993-K-825, 1996 Ohio Tax LEXIS 694, unreported, at 16-17, fn. 2, we find it appropriate to review eachcase in the context of the particular evidence presented.

[*37]

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2005 Ohio Tax LEXIS 753, *Page 12

Special and unusual circumstances have been found to exist when a taxpayer clearly demonstrates its property issubject to conditions atypical within the industry, often exemplified by unusual or unanticipated operating environ-ments, extreme use, obsolescence, unusually high disposal rates, poor production flows, or excess manpower. See, e.g.,Defiance Precision Products, Inc. v. Tracy (Apr. 3, 1998), BTA No. 1995-T-564, unreported (equipment operated atabnormally high speeds for extended periods of time not common within the industry); Philips Electronics NorthAmerican Corp. v. Tracy (June 28, 1996), BTA No. 1993-K-825, 1996 Ohio Tax LEXIS 694, unreported (the taxpayer,which was the only remaining entity within the television tube manufacturing industry still using a dry phosphorus ap-plication process, demonstrated its equipment was used in an area of poor ventilation and subjected to continuous use,extreme heat and product weight, and caustic chemicals); Dayton Walther Corp. v. Limbach (Aug. 24, 1990), BTA No.1988-J-190, 1990 Ohio Tax LEXIS 709, unreported (equipment operated almost continuously and subjected to extremeproduct weights, high speeds, and corrosive substances); AmeriData Control Corp. v. Limbach (Jun. 29, 1990), BTANo. 1987-A-1102, 1990 Ohio Taz LEXIS 507, unreported [*38] (televisions supplied to hospitals received heavy useand were disposed of in unusually shorter time periods); Sun Chemical Corp. v. Limbach (Apr. 21, 1989), BTA Nos.1986-A-157, et seq., 1989 Ohio Tax LEXIS 352, unreported (equipment subjected to caustic chemicals and continuousoperations, with evidence demonstrating such use was different from other chemical plants in Ohio).

While several of the preceding cases highlight the hostile conditions under which manufacturing equipment may beoperated, they stand for the general proposition that "special and unusual circumstances" constitute conditions not gen-erally experienced by others within the industry. As this board recently noted in Aloca, Inc. v. Zaino (Oct. 22, 2004),BTA No. 1999-G-1401, 2001 Ohio Tax LEXIS 1672, unreported, at 17, appeal pending Sup. Ct. No. 04-1953:

"Alcoa must prove that the special or unusual circumstances surrounding the use of its equipment are notexperienced generally throughout the industry or that its equipment was subjected to conditions notplanned for when the equipment was originally purchased. Alcoa has not presented sufficient evidence toestablish that the experience of Alcoa at Cleveland [*391 Works, in its forgings for the aerospace busi-ness, was special or unusual when compared to the rest of the industry. Indeed, the appellant acknowl-edges that other large forgers experienced the same decline and left the aerospace industry."). 2001 OhioTax LEXIS 1672 at *25.

A review of appellant's evidence reveals that it has not demonstrated that special and unusual circumstances exist.Indeed, as asserted by the commissioner, the evidence offered by appellant suggests that the factors impacting the valueof its property similarly affect others within its industry. While the providers with whom appellant competes may beunique to its market, appellant's evidence demonstrates that it is far from alone regarding the competitive forces withwhich it must deal and the impact technological progress is generally having upon participants in the telecommunica-tions industry.

However, as the court emphasized in Texas E. Transm., and in numerous cases involving challenges to the applica-bility of the 302 computation, where a party demonstrates through competent and probative evidence that application ofthe commissioner's prescribed rates creates an unjust or unreasonable result, reliance upon the statutory [*40] method isinappropriate and must give way to more reliable evidence of value. See, e.g., Centerior Fuel Corp. v. Tracy (2001), 90Ohio St.3d 540, 2001 Ohio 13, 740 N. E. 2d 255; PPG Industries, supra; Towmotor, supra.

In W.L. Harper, supra, the court rejected the notion that the existence of special and unusual circumstances is theonly basis which would justify deviation from the commissioner's valuation directives:

"In other words, the thesis of the Department of Taxation is that its directive must be applied regardlessof any evidence as to what the actual life of equipment is, that the directive is, like the law of the Medesand the Persians, rigid and undeviating, and that any evidence as to realities is without probative forceunless it shows special or unusual circumstances or conditions of use.'

"It is our opinion that such an application of the directive is in many cases and in the present ones unrea-sonable.

"We are fully in accord with the use of a directive in the ascertainment of the true value of personalproperty, but in our opinion the Board of Tax Appeals is required [*41] to ascertain from the evidence

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2005 Ohio Tax LEXIS 753, *

before it whether in a particular case the application of such a directive will produce an unreasonable re-sult.

"In the present cases the evidence of appellants presented a question whether the application of a 10 percent depreciation rate is reasonable, and the Board of Tax Appeals must consider the evidence before itand, in making a determination, attempt to arrive at the truth rather than to rigidly apply the directive inspite of any evidence.

Page 13

"Our conclusion is that it is proper to ascertain the true value of construction equipment by the use ofproper directives, but that such directives must be applied so that they are subject to adjustment not onlyin the case of special or unusual circumstances or conditions of use, as provided in the directive underconsideration herein, but also to adjustment in all cases where the evidence shows that a rigid applicationwill result in injustice." Id at 304-306.

With this in mind, we now consider the probative value of appellant's evidence. The TFI study finds that appellant'sproperty has been, and will continue to be, impacted significantly by increased competitive forces [*42] arising fromseveral sources, rapid technological change occurring within the telecommunications industry, the growth of the Inter-net, and, in some instances, anticipated mortality factors. With respect to each category of property reviewed, the natureand extent of these factors was elaborated upon. n20

n20 Appellant also called as a witness Richard Ellsworth, a director of the valuation group at Deloitte & Touche,who indicated that the approach utilized in the TFI study was the preferred method for valuing assets like thosein issue in the present appeals.

In estimating the rates at which appellant's property would effectively be displaced, the TFI study indicated thatvarious other publications, studies, and models had been relied upon. Among those apparently most heavily relied uponwas a recent publication in a series of forecasting studies undertaken by TFI for incumbents within the telecommunica-tions industry entitled "Transforming the Local Exchange Network." Apparently periodically updated, this study fore-casts the impact new technology and increased competition has upon existing businesses and technology. Reliance isalso placed upon the Fisher-Pry and Gompertz models, [*43] the former apparently used to predict the rate at whichbusinesses engage in technology substitution while the latter is apparently used to predict the rate at which consumersbegin adopting newer technologies.

Ultimately, based upon its review of the telecommunications industry, the market in which appellant operates, andexpectations regarding the changes likely to impact both, the TFI study recommends percent good schedules similar instyle to those prescribed by the commissioner. Different, however, is the fact that these proposed schedules address in-dividual assets within the composite groups reflected within the commissioner's prescribed allowances and the rates andtime periods at which such assets should be depreciated. With respect to switching and circuit equipment, for all threeyears, the TFI study recommends a ten-year life span with a five percent floor being reached in the last year, while un-derground metallic cable, aerial metallic cable, buried metallic cable, and non-metallic cable are ascribed a fifteen-yearlife span with a floor value at or near zero.

As noted throughout our decision, the thrust of the TFI study is that, for the specific assets considered, increased[*44] competition, technological advancements, and consumer expectations and demands warrant a faster rate of de-preciation than that provided for by the commissioner. In reviewing appellant's evidence, we are persuaded that the tele-communications industry, as a whole, is undergoing continuing and dynamic change. Clearly, since 1996, appellant andother ILECs, and indeed all market participants, have experienced increased and varied competition. Similarly, as is thecase in most industries, technological advancements have resulted in the elimination, modification, or enhancement ofmany preexisting forms of technology.

However, we are not convinced that the manner by which appellant attempts to account for the impact of such fac-tors results in an accurate and reliable representation of true value or, for that matter, that application of the rates pre-scribed by the commissioner will necessarily create an unjust or unreasonable result. Although the TFI study referencescertain historical and market data unique to appellant, it is heavily weighted to account for events anticipated to occurgenerally within the telecommunications industry in the future. Because it is premised upon conjecture [*45] regardingfuture events, its conclusions are incapable of objective verification. Where, as here, there exists little or no historicaldata to effectively test the validity of the numerous assumptions made, errors can easily occur regarding the timing andimpact the cited factors may have upon the value of appellant's property.

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2005 Ohio Tax LEXIS 753, *Page 14

For example, much of the replacement technology to which reference is made was newly emerging near the yearsin question and continues, even today, to be at a stage of relative infancy. In the absence of historical data, the actualimpact of newer technology upon the value of appellant's property, which it continues to use and, in many instances,deploy within its network, is difficult to measure. Equally unpredictable, despite representations otherwise, are con-sumer demands and transitions among technologies. While TFI represents that the Fisher-Pry model can be an effectivedevice for making such evaluations, it still requires supposition not immediately capable of confirmation. Along similarlines, we question TFI's ability to effectively predict the extent to which increased competition will impact the value ofappellant's property. Suggested by the numerous [*461 acquisitions and failures which have occurred within the tele-communications industry during the past several years, even market participants experience difficulty accurately antici-pating the effects of competition. Accordingly, while the forecasting studies and models relied upon within the TFIstudy may be useful to appellant in the development of its long-range business plans, we do not find it a reliable meansby which to determine the value of appellant's property for the specific tax listing dates in issues in these appeals.

We also fmd unsupported and unreasonable the suggestion that appellant's assets would be rendered valueless aftera certain number ofyears despite their continued use with appellant's network. In Wheeling Steel, supra, the court con-sidered a manufacturer's claim that once certain assets reached twenty years of age, despite the fact such assets contin-ued to be used in its production line, they should be accorded no value. Expressly rejecting such a position, the courtheld that "where personal property is still used in the business of manufacturing it must be retumed at its true value inmoney even though 100 percent depreciation [*47] is claimed by the taxpayer as depreciated book value or otherwise."Id at paragraph four ofthe syllabus. Although personal property may have a limited resale value, until scrapped orabandoned, it retains value in the hands of the taxpayer who continues to benefit from its use. See, e.g., BOC Group,Inc. v. Limbach (June 30, 1989), BTA No. 1985-G-679, 1989 Ohio Tax LEXIS 631, unreported; Col -- XCorp. v. Lind-ley (Dec. 16, 1982), BTA No. 1980-B-236, 1982 Ohio Tax LEXIS 26, unreported; AMF Tuboscope, Inc. v. Lindley (July1, 1982), BTA No. 1980-A-383, 1982 Ohio Tax LEXIS 287, unreported; Westinghouse Electric Corp. v. Lindley (Feb. 8,1980), BTA Nos. F-953, et seq., 1980 Ohio Tax LEXIS 492, unreported, affumed (1980), 64 Ohio St.2d 31, 413 N E.2d1178. Although appellant's salvage data was apparently reviewed and found to be an inappropriate means by which tomeasure residual value, see Campbell Soup, supra, it appears the projected floor values were again the result of relianceupon the previously referenced forecasting studies and models. Further, the property which the TFI study would deemvalueless involves assets which appellant continues to deploy in its network.

This board is accorded wide discretion in weighing [*481 the evidence and judging the credibility of the witnessesbrought before us. Zukowski v. Franklin Cty. Bd of Revision (1994), 70 Ohio St.3d 503, 504, 1994 Ohio 168, 639N.E. 456. Further, we are not required to accept the opinion of valuation fixed by any expert or witness. CardinalFederal S. & L. Assn. v. Bd ofRevision (1975), 44 Ohio St.2d 13, 336 KE.2d 433, paragrapb two of the syllabus. Inconsidering the evidence before us, we are unable to conclude that appellant has met its burden of proving, with compe-tent and probative evidence, that application of the commissioner's prescribed rates will result in its property be valuedat other than true value.

Finally, we address appellant's argument that personal property tax was erroneously assessed on items which itclaims are pennanently mounted on its motor vehicles used to deliver telecommunications services to its customers. n21Although Ohio imposes a personal property tax on tangible personal property located and used in business in this state,R.C. 5709.01, there exist limited statutory exceptions and exemptions which exclude certain property from taxation.Among the property expressly excluded from the definition [*49] of taxable property is that set forth in R C.5701.03(A): "'Personal property' does not include * * * motor vehicles registered by the owner thereof ***."

n21 Appellant maintains that its vehicles, as well as the equipment attached thereto, are already subject to tax asa result of the annual licensure fee it pays on its individual commercial vehicles. R.C. 4503.02 ("An annual li-cense tax is hereby levied upon the operation of motor vehicles on the public roads or highways ***."). Pursu-ant to R.C. 4503.042, the amount of the annual license tax is based upon "gross vehicle weight," defined by R. C.4501.01(JJ) as "the unladen weight of the vehicle fully equipped plus the maximum weight of the load to be car-ried on the vehicle." Since no distinction is made within the preceding definition as to whether or not the equip-ment attached to appellant's vehicles is considered separate personal property or inherently part of the vehicle, asdiscussed above, the license tax paid on such vehicles was necessarily paid on such equipment.

In Parisi Transportation Co. v. Wilkins, 102 Ohio St.3d 278, 2004 Ohio 2952, 809 N.E. 1126, the Supreme Courtheld that refrigeration [*50] units built into the taxpayer's semitrailers were an inherent part of the vehicle for which no

2005 Ohio Tax LEXIS 753, *Page 15

personal property tax was owed. In reaching this conclusion, the court was guided by a test employed by the Montgom-ery County Court of Appeals in State ex rel. Tejan v. Lutz (1934), 31 Ohio N.P. (NS.) 473 n22:

"First, does the apparatus become an integral n23 part of the truck and form an addition to its structure sothat it may be regarded as a part of the truck, itself?

"Second, whether permanent or detachable, is it per se truck equipment?

"Third, does its use indicate it to be functioning as part of the truck for truck uses, or as machinery, in it-self, for its special use and results?

[*51]

"Fourth, does it carry the truck load, or assist in doing so, or does it merely become an object trans-ported?" Id at 512.

n22 In Tejan, supra, after reviewing the legislative history regarding the motor vehicle registration and the de-termination of the annual license tax, the court considered whether certain equipment, apparatus, and machinerywhich was placed on motor vehicles was part of the taxable truck weight for purposes of registration and as-sessment of the license tax under former G.C. 6293.

n23 The court relied upon the dictionary to define what is meant by the term "integral": "]a: of, relating to, orserving to form a whole: essential to completeness: organically joined or linked." Id at 281, quoting Webster'sThird New Intemational Dictionary (1986) 1173.

In Parisi, the court elaborated upon these questions, adapted them to more accurately reflect the inquiry necessaryfor the particular items the taxability of which was in issue, and reviewed the evidentiary record which had been devel-oped in order make its ultimate determination. However, in the instant appeals, the record is substantially inferior to thatdeveloped in Parisi. The only information regarding the equipment in issue, beyond the assertions made by appellantthrough written argument, n24 consists of the following findings made by the commissioner in his final determinations:

"The petitioner owns a fleet of trucks that it utilizes in its business. These trucks are commercial cars' asthat term is defined in R. C. 4501. 01(J), n25 and are required to be licensed pursuant to R C. 4503. 02. Thepetitioner is required to pay a license tax on each vehicle. However, mounted on the petitioner's [*52]trucks are various items of equipment such as generators (providing ventilation and heat, compressed air,low pressure humidity-free air, and power), power ladders, aerial lifts, earth boring machines, digger der-ricks, trenchers, specialized racks and storage units." BTA No. 2003-K-765, S.T. at 3; BTA No. 2003-K-1612, S.T. at 5.

n24 By way of post-hearing brief, appellant asserts that: (a) the equipment in issue is permanently installed intoits vehicles before the vehicles are put into service; (b) the equipment is specially designed to be used only withits vehicles and could not be used in a stand-alone fashion; and (c) the sole purpose for such equipment is to al-low appellant to maintain and repair its plant and equipment. However, no evidence was presented which wouldsupport these claims. Although appellant makes reference to a portion of the statutory transcript, see BTA No.2003-K-765, S.T. at 31, the document identified is simply a memorandum which appellant filed in support of itspetition for reassessment. Likewise, the schedule attached thereto is of no evidentiary value as it merely ascribesdollar values to aspects of appellant's claim.n25 R. C. 4501.01(J) provides: "'Commercial car' or truck' means any motor vehicle that has motor power and isdesigned and used for canying merchandise or freight, or that is used as a commercial tractor."

[*53]

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2005 Ohio Tax LEXIS 753, *Page 16

Although accorded an opportunity to do so, appellant elected to present no additional evidence regarding its motorvehicles and the equipment claimed to have become inherently part of such vehicles following attachment. See H.R.Vol. II, at 175-176. Mere assertions made by counsel do not rise to the level of evidence upon which this board can rely.See, e.g., Exchange Bldgs. IV& V, L.P. v. Franklin Cty. Bd. ofRevision (1998), 82 Ohio St.3d 297, 299, 695 N.E.2d743; Rite Aid of Ohio, Inc. v. Cuyahoga Cry. Bd of Revision (Jan: 15, 1999), BTA No. 1997-K-1253, 1999 Ohio TaxLEXIS 23, unreported. Given the absence of evidence regarding such equipment, we cannot conclude that appellant hasmet its burden of proof. Accordingly, we reject appellant's arguments relating to this issue.

Based upon the foregoing, appellant's specifications of error are not well taken and they are therefore ovenvled. Itis the order of this board that the final determinations of the Tax Commissioner must be, and hereby are, affirmed.

Aonx.52

Dave Dennis Dodge, Inc., Appellant, vs. William W. Wilkins, Tax Commissioner ofOhio, Appellee; Dave Dennis, Inc., Appellant, vs. William W. Wilkins, Tax Commis-

sioner of Ohio, Appellee.

CASE NO. 2005-K-857 (PERSONAL PROPERTY TAX PENALTY ABATEMENT);2005-K-858 (PERSONAL PROPERTY TAX PENALTY ABATEMENT)

STATE OF OHIO -- BOARD OF TAX APPEALS

2006 Ohio Tax LEXIS 1365

October 27, 2006, Entered

COUNSEL:[*1]

APPEARANCES:

For the Appellants - Taft, Stettinius & Hollister, LLP, Lance A. Gildner, 110 North Main Street, Suite 900, Dayton,Ohio 45402-1786

For the Appellee - Jim Petro, Attorney General of Ohio, Janyce C. Katz, Assistant Attomey General, Rhodes StateOffice Tower, 16th Floor, 30 East Broad Street, Columbus, Ohio 43215

OPINION:

DECISION AND ORDER

Ms. Margulies, Mr. Eberhart, and Mr. Dunlap concur.

On July 28, 2005, the above-named appellants filed notices of appeal challenging final determinations of the TaxCommissioner, dated May 31 and June 9, 2005, respectively. nl In these determinations, the commissioner dismissedappellants' petitions to abate personal property tax late filing penalties assessed for tax year 2004 because they failed toprovide copies of their most recent assessment certificates.

n1 Although not previously consolidated, given the similarity in facts and issues, we find that these appealscan be addressed through a single decision and they are therefore, sua sponte, consolidated pursuant to OhioAdm. Code 5717-1-08.

This matter is now considered by this board based upon appellants' notices of appeal, the statutory transcripts certi-fied by the Tax Commissioner, [*2] and written argument provided by counsel. Although accorded an opportunity topresent additional evidence at a hearing before this board, the parties elected to waive hearing.

Before we may consider the merits of appellants' appeals, two preliminary issues must first be addressed. Initially,the commissioner's counsel has filed motions in each of these appeals seeking leave to submit affidavits of an employeeof the Department of Taxation which were referenced in her initial briefs, but inadvertently omitted as attachments.Recognizing this board's past reluctance to rely upon evidence submitted outside hearing, the commissioner suggeststhat these affidavits are admissible by virtue of Evid.R. 803(8) and through an exercise of this board's investigatorypowers. Through motions to strike, appellants object to the commissioner's request, noting that the parties agreed tosubmit these appeals upon the existing records. Only in the event this board elects to consider the aforementioned affi-davits, appellants request that consideration be accorded affidavits attached to their own reply briefs filed in these ap-peals.

This board has repeatedly held that, in the absence of an agreement of [*3] the parties that such information maybe submitted in lieu of testimony at hearing, affidavits (and other materials) attached to pleadings do not rise to the levelof evidence upon which this board will rely in resolving the merits of an appeal. See, e.g., Raskin v. Limbach (Feb. 2,1988), BTA No. 1986-F-28, unreported, at 11, fn. 1("We generally regard affidavits of the type herein submitted, as

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2006 Ohio Tax LEXIS 1365, *Page 2

simply voluntary, ex parte declarations, primarily self-serving in nature, and while submitted under oath, made withoutnotice to the adverse party, and, since the affiant never appears, there is no opportunity for cross-examination. Natu-rally, these characteristics substantially reduce the weight accorded thereto, rendering such material of little probativevalue."). See, also, American District Telegraph Co. v. Porterfield (1968), 15 Ohio St:2d 92 (holding that the board didnot unreasonably or unlawfully exclude evidence in the form of affidavits because there was no opportunity for cross-examination); Co[umbus Bd ofEdn. v. Franklin Cty. Bd ofRevision (1996), 76 Ohio St.3d 13, 16-17 (concluding thatboard erred in considering [*41 documents not included within an original record and submitted after hearing); DialCorp. v. Tracy (Mar. 10, 1995), BTA No. 1993-H-321, unreported (rejecting as evidence affidavit and additional docu-mentation attached to appellant's brief where parties waived hearing and failed to jointly agree to submission of addi-tional evidence beyond that contained within the transcript certified by the commissioner); Hanley v. Tracy (InterimOrder, May 12, 1995), BTA No. 1994-K-1413, unreported (granting Tax Commissioner's motion to strike from consid-eration affidavit attached to notice of appeal); Fairchild Corp. v. Tracy (Dec. 20, 1996), BTA No. 1995-T-137, unre-ported (granting commissioner's motion to strike documents, including affidavits, attached to appellant's notice of ap-peal and reply brief); Ellwood Engineered Castings Co. v. Zaino (Mar. 22,2002), BTA No. 2000-P-391, unreported,affirmed in part and reversed in part on other grounds, 98 Ohio St.3d 424, 2003-Ohio-1812 (upon commissioner's mo-tion, board disregarded an affidavit attached to appellant's reply brief).

With respect to the present appeals, appellants' counsel advised this board via [*5] letter that the parties agreed towaive the presentation of any additional evidence and, further, that "it appears that the transcript of record certified tothe Board contains all factual information relevant to the legal issues involved in this case." The commissioner has notdisputed that the foregoing accurately reflected the parties' agreement. As a result, the evidentiary hearing before thisboard was cancelled and a schedule was established for the filing of written argument by the parties.

Absent an agreement of the parties, it would be contrary to case law for this board to consider information not in-cluded in the statutory transcript or not provided during the course of hearing. Columbus Bd ofEdn., supra. Cf Cam-bridge Commons Ltd Partnership v. Guernsey Cty. Bd of Revision, 106 Ohio S1.3d 27, 2005-Ohio-3558, at P 11 ("Inreaching its decisions, the BTA may properly rely on the sworn testimony of the witnesses who appear before it, anyexhibits admitted at BTA hearings, and the record certified to it by the county board of revision or the Tax Commis-sioner."). Furthermore, it would be inappropriate for this [*6] board to exercise its investigatory authority and receivevia affidavit evidence which could have been presented through testimony offered at hearing and subject to examinationby opposing counsel and this board. See, e.g., ALLTELL Ohio, Inc. v. Wilkins (June 30, 2005), BTA Nos. 2004-K-566,et seq., unreported. n2

[*7]

n2 Although the commissioner suggests that Evid.R. 803(8) provides a basis for admitting his employee'saffidavits into the evidentiary record in these appeals, it does not. In order to be admissible, evidence must beboth relevant, Evid.R. 402, and properly authenticated by extrinsic evidence or, in the alternative, self-authenticating: See Evid.R. 901 and 902. See, also, Bd ofEdn. ofthe Hilliard City School Dist. v. Franklin Cty.Bd of Revision (July 15, 2005), BTA No. 2003-R-1430, unreported; Trans Healthcare of Ohio, Inc. v. Cuya-hoga Cty. Bd ofRevision (May 16, 2003), BTA No. 2002-R-2563, unreported. Evid.R. 803(8) merely providesan exception to the bar against the use of hearsay evidence set forth in Evid.R. 802 where a public record or re-port is sought to be admitted. The affidavits offered by the commissioner are not themselves maintained by himas a public record or report, nor do they identify other government records sought to be admitted. Instead, the af-fiant's statements, albeit made under oath, describe documents already included within the statutory transcript,set forth general practices of the Department of Taxation, and purportedly declare how the Tax Commissionerwould have ruled under a particular set of circumstances. To the extent the commissioner suggests that these af-fidavits are intended to supplement the transcript which he is obligated by statute to certify to this board uponthe filing of an appeal, we do not find that they fall within the type of materials contemplated by statute. SeeR.C. 5717.02 ("Upon the filing of a notice of appeal, the tax commissioner * * * shall certify to the board a tran-script of the record ofthe proceedings before the commissioner *** together with all evidence considered bythe commissioner * * * in connection therewith.").

Accordingly, we deny the Tax Commissioner's requests that this board receive into the evidentiary record the affi-davits tendered on his behalf. As appellants requested that the affidavits they submitted be admitted only in response tothose offered by the commissioner, they are likewise stricken from our consideration.

Appx. 54

2006 Ohio Tax LEXIS 1365, *Page 3

In the brief filed on his behalf, the commissioner next questions this board's jurisdiction to address the issues raisedby appellants through their own briefs, asserting that they failed to adequately specify such issues in their notices ofappeal. In each of his final determinations from which the present appeals are taken, the commissioner dismissed appel-lants' petitions for abatement, stating as follows:

"This matter now comes on for final determination. It involves a petition for abatement of a personalproperty tax late filing penalty assessment pursuant to R.C. 5711.28.

"R.C. 5711.27 provides that if the retums are not filed within the dates required by R.C. 5711.04, thereshall be assessed to the retums a penalty of up to 50% of the assessed value.

"In this instance, the applicant filed a petition for abatement of penalty for its 2004 personal property[*8] tax retum, which the Tax Commissioner received on December 28, 2004. The applicant did not in-clude a copy of the most recent assessment certificate.

"In an effort to assist the applicant in perfecting this application, the Tax Commissioner sent a letter bycertified mail to the applicant on December 30, 2004 requesting a copy of the most recent assessmentcertificate.

"The Tax Commissioner finds that the applicant has failed to meet the requirements of R.C. 5711.26 be-cause the applicant has not provided the requisite copy of the most recent assessment certificate. There-fore, the subject application for penalty abatement is hereby denied." S.T. at 1.

In their notices of appeal, appellants specified a single error:

"The Ohio Department of Taxation erred by dismissing the request for the penalty to be abated since thefailure to timely file the return and timely pay the tax was due to reasonable cause."

The commissioner argues that appellants failed to specify as error the "threshold issue" in these appeals, i.e., the ju-risdictional dismissal of appellants' pefitions for abatement. The commissioner maintains that appellants' petitions forabatement were dismissed for two [*9] reasons, i.e., copies of assessment certificates were not submitted and the peti-tions were not timely filed. According to the commissioner, appellants challenge in their notices of appeal a ruling notmade, i.e., that the dismissal was erroneous because there existed reasonable cause for their failure to timely file theirpersonal property tax returns and timely remit the tax owed. As a result, the commissioner requests that appellants' ap-peals be dismissed.

R.C. 5717.02 requires that "[t]he notice of appeal *** specify the errors therein complained of ***." The com-missioner correctly notes that in an appeal from a final determination, this board's jurisdiction is generally considered n3to be limited to those issues specified by an appellant in its notice of appeal, a principle often reaffumed by the SupremeCourt. See, e.g., Queen City Valves v. Peck (1954), 161 Ohio St. 579, syllabus; Ellwood Engineered Castings Co. v.Zaino, 98 Ohio St.3d 424, 427, 2003-Ohio-1812, at P20; Gen. Motors Corp. v. Wilkins, 102 Ohio St3d33, 2004-Ohio-1869, at P74; Cousino Construction Co. v. Wilkins, 108 Ohio St3d90, 2006-0 [* 10] hio-162, at P41.

n3 As noted above, this board's jurisdiction is generally considered to be limited to those errors specified byan appellant in its notice of appeal. However, the board may have the authority to consider additional issues notraised in a notice of appeal where obvious error exists, the board exercises its investigatory powers and discov-ers clear error, or where the commissioner himself contests an issue neither addressed in his final determinationnor raised by an appellant in a notice of appeal. See, e.g., Buckeye Internatl., Inc. v. Limbach (1992), 64 OhioSt.3d 264, 267-268; Key Serv. Corp. v. Zaino (2002), 95 Ohio St.3d I1, 15-17; Howard Gas & Oil Co. v. Lim-bach (May 21, 1993), Lucas App. No. L 92-128, unreported. See, also, R.C. 5717.02 and 5717.03.

While appellants may not have referenced the commissioner's finding that their petitions were deficient becauseappellants failed to provide copies of their most recent assessment certificates, they did challenge his dismissal of theirpetitions as erroneous. We consider this claim sufficient to vest this board with jurisdiction to consider whether [* 11]the connnissioner acted appropriately in dismissing appellants' petitions.

Appx.55

2006 Ohio Tax LEXIS 1365, *Page 4

Moreover, and now turning to the merit issue presented through these appeals, it would be inappropriate and unrea-sonable for this board to allow the commissioner's dismissal of appellants' petitions to stand when the basis cited forsuch action is expressly precluded by statute. Cf. Buckeye Internatl., supra; Howard Gas & Oil, supra. In citingappel-lants' failure to provide the "requisite" copies of assessment certificates, the commissioner refers to the requirementsimposed by R.C. 5711.26. n4 Although this statute requires an applicant to provide such certificates, it is not applicableherein. Instead, R.C. 5711.26 sets forth the statutory mechanism by which a taxpayer can request that the commissionerissue a final assessment of property required to be returned. See, generally, SCM Chemicals, Inc. v. Zaino, 106 OhioSt.3d 43, 2005-Ohio-3676, at P6. However, as noted by the commissioner in his fmal determinations, appellants did notseek the issuance of final assessment certificates, but instead petitioned the commissioner to abate penalties [* 12Jwhich were assessed due to the untimely filing of their personal property tax returns. In contrast to R.C. 5711.26, R.C.5711.28 expressly states that assessment certificates need not be attached to such a petition:

"The petition shall have attached thereto and incorporated therein by reference a true copy of the noticeof assessment complained of, but thefailure to attach a copy ofsuch notice and incorporate it by refer-ence does not invalidate the petition." (Emphasis added.)

n4 As a condition for vesting the Tax Commissioner with jurisdiction to consider an application for final as-sessment, R.C. 5711.26 provides that "[t]he application shall have attachedxhereto and incorporated therein byreference a true copy of the most recent preliminary or amended assessment, whether evidenced by certificate orreturn, to which correction is sought through the issuance of a final assessment certificate."

Accordingly, it is the decision and order of this board that the Tax Commissioner's fmal determinations dismissingappellants' petitions for the reason stated therein must be, and hereby are, reversed. These matters are remanded to theTax Commissioner for further proceedings. [*131 n5

n5 As indicated above, the commissioner argues, by way of brief, that appellants' applications were alsodismissed as having been filed beyond the period prescribed by statute. See R.C. 5711.28 ("Within sixty days af-ter the mailing of the notice of a penalty assessment prescribed by this section, the taxpayer may file with the taxcommissioner, in person or by certified mail, a petition for abatement of such penalty assessment."). However, areview of the commissioner's final determinations fails to disclose that this was a basis for dismissal. While ju-risdictional issues may be raised at any time, see, e.g., Columbus City School Dist. Bd ofEdn. v. Wilkins, 101Ohio St.3d 112, 2004-Ohio-296, at P20, and H.R. Options, Inc, v. Zaino, 100 Ohio St.3d 373, 2004-Ohio-1, atP8, the commissioner made no fmdings regarding the date on which the assessments were mailed nor whetherappellants' petitions were filed within the period prescribed by R.C. 5711.28. See, e.g., CMAcquisition Co. v.Wilkins (Aug. 25, 2006), BTA No. 2005-R-531, unreported; Troll Construction, Inc. v. Wilkins (July 8, 2005),BTA No. 2005-K-299, unreported. Compare Hy-Level Industries, Inc. v. Zaino (Nov. 21, 2003), BTA No. 2003-J-413, unreported; Construction Co., Inc. v. Wilkins (Oct. 10, 2005), BTA No. 2005-T-295, unreported; GaydashIndustries, Inc. v. Wilkins (Aug. 8, 2005), BTA No. 2005-A-297, unreported. Accordingly, like the commis-sioner, we do not reach this issue.

[*14]

Appx.56

Ex parte HealthSouth Corporation (In re: HealthSouth Corporation v. JeffersonCounty Tax Assessor, Dan Weinrib, and Jefferson County Tax Collector, J.T.

Smallwood)

1060296

SUPREME COURT OF ALABAMA

978 So. 2d 745; 20074 1a. LEXIS 174

August 24, 2007, Released

SUBSEQUENT HISTORY: As Corrected August 27,2007.

PRIORHISTORY: [**I]Jefferson Probate Court, 187686; Court of Civil Ap-

peals, 2050538.Fx parte Healthsouth Corp., 2007 Ala. LEXIS 76 (Ala.,May 4, 2007)

DISPOSITION: APPLICATION OVERRULED;OPINION OF MAY 4, 2007, WITHDRAWN; OPINIONSUBSTITUTED; AFFIRMED.

JUDGES: Cobb, C.J., and Woodall, Stuart, and Smith,JJ., concur. See, J., concurs in the rationale in part andconcurs in the result. Parker, J., concurs in part and dis-sents in part. Bolin and Murdock, JJ., recuse themselves.

OPINION BY: LYONS

OPINION

[*746] PETITION FOR WRIT OF CERTIORARITO THE COURT OF CIVIL APPEALS

On Applicationfor Rehearing

LYONS, Justice.

The opinion of May 4, 2007, is withdrawn, and thefollowing is substituted therefor.

[*747] HealthSouth Corporation appealed to theCourt of Civil Appeals from a judgment of the JeffersonProbate Court in favor of Dan Weinrib, the JeffersonCounty tax assessor, and J.T. Smallwood, the JeffersonCounty tax collector ("the taxing authorities"). The Courtof Civil Appeals affirmed the judgment of the probatecourt. HealthSouth Corp. v. Jefferson County Tax Asses-sor, [Ms. 2050538, October 27, 2006] _ So. 2d _978 So: 2d 737, 2006 Ala. Civ. App. LEXIS 659 (Ala.

Civ. App. 2006). HealthSouth then petitioned this Courtfor a writ of certiorari, and we granted HealthSouth'spetition to review two issues presented by this case. Weaffum the judgment of the Court of Civil Appeals.

I. [* *2] Factual Background and Procedural History

For the tax years 2001, 2002, and 2003, HealthSouthsubmitted personal-property tax returns to the JeffersonCounty tax assessor on which it intentionally listed nu-merous fictitious items of personal property and assignedfabricated values to those items. ` HealthSouth paid taxesfor the years 2001 and 2002 based on the submitted re-turns. Before paying the amount due for 2003, however,HealthSouth amended its tax return for that year to re-move the fictitious assets. The Jefferson County tax as-sessor allowed the adjustment as to 2003. HealthSouththen amended its 2001 and 2002 returns and filed peti-tions for a refund of the portion of ad valorem personal-property taxes it claims it overpaid as a result of listingthe fictitious items of personal property on its tax returnsfor 2001 and 2002. The Jefferson County tax collectorrequested an opinion from the attomey general, who de-termined that no refund was due. The tax collector thendenied the petitions for a refund of the taxes HealthSouthhad paid for 2001 and 2002 on the fictitious property.

1 As the Court of Civil Appeals noted, before2002 several officials of HealthSouth were in-volved in [**3] a scheme to artificially inflatethe company's reported eatnings and, in further-ance of that scheme, overstated the corporation'sfixed assets. The inflated personal-property taxreturns reflected the overstated assets.

HealthSouth filed an action in the Jefferson ProbateCourt challenging the tax collector's refusal to grant itspetitions for the refund of ad valorem taxes paid on per-sonal property for the years 2001 and 2002. When theprobate court denied the petitions for refund, Health-South appealed to the Court of Civil Appeals. That court

Appx. 57

978 So. 2d 745, *; 2007 Ala. LEXIS 174, **

affirmed the judgment of the probate court. The Court ofCivil Appeals held that § 40-10-160, Ala. Code 1975,providing for tax refunds based upon a mistake or anerror, did not petmit a refund when the taxpayer's over-payment resulted from the taxpayer's intentionally falsestatements as to the value of nonexistent assets. TheCourt of Civil Appeals further held that "HealthSouth'sviolation of its duty to provide correct and truthful in-formation on its tax returns did not abrogate the tax as-sessor's authority to affix values for assessment purposesto the property listed on HealthSouth's tax returns."So. 2d at . This Court granted certiorari [**4] to con-sider two questions of first impression: whether the term"error" has a meaning different from the term "mistake,"specifically whether the former term is broad enough toencompass intentional dishonest conduct; and whether anintentional misrepresentation by a taxpayer in-reportingproperty on a tax return can create a right in the taxingauthorities to collect and retain taxes on nonexistentproperty so that no refund of taxes collected because ofsuch an error can be had under § 40-10-160, Ala. Code1975.

[*748] II. Standard ofReview

"In reviewing a decision of the Court ofCivil Appeals on a petition for a writ ofcertiorari, this Court 'accords no presump-tion of correctness to the legal conclu-sions of the intermediate appellate court.Therefore, we must apply de novo thestandard of review that was applicable inthe Court of Civil Appeals.' Ex parte Toy-ota Motor Corp., 684 So. 2d 132, 135(Ala. 1996). Because the material factsbefore the Court of Civil Appeals wereundisputed, that court's review of the trialcourt's ruling would be de novo as well.State Dep't of Revenue v. Robertson, 733So. 2d 397, 399 (Ala. Civ. App. 1998).This is particularly true where the inter-mediate [**5] appellate court is constru-ing statutory provisions. Robertson, su-pra; Pilgrim v. Gregory, 594 So. 2d 114,120 (Ala. Civ. App. 1991)."

Fx parte Exxon Mobil Corp., 926 So. 2d 303, 308 (Ala.2005).

Page 2

"Any taxpayer who through any mis-take, or by reason of any double assess-ment, or by any error in the assessment orcollection of taxes, or other error, haspaid taxes that were not due upon theproperty of such taxpayer shall be enti-tled; upon making proof of such paymentto the satisfaction of the Comptroller, tohave such taxes refunded to him if appli-cation shall be made therefor, as hereinaf-ter provided, within two years from thedate of such payment."

(Emphasis added.)

This Court's decision to grant HealthSouth's petitionfor the writ of certiorari was triggered by the pivotal is-sue of the significance, if any, of the legislature's choiceof two words -- "error" and "mistake" -- in its refundstatute and its linking those words with the disjunctiveconjunction "or." The parties have wrestled mightily withparsed definitions from various sources that might afforda separate field of operation for [**6] each term. Ofcourse, HealthSouth contends that "error" can embracean intentional act and therefore that its fraudulent inclu-sion on its personal-property tax returns of assets that didnot exist constitutes the type of activity for which it isentitled to relief pursuant to § 40-10-160 in the form of arefund of taxes paid. HealthSouth does not contend that"mistake" embraces its activities. The taxing authorities,'on the other hand, argue that neither "error" nor "mis-take" includes deliberate, intentional acts of the charactercommitted by HealthSouth.

2 The State of Alabama has intervened as anamicus curiae in support of the taxing authorities.

The Court of Civil Appeals, after citing definitionsfor each word, concluded:

"Although HealthSouth may be correctthat the plain meaning of the word 'mis-take' is slightly different from the plainmeaning of the word 'error,' we are clearto the conclusion that an intentional mis-representation is not included in the plainmeaning of either word."

III. Analysis

A. Whether 'Error"Has a Meaning Different from "SLIis-take"

Section 40-10-160 provides:

So. 2d at = 2006 Ala. Civ. App. LEXIS 659 at*8.

We conclude that the Court of Civil Appeals wascorrect. While nuanced definitions of the two words

Apnx.58

978 So. 2d 745, *; 2007 Ala. LEXIS 174, **

could considerably lengthen this opinion, there is ampleauthority for the [**7] proposition that neither "etror"nor "mistake" contemplates dishonest activity. ThisCourt considered the significance of a legislative choiceof "clerical [*749] error" and "other mistake of theclerk" in Ford v. Tinchant & Brother, 49 Ala 567, 571(1873). Although the Ford Court concluded that each ofthe terms had a separate field of operation, a limitation inits holding is significant to the issue in this case. ThisCourt in Ford stated:

"The legislature cannot be held to havebeen so careless of language, as to haveused the expressions 'clerical error,' and'other mistake of the clerk,' in exactlysynonymous sense, in view of the liabilityto mistake in the entries and record ofcauses; or to have excluded from amend-ment the manifest oversights and inaccu-racies of the counsel, not calculated tomislead, in permitting the correction of'any error in fact in the process."'

(Emphasis added.) Thus, in Ford this Court qualified thefield of operation of "clerical error" and "other mistakeof the clerk" by embracing only conduct that was "notcalculated to mislead."

In Alabama & Georgia Lumber Co. v. Tisdale, 139Ala. 250, 36 So. 618 (1903), the amount of the judgmentenforcing a mechanic's [**8] lien was less than theamount that had previously been claimed in the state-ment of lien filed in the office of judge of probate. Thevalidity of the lien was challenged on the basis of thediscrepancy. The applicable statute provided: "[N]o errorin the amount of the demand or in the name of the owneror proprietor shall affect the lien ...... 139 Ala. at 255, 36So. at 619. The Court observed:

"Fraud is never presumed. On the factsfound, the discrepancy can and should beaccounted for on the ground of a mistakeor error ....

... Whether the present statute wasintended to prevent a destruction of thelien when the amount in the statement wasintentionally made excessive in order tosecure to the lienor a fraudulent advan-tage, we will not decide. But where, ashere, no fraudulent purpose or intent isfound to exist, we are clearly of [the]opinion that the lien is not impaired or de-stroyed by the error as to the amount."

Page 3

139 Ala. at 256-57, 36 So, at 620. Later, in Fleming v.McDade, 207 Ala. 650, 651, 93 So. 618, 619 (1922), thisCourt was required to resolve the question left unan-swered in Alabama & Georgia Lumber Co. This Courtstated:

"In Ala. & Ga. Lbr. Co. v. Tisdale, 139Ala. 250, 257, 36 South. 618 [(1903)],[**9] there is to be found a query whetherthe present statute [providing for protec-tion from destruction of the lien for errorin the amount of the demand] was in-tended to prevent the destruction of thelien, as held in Lane & Bodley Co. v.Jones, [79 Ala. 156 (1885), holding that afraudulent statement vitiated the lien] un-der the statute then in force, as to whichno opinion was expressed. We are clearlyof the opinion, however, that the principleannounced in the older case has been inno wise affected by the provision of thepresent statute that 'no error in the amountof the demand, ... shall affect the lien'; forthis means merely an inadvertent or hon-est mistake, and not a willfully falseclaim."

In Scheuer v. Berringer, 102 Ala. 216, 14 So. 640(1894), dealing with error or mistake, on the one hand, orfraud, on the other, in settlements of accounts betweenpartners, this Court recognized differing relief availableattending each circumstance. This Court quoted withapproval the trial court's order, which in tum quotedCowan v. Jones, 27 Ala. 317, 325 (1855), in which thisCourt stated, ""'The rule is settled that, where errors ormistakes only are shown, the account will not be opened,[**10] as where fraud is shown; but the party allegingerror or mistake in the account, [*750] will be permittedto surcharge and falsify it.""' 102 Ala. at 220, 14 So. at642. The trial court's order continued:

"'In Moses [Bros] v. Noble['s Adm'rJ,86 Ala. 407, [410, 5 So. 181, 182 (1888),]Justice Clopton remarks: "In the absenceof allegation and proof of fraud or undueinfluence, which taints the entire account,the court will not open and unravel as ifno account had been made. ... When onlyerrors or mistakes are made, alleged, andproved, wrong charges which should bededucted, or omission of credit whichshould be allowed, the court will give theparty complaining permission to sur-charge and falsify the account, and limits

Appx. 59

978 So. 2d 745, *; 2007 Ala. LEXIS 174, **Page 4

its authority to a correction of the errorsor mistakes.""'

102 Ala at 220, 14 So. at 642. Scheuer was followed inBurks v. Parker, 192 Ala. 250, 68 So. 171 (1915).

In the context of acts of a municipality, this Courthas limited error or mistake to honest activity:

"Bad faith is synonymous with fraud. 6C.J. pp. 880, 881; Morton & Bliss v. [NewOrleans & Selma] Railway Co., 79 Ala.590, 617 [(1885)]. Error or mistake ofjudgment, in the exercise of a discretion-ary power, [** I 1] is not the equivalent ofbad faith or fraud. In such circumstances,error or mistake ofjudgment consists withhonest intention, or freedom from unwor-thy or unlawful motive or design."

Pilcher v. City ofDothan, 207 Ala. 421, 424, 93 So. 16,19 (1922) (emphasis added).

HealthSouth accuses the Court of Civil Appeals ofrewriting § 40-10-160 by refusing to permit the modifier"any," used in the statute to modify both error and mis-take, to have a field of operation. But adopting Health-South's view requires us to expand the commonly under-stood and long-settled scope of the terms "error" or "mis-take," contrary to this Court's treatment of those termsover the years. Indeed, in Fleming v. McDade, the statutein question used an equally broad adjective in providingthat "no error in the amount of the demand, ... shall affectthe lien." 207 Ala. at 651, 93 So. at 619 (emphasisadded). As previously noted, this Court did not permitsuch language, contrary to common usage, to sweep sobroadly as to protect a party from the destruction of itslien by reason of its fraudulent statement of amount.

We are not led to a different conclusion by reason ofa recent opinion of a Georgia trial court recognizing[**12] HealthSouth's right to a refund pursuant to aGeorgia statute. ' Section 48-5-380(a), Ga. Code Ann.,provides:

"Each county and municipality may re-fund to taxpayers any and all taxes and li-cense fees which are determined to havebeen erroneously or illegally assessed andcollected from the taxpayers under thelaws of this state or under the resolutionsor ordinances of any county or municipal-ity or which are determined to have beenvoluntarily or involuntarily overpaid bythe taxpayers."

(Emphasis added.) In Marconi Avionics, Inc. v. DeKalbCounty, 165 Ga. App. 628, 630, 302 S.E.2d 384, 385-86(1983), relied upon by the Georgia trial court, the Geor-gia Court of Appeals stated: "We interpret the refundstatute according to its literal and logical meaning: itapplies to all property 'en•oneously or illegally assessed'[*751] and taxes 'voluntarily or involuntarily overpaid,'for whatever reason." Section 40-10-160 is materiallydifferent from the Georgia statute.

3 HealthSouth relies upon an unpublished opin-ion rendered by the Superior Court of ClaytonCounty, Georgia, a copy of which HealthSouthprovided to this Court. HealthSouth Holdings,Inc. v. Clayton County, Georgia, No. 2005-CV-2056-7 [**131 (Clayton Superior Court, October19, 2006).

Finally, we note that HealthSouth contends that theCourt of Civil Appeals has disregarded the rule of con-struction of statutes that presumes every word has somepurpose and that no superfluous provisions are used. SeeEx parte Panell, 756 So. 2d 862, 867 (Ala. 1999). Ourdetermination that the words "error" and "mistake" arenot consistent with dishonest acts, regardless of whateverelse they might mean, obviates the necessity for deter-mining the applicability of this presumption. Neverthe-less, we note that this Court, as well as other jurisdic-tions, has recognized that presumption can be overcomeby a determination that the legislature has used syno-nyms. See Anderson v. Hooks, 9 Ala. 704, 709-10(1846), discussing the significance of a phrase in theStatute of Frauds referring to "the intent or purpose" andconcluding:

"The introduction of the term 'purpose'into the act, does not impart to it any addi-tional potency. It is only the synonym fordesign, intention, aim -- is but a mere ex-pletive, intended to convey the idea whichthe legislature had in view more strik-ingly, and might be stricken from the actwithout affecting its interpretation [**14]in any manner."

Likewise, in Caldwell v. State, 32 Ala. App. 228, 230, 23So. 2d 876, 878 (1945), the Court of Appeals held that"[tlhe words 'oppose' and 'resist' as they appear in the[Code] section are synonymous."

"It seems clear that the terms 'oppose'and 'resist', as they are used in the statuteunder consideration, convey a legislativeintent to protect the officer against ob-

Appx. 60

978 So. 2d 745, *; 2007 Ala. LEXIS 174, **

struction and interference and thereforecontemplate the use of either actual orconstructive force against the officer whois making an effort to serve or execute thelegal writ or process. In other words, it isnot made a criminal offense to hinder orinterrupt or circumvent the service of theprocess with which the officer is armed,unless in doing so actual or constructiveforce is used against the officer himself."

32 Ala. App, at 230-31, 23 So. 2d at 878.

Such observations about a legislature's capacity toemploy synonyms were summarized in Hawaiian Air-lines, Inc. v. Norris, 512 U.S. 246, 253, 114 S. Ct. 2239,129 L. Ed 2d 203 (1994), in which the United StatesSupreme Court noted the existence of cases recognizingthe use of synonyms in statutes, by referring to UnitedStates v. Olano, 507 U.S. 725, 732, 113 S. Ct. 1770, 123L. Ed 2d 508 (1993), which it described as "reading[**15] 'error or defect' to create one category of'error."'The Court then noted that Olano cited McNally v. UnitedStates, 483 U.S. 350, 358-59, 107 S. Ct. 2875, 97 L. Ed2d 292 (1987), which the Court described as holding thatthe "second phrase in [the] disjunctive [was] added sim-ply to make the meaning of the first phrase 'unmistak-able."' In McNally, the Court stated: "As we see it, add-ing the second phrase simply made it unmistakable thatthe statute reached false promises and misrepresentationsas to the future as well as other frauds involving moneyor property." 483 U.S. at 359. See also Southwick v.State, 126 Ark 188, 190, 189 S. W. 843, 844 (1916)("'The use of the disjunctive 'or' between the words 'in-timidation' and'threats' in the statute was not in the senseof indicating that they are two different things, but wasonly used as an alias to designate the same thing by dif-ferent words."); and Smith v. R.F. Brodegaard & Co., 77Ga. App. 661, 663-64, 49 S.E.2d 500, 502 (1948):

[*752] "We do not think the words'possession, custody, or control,' as usedin the statute providing for bail in actionsfor personalty, mean three differentthings; or that they state three differentsituations or grounds on which a plaintiff[**161 in trover can require a bond of thedefendant. They express an alterttative ofterms, defmitions or explanations of thesame thing in different words. They meansubstantially the same thing, i.e. that theproperty is within the power and domin-ion of the defendant. ... 'The word "or,"when used not to connect two distinctfacts of different natures, but to character-

ize and include two or more phases of thesame fact, attended with the same result,states but a single ground, and not the al-tetnative.' 46 C.J., 1125(4). This rule ofconstruction has been recognized and ap-plied by our courts in criminal cases andin civil cases."

Page 5

See also Lewis v. Superior Court, 217 Cal. App. 3d 379,397, 265 Cal. Rptr. 855, 865 (1990) ("Although we en-deavor to give effect to every word in a statute, some-times terms used together are simply synonymous.").Finally, see United States v. Patterson, 55 F 605, 639(C. C. D. Mass. 1893):

"The court is well aware of the generalrule which has been several times (twicecertainly) laid down by the supreme courtof the United States, that in construing astatute every word must have its effect,and the consequent presumption that thestatute does not use two different [**17]words for the same purpose; but this rulehas its limitations, and it is a constantpractice for the legislature to use syno-nyms. A word is used which it is thoughtdoes not perhaps quite convey the ideawhich the legislature intends, and it takesanother word, which perhaps has to somea little different meaning, without intend-ing to more than make strong the purposeof the expression in the statute."

Even if the terms "error" or "mistake" are synonymous,resort to synonyms for clarity or emphasis is clearlywithin the prerogative of the legislature.

B. Whether a Taxing Authority Has the Right to Assessand Collect Taxes on the Basis of an Intentional Misrep-resentation by the Taxpayer

HealthSouth also argues that even though it inten-tionally misrepresented assets on its personal-propertytax retums, because those assets did not actually exist,the taxing authorities did not have the right to assess andcollect personal-property taxes on the assets listed on thetax returns. As to this issue, we affum the judgment ofthe Court of Civil Appeals for the reasons set forth inPart II of its opinion of October 27, 2006. The Court ofCivil Appeals stated:

"In essence, HealthSouth requested*18] the probate court to invoke its eq-

uity jurisdiction to grant the refund peti-tions. A party seeking equitable relief,

Appx. 61

978 So. 2d 745, *; 2007 Ala: LEXIS 174, **

however, must have acted with equity andmust come into court with clean hands.Levine v. Levine, 262 Ala. 491, 494, 80So. 2d 235, 237 (1955). In J&M BailBonding Co. v. Hayes, 748 So. 2d 198(Ala. 1999), the Alabama Supreme Courtstated:

"'The purpose of theclean hands doctrine is toprevent a party from as-serting his, her, orits rightsunder the law when thatparty's own wrongful con-duct renders the assertionof such legal rights "con-trary to equity and goodconscience." Draughon v.General Fin. Credit Corp.,362 So. 2d 880, 884 (Ala.1978). The application ofthe clean hands doctrine isa matter within the sounddiscretion of the trial[*753] court. Lowe v.Lowe, 466 So. 2d 969 (Ala.Civ. App. 1985).'

"748 So. 2d at 199. HealthSouth can-not be permitted to take advantage of itsown wrong by receiving a refund basedon its own inequitable conduct. There isno equity in allowing HealthSouth to ob-tain relief from its own fraudulentscheme."

_ So. 2d at = 2006 Ala. Civ. App. LEXIS 659 at*21.

Justice Parker's dissent states: "Such refunds [foroverpayment of taxes] are appropriate regardless of themalfeasance [**19] of the person seeking the refund.This was noted by Craig M. Boise in Playing with 'Mo-nopoly Money': Phony Profits, Fraud Penalties and Eq-uity, 90 Minn. L. Rev. 144, 147-48 (2005), which exam-ines recent incidents of falsely inflated income of majorU.S. corporations." So. 2d at .

The law review article cited by Justice Parker in factsupports the completely opposite view that equitabledefenses should be available in actions seeking a taxrefund after the taxpayer's fraud in overstating its taxliability has been exposed. The article states:

"Recognizing that companies that in-flate their taxable income make the IRS'an unwitting accomplice to ... fraud,' theSenate, in May 2003, approved a measurethat would have increased the penaltyfortax fraud to an amount equal to the over-payment of tax attributable to the fraud.The effect of this provision would havebeen to disallow any refunds of taxes paidon fraudulently inflated income. Unfortu-nately, the measure was dropped in theconference committee and did not becomepart of the American Jobs Creation Act of2004 ultimately signed by PresidentGeorge W. Bush in October 2004. How-ever, this Article suggests that the IRSmay be able [**20] to achieve the resultsintended by the omitted Senate provisionthrough the rules of equity. Moreover, eq-uity may well furnish a more sound ap-proach to penalizing offenders in suchcases than would a legislative enactment.

"Central to the thesis of this Article isthe fact that tax-refund suits are in essenceclaims in equity, a proposition that hastwo important implications. First, the tax-payer filing a tax-refund suit is asking thecourt to impose a fair, just, and equitable'remedy' -- namely, the refund of taxespaid in excess of what was due. As an eq-uity claimant, the taxpayer is not in a po-sition to demand that the refund begranted. Second, the fact that refund suitsare actions in equity means that claimantsare subject to well-established equitabledefenses like the doctrine of uncleanhands. Based on these twin propositions,this Article asserts that the IRS not onlymay but should, assert equitable defensesto deny refunds of taxes paid on fraudu-lently inflated earnings."

Page 6

90 Minn. L. Rev. at 150-51 (emphasis added) (footnotesomitted).

The dissenting opinion also relies on the views ofthree staff reporters of The Wall Street Joumal. The dis-sent states:

"A Wall Street Joumal [**21] articlenoted the same principle: '[t]raud or not,the current tax code makes no distinc-tions. It is a basic tenet of tax law -- bothfor individuals and corporations -- that

Anox-F2

978 So. 2d 745, *; 2007 Ala. LEXIS 174, **

those who overpay are entitled to a re-fund.' Rebecca Blumenstein, Dennis K.Berman, and Evan Perez, After InfatingTheir Income, Companies Want IRS Re-

funds, The Wall Street Journal, May 3,2003, arAl."

So. 2d at .

We are more impressed with the holding in Stone v.White, 301 U.S. 532, 535, 57 S. Ct. 851, 81 L. Ed. 1265,1937-1 C.B. 224 (1937):

[*754] "The statutes authorizing tax re-funds and suits for their recovery arepredicated upon the same equitable prin-ciples that underlie an action in assumpsitfor money had and received. United Statesv. Jefferson Electric [Mfg.] Co., 291 U.S.386, 402, 54 S. Ct. 443, 78 L. Ed 859, 78Ct. Cl. 846, 1934-1 C.B. 393 [(1934)].Since, in this type of action, the plaintiffmust recover by virtue of a right measuredby equitable standards, it follows that it isopen to the defendant to show any state offacts which, according to those standards,would deny the right, Moses v. Macferlan,supra, [2 Burr. 1005] at 1010 [(K.B.I750)]; Myers v. Hurley Motor Co., 273U.S. 18, 24, 47 S. Ct. 277, 71 L. Ed. 515,50 A.L.R. 1181 [(1927)]; cf. Winchester v.Hackley, 6 U.S. 342274, 2 Cranch 342, 2L. Ed 299 [(1805)], even without resortto the modem statutory [**22] authorityfor pleading equitable defenses in actionswhich are more strictly legal, Jud. Code, §274b, 28 U S. C. ,¢ 398."

IV. Conclusion

The settled meaning of the terms "error" and "mis-take" is not consistent with intentional dishonest acts.Furthermore, HealthSouth's intentional misrepresentationof its assets did not abrogate the right of the taxing au-thorities to assess and collect personal-property taxesfrom HealthSouth based upon the information Health-South provided on its personal-property tax return. Wetherefore affirm the judgment of the Court of Civil Ap-peals.

APPLICATION OVERRULED; OPINION OFMAY 4, 2007, WITHDRAWN; OPINION SUBSTI-TUTED; AFFIRMED.

Page 7

Cobb, C.J., and Woodall, Stuart, and Smith, JJ.,concur.

See, J., concurs in the rationale in part and concursin the result.

Parker, J., concurs in part and dissents in part.

Bolin and Murdock, JJ., recuse themselves.

CONCUR BY: SEE (In Part); PARKER (In Part)

CONCUR

SEE, Justice (concurring in the rationale in part andconcurring in the result).

I fully join in the holding of the main opinion. Iagree that neither "mistake" nor "error" in this statuteencompasses HealthSouth's deliberate misrepresentationson its tax returns. I write specially only to note that I do[**23] not consider it necessary to determine whether thelegislature could have intended to use the terms "error"and "mistake" as synonyms. Therefore, I do not join inthat discussion.

DISSENT BY: PARKER (In Part)

DISSENT

PARKER, Justice (concurring in part and dissentingin part).

I concur with the conclusion of the main opinion onthe first issue -- whether the term "error" differs from theterm "mistake," specifically, whether "error" is broadenough to encompass intentional conduct. However, Idissent from the adoption by the majority of the rationaleof the Court of Civil Appeals' opinion on the second is-sue -- whether an intentional misrepresentation by a tax-payer in reporting property can create a right to collectand retain taxes on nonexistent property so that no refundof taxes collected due to such an error can be had under §40-10-160, Ala. Code 1975.

The majority opinion, by affirming the judgment ofthe Court of Civil Appeals on this issue, effectually holdsthat the State has the authority to tax nonexistent prop-erty. The Court of Civil Appeals distinguished the pre-sent case from City of Birmingham v. Piggly Wiggly Ala-bama Distributing Co., 638 So. 2d 759, 765 (Ala. 1994),in order to contradict [**24] HealthSouth's contentionthat the tax assessor [*755] had no authority to assessnonexistent personal property to HealthSouth. The Courtof Civil Appeals' opinion notes that Piggly Wiggly in-volved a mistake, whereas the present case involves anintentional misrepresentation. That opinion holds that inan instance of mistake, such as in Piggly Wiggly, the

Appx. 63

978 So. 2d 745, *; 2007 Ala. LEXIS 174, **

assessor is without authority to assess the property. Butin this case, the Court of Civil Appeals held:

"The tax assessor was authorized to as-sess the taxes based on the lists providedby HealthSouth. HealthSouth's violationof its duty to provide correct and truthfulinformation on its tax retums did not ab-rogate the tax assessor's authority to affixvalues for assessment purposes to theproperty listed on HealthSouth's tax re-turns."

So. 2d at (citation omitted). Although this mis-take/intentional-misrepresentation distinction does dis-tinguish Piggly Wiggly from this case, it is irrelevant.The forms an entity fills out may give the assessor au-thority to assess the value of the property listed; how-ever, this presupposes there is property listed that hasvalue to be assessed. Nonexistent property has no value,and without property [**25] to assess, the assessor iswithout authority.

The Court of Civil Appeals also suggested that eq-uity has a place in tax matters. _ So. 2d at _, 2006AIa.Civ. App. LEXIS 659 at *18 (citing Sims v. White,522 So. 2d 239, 240 (Ala. 1988)). However, equity maynot prevent HealthSouth from receiving a refund, be-cause it is illegal for the tax assessor to assess nonexis-tent property. '"'Illegal' is defined generally as '[a]gainstor not authorized by law."' Piggly Wiggly, 638 So. 2d at765 (quoting Black's Law Dictionary 747 (6th ed.1990)). Because the assessor has no authority to assessnonexistent property, it is illegal for the assessor to doso. There is no constitutional or statutory support for theproposition that the assessor is authorized to assess non-existent property.

4 The majority opinion quotes Stone v. White,301 US. 532, 535, 57 S. Ct. 851, 81 L. Ed. 1265,1937-1 C.B. 224 (1937), as recognizing that fed-eral tax "'statutes authorizing tax refunds andsuits for their recovery are predicated upon thesame equitable principles that underlie an actionin assumpsit for money had and received."' So.2d at . In Stone, where a tmst had mistakenlypaid the tax on money disbursed to a beneficiarywhen the beneficiary should have paid the tax,the trust sued [**26] to recoup the tax paymentafter the point in time when the Intental RevenueService could have required the beneficiary topay the tax. The Supreme Court recognized thatequitable principles would apply to the govern-ment, as well as to the taxpayer: "Equitable con-ceptions of justice compel the conclusion that the

Page 8

retention of the tax money would not result in anyunjust enrichment of the govemment." 301 US.at 537. The Court found that although the tax-payment procedure had been erroneous, it had"resulted in no unjust enrichment to the govern-ment, and in no injury to petitioners or their bene-ficiary." 301 US. at 539.

Here, in contrast, the retention of the taxpayment would result in unjust enrichment to thegovernment and injury to the petitioner and itsshareholders.

Equity, however, has no place in our consti-tutional scheme limiting the authority of the taxassessor, explained infra. Moreover, court adop-tion of equity principles would empower the judi-ciary to exact penalties against taxpayers that thelegislature has not enacted.

Constitutional and Statutory Construction

The Alabama Constitution of 1901, § 211, explicitlylimits the State's taxing authority:

"All taxes levied on [**27] property inthis state shall be assessed in exact pro-portion to the value of such property ......

Nonexistent property has no value; therefore, nonexistentproperty may not be taxed. The "value o f[ n o nexistentlproperty" is zero. Any "exact proportion" of zero is zero.

[*7561 This Court has recognized the followingthree principles regarding the govemment's power oftaxation:

"(1) The power of taxation is an incidentof sovereignty and is possessed by thegovemment without being expressly con-ferred by the people.

"(2) The power is purely legislative.

"(3) So long as no constitutional limi-tations are exceeded, the Legislature is ofsupreme authority, and the courts, as wellas all others, must obey."

State v. Birmingham So. Ry., 182 Ala. 475, 479, 62 So.77, 79 (1913). This Court noted that "[t]he purpose andscope of this constitutional limitation ... is that it wasdesigned to secure uniformity and equality by the en-forcement of an ad valorem system of taxation and toprohibit arbitrary or capricious modes of taxation with-out regard to value." 182 Ala. at 480-81, 62 So. at 79

978 So. 2d 745, *; 2007 Ala. LEXIS 174, **

(emphasis added). This Court further stated that "[i]f thelegislative provision in question is unconstitutional, it[**28] must be because it is repugnant to one or more ofthe following sections of the state constitution: Section211 ...." 182 Ala. at 479, 62 So. at 79.

The authority of the tax assessor is derived from thelegislature through § 40-7-1, Ala. Code 1975, as shownbelow, and if that authority is to extend to nonexistentproperty, the statute would be unconstitutional because itwould be repugnant to § 211, Ala. Const. 1901. It is awell-settled principle of statutory construction that astatute should be construed to avoid conflict with theconstitution. The Constitution of Alabama establishes theextent of the authority to tax property when it states: "Alltaxes levied on property in this state shall be assessed inexact proportion to the value of such property." Ala.Const. 1901, § 211. This section "prohibit[s] the Legisla-ture from prescribing or declaring an arbitrary or artifi-cial value of the property of individuals or corporations,and assessing taxes on such valuation." Birmingham So.Ry., 182 Ala. at 481, 62 So. at 79 (citing AssessmentBoard v. A.C.R.R., 59 Ala. 551 (1877)). Section 211 pre-vents placing an "artificial value" on nonexistent prop-erty. Such a valuation would disregard [**29] the con-stitutional mandate that the tax is to be "in exact propor-tion to the value of' the property. Nonexistent propertyhas no value. Therefore, if the authority of the assessor,derived from § 40-7-1, is to be read to include nonexis-tent property, the statute conferring that authority wouldbe repugnant to § 211 and, therefore, unconstitutional.

Taxation statutes are to be strictly construed againstthe taxing authority: "[W]e are here concerned with ataxing act, with regard to which the general rule requir-ing adherence to the letter applies with peculiar strict-ness." Crooks v. Harrelson, 282 U.S. 55, 61, 51 S. Ct. 49,75 L. Ed 156, 1931-1 C.B. 469 (1930). In United Statesv. Merriam, 263 US. 179, 187-88, 44 S. Ct. 69, 68 L. Ed240, T.D. 3535, 21 Ohio L. Rep. 379 (1923), the Su-preme Court stated: "[I]n statutes levying taxes the literalmeaning of the words employed is most important forsuch statutes are not to be extended by implication be-yond the clear import of the language used." "[I]f there isa serious doubt as to taxability, the doubt should be re-solved in favor of the taxpayer." Western Elec. Co. v.United States, 564 F.2d 53, 66, 215 Ct. Cl. 100, 124(1977)(citing Allstate Ins. Co. v. United States, 530 F.2d378, 209 Ct. Cl. 1(1976); Ellis v. United States, 416F.2d 894, 897 (6th Cir. 1969); [**301 and McFeely v.Commissioner, 296 U.S. 102, 111, 56 S. Ct. 54, 80 L. Ed83 (1935)). "A basic rule of statutory construction is thatambiguous tax statutes are construed against the taxingauthority and in favor of the taxpayer." Birmingham v.AmSouth Bank, NA., 591 So. 2d 473, 477 (1991) (citingAlabama Farm Bureau Mut. Cas. Ins. [*757] Co. v.

Page 9

City of Hartselle, 460 So. 2d 1219 (Ala. 1984); Owen v.West Alabama Butane Co., 278 Ala. 406, 178 So. 2d 636(1965); and Miller v. Standard Nut Margarine Co., 284US. 498, 52 S. Ct. 260, 76 L. Ed 422, 1932 C.B. 370,1932-1 C. B. 370 (1932)).

The Court of Civil Appeals concluded that the taxassessor was authorized to assess taxes on the assetsHealthSouth listed on its tax returns. So. 2d at2006 Ala. Civ. App. LEXIS 659 at *15 (relying on § 40-7-1(a), § 40-7-27, and § 40-7-34). "HealthSouth's viola-tion of its duty to provide correct and truthful informa-tion on its tax returns did not abrogate the tax assessor'sauthority to affix values for assessment purposes to theproperty listed on HealthSouth's tax returns." - So. 2dat J 2006 Ala. Civ. App. LEXIS 659 at *17. Therefore,the Court of Civil Appeals concluded, it was not illegalto assess value on the nonexistent property, because thetax assessor had the authority to do so and that authoritywas not abrogated.

The Court of Civil Appeals misinterprets [**31] thestatutes that give the tax assessor his authority. The onlystatute relevant to the issue of authority, because it is theonly statute that addresses the issue of authority, is § 40-7-1, which provides: "The tax assessor ... shall have theright and authority to assess all ... personal property tothe party last assessing the same, or to the owner of re-cord ...... That court concluded that because the statutegives authority to the assessor to "assess all personalproperty ... to the owner of record" and because Health-South included the nonexistent property on its returns,the statute gives the assessor authority over the nonexis-tent property. However, § 40-7-1 nowhere grants author-ity to the tax assessor to assess nonexistent property. Thephrase "owner of record" allows the assessor to assessthe property listed on the retum, but this necessarily pre-sumes that the property listed actually exists and hasvalue. Even though it may be listed, nonexistent propertyhas no owner -- of record or otherwise -- and no valuecapable of being assessed. Even if somehow we were toconclude that the assessor could assess fictitious prop-erty, no verifiable valuation criteria would exist by whichto [**32] do so.

If doubt exists as to whether the State has constitu-tional or statutory authority to tax nonexistent property,we must return to the basic axiom of statutory interpreta-tion set forth above: Taxation statutes are to be construedstrictly in favor of the taxpayer and against the State.

Analogous Cases

Taxes are to be assessed in exact proportion to thevalue of the property taxed. Although it has been statedthat this valuation may be a percentage of the actualvalue, see State v. Birmingham So. Ry., supra, and the

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978 So. 2d 745, *; 2007 Ala. LEXIS 174, **

valuation process is not always accurate, see Hamilton v.Adkins, 250 Ala. 557, 35 So. 2d 183 (1948), if that pro-portionate value is overstated, in the case of nonexistentor exempt property, and the taxes collected are beyondthose owed, then refunds have been allowed. "In PacificCoast Co. v. Wells, 134 Cal. 471, [66 P. 657 (1901)], thetaxpayer inadvertently overstated the amount of his sol-vent credits, and the assessor adopted the erroneous fig-ure as the basis of the assessment. The Supreme Courttreated the tax there as based pro tanto on nonexistentproperty and held the taxpayer entitled to a refund."Lockheed Aircraft Corp. v. County of Los Angeles, 207Cal: App. 2d 119, 126-27, 24 Cal. Rptr. 316, 321 (1962).[*"33] In Lockheed, the court stated that the various re-fund decisions "reflect the view of the courts that whereit can be established that an assessment is based uponproperty which is exempt, outside the jurisdiction, ornonexistent, the taxpayer is entitled to judicial relief."207 CaL App. 2d [*758] at 127, 24 Cal. Rptr. at 321.Therefore, an overpayment of tax should result in a taxrefund.

Such refunds are appropriate regardless of the mal-feasance of the person seeking the refund. This wasnoted by Craig M. Boise in Playing with "MonopolyMoney": Phony Profits, Fraud Penalties and Equity, 90Minn. L. Rev. 144, 147-48 (2005), which examines re-cent incidents of falsely inflated income of major U.S.corporations. ' A Wall Street Joumal article noted thesame principle: "[f]raud or not, the current tax codemakes no distinctions. It is a basic tenet of tax law --both for individuals and corporations -- that those whooverpay are entitled to a refund." Rebecca Blumenstein,Dennis K. Berman, and Evan Perez, After Inflating TheirIncome, Companies Want IRS Refunds, The Wall StreetJournal, May 3, 2003, at Al. Additionally, many articleshave reported that HealthSouth, Enron Corporation, andWorldCom [**34] are seeking tax refunds from the In-terttal Revenue Service ("the IRS"). See, e.g., AssociatedPress, Judge orders Scrushy to pay back millions inHealthSouth bonuses, Bradenton Herald, Jan. 5, 2006,which stated: "Combined with as much as $ 265 millionin refunds the company is seeking from the federal gov-emment for taxes it paid on overstated income during thefraud, the court-ordered repayment could help shore upthe fmances of HealthSouth."

5 As noted in the majority opinion, the author ofthis article argues "that equitable defenses shouldbe available in actions seeking a tax refund afterthe taxpayer's fraud in overstating its tax liabilityhas been exposed." So. 2d at (emphasisadded). The author states that the position he ar-gues "would establish a new precedent." 90 Minn.L. Rev. at 201 ("The use of equitable defenses indenying a fraud-related refund claim in a case

Page 10

like WorldCom's, for example, would establish anew precedent."). In that portion of the articlequoted in the majority opinion, the author arguesthat the Internal Revenue Service should useprinciples of equity to accomplish what Congressrefused to do in 2004 -- to authorize the InternalRevenue Service [**35] to retain the full amountof the overpayment in cases of fraudulent over-payments.

As noted in note 4, supra, equity cannot beemployed to expand the constitutionally limitedauthority of our tax assessors.

Although taxpayers who fraudulently increase theirincome are entitled to a refund, we may have difficultydetermining whether these taxpayers actually get a re-fund. The IRS requires confidentiality of federal income-tax retums. 26 US.C. § 6103. Nonetheless, some reportsmay come from the corporations themselves, as was thecase for MCI, formerly WorldCom. "MCI, formerlyknown as WorldCom Inc., has already collected nearly $300 million in overpayments from the I.R.S., a companyspokeswoman said. The telecommunications giant's ac-counting irregularities total $ 11 billion." Anitha Reddyand Christopher Stem, Firms Want Refunds of Tax onFake Profit; MCI Collects Almost $ 300 Million, TheWashington Post, fmal ed. May 3, 2003, at El. The Stateof Alabama should not deny refunds on nonexistentproperty when the IRS provides refunds of taxes paid onnonexistent income.

Punitive Aspect Is Misdirected

The Court of Civil Appeals' opinion concludes:"HealthSouth cannot be permitted to take [**36] advan-tage of its own wrong by receiving a refund based on itsown inequitable conduct." _ So. 2d at _, 2006 Ala.Civ. App. LEXIS 659 at *21. HealthSouth is not seekingto "take advantage of its own wrong"; rather, Health-South is asking to be placed in the position it would be inif the property had been reported and assessed properly.In so doing, HealthSouth is attempting to right the wrongdone to its shareholders by its former officers or agents.

[*759] Any effort to hold HealthSouth accountablefor the fraud of its former officers should not overlookthe fact that those who have suffered most as a result ofHealthSouth's wrongdoing are its innocent stockholders.HealthSouth's fotmer officers who were involved in thefraud have already, for the most part, botne the conse-quences of their actions. Penalizing HealthSouth furtherby retaining this tax would not be an act of reprimand,but a misplaced chastisement of the innocent sharehold-ers, because withholding the tax refund would preventthe shareholders and creditors from using the tax refundto mitigate damages. As Boise says, "After all, the direct

978 So. 2d 745, *; 2007 Ala. LEXIS 174, **

cost of any penalty generally will be borne by sharehold-ers in addition to the potential indirect costs associatedwith the [**37] penalty." Playing with "MonopolyMoney, " 90 Minn: L. Rev. at 201. Retaining the excesstax does not deter future tax fraud, because those whoperpetrated the fraud are not the persons who will sufferfrom the denial of the refund.

It is true that shareholders assume the risks of theirinvestments. However, the State should not magnify theshareholders' losses by refusing to refund illegal taxes onnonexistent property, especially when, as in this case, thefraud and misrepresentations were concealed from theshareholders.

Page 11

Conclusion

I therefore dissent -- not because I tolerate corporatefraud, but because I see the need to carefully limit thepower of the State in the area of taxation. In McCullochv. Maryland, 17 US. (4 Wheat.) 316, 391, 4 L. Ed 579(1819), Chief Justice John Marshall declared: "A right totax, without limit or control, is essentially a power todestroy." The power to tax nonexistent property adds tothe power to destroy the power to redefme reality. This isa power that must not be ceded, even in the most egre-gious of circumstances.

Appx. 67

ADnx. 6 R

Hancor, Inc., Appellant, vs. Joanne Limbach, Tax Commissioner of Ohio, Appellee.

CASE NO. 89-H-443 (PERSONAL PROPERTY)

STATE OF OHIO -- BOARD OF TAX APPEALS

1991 Ohio Tax LEXIS 61

January 11, 1991

APPEARANCES

For the Appellant - John Haugawout, Vice President, Finance, Hancor, Inc., 401 Olive Street, Findlay, Ohio 45840

For the Appellee - Anthony J. Celebrezze, Jr., Attomey General of Ohio, By: M. Linda Weigand, Assistant Attor-ney General, State Office Tower-l6th Floor, 30 East Broad Street, Columbus, Ohio 43266-0410

OPINION:

DECISION AND ORDER

This cause and matter came on to be considered upon a notice of appeal filed with the Board of Tax Appeals onJune 6, 1989, from a final order of the Tax Commissioner of May 8, 1989, wherein that official modified and affirmedassessments of personal property tax for the years 1982, 1983 and 1984.

Hancor, Inc. manufactures plastic tubing, plastic septic tanks, and various other plastic products. It is incorporatedin the State of Ohio, with its corporate offices located in Findlay, Ohio.

Hancor, Inc. timely filed its 1982, 1983 and 1984 personal property tax returns. Statutory Transcript (hereafterS.T.) p.p. 1, 42, 70. Upon review corrections were made thereto by the Tax Commissioner and Amended PreliminaryAssessment Certificates were issued for the three tax years. Upon appeal modifications in the amended preliminaryassessments [*2] were made by the Tax Commissioner and the Appellant thereafter appealed the assessments to theBoard of Tax Appeals.

This case is decided upon the notice of appeal, the Statutory Transcript furnished by the Tax Commissioner, the re-cord of the evidentiary hearing held June 22, 1990, and the briefs submitted by the parties.

In 1981 Appellant obtained a judgment against Plastic Tubing, Inc., a North Carolina Corporation. Pursuant to thejudgment, later that same year a non-interest bearing promissory note was executed by Plastic Tubing, Inc. to Hancor,Inc. in the amount of $400,000.

Hancor, Inc. booked, in 1981, $100,000 as a current receivable and $100,000 as a long termreceivable as a result ofthe judgment and note. As payments were made (the PTI note was timely paid in full) the entire $400,000 was eventu-ally reflected as a receivable on the company's books. Hancor never booked the face value of the note as a receivable,nor did it have any bad debt reserve for the note. Hancor, Inc. did not include the promissory note in its personal prop-erty tax returrts.

The Tax Commissioner's position is that the entire $400,000 was an "other taxable intangible" under O.R.C. section5701.09 [*3] and should have been included in Schedule 10, less any payments, and less any reserve maintained on thebooks, as authorized by O.A.C. section 5703-3-15. As indicated above, Appellant did not maintain on its books a re-serve or bad debt allowance against the P.T.I. note, instead recording what it thought it would recover net as a receiv-able.

O.R.C. section 5709.02 "Taxable property to be entered on classified tax list and duplicate", provided as follows:

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1991 Ohio Tax LEXIS 61, *Page 2

"All money, credits, investments, deposits, and other intangible property of persons residing in this state shall besubject to taxation, ---."

A judgment is a"credit" under O.R.C. section 5701.07 (Cameron v. Cappeller, 41 Ohio St. 533 (1885)), and an in-terest-bearing note is an "investment" under section 5701.06. ft seems clear that a non-interest bearing note would con-stitute "other intangible property" under section 5701.09, O.R.C., which provided as follows:

"Section 5701.09 Other taxable intangibles; other intangible property defined.

"As used in Title LVIY[57] of the Revised Code, 'other taxable intangibles' and 'other intangible property' includeevery valuable right, title, [*4] or interest not comprised within or expressly excluded from any of the other definitionsset forth in sections 5701.01 to 5701.09, of the Revised Code."

Obviously, a promissory note will often have a true value --- which is what is required to be listed for personalproperty purposes --- different from the face amount. O.A.C. section 5703-3-15 recognizes this fact: amount. O.A.S.section 5703-3-15 recognizes this fact:

""5703-3-15 Allowances of reserves against accounts receivable

"Any taxpayer, whether individual, fiduciary or corporation, whose accounts of assets and liabilities are kept insuch a way as to show accounts receivable and notes receivable as assets at face value, with proper reserves for baddebts and the like, may, in setting forth the total amount of accounts receivable, arrive at the amount thereof by deduct-ing from the total amount of accounts receivable as per books, the total amount of such reserve or reserves; providedthat in case such reserve or reserves are carried against all the accounts or notes receivable, the deductible portion ofsuch reserves shall be the same proportion thereof as current accounts receivable (payable on demand or within one year[*5] from date of inception) bears to total accounts receivable.

"In arriving at the amount of current accounts receivable and prepaid items used and arising out of business outsideof Ohio, such proportion of the net deductible reserves, etc., as defmed in the preceding paragraph, shall be deductedfrom the face value of foreign accounts receivable and prepaid items as the accounts receivable arising out of businesstransacted outside of Ohio bears to total accounts receivable."

Section 5703-3-15 merely provides authorization for listing at true value when the taxpayer's books reflect accountsand/or notes receivable at face value and reserves. That section does not require that the trae value of the account ornote receivable placed on the personal property tax return be arrived at in that manner. It would appear that for pur-poses of the personal property tax all that is required is that the promissory note be included in the appropriate scheduleat its true value.

Appellant Hancor, Inc. did not include the PTI note in the 1982-1984 personal property tax returns; in any amount.The Tax Commissioner was thus correct in issuing a correction including it. She was correct [*6] in including the full$400,000 face amount of the note because the evidence in her possession indicated that that was the true value of thenote, not because Appellant failed to maintain a "bad debt" reserve against the face value. It was then Appellant's dutyin this appeal to prove that the true value of the note was less then the face amount. We find it succeeds to this degree:the true value of the note in the 1983 and 1984 retums should be reduced to reflect the $100,000 paid in 1982 and the$75,000 paid in 1983. [the amended 1983 and 1984 assessments reflect payments, but not correctly]. Beyond that, wedo not find that Appellant has proven a true value of the note below face value.

Appellant's second contention in this appeal is that the Tax Commissioner wrongly failed to give Appellant credit[as an account or note payable] on Schedule 9 for $3,039,000 of a revolving credit loan that was paid off on December8, 1982. (this is a reduction from the notice of appeal, where Appellant sought credit for $6,000,000 term and revolvingcredit loans paid off).

Schedule 9 requires the inclusion as "credits" of the excess of net notes and accounts receivable (due within one[*7] year from date of inception) and prepaid expenses over notes and accounts payable (due within one year from dateof inception) and accrued expenses. Appellant is here claiming that the Tax Commissioner's amended preliminary as-sessment wrongly failed to deduct the $3,039,000 revolving credit loan paid off as a "note and account payable - duewithin one year from date of inception."

O.R.C. section 5701.07 defines "credits", the subject of Schedule 9. Quite clearly the paid off revolving creditloans must come under this definition to properly be deductible:

Annv 7n

1991 Ohio Tax LEXIS 61, *Page 3

"Section 5701.07 Credits; current accounts; prepaid items defined.

"As used in Title LVII[57] of the Revised Code:

"(A) 'Credits' means the excess of the sum of all current accounts receivable and prepaid items used in businesswhen added together, estimating every such account and item at its true value in money, over and above the sum of cur-rent accounts payable of the business, other than taxes and assessments.

"(B) 'Cun•ent accounts' includes items receivable or payable on demand or within one year from the date of incep-tion, however evidenced.

"(C) 'Prepaid items' does not include tangible property.

"The sum of current [*8] accounts payable shall not take into account an acknowledgement of indebtedness, unlessfounded on some consideration actually received, and believed at the time of making such acknowledgment to be a fullconsideration therefor, nor an acknowledgement for the purpose of diminishing the amount of credits to be listed fortaxation."

Although we have the testimony of one witness that $3,039,000 in "revolving" credit loans were paid off on De-cember 8, 1982, we have no evidence that date was within one year from the date of inception of the loans. Even thatbegs the question, however, because the issue under section 5701.07 is not whether the loans were paid within one yearbut rather whether they were payable within one year from the date of inception. Appellant failed to introduce into evi-dence the written credit agreements or any other independent evidence proving the terms of these loans. We have onlythe testimony or Mr. John Haugawout, Vice President, Finance, of Appellant, that these were truly "revolving" creditarrangements, or otherwise payable within one year of inception. This is insufficient when the definite proof was soreadily available. The nature and terms [*9] of a loan should not be proven by mere recollection. We are thus com-pletely unable to find that the Tax Commissioner erred in failing to deduct the $3,039,000 to determine taxable "credits"under Schedule 9.

Appellant's third contention is that the Tax Commissioner erred in failing to subtract in Schedule 9 as "accountspayable" amounts in an "accrued consulting" account. These amounts, totaling $6,750 in the 1982 return, $118,852 in1983, and $50,168 in the 1984 retum, represent expenses that were allegedly incurred in the appropriate fiscal year(1981, for the 1982 return, for example) but were not paid until the following year. The expenses involved among thethree years were pension administration, personnel expenses, executive expenses, moving expenses, and agent fee ex-pense. As explained at the evidentiary hearing the services or products were received within the taxable year, but noinvoice was received prior to the close of the accounts payable system on January 15 --- Appellant was on a calendarfiscal year. Since Appellant believed that these expenses were properly accountable in the prior year, and it held itsbooks open until mid-February, it accounted for these [* 10] expenses by putting them into "accrual" accounts, of which"accrued consulting" was one. As an example, if the invoice for fourth quarter 1981 pension administration arrived onFebruary 1, 1982, Appellant included it in the "accrued consulting" expense account for 1981.

The Tax Commissioner in her final order denominated the "accrued consulting" account a "reserve" (as she did the"closing account" balances --- which Appellant does not here contest), apparently recognizing, in the case of this ac-count, that the service or product was consumed in the taxable year, but finding there was no liability until a bill wasreceived.

We find that a service or product received during the fiscal year, but not billed until after, can properly be consid-ered an "account payable" in the fiscal year under O.R.C. section 5701.07. The liability arises upon the provision of theservice or product, and can be properly accounted for during the fiscal year received.

The Tax Commissioner's brief argument on this subject states that Appellant has failed to submit proof that the ex-penses for which credit is here sought were incurred at all, and, moreover, has failed to prove that they were incurred ---[* 1 I] the goods or services provided --- in the fiscal years at issue. We must agree with the Tax Commissioner on thispoint. The only evidence we have that the expenses were incurred in the appropriate fiscal years is the testimony of Mr.Haugawout and certain summaries, written after the fact by Mr. Haugawout and co-workers, found in Appellant's Ex-hibit D. At the hearing Mr. Haugawout explained that the checks and invoices had been discarded due to the substantialpassage of time. We understand that, but we find that the evidence presented is not sufficiently reliable when the cru-cial factor is when expenses were incurred and all evidence consists of summaries --- constructed from what records wedo not know --- written after the fact. And it appears Appellant may be in possession of records which would have as-sisted us in this effort. Appellant's exhibit E consists of expense distribution summaries, summarized from the invoices

Appx.71

1991 Ohio Tax LEXIS 61, *Page 4

among other records, which lists, inter alia, expenses in the "accrued consulting" account by "transaction date" --- fromMr. Haugawout's testimony the period during which the product or service was provided. Appellant did not, however,submit expense [* 121 distribution sununaries for all the expenses here sought credit for, and did not, moreover, identifyorally or in writing the line or "transaction date" in the expense distribution summaries where would be found the 1981,1982 and 1983 expenses in the "accrued consulting" account with which we are here concerned. Thus, not only is theevidence received of the existence and timing of the "accrued consulting" expenses not sufficiently reliable, it is also notthe best evidence.

As to Appellant's third contention, we thus conclude that the Tax Commissioner was correct in not including the al-leged expenses in the "accounts payable" factor in the section 5701.07 formula.

OHIO BOARD OF TAX APPEALS

HealthSouth Corporation,

Appellant,

vs.

William W. Wilkins, Tax Commissionerof Ohio,

Appellee.

CASE NO. 2005-A-1386

(PERSONAL PROPERTYTAX)

DECISION AND ORDER

APPEARANCES:

For the Appellant - Siegel Siegel Johnson & Jennings Co., LPANicholas M. J. Ray3001 Bethel Road, Suite 208Columbus, Ohio 43220

For the Appellee - Marc DannAttomey General of OhioBarton A. HubbardAssistant Attomey General30 East Broad Street, 25" FloorColumbus, Ohio 43215

EnteredNOV 9 2007

Ms. Margulies, Mr. Eberhart, and Mr. Dunlap concur.

This cause and matter came on to be considered by the Board of Tax

Appeals upon a notice of appeal filed herein by the above-named appellant from fmal

assessment certificates of valuation issued by the Tax Conunissioner. The assessment

Appx. 73

certificates, issued under date of July 22, 2005, relate to an application for final

assessment, i.e., request for refund, filed by appellant for the 2002 personal property

tax year.

The matter was submitted to the Board of Tax Appeals upon the notice

of appeal, the statutory transcript certified to this board by the Tax Commissioner, the

record of the hearing before this board, and the brief filed by counsel to the appellant.

In reviewing appellant's appeal, we recognize the presumption that the

findings of the Tax Commissioner are valid. Alcan Aluminum Corp. v. Limbach

(1989), 42 Ohio St.3d 121. It is therefore incumbent upon a taxpayer challenging a

finding of the Tax Conunissioner to rebut the presumption and establish a right to the

relief requested. Hatchadorian v. Lindley (1986), 21 Ohio St.3d 66; Belgrade

Gardens v. Kosydar (1974), 38 Ohio St.2d 135; Midwest Transfer Co. v. Porterjield

(1968), 13 Ohio St.2d 138. Moreover, the taxpayer is assigned the burden of showing

in what manner and to what extent the Tax Cornmissioner's determination is in error.

Kern v. Tracy (1995), 72 Ohio St.3d 347; Federated Dept. Stores, Inc, v. Lindley

(1983), 5 Ohio St.3d 213. Where no competent and probative evidence is developed

before this board by the appellant to show that the Tax Commissioner's findings are

incorrect, then the Board of Tax Appeals must affirm the Tax Commissioner's

findings. Kern, supra; Kroger Co. v. Limbach (1990), 53 Ohio St.3d 245; Alcan,

supra.

As we consider this case, we note that every taxpayer engaged in'

business in Ohio must annually file a personal property tax return with the county

2Appx. 74

auditor of each county in which property used in the taxpayer's business is located.

R.C. 5711.02. On that retum, the taxpayer must list "all his taxable property *** as to

value, ownership and taxing districts as of the tax lien date he engages in business."

R.C. 5711.03. In this instance, appellant has filed an inter-county retum. R.C.

5711.13.

Initiaily, we note appellant's contentions, as set forth in the notice of

appeal, as follows:

"2. Appellant requests that the decision be reversedbecause the Tax Commissioner erred in the followingrespects:

"A. The Tax Commissioner erred in upholding a taxassessment against property which did not exist on the taxlien date. Such property which was initially reported wasthe result of accounting irregularities at the Appellantwhich resulted in the listing of fictitious assets on theoriginally filed return. Taxpayers has [sic] timelyrequested a refund of tax paid on these fictitious assetsand such refund should be granted.

"B. The Tax Commissioner also erred by denyingAppellant the right to due process of law and equalprotection under the FiBh and Fourteenth Amendments ofthe Constitution of the United States of America, andArticle I, Section 2 of the Ohio Constitution, and denyingAppellant the right to due course of law under Article I,§ 16 of the Constitution of the State of Ohio, including butnot limited to the improper disqualification of theproperty, if the Tax Commissioner believes that it didexist, from its proper classification as not used inbusiness."

More specifically, attached to its request for final assessment for tax

year 2002, appellant HealthSouth Corporation provided the following information

regarding its claim:

3

Appx. 75

"In March 2003, HealthSouth became aware ofaccounting irregularities. Part of the accountingirregularities, consisted of overstating property, plant andequipment by listing fictitious assets on depreciationschedules using the asset description "AP SUMMARY".These assets do not exist. As a result of this, HealthSouthhas been reporting, has been assessed and has paidpersonal property taxes on these erroneous assets.Consequently, these erroneous assets have been includedin the taxing jurisdictions certified tax roll in error." S.T.at 73.

The basis of the tax department's denial of HealthSouth's refund request

was set forth in a letter from the Ohio Department of Taxation regarding the final

audit results and indicated that:

"You requested final assessment of the 2002 return on thebasis that the assets have been over reported [sic] on the2002 return. The asset listing you submitted in regards[sic] to this request show [sic] acquisition cost amountscompared to the AP summary amounts for various itemsof property in the State of Ohio. Under section 5711.18 ofthe Ohio Revised Code and Section 5703-3-10[c] of theOhio Administrative rules, probative evidence is neededto establish true value of tangible personal property. Inthe request letter of March 11, 2005, the auditor requestedjoumal entries to establish probative evidence the itemsbeing requested to be removed from the 2002 return havein fact been written off the books as well. ^ As thisinformation was not provided, there is a sufficient lack ofevidence to establish these items have fully been removedfrom the assets as required by GAAP." S.T. at 37.

It is appellant's contention that specific line items designated on its

2002 personal property tax return as "AP SUMMARY" were erroneously included as

tangible personal property, when, in fact, the items did not exist. H.R. at 7. This

overstatement of assets was uncovered when HealthSouth "hired

PricewaterhouseCoopers' forensic auditors to come in and start reviewing *** retums

4

Annv 79

and identifying all the irregularities and fixed asset - fictitious fixed assets, and just

completely restate *** financial statements." H.R. at 32-33. In addition, "a bag and

tag inventory" count for virtually all of HealthSouth's facilities was used to assist in

completing a restatement of HealthSouth's assets for purposes of filing restated and/or

original financial statements for a four-year period, 2001-2004, a "super 10-K" that

was filed with the SEC. H.R. at 40-42, 57. In the course of identifying the fraudulent

listings on the earlier-filed tax returns and filing refund claims in various jurisdictions

throughout the country, asset information was assembled by HealthSouth's asset

management group, which, in turn provided it to an outside consultant in order to help

him "to determine the property, plant and equipment totals for each facility, which

ties back to this schedule [Exhibit 4], and to the 10-K." H.R. at 45.

Testimony before this board indicates that for purposes of preparing the

refund request in question, HealthSouth's asset management group assembled the

asset listing, which was established through "bag and tag" inventory counts at each of

HealthSouth's facilities in Ohio. H.R. at 79, 85. In completing the inventory counts,

consultants were given an asset listing of everything that should be at a particular

facility. "*** [T]hen any assets that they had at the facility that weren't on the list,

that was added, and then anything that was on the list that wasn't physically there was

removed." H.R. at 86-87.

As we review the foregoing evidence and testimony offered by

appellant, we first note that there appears to be no dispute that a significant

accounting fraud occurred at HealthSouth in which its earnings were dramatically

5

Appx. 77

overstated. "Stated most simply, the fraud was accomplished by making over $2.7

billion in false or unsupported entries in the Company's accounting systems. These

improper accounting entries, made for the purpose of inflating HealthSouth's

earnings, took two principal forms: (1) exaggeration of reported revenue, primarily

through reductions to contractual adjustment accounts, and (2) failure to properly

characterize and record operating expenses." Ex. 1 at 13. It is HealthSouth's claim

that as a result of this fraudulent actfivity, its assets were overstated, and

correspondingly, the personal property taxes on such assets were overpaid.

It appears from the record that the state's basis for denying

HealthSouth's refund stems from HealthSouth's failure to provide the state with

evidence, e.g., journal entries, that it had properly written off the "AP SUMMARY"

assets from its books. When asked by counsel why those entries had not been

provided, HealthSouth's witness, Michael D. Martin, vice-president of tax in charge

of the sales and use tax, property tax, and unclaimed property tax departments, stated

"I'm not aware of any journal entries to write this stuff off." H.R. at 65. He then went

on to testify how the restated financials were determined, indicating "for property,

plant and equipment, I know we hired American Appraisal Associates and quite a few

other consulting firms to actually go out to our facilities and do a physical inventory

of equipment at each facility. And I believe that was one of the primary tools or

documents used to restate the property, plant and equipment accounts." H.R. at 66.

As we review the efforts undertaken by HealthSouth to accurately

establish and report its personal property asset listings, we find nothing in the record

6

Appx. 78

to indicate any impropriety in the methodology utilized. While HealthSouth did not

provide the documentation requested by the Department of Taxation to establish that

the assets listed as AP SUMMARY did not exist, it arguably utilized a viable,

altemative means of establishing the assets that did exist. There is nothing in the

provisions cited by the Department of Taxation, i.e., R.C. 5711.18 and Ohio Adm.

Code 5703-3-10(c), to demonstrate that the means by which this taxpayer chose to

establish its assets, and accordingly, the associated value of those assets for personal

property taxation purposes, was improper. Further, there is nothing in the record to

indicate that the amounts sought through the refund request were erroneous; it simply

appears that the refund request was denied solely on the basis that the taxpayer did not

provide evidence of its personal property value in the form in which the Department

of Taxation requested. We find HealthSouth's evidence of value sufficient and

probative in that regard.

Therefore, based upon the foregoing, we find that HealthSouth has

sufficiently established that the assets designated as AP SUMMARY never existed.

Further, we find that HealthSouth has met its burden of proof with regard to

establishing that the denial of its refund request was improper. Accordingly, we find

that HealthSouth has rebutted the presumption of correctness of the Tax

Commissioner's findings herein. Therefore, it is the decision and order of the Board

of Tax Appeals that the determination of the Tax Commissioner must be, and

7

Appx. 79

hereby is, reversed and that the taxpayer's refaand request shall be granted.

I hereby certify the foregoing to be a trueand complete copy of the action taken bythe Board of Tax Appeals of the State ofOhio and entered upon its journal this day,with respect to the captioned matter.

ter, Boar SecreaK F. VanMe

8

ty

Appx. 80

[Cite as MCI ATePro Access Transns Servs. v. Levin, 2005-®heo-5057.1

IN THE COURT OF APPEALS OF OHIO

TENTH APPELLATE DISTRICT

MCI Metro Access TransmissionServices, LLC et al.,

No. 07AP-398Appellants-Appellants, (BTA No. 2004-K-749)

andNo. 07AP-399

V.

[Richard A. Levin], Tax Commissionerof Ohio,

(BTA No. 2004-K-750)

(REGULAR CALENDAR)

Appellee-Appellee.

O P I N I O N

Rendered on September 30, 2008

Jones Day, Todd S. Swatsler, Kerstin Sjoberg-Witt, andCharles M. Steines, for appellants.

Nancy H. Rogers, Attorney General, Barton A. Hubbard, andRyan P. O'Rourl<e, for appellee.

APPEALS from the Board of Tax Appeals

BROWN, J.

{ql} In these consolidated appeals, appellants, MCI Metro Access Transmission

Services, LLC ("MCI Metro") and MCI WorldCom Network Services, Inc. ("MWNS"),

appeal from a decision and order of the Ohio Board of Tax Appeals ("BTA"), affirming

final determinations by appellee, Ohio Tax Commissioner ("tax commissioner'), denying

Appx. 81

Nos. 07AP-398 and 07AP-3992

appellants' petitions for reassessments and affirming public utility property tax

assessments issued to each appellant for the tax year 2003.

{¶2} The following facts, which are essentially undisputed, are drawn primarily

from the BTA's decision and order journalized April 13, 2007. Appellants are wholly-

owned subsidiaries of MCI, Inc., formerly WorldCom, Inc. ("MCI/WorldCom"); appellant

MCI Metro is a telephone company, and appellant MWNS is an inter-exchange

telecommunications company. In 2002, MCI/WorldCom, as well as most of its domestic

subsidiaries, filed petitions for bankruptcy protection.

{113} On May 2, 2003, both MCI Metro and MWNS (collectively "appellants") filed

2003 annual reports with the Ohio Department of Taxation (the "department"), in which

appellants listed by vintage year and original acquisition cost their Ohio taxable and

exempt personal property. Based upon the "true value" computation methodology

prescribed by the tax commissioner, MCI Metro's "general support assets," "central office

assets," "information origination/termination assets," "stand alone computers," as well as

"cable and wire facilities assets," as reflected on its Schedule C assets, was valued at

$63,570,814. MWNS reported a total true value of $410,625,278 for similar assets. On

Schedule G of their annual reports, appellants each claimed that the net book value of

their assets should be approximately two-thirds less, or $21,573,961 and $137,003,405,

respectively.

{14} In a letter to the department dated April 30, 2003, the property tax manager

for MCINVorldCom offered the following explanation for the claimed reduction in net book

value:

Appx. 82

Nos. 07AP-398 and 07AP-399 3

As you may know, WorldCom, Inc. and substantially all of itsdomestic subsidiaries filed for protection under Chapter 11 ofthe Bankruptcy Code on July 21, 2002. On March 14, 2003,following an impairment analysis and other adjustments inaccordance with generally accepted accounting principles(GAAP), WorldCom announced that it had completed apreliminary review of its asset accounts. The result of thisanalysis was a write-off of all existing goodwill and a $34.8billion impairment adjustment to the carrying value of PP&Eand other intangible assets as required by SFAS No. 144.The PP&E and other intangible assets will be adjusted from$45 billion to approximately $10 billion as of December 31,2002. Since the audit of WorldCom will not be completed untillater this year, the enclosed return was prepared using theunadjusted numbers for 2002 as the net cost of taxableproperty. This net cost was reduced by the amount of theannounced asset adjustment to arrive at net book value.Since this net book value more accurately reflects the truevalue of these assets than the true value calculated using theclass lives in Schedule C, the net book value has been usedin this return to calculate the total taxable value.

{1[5} The department's auditing personnel accepted the true values as set forth

in Schedule C of appellants' annual reports, and disallowed appellants' claimed additional

reductions. As a result, the department established an assessed value for MCI Metro's

property in the amount of $15,892,700, and an assessed value for MWNS's property in

the amount of $102,656,320.

{¶6} As part of the bankruptcy reorganization process, MCI/WorldCom restated

its revenues and expenses, and wrote down the value of its assets for the year ending

December 31, 2002. On November 10, 2003, appellants filed a petition with the tax

commissioner, requesting a reassessment of their taxable property. Appellants argued

that the write-down of MCWVorldCom's assets, representing approximately two-thirds of

its value, entitled appellants to a reassessment pursuant to R.C. 5727.47. On April 20,

2004, MCI/WorldCom emerged from Chapter 11 bankruptcy reorganization.

Appx. 83

Nos. 07AP-398 and 07AP-3994

{57} On May 18, 2004, appellants' petitions for reassessment came for hearing

before the tax commissioner. On June 22, 2004, the tax commissioner issued final

determinations denying appellants' petitions for reassessment and affirming the public

utility property tax assessments issued to each entity for tax year 2003.

{q(8} Appellants filed an appeal with the BTA from the tax commissioner's final

determinations. On December 20, 2005, the matter came for hearing before the BTA.

{¶9} During the hearing, appellants presented two witnesses, Rafael Garces,

and Bart Uze. Garces, the director of property tax for MWNS, testified that the values

carried on the parent company MCI/WorldCom's books prior to bankruptcy were "seen as

being excessively high." (Tr. 28.) According to Garces, the values for appellants'

property, as computed by the tax commissioner, failed to account for impairment of those

assets as reflected in the write-down of the parent company's assets. Uze, the property

tax representative for MCIM/orldCom, testified that the parent company utilized an

impairment analysis of its assets resulting in an impairment reduction ratio of 79.63

percent. Uze testified that the ratio was then applied to appellants' Ohio assets to arrive

at the proposed reduced assessment values.

{110} On April 13, 2007, the BTA issued a decision and order affirming the

determinations of the tax commissioner. The BTA found that appellants had failed to

demonstrate, by competent and probative evidence, that the 2003 assessed values did

not reflect the true value of their Ohio assets.

{¶11} On appeal, appellants set forth the following five assignments of error for

this court's review:

Appx. 84

Nos. 07AP-39E and 07AP-399 5

1. The Board acted unreasonably and unlawfully by failing tovalue Appellants' taxable public utility personal property at itstrue value as of December 31, 2002.

2. The Board acted unreasonably and unlawfully by affirmingthe Tax Commissioner's assessments, which were basedsolely upon outdated book values that did not represent truevalue, and which the Tax Commissioner conceded overstatedthe value of Appellants' property as of December 31, 2002.

3. The Board acted unreasonably and unlawfully in rejectingAppellants' claim that their property was significantly impaired(i.e., that the book values substantially overstated the truevalue of Appellants' property) despite the fact that suchimpairment was fully recognized in the audited financialstatements of Appellants' parent company, MCI, Inc., andproperly reflected in Appellants' claimed values in accordancewith generally accepted accounting principles as set forth inFinancial Accounting Standards Board, Statement No. 144("FAS 144").

4. The Board acted unreasonably and unlawfully in refusing torecognize and apply generally accepted accountingprinciples, including FAS 144, in determining the true value ofAppellants' property.

5. The Board acted unreasonably and unlawfully incharacterizing Appellants' competent and probative evidenceof true value as mere estimates and rejecting that evidence.

{¶12} Appellants' assignments of error are interrelated and will be considered

together. Under these assignments of error, appellants challenge in general the BTA's

rejection of appellants' argument that the tax commissioner's assessments did not reflect

the true value of their Ohio taxable property.' Appellants maintain that the BTA acted

unreasonably and unlawfully in rejecting their claims that the property at issue was

significantly impaired based upon generally accepted accounting principles ("GAAP"),

' We note that amicus briefs in support of appellee tax commissioner have been filed by the Ohio School

Board Association, as well as (a joint brief on behalf of) the Cincinnati Public School District, the ClevelandMetropolitan School District, the Mayfield City School District, and the Nordonia Hills City School District.

Appx. 85

Nos. 07AP-398 and 07AP-399 6

g1113} R.C. 5717.04 provides for appeals from orders of the BTA, and states in

part:

If upon hearing and consideration of such record andevidence the court decides that the decision of the boardappealed from is reasonable and lawful it shall affirm thesame, but if the court decides that such decision of the boardis unreasonable or unlawful, the court shall reverse andvacate the decision or modify it and enter final judgment inaccordance with such modification.

{¶14} In Lovell v. Levin, 116 Ohio St.3d 200, 2007-Ohio-6054, at ¶23-24, the Ohio

Supreme Court discussed a reviewing court's standard of review from a decision of the

BTA as follows:

In reviewing a BTA decision, this court looks to see whetherthat decision was "reasonable and lawful." Columbus CitySchool Dist. Bd. of Edn. v. Zaino (2001), 90 Ohio St.3d 496,497, 739 N.E.2d 783; R.C. 5717.04. This court "will nothesitate to reverse a BTA decision that is based on anincorrect legal conclusion." Gahanna-Jefferson Local Schoo!Dist. Bd. of Edn. v. Zaino (2001), 93 Ohio St.3d 231, 232, 754N.E.2d 789. But "[t]he BTA is responsible for determiningfactual issues and, if the record contains reliable andprobative support for these BTA determinations," this courtwill affirm them. Am. Natt. Can Co. v. Tracy (1995), 72 OhioSt.3d 150, 152, 648 N.E.2d 483.

The burden of proof rests on the taxpayer "to show themanner and extent of the error in the Tax Commissioner'sfinal determination." Stds. Testing Laboratories, Inc. v. Zaino,100 Ohio St.3d 240, 2003-Ohio-5804, 797 N.E.2d 1278, ¶30.The Tax Commissioner's findings "are presumptively valid,absent a demonstration that those findings are clearlyunreasonable or unlawful." Nusseibeh v. Zaino, 98 Ohio St.3d292, 2003-Ohio-855, 784 N.E.2d 93, ¶10.

{¶15} R.C. 5727.10 provides in part that the tax commissioner shall annually

determine, in accordance with R.C. 5727.11, "the true value in money of all taxable

property * * * required by section 5727.06 of the Revised Code to be assessed by the

Appx.86

Nos. 07AP-398 and 07AP-399 7

commissioner." Further, "[t]he commissioner shall be guided by the information contained

in the report filed by the public utility and such other evidence and rules as will enable the

commissioner to make these determinations." Id.

{¶16} R.C. 5727.11 addresses methods of valuation for public utilities, and R.C.

5727.11(A) states as follows:

Except as otherwise provided in this section, the true value ofall taxable property, except property of a railroad company,required by section 5727.06 of the Revised Code to beassessed by the tax commissioner shall be detemlined by amethod of valuation using cost as capitalized on the publicutility's books and records less composite annual allowancesas prescribed by the commissioner. If the commissioner findsthat application of this method will not result in thedetermination of true value of the public utility's taxableproperty, the commissioner may use another method ofvaluation.

{¶17} The Ohio Supreme Court has recognized that it is "impractical for the

commissioner to personally value all personal property in Ohio," and, therefore, the

commissioner "may resort to a predetermined formula to ascertain value." Snider v.

Limbach (1989), 44 Ohio St.3d 200, 201. Despite the fact that R.C. 5727.11 "identifies

the cost-based method of valuation as a means of assessing true value, the General

Assembly has not restricted the commissioner's use of alternate valuation methods."

Texas Eastern Transmission Corp. v. Tracy (1997), 78 Ohio St.3d 83, 85. Rather, if the

statutory method fails to yield true value, "another method of valuation may be used,

whether or not there are special or unusual circumstances." Id., at 86. Accordingly, while

a statute may provide a prima facie estimate or presumption of value, "where rigid

application of the statute would be inappropriate, the presumption of value must yield to

other competent evidence reflecting true value." Id.

Appx. 87

Nos. 07AP-398 and 07AP-3998

{118} A taxpayer's burden to show that the commissioner's formula does not

ascertain true value "is met only if the appellant '* * * introduces competent evidence of

probative value of the personal property's true value in money.' " Snider, supra, at 201,

quoting Alcoa v. Kosydar(1978), 54 Ohio St.2d 477, 481.

{119} In the present case, appeilants assert that they presented evidence

establishing that the cost-based statutory method set forth in R.C. 5727.11(A) does not

yield true value. On this issue, appellants argued before the tax commissioner and the

BTA that, due to substantial impairment of MCI/WorldCom's assets, the carrying values

set forth in MCIIWorldCom's pre-bankruptcy financial records significantly overstated the

true value of their personal property, affecting in tum the true value of appellants' Ohio

assets.

{120} According to appellants, the impairment was reflected in their Ohio assets

using a pro rata allocation method for the impairment of long-lived assets explicitly

required by Statement of Financial Accounting Standards No. 144 ("FAS 144"). Under

this method, appellants maintain, they first determined the percentage of impairment that

existed with respect to all of MCI/WorldCom's assets (at the parent level). Specifically,

the impairment percentage was determined by comparing the book value of

MCI/WorldCom's property as of December 31, 2001 ($45.665 billion) to the impaired

value of MCINVorldCom's property as reflected in the un-audited books effective

December 31, 2002 ($9.3 billion). Appellants then applied this same impairment

percentage (79.63 percent) to the historical book costs associated with appellants' Ohio

personal property, resulting in taxable values of $5,393,490 for MCI Metro and

$34,250,850 for MWNS. Following the final audit, the impairment percentage changed to

Appx. 88

Nos. 07AP-398 and 07AP-3999

68.93 percent, and the recalculations resulted in appellants' proposed taxable values of

$8,227,687 for MCI Metro, and $52,249,154 for MWNS.

{1121} Both the tax commissioner and the BTA considered and rejected appellants'

methodology whereby appellants sought a nearly two-thirds reduction in the assessed

values of their Ohio property based upon an impairment analysis of the parent

MCI/WorldCom's assets. The tax commissioner deemed appellants' request to value

their personal property at one-third of the historical cost, based upon the fact the parent

company booked a large write-down, to be "at best merely a crude approximation of the

value of the petitioner's telecom assets." The tax commissioner found significant the fact

that appellants had "not written down [their Ohioj assets on its books," but nonetheless

were asking the department to "assume" that appellants' Ohio assets "have diminished in

value in exactly the same percentage as the parent corporation's assets have been

written down[.]" The commissioner further found that appellants had submitted "no

information showing that its assets have been impaired to the same extent as the parent

corporation's assets."

{122} The BTA, in affirming the decision of the tax commissioner, similarly

rejected appellants' argument that the true value of their Ohio assets is appropriately

ascertained by applying the same percentage of impairment to their own booked costs as

was found to exist at the system-wide level of their parent company. The BTA further

determined that it could not review the basis upon which the adjustments were sought

because "appellants ask that we accept at face value an impairment analysis perfomied

on a system-wide level which, in some undisclosed manner, purportedly took into account

issues of accounting fraud and the overall decline experienced by WorldComlMCl within

Appx. 89

Nos. 07AP-398 and 07AP-399 10

the telecommunications industry." Thus, the BTA concluded, appellants failed to show,

by competent and probative evidence, that the 2003 assessed values did not accurately

reflect the true value of appellants' Ohio assets.

{123} As noted by both the tax commissioner and the BTA, the impairment

percentage appellants sought to apply to the capitalized acquisition costs of their Ohio

property was based, not upon an analysis of appellants' Ohio assets but, instead, on an

analysis of the assets of the parent company (MCINVorldCom). On this point, the record

indicates that appellants, in correspondence with the department, made clear they did not

intend to perform an analysis of the Ohio assets at issue. Specifically, in a letter sent by

MCI/WorldCom employee Uze to the department, and cited in the BTA's decision and

order of April 13, 2007, Uze stated that MCI/WorldCom's 2002 10-K "[u]nfortunately "``

does not give the value of the property, plant and equipment at the entity or asset level of

detail." Uze further informed the department that "our finance department does not have

any way of determining the exact value of property, plant and equipment as of

December 31, 2002, at the entity or individual asset level, and we have been informed

that the company has no plans to push down the 2002 10K values to the entity or asset

level."

{¶24} As noted by the tax commissioner, appellants' decision to rely solely upon

an analysis of the parent company's world-wide assets, rather than evidence of its Ohio

property, effectively meant that the BTA was required to assume that the parent

company's entire system-wide telecommunications plant property was, on average, of

comparable age, condition, and use as appellants' own Ohio taxable property. Part of the

record before the tax commissioner included MCI/WorldCom's "Unaudited Consolidated

Appx.90

Nos. 07AP-398 and 07AP-399 11

Statement of Operations for the Month Ended February 28, 2003," which listed over 200

subsidiaries of MCIIWorldCom, including various global enterprises. According to the

"Management's Discussion and Analysis of the Results of Operations," contained in that

document, WorldCom's "extensive, advanced facilities-based global communications

network" offerings included data services, internet related services, commercial voice

services, and international communications services. In addition, the consolidated

statement also noted that MCIM/orldCom "provides a broad range of consumer and

wholesale communications services, including long distance voice and data

communications, consumer local voice communications, wireless messaging, private line

services, DSL, and dial-up Internet access services."

{¶25} The BTA found the evidence presented by appellants insufficient to support

a conclusion that appellants' property was impaired to the same degree as that of the

parent company. Upon review, we cannot conclude that the BTA acted unreasonably in

rejecting appellants' methodology that was dependent, not upon write-downs/adjustments

to appellants' Ohio assets, but, rather, upon the parent company's purported system-wide

impairment. Here, the record did not require the tax commissioner or BTA to conclude,

based upon appellants' proposed methodology, that the Ohio taxable property at issue

mirrored the various assets comprising MCUVVorldCom's world-wide property, or that

appellants' Ohio property suffered the same percentage of impairment as the parent

company. See Alcoa, supra, at 483 (rejecting appraisal which ignored actual cost of

expenses, but, instead, relied upon appraiser's estimates of value); United Telephone Co.

v. Tracy (1999), 84 Ohio St.3d 506, 512 (affirming tax commissioners denial of telephone

company's use of statistical estimates of costs as not probative evidence of actual value).

Appx. 91

Nos. 07AP-398 and 07AP-39912

{126} Moreover, as the BTA alluded to in its decision, the fact that the parent

company engaged in massive accounting fraud added a further layer of uncertainty to

appellants' proposed application of a system-wide impairment analysis to the Ohio

assets. Such fraud was acknowledged by appellants' witnesses before the BTA, and was

further reflected in the admissions by MCIMlorldCom in its 10-K filings with the Securities

Exchange Commission ("SEC"). Specifically, MCI1WorldCom, in a Form 10-K filed with

the SEC, dated March 8, 2004, stated that an internal audit of the company's capital

expenditure accounting "determined that certain transfers from line cost expenses "" to

capital accounts in the amount of $3.9 billion during 2001 and the first quarter of 2002

were not made in accordance with GAAP." The "line costs" referenced above are fees

MCINVorldCom paid to third-party telecom network providers for the transmission of voice

and data over the third-party provider's networks, and these costs constituted

MCINVorldCom's single largest operating expense. In re WorldCom, Inc. Sec. Litig.

(S.D.N.Y.2005), 352 F.Supp.2d 472, 477. As noted by one commentator, instead of

treating these line costs as capitalized expenses (i.e., assets to be written down over

future periods), MCI/WorldCom's line cost disbursements "should have been recorded as

current operating expenses[.]" Cunningham, The Sarbanes-Ox/ey Yawn: Heavy

Rhetoric, Light Reform (And It Just Might Work), 35 Conn.L.Rev. 915, 935.

{¶27) In addition to irregularities by MCI/WorldCom in accounting for line costs,

the parent company also manipulated its books regarding its "charges to income and

classification of assets in connection with acquisitions[.]" In re WorldCom Sec. Litig.

(S.D.N.Y.2003),294 F.Supp.2d 392, 401.

Appx. 92

Nos. 07AP-398 and 07AP-399 13

{¶28} In addressing the issue of accounting fraud, the tax commissioner argues

that the impairment reduction offered by appellants implicitly assumes that the capitalized

acquisition costs for the Ohio assets reflected "the same fraudulent overcapitalization

percentage as the average fraudulent overcapitalization reflected on the parent's

consolidate balance sheet[.]" (Brief of Appellee, at 4.) The tax commissioner maintains

that appellants presented no evidence that the capitalized acquisition costs reported on

their Ohio public utility personal property tax returns for the 2003 tax year were

fraudulently overstated, and, thus, it would require mere speculation to determine whether

or not, and to what extent, appellants' historical capitalized acquisition costs include any

such fraudulent overcapitalization. We agree with the tax commissioner that there was no

evidence as to whether, or to what extent, the capitalizing of line costs by the parent

company affected appellants' Ohio assets (nor was there evidence whether other

irregularities by the parent company affected the value of appellants' Ohio property).

Moreover, we note the record contains little or no evidence as to which assets within the

umbrella of the parent MCI/WorldCom's numerous subsidia(es were improperly valued

due to accounting irregularities.

{129} Appellants maintain that the BTA erred in rejecting their use of FAS 144

impairment analysis (and "fresh start accounting"), arguing that such analysis was in

accordance with GAAP. However, in addition to the previous discussion regarding

appellants' proposed application of a system-wide impairment analysis in relation to

appellants' Ohio property, the BTA noted that appellants presented "Iittle [evidence]

regarding either the entity which performed this analysis," including "the data relied upon

and the methodology utilized in generating the impairment estimates." Thus, the BTA

Appx. 93

Nos. 07AP-398 and 07AP-39914

determined that it was unable to ascertain whether the impairment figures themselves

were reasonable. We note that appellants' witness Garces, who testified regarding the

FAS 144 impairment analysis, did not perform the analysis himself. Rather, according to

Garces, The Lazard Company performed this analysis. Specifically, Garces stated that it

was his "understanding" that Lazard performed a discounted cash flow of the MCI system

to develop a value for the assets and to develop the impairment related to those assets.

(Tr. 36.)

111301 The BTA is afforded "great latitude in determining the weight to be given

evidence and the credibility of witnesses before it," and it is "not required to adopt the

valuation fixed by any expert or witness." Snider, supra, at 202. Rather, "[vjalue for tax

purposes is a question of fact, and this finding is primarily within the province of the taxing

authorities." Id. In the instant case, apart from the impairment percentages listed, there

was little testimony or evidence as to the methodology used in calculating the impairment.

Further, as already noted, whatever factors were utilized by the parent company's

accounting firm in arriving at an impairment reduction percentage for MCINVorldCom's

assets, there was a lack of probative evidence before the tax commissioner and the BTA

as to whether those factors equally affected the subject Ohio property. Thus, the BTA

was not required to accept, at face value, the final FAS 144 impairment numbers and/or

percentages introduced by appellants.

{131} The Ohio Supreme Court has "consistently determined that the burden is

upon the taxpayer to affirmatively demonstrate" the inapplicability or unfairness of the

statutory method of computation. Westinghouse Elec. Corp. v. Lindley (1980), 64 Ohio

St.2d 31, 33. Here, we find that the BTA's rejection of appellants' methodology as

Appx. 94

Nos. 07AP-398 and 07AP-399 15

probative evidence of the true value was reasonable and lawful, and we find no error with

the BTA's conclusion that appellants failed to prove the tax commissioner's determination

of value did not accurately reflect true value.

{¶32} Accordingly, appellants' first, second, third, fourth, and fifth assignments of

error are overruled, and the decision and order of the Board of Tax Appeals, affirming the

tax commissioners final determinations, is hereby affirmed.

Order affirmed:

McGRATH, P.J., and TYACK, J., concur.

Appx. 95

Appx. 96

OHIO BOARD OF TAX APPEALS

MCI Metro Access TransmissionServices, LLC, and MCI WorldComNetwork Services, Inc.,

Appellants,

CASE NOS. 2004-K-7492004-K-750

(PUBLIC UTILTTY PERSONALPROPERTY TAX)

vs.

William W. Wilkins, Tax Commissioner of

Ohio,

Appellee.

DECISION AND ORDER

Appeal Filed May 11, 2007Franklin County Court of Appeals

APPEARANCES:

For the Appellants - Jones DayTodd S. SwatslerKerstin Sjoberg-WittP.O. Box 165017Columbus, Ohio 43216-5017

For the Appellee

For the Amici CuriaeCincinnati Public SchoolDistrict, ClevelandMunicipal School District,Mayfield City SchoolDistrict, and NordoniaHills City School District

For the Amicus CuriaeOhio School BoardsAssociation

Marc DannAttomey General of OhioBarton A. HubbardChristine MesirowAssistant Attorneys GeneralRhodes State Office Tower, 16th Floor30 East Broad StreetColumbus, Ohio 43215

Taft, Stettinius & Hollister LLPFred J. LivingstoneMajeed G. Makhlouf3500 BP Tower200 Public SquareCleveland, Ohio 44114-2302

- Craig M. Boise, Esq.Case School of Law11075 East Blvd.Cleveland, Ohio 44106-7148

Entered April 13, 2007

Ms. Margulies, Mr. Eberhart, and Mr. Dunlap concur.

Appx. 97

Appellants, MCI Metro Access Transmission Services, LLC ("MCI Metro"),

and MCI WorldCom Network Services, Inc. ("MWNS"), challenge final determinations

issued by the Tax Commissioner denying their petitions for reassessment and affirming

public utility property tax assessments issued to each entity for tax year 2003. These

appeals' are now considered by this board upon appellants' notices of appeal, the statutory

transcripts certified by the commissioner, the record presented at hearing, and the briefs

submitted on behalf of the parties.z hi addition to the documentary exhibits admitted into

evidence, appellants called as witnesses Rafael Garces, director of property tax, and Barton

J. Uze, property tax representative.'

MCI Metro and MWNS are wholly owned subsidiaries of MCI, Inc., formerly

WorldCom, Inc. (" WorldCom/MCP'). In mid-2002, WorldCom/IvICI, along with most of its

domestic subsidiaries, filed petitions seeking bankruptcy protection. WorldCom/MCI's

financial situation at the time of its bankruptcy filing was in very poor shape due in large part

to allegations of fraud involving its financial reporting and the overall decline of the

telecommunications industry. On May 2, 2003, prior to the ultimate emergence of

WorldCom/MCI and its subsidiaries from Chapter 11 reorganization in April 2004, both MCI

' These appeals were previously consolidated by this board for purposes of a single hearing. See MCI MetroAccess Transmission Serv., LLC v. Wilkins (Interim Order, Jan. 20, 2005), BTA No. 2004-K-749, et seq.,unreported. Following hearing, the parties filed briefs addressing both appeals collectively. Uponconsideration of the pertinent facts and legal issues presented, we now consider it appropriate to issue a singledecision with respect to these appeals.2 Subsequent to this board's hearing, the Cincinnati Public School District, Cleveland Municipal SchoolDistrict, Mayfield City School District, Nordonia Hills City School District, and the Ohio School BoardsAssociation requested and were granted leave to file written argument in support of the Tax Commissioner'sposition.3 At hearing, Garces testified that he was "employed by MCI; specifically, MCVWorldCom Network Services"[herein referred to as MWNS], H.R. at 21, while Uze testified he was employed by MCI. H.R. at 60.Presumably, MCI is intended to be a reference to the parent company, herein referred to as WorldCom.

2

Appx. 9 8

Metro, as a telephone company, and MWNS, as an interexchange telecommunications

company,' filed 2003 annual reports with the Ohio Department of Taxation ("department"),

in which they listed by vintage year and original acquisition cost their Ohio taxable and

exempt personal property.

In accordance with the true value computation methodology prescribed by the

Tax Commissioner, the total true value of MCI Metro's "general support assets," "central

office assets," "information origination/termination assets," "stand alone computers," and

"cable and wire facilities assets," as reflected on its Schedule C assets was $63,570,814.

BTA No. 2004-K-749, S.T. at 294-299. MWNS reported the total true value of similar

assets at $410,625,278. See BTA No. 2004-K-750, S.T. at 305-308, 312. On Schedule G of

their annual reports, MCI Metro and MWNS each claimed the net book value of their assets

should be approximately two-thirds less, or $21,573,961 and $137,003,405, respectively.

BTA No. 2004-K-749, S.T. at 303; BTA No. 2004-K-750, S.T. at 312. In doing so,

appellants offered the following explanation:

"As you may know, WorldCom, Inc. and substantially all of itsdomestic subsidiaries filed for protection under Chapter 11 ofthe Bankruptcy Code on July 21, 2002. On March 14, 2003,following an impairment analysis and other adjustments inaccordance with generally accepted accounting principles(GAAP), WorldCom announced that it had completed apreliminary review of its asset accounts. The result of thisanalysis was a write-off of all existing goodwill and a $34.8billion impairment adjustment to the carrying value of PP&Eand other intangible assets as required by SFAS No. 144. ThePP&E and other intangible assets will be adjusted from $45

° R.C. 5727.01(D)(2) defines a "telephone company' as any person "primarily engaged in the business ofproviding local exchange telephone service, excluding cellular radio service, in this state." R.C. 5727.01(H)defines an "interexchange telecommunications company" as "a person that is engaged in the business oftransmitting telephonic messages to, from, through, or in this state, but that is not a telephone company."

3

Appx. 99

billion to approximately $10 billion as of December 31, 2002.Since the audit of WorldCom will not be completed until laterthis year, the enclosed return was prepared using the unadjustednumbers for 2002 as the net cost of taxable property. This netcost was reduced by the amount of the announced assetadjustment to arrive at net book value. Since this net bookvalue more accurately reflects the true value of these assets thanthe true value calculated using the class lives in Schedule C, thenet book value has been used in this return to calculate the totaltaxable value." BTA No. 2004-K-749, S.T. at 304; BTA No.2004-K-750, S.T. at 313.

Reflected by preliminary assessments issued to each company, the

department's auditing personnel accepted the true values reflected in schedule C of their

annual reports and disallowed the additional reductions claimed. As a result, the assessed

value of MCI Metro's property was established at $15,892,700, BTA No. 2004-K-749, S.T.

at 259-262, while MWNS' property had an assessed value of $102,656,320. BTA No. 2004-

K-750, S.T. at 102-192. Appellants timely filed petitions for reassessment, raising several

objections to the denial of their proposed reductions.. BTA No. 2004-K-749, S.T. at 239-

252; BTA No. 2004-K-750, S.T. at 96-191.

In a subsequent letter, Barton Uze elaborated as to appellants' rationale for the

requested adjustments:

"WorldCom and substantially all of its domestic United Statesoperating subsidiaries filed for Chapter 11 Bankruptcy on July21, 2002 ***. All of the entities involved in this appeal weredomestic United States operating subsidiaries of the parentWorldCom during the 2002 tax year. The parent, WorldCom, isa holding company that conducts all of its business by andthrough its operating subsidiaries.

"It is unfortunate that, due to the WorldCom bankruptcy, wehad no balance sheet or financials for the tax year endedDecember 31, 2002, to submit with our property tax returns tohelp you arrive at a true value for WorldCom. In addition, our

4

Appx. 100

2003 property tax returns were filed using the property, plantand equipment values as of December 31, 2001, which, at thetime, was the last year we had audited financials.

"On March 13, 2003, prior to the filing of its Ohio property taxreturns, WorldCom issued a press release that was provided toyou when WorldCom filed these 2003 returns.s This pressrelease indicated WorldCom's intent to write down the parentcompany's property, plant and equipment to a value ofapproximately $10B as of December 31, 2002. Thisinformation was given to the SEC, the bankruptcy court, andother investigative agencies. We based the reduced values inour 2003 Ohio property tax returns on this press release; sincewe had no other financial guidance at the time we filed thesereturns.

"Subsequently, KPMG conducted a detailed audit ofWorldCom's financials. This audit culminated in the filing ofWorldCom's 10K for the fiscal year ending December 31,2002. This 10K was filed with the SEC on Friday, March 12,2004. The 10K contains the restated financials for 2000 and2001 as well as first-time audited financials for 2002.

"The 2003 returns that are the subject of this appeal are basedon the value of the filing entities as of December 31, 2002.These returns were initially filed using the original, gross, pre-10K book values as of December 31, 2002. The 2001 value ofproperty, plant and equipment for WorldCom that we used inour returns was approximately $45B. This appeal is based onour claim that the actual value of the property, plant andequipment for WorldCom on December 31, 2002, as stated inthe recently filed 2002 10K, is 14.9B, which is somewhat lowerthan we had estimated when we calculated the reduced valuesrelating to this appeal.

"Unfortunately, this 10K does not give the value of theproperty, plant and equipment at the entity or asset level ofdetail. Also, our finance department does not have any way ofdetermining the exact value of property, plant and equipment asof December 31, 2002, at the entity or individual asset level,

5 The March 13, 2003 press release to which reference is made appears in the statutory transcripts, see BTA

No. 2004-K-749, S.T. at 242, and BTA No. 2004-K-750, S.T. at 232, and was received into evidence at this

board's hearing, i.e., Ex. 5.

5

Appx.101

and we have been informed that the company has no plans topush down the 2002 10K values to the entity or asset level.Thus, the only way we can determine a realistic, equitable, andaccurate value of property, plant and equipment as of December31, 2002, for purposes of the returns at issue, is on a parentcompany level based on the 2002 10K. If we take the pre-bankruptcy 2001 value of the parent company that we used inour original 2003 retutns and compare it with the actual auditedDecember 31, 2002 value as stated in the 10K, we arrive at avalue as of December 31, 2002, that is approximately one thirdof the of the [sic] original 2001 values we used in our originalreturns. Therefore, since it is impossible to determine the exactbook value of the property, plant and equipment at theindividual filing entity level, we submit that the reasonablemethod, (and only method possible), to determine this value isto multiply the original value ($45B) used when the returnswere filed by 33% to arrive at the actual audited 12/31/02 value($14.19B) in the 10K. It is not reasonable, accurate or equitableto base WorldCom's 2003 Ohio property tax on numbers thatare not consistent with, and three times higher than, its filed2002 10K balance sheet numbers.

"We note that the origina12001 numbers we used when we filedour 2003 returns are also no longer accurate, since they toowere restated in the 10K. The WorldCom property, plant andequipment value as of December 31, 2001, went down to arestated value of $21.486B after impairment write downs forboth 2000 and 2001." BTA No. 2004-K-749, S.T. at 5; BTANo. 2004-K-750, S.T. at 5.`

In his final determinations, the commissioner denied appellants' petitions for

reassessment, stating in part as follows:

"The petitioner's request to value its personal property at one-third of its historical cost because its parent booked a largewritedown is at best merely a crude approximation of the valueof the petitioner's telecom assets. The petitioner is asking the

6 At this board's hearing, Uze identified the letter as being one he sent to the department, but he could not recallthe date on which it would have been sent. While handwritten notations appear on the letters in both statutorytranscripts, it is only on the one appearing in BTA No. 2004-K-749 that portions have been underlined. Assuch markings do not appear to have been part of the original correspondence, they have not been included

above.

6Appx. 102

Department to assume that the petitioner's assets havediminished in value in exactly the same percentage as the parentcorporation's assets have been written down, even though thepetitioner itself has not written down its assets on its books.Further, the petitioner has submitted no information showing itsassets have been impaired to the same extent as the parentcorporation's assets. Such an approximation of values based ona related corporation's writedown is not probative evidence fora deduction from taxable personal property. See United Tel.Co. of Ohio v. Tracy (1999), 84 Ohio St.3d 506. In challengingthe assessed value, the petitioner has the burden of establishingthe value of its taxable property. The information submitteddoes not meet this burden." BTA No. 2004-K-749, S.T. at 3;BTA No. 2004-K-750, S.T. at 3.

The present appeals ensued, with appellants specifying the following as error:7

"The Commissioner's final determination[s are] erroneous in[their] entirety for the following reasons:

"The assessment[s], and the final determination[s] affirming[them], erroneously determined that the assets of [MCl] Metro[and MWNS] were not written down pursuant to SFAS No.144.

"The Conunissioner failed to properly apply an alternativevaluation methodology in conformance with Texas EasternTransmission Corp. v. Tracy (1997), 78 Ohio St.3d 83.

"The Commissioner did not follow the Department's ownguidelines as published in its `Valuation of Public UtilityProperty' handbook when he blindly followed the prescribeddepreciation rates to [MCI] Metro's and [MWNS'] property.

"The rate of depreciation as provided by R.C. 5727.11 and asused by the Commissioner should not be used in this case sincethis is a special and unusual circumstance, and since an

' We note that in the "background" portion of their notices of appeal, appellants make reference toconstitutional challenges that were previously raised before the commissioner regarding the issuance of theunderlying assessments. See Notices of Appeal, at ¶9. However, such assertions were not included inappellants' specifications of error nor argued at hearing or by way of brief. Accordingly, such issues will not

be fiirther addressed by this board. Cf. Cleveland Gear Co. v. Limbach (1988), 35 Ohio St.3d 229, paragraph

three of the syllabus; Castle Aviation, Inc. v. Zaino, ] 09 Ohio St.3d 290, 2006-Ohio-2420.

7

Appx. 103

unreasonable or unjust result would occur. The depreciationcalculated by the Commissioner does not result in an accuratetrue value of the taxpayer[s'] personal property. Thetaxpayer[s] [have] presented competent evidence relating to thetrue value of the property. ,

"The alternative valuation[s] proposed by [MCI] Metro [andMWNS are] a more accurate gauge of the true value of [their]property than the assessed value based on the historical costs on

[their] books."

Before we reach the merits of appellants' appeals, we must first dispense with

a motion filed on behalf of the Tax Commissioner in which he "moves the BTA to dismiss

the captioned appeals for the reason that the appellants seek reductions in the valuation of

their public utility personal property, that, if granted, would `recognize a fraud upon the

public."' Citing principles of equitable estoppel, the commissioner argues that appellants are

"jurisdictionally barred" from achieving the relief requested through their appeals. However,

the Tax Commissioner has not identified any failure by appellants to comply with the

requirements imposed by R.C. 5717.02 necessary to invoke this board's jurisdiction.e In the

absence of such demonstration, this board is not predisposed to find jurisdictional

In his brief, the commissioner suggests the possibility of an altemative defect:"As a condition for seeking administrative review pursuant to a petition forreassessment, a public utility property taxpayer/petitioner shall pay the taxassessed by the Commissioner to which the taxpayer/petitioner objects. See

R.C. 5727.47. We assume, for purposes of this brief, that the appellantshave complied with this jurisdictional requirement and thus are seekingrefunds. If not, then their appeals to the BTA from the Commissioner's final

determinations on the petitions should be properly dismissed for failure tohave made such payments." Appellee's brief at 1, fn. 2.

Although raising the preceding as a possible bar to our consideration of appellants' appeals, the commissioner,who presumably is in the best position to ascertain whether appellants have complied with the requirementsattendant to the filing of petitions for reassessment before him, has provided this board with no factual basis

which would call into question the validity of appellants' underlying petitions. We must therefore question the

timing, manner, and appropriateness of the commissioner's assertion in this instance. See, also, Choice One

Communications of Ohio, Inc. v. Wilkins (June 9, 2006), BTA No. 2003-K-1461, et al., unreported, at 3-4, fn.

4.

8Appx. 104

deficiencies where none patently exist. CE Nucorp, Inc. v. Montgomery Cty. Bd. of Revision

(1980), 64 Ohio St. 2d 20, 22 ("While this court has never encouraged or condoned disregard

of procedural schemes logically attendant to the pursuit of a substantive legal right, it has

also been unwilling to find or enforce jurisdictional barriers not clearly statutorily or

constitutionally mandated, which tend to deprive a supplicant of a fair review of his

complaint on the merits."). Accordingly, the commissioner's motion is hereby overruled.

In addition, we note that the commissioner attached to his brief several

materials neither included within the statutory transcripts nor submitted during the course of

this board's hearing, among them a September 8, 2005 news article obtained apparently via

the lnternet. Clearly, the intended purpose of such a document is evidentiary in nature and,

consistent with the Ohio Supreme Court's admonition, it must be stricken from this board's

consideration. See Columbus Bd. of Edn. v. Franklin Cty. Bd. of Revision (1996), 76 Ohio

St.3d 13, 16 ("After the BTA hearing, Nestle submitted a copy of a resolution and quitclaim

deed by the Franklin County Commissioners. Because these documents were not part of the

original record from the BOR and were submitted after the BTA hearing, they must be

disregarded by the BTA.").'

In order to understand the issues presented in these appeals, it is beneficial to

provide a brief background regarding the manner by which public utilities report the value of

their personal property for tax purposes. Public utilities are required to annually file reports

' The entities granted leave to file briefs as amici curiae in this matter have likewise referred to a number ofsources outside the evidentiary record developed before this board. As with the commissioner's references,such factual allegations unsupported by the existing record will likewise be disregarded. CE Lakewood v. State

Emp. Relations Bd. (1990), 66 Ohio App.3d 387, 394 ("Amici curiae are not parties to an action and may not,therefore, interject issues and claims not raised by parties.").

9

Appx. 105

with the Tax Commissioner which will enable him to "make any assessment or

apportionment required under this chapter." R.C. 5727.08. The commissioner is required to

determine the "true value in money" of all such property required to be assessed. R.C.

5727.10. R.C. 5727.11 prescribes the method to be employed by the commissioner in

valuing public utility property, providing in part:

"(A) Except as otherwise provided in this section, the truevalue of all taxable property required by division (A)(2) or (3)of section 5727.06 of the Revised Code to be assessed by thetax commissioner shall be determined by a method of valuationusing cost as capitalized on the public utility's books andrecords less composite annual allowances as prescribed by thecommissioner. If the commissioner finds that application of thismethod will not result in the determination of true value of thepublic utility's taxable property, the commissioner may useanother method of valuation."

The preceding method of determining the "true value" of personal property,

whereby the capitalized costs of a public utility's property are reduced by prescribed

composite annual allowances, is generally comparable to that employed by the commissioner

when valuing property of general business taxpayers, i.e., the "302 computation." See RC.

5711.18. In the context of the 302 computation, the Supreme Court has consistently

recognized the reasonableness of employing a predetermined statutory formula. For

example, in Wheeling Steel Corp. v. Evatt (1944), 143 Ohio St. 71, the Supreme Court

commented:

"So far as the record in this case discloses, we see no reason forcriticism of the application of the so-called `302 Computation'especially as the evidence shows and as appellant admits, it isapplied generally to all taxpayers in similar situations. Ofcourse, situations may arise where such computation would notbe proper. *** Percentage depreciation is used almostuniversally in industry and in accounting." Id. at 81.

10Appx. 106

In W.L. Harper Co. v. Peck (1954), 161 Ohio St. 300, the court reiterated this

view:

"The law of Ohio requires that personal property used inbusiness be taxed at its true value. Since it is impractical for theDepartment of Taxation to personally value all such personalproperty in this state, it is reasonable and lawfizl to use thestraight-line method of depreciation in arriving at true value.This method consists of depreciating the cost of the personalproperty in accordance with its useful life. That is what thedirective of the Department of Taxation purports to accomplish***." Id. at 303.

See, also, PPG Industries v. Kosydar (1981), 65 Ohio St.2d 80, 83 ("This directive has been

approved by this court as a practical, reasonable and lawful method and device to achieve

uniform valuation of plant equipment in Ohio by prescribing annual depreciation rates in lieu

of book depreciation for Ohio personal property tax purposes.").

While a statutorily prescribed formula provides a prima facie means for

determining the value of personal property used in a taxpayer's business, the court has made

it clear that such a formula should not be applied where it is affirmatively demonstrated that

true value will not result. As noted in Snider v. Limbach (1989), 44 Ohio St.3d 200, 201-

202:

"Moreover, it is impractical for the commissioner to personallyvalue all personal property in Ohio; thus, she may resort to apredetermined formula to ascertain value. W.L. Harper Co. v.

Peck (1954), 161 Ohio St. 300, ***. However, the formulamust be adjusted when special or unusual circumstances orconditions of use exist or when evidence shows that rigidapplication would be inappropriate. Monsanto Co. v. Lindley

(1978), 56 Ohio St.2d 59, 62, ***. The burden to show that thecommissioner's formula does not ascertain true value is metonly if the appellant `*** introduces competent evidence of

11Appx.1o7

probative value of the personal property's true value in money.'Alcoa v. Kosydar (1978), 54 Ohio St.2d 477, 481, ***."

A similar point has been made with respect to the valuation of public utility

property. In Texas E. Transm. Corp. v. Tracy (1997), 78 Ohio St.3d 83, the court held:

"Although R.C. 5727.11 identifies the cost-based method ofvaluation as a means of assessing true value, the GeneralAssembly has not restricted the commissioner's use of alternatevaluation methods. In fact, in these statutes, the GeneralAssembly specifically states that the commissioner may use`another method of valuation' and that he may consider `otherevidence' to determine true value. Contrary to thecommissioner's assertion, in deciding true value, the BTA neednot adhere to the cost-based statutory method of valuation.

"The ultimate goal imposed by R.C. 5727.10 clearly is to

determine the true value of the property taxed. R.H. Macy Co.,

Inc: v. Schneider (1964), 176 Ohio St. 94, 97 ***. If thestatutory method does not yield true value, then another methodof valuation may be used, whether or not there are special orunusual circumstances. Although a statute may provide a primafacie estimate or presumption of value, where rigid applicationof the statute would be inappropriate, the presumption of valuemust yield to other competent evidence reflecting true value.

Monsanto Co. v. Lindley (1978), 56 Ohio St.2d 59, 61, 10

0.O.3d 113, 114 ***; W.L. Harper Co. v. Peck (1954), 161Ohio St. 300 ***:' Id. at 85-86. (Emphasis sic and parallel

citations omitted.)

In the present appeals, appellants argue that the subject assessments do not

fairly represent the true value of their taxable property because such amounts are based

exclusively upon historical booked costs which precede the filing of, and emergence from,

bankruptcy by WorldComIMCI and its subsidiaries. Referring to final impairment figures

reflected on WorldCom/MCI's audited 2002 Form 10-K filed with the Securities and

Exchange Commission and an analysis used in estimating the extent to which their assets

12Appx. 108

were impaired for financial reporting purposes, appellants insist that the values previously

carried on the books of WorldCom/MCI and its subsidiaries for property, plant, and

equipment were significantly overstated. Citing to generally accepted accounting principles

("GAAP"), more specifically Statement of Financial Accounting Standard ("FAS") No. 144,

and the "fresh-start accounting" adopted for tax year 2004 after WorldCom/IviCI and its

subsidiaries emerged from bankruptcy, appellants maintain that the true value of their Ohio

assets is more appropriately ascertained by applying the same percentage of impairment to

their own booked costs as was found to exist at the system-wide level of their parent

company.

In responding to appellants' arguments, the Tax Commissioner offers a number

of objections, but we find one particularly persuasive and therefore dispositive of appellants'

claims. Recently, other participants within the telecommunications industry have asserted

that "true value" will not result from application of the valuation methodology prescribed by

R.C. 5727.11. In support of their claims, these appellants have offered studies suggesting

that their assets are entitled to a much greater depreciation rate than that provided for by

application of the commissioner's prescribed composite allowances to the booked value of

their assets. See, e.g., Cincinnati Bell Tel. Co. v. Zaino (June 10, 2005), BTA Nos. 2003-K-

765, et al, unreported; Choice One Communications of Ohio, Inc. v. Wilkins (June 9, 2006),

BTA No. 2003-K-1461, et al., unreported. In considering these assertions, this board has

carefully reviewed the information relied upon in order to determine whether the valuation

methodology is sound and the conclusions reached are supported by reliable, verifiable data.

13

Appx. 109

In these appeals, we are presented with virtually no information to evaluate.

Appellants have offered no evidence attesting to the market value of their Ohio assets.

Instead, they propose that their property simply be reduced on a pro rata basis consistent with

the impairment write-down taken by their parent following its emergence from bankruptcy.

We have been provided with no information which would support our drawing the

conclusion that appellants' property, for public utility personal property tax purposes, was

impaired to the same degree as their parent company.

Even if we were to accept appellants' claim that historical costs overstate the

value of their assets, we still consider it necessary to critically review the basis upon which

adjustments are sought to be made. In the present appeals, we cannot undertake such a

review. Instead, appellants ask that we accept at face value an impairment analysis

performed on a system-wide level which, in some undisclosed manner, .purportedly took into

account issues of accounting fraud and the overall decline experienced by WorldCom/MCI

within the telecommunications industry. We have little before us regarding either the entity

which performed this analysis10 or, more significantly, the data relied upon and the

methodology utilized in generating the impairment estimates. Indeed, such estimates may

suffer from the same deficiencies of which this board has previously been critical. We

therefore cannot conclude that appellants have demonstrated, by competent and probative

evidence, that the 2003 assessed values do not accurately reflect the true value of their Ohio

assets.

10 Although Garces made a few general references to Lazard, by way of brief, appellants represent that Lazardis an independent investment banking finn. Appellant's Brief at 4. In the Form 10-K filed on behalf of

WorldCom, the company is referred to as Lazard LLC and identified as its financial advisor. Ex. 6 at 83.

14Appx. 110

Based upon the foregoing, appellants' specifications of error are not well taken

and they are therefore overruled. It is the order of this board that the Tax Commissioner's

final determinations must be, and hereby are, affirmed.

ohiosearchkeybta

15

Appx.lll

Appx. 112

Rent-Way Inc., Appellant, vs. William W. Wilkins, Tax Commissioner of Ohio, Appellee.

CASE NO. 2004-A-331 (PERSONAL PROPERTY TAX)

STATE OF OHIO -- BOARD OF TAX APPEALS

2007 Ohio Tax LEXIS 523

April 13, 2007

COUNSEL:[*1]

APPEARANCES

For the Appellant - Bailey Cavalieri LLC, Harlan S. Louis, One Columbus, 10 West Broad Street, Suite 2100, Co-

lumbus, Ohio 43215-3422For the Appellee - Marc Dann, Attotney General of Ohio, John K. McManus, Assistant Attorney General, 30 East

Broad Street, 16<th> Floor, Columbus, Ohio 43215

OPINION:

DECISION AND ORDER

Ms. Margulies, Mr. Eberhart, and Mr. Dunlap concur.

This cause and matter came on to be considered by the Board of Tax Appeals upon a notice of appeal filed hereinby the above-named appellant from fmal assessment certificates of valuation issued by the Tax Conunissioner. The as-sessment certificates relate to applications for fmal assessment filed by appellant for the 2000, 2001, and 2002 personalproperty tax years. By such applications, Rent-Way sought the designation of a shorter class life for its schedule 4 short-term rental property than the class life III it used in reporting the true value on its 2000 and 2001 returns and the classlife V used on its 2002 retum. Rent-Way primarily contends that the application of the standard 302 computation by theTax Commissioner to its inventory does not provide an accurate reflection of its inventory life, which it [*2] claimshas a useful life of thirty months, as supported by a disposal analysis it offered. H.R., Vol. I at 6-7.

The matter was submittedto the Board of Tax Appeals upon the notice of appeal, the statutory transcript nl certi-fied to this board by the Tax Commissioner, the record of the hearing before this board, and the briefs filed by counsel.

nl We note that appellant contends, both by motion and in post-hearing briefs, that the statutory transcript, filedwith this board by the tax commissioner pursuant to R.C. 5717.02, is incomplete. By order dated November 10,2004, the board acknowledged the filing of the statutory transcript on September 1, 2004, and indicated that "ap-pellant has alleged that the transcript which has been filed is incomplete. However, since this is an issue that re-quires evidentiary proof, the board will reserve ruling on this portion of the motion until the parties have had anopportunity to submit evidence addressing this issue." Rent-Way Inc. v. Wilkins (Interim Order, Nov. 10, 2004),

BTA No. 2004-A-331, unreported, at 2. Appellant neither renewed its previous motion nor provided evidence ortestimony at the hearing to substantiate its claim; all of the exhibits offered by appellant at the hearing, whicharguably supplement information provided in the statutory transcript, were received into evidence and consid-ered by this board in making its determination herein. Therefore, without a specific reference from appellant toindicate the nature of the omission from the transcript and/or the related prejudice caused by such omission, wedeem the record before the board in this matter, including the statutory transcript, complete.

[*3]In reviewing appellant's appeal, we recognize the presumption that the fmdings of the Tax Commissioner are valid.Alcan Aluminum Corp. v. Limbach (1989), 42 Ohio St.3d 121. It is therefore incumbent upon a taxpayer challenging a

finding of the Tax Commissioner to rebut the presumption and establish a right to the relief requested. Hatchadorian v.

Lindley (1986), 21 Ohio St.3d 66; Belgrade Gardens v. Kosydar (1974), 38 Ohio St.2d 135; Midwest Transfer Co. v.

Appx. 113

Page 2

2007 Ohio Tax LEXIS 523, *

Porterfield (1968), 13 Ohio St.2d 138.Moreover, the taxpayer is assigned the burden of showing in what manner and to

what extent the Tax Commissioner s determination is in error. Kern v.Tracy (1995), 72 Ohio St.3d 347; Federated

Dept. Stores, Inc. v. Lindley (1983), 5 Ohio St.3d 213.Where no competent and probative evidence is developed before

this board by the appellant to show that the Tax Commissioner's findings are incorrect, then the Board of Tax Appeals

must affirm the Tax Commissioner's findings.Kern, supra; [*4] Kroger Co. v. Limbach (1990), 53 Ohio St.3d 245;

Alcan, supra.

Initially, we note appellant's contentions, which are set forth in the notice of appeal, in pertinent part, as follows:

"2. For the assessment amounts for the rettun years of 2000, 2001 and 2002, the Tax Commissioner erredin assessing tangible personal property tax by failing to properly account for and value Appellant's rental

merchandise as follows:

"a. By assigning the wrong useful life time periods and by erroneously valuing such property differentfrom its true value in money under Ohio Revised Code Section 5711.21, Ohio Administrative Code Sec-

tion 5703-3-10, and other relevant provisions. ***

"b. Or in the alternative, by not classifying such property as merchandising inventory, under Ohio Re-vised Code Section 5711.15 and other relevant provisions, and by not valuing such inventory at itsproper value, including lower of cost or market adjustments.

"3. For the assessment amounts for the return years of 2000, 2001 and 2002, the Tax Commissioner erredin assessing tangible personal property tax on idle assets that are being held for disposal and [*5] no

longer used in business.

"4. For the assessment amounts for the return years of 2000, 2001 and 2002, the Tax Commissioner erred

in assessing tangible personal property tax on certain assets that were disposed of and no longer at theAppellant's facilities and assets that were stolen, lost, and otherwise removed from an Ohio taxing dis-

trict and no longer used in business.

"5. For the assessment amounts for the return years of 2000, 2001 and 2002, the Tax Commissioner erredin assessing tangible personal property tax on inventory that is being held for storage only.

"6. For the assessment amounts for the return years of 2000, 2001 and 2002, the Tax Commissioner erredin assessing tangible personal property tax by including items not properly taxable as personal property,by not correctly reflecting the year of acquisition, and by not correctly reflecting the class and class lifeof certain assets, including real properties and other tangible personal property not owned by the Appel-lant and/or represented on the Appellant's books and records as intangible assets.

"7. For the assessment amounts for the return years 2000, 2001 and 2002, the Tax Commissioner erred inassessing [*6] tangible personal property by not following its own directives, procedures, methods and

other obligations prescribed by law."

Appellant Rent-Way operates a rent-to-own business. Rent-Way's customers may rent, on a week-to-week basis, avariety of household goods, including, but not limited to, televisions, computers, furniture, appliances, and other elec-tronic items. H.R., Vol. I at 19-20. If all of the rental payments under the rental agreement are made, the customerwould then own the item(s) in question; if all payments are not made, the item")o are

to the nd of the rental termbfore^edagain. H.R., Vol. I at 16-17. Customers may also purchase the rented item(s) pamount specified at the inception of the rental agreement. H.R., Vol. I at 17. Certain previously rented merchandise canalso be purchased outright, in a cash transaction, by customers, when it no longer meets Rent-Way's standards for fur-ther rental. H.R., Vol. I at 38. Rent-Way's employees can also purchase merchandise outright. H.R., Vol. I at 60.

Any merchandise that is not purchased by a customer is returned to Rent-Way and rented again to a different cus-tomer, until it can [*7] no longer be offered for rent due to its condition. H.R., Vol. I at 30. Merchandise rental termsare based on the condition of the merchandise at the time of rental; rental rates remain constant for each category ofmerchandise. H.R., Vol. I at 32-24. Ultimately, Rent-Way's inventory of merchandise is either purchased by customers

Appx. 114

Page 3

2007 Ohio Tax LEXIS 523, *

or disposed of by other means, i.e., it may be stolen, lost, discarded, damaged or destroyed while in a customer's posses-sion, or donated to charity. H.R., Vol. I at 58-59, 61. It is noted that even when an item is never ultimately purchased bya customer, Rent-Way may have previously received rental payments and/or insurance reimbursements prior to an

item's disposal. H.R., Vol. I at 75.Appellant Rent-Way summarized its position regarding its appeal in its brief, stating, "Rent-Way, Inc., rents and

sells consumer goods. These items are taxed by the Tax Commissioner as tangible personal property. These items, how-ever, do not fit neatly into the Commissioner's '302 computation.' Rent-Way's disposal study dramatically points thisout. The Commissioner erred by not adjusting the 302 computation." Appellant's Brief at 1. Rent-Way requested thatthe true value [*8] of its short-term rental merchandise be calculated by applying the following percentages of acquisi-tion cost: acquisition year 1-- 60%; year 2 -- 30%; year 3 and older -- 10%, and offered a disposal study for the years in

question to support its position. S.T. at 48.

As we begin our consideration of this case, we note that every taxpayer engaged in business in Ohio must annuallyfile a personal property tax return with the county auditor of each county in which property used in the taxpayer's busi-ness is located. R.C. 5711.02. On that return, the taxpayer must list "all his taxable property *** as to value, ownershipand taxing districts as of the date he engages in business." R.C. 5711.03. R.C. 5711.18 describes the manner in whichtaxable property is to be listed, providing in pertinent part that:

"In the case of personal property used in business, the book value thereof less book depreciation at suchtime shall be listed, and such depreciated book value shall be taken as the true value of such property,unless the assessor finds that such depreciated book value is greater or less than the then true value ofsuch property in money. Claim for any deduction from *** depreciated [*9] book value of p^rksonalproperty must be made in writing by the taxpayer at the time of making the taxpayer's return

Recognizing that it would be impractical to personally value all personal property in Ohio, the Tax Commissionerdeveloped a formula, referred to as the "302 computation," in order to determine the true value of such property. W.L.

Harper v. Peck (1954), 161 Ohio St. 300; Snider v. Limbach (1989), 44 Ohio St.3d 200.

Ohio Adm. Code 5703-3-10 speaks directly to the valuation of personal property for tax purposes and provides in

pertinent part that:

"(A) Tangible personal property used in business in this state must be returned, for purposes of the per-sonal property tax, at its true value in money. The true value of depreciable personal property is its bookcost less book depreciation, unless the tax commissioner finds that the depreciated book value is greater

or less than the true value of such property.

"(B) Application of the composite annual allowance procedure provided for in rule 5703-3-11 of theAdministrative Code shall determine the prima facie true value of depreciable tangible personal [* 10]property used in business. The prima facie valuations can be rebutted by probative evidence of higher or

lower valuation.

"(3) If a taxpayer believes that the composite annual allowance procedure as determined by the commis-sioner does not accurately reflect the true value in money of the taxpayer's depreciable tangible personalproperty on hand, the taxpayer may establish more accurate annual allowances by probative evidence.

"(a) Such evidence must show that the published composite annual allowance procedures are inappropri-ate because they cause an unjust or unreasonable result, or must be modified because of special or un-

usual circumstances.

"(b) Such evidence may include, but is not limited to, an aging of disposals study and any other studies,data, or documentation the taxpayer wishes to submit for consideration by the commissioner.

Appx.115

Page 4

2007 Ohio Tax LEXIS 523, *

"(c) Such evidence must cover a sufficient number of years to demonstrate a pattem in the history of the

useful life of the subject property."

The "composite annual allowance" or "302 computation" is more fully discussed in Ohio Adm. Code 5703-3-11,

which provides, in pertinent part:

"(A) To assist taxpayers in returning the [* 11 ] true value of depreciable tangible personal property usedin business in this state, as required by Chapter 5711 of the Revised Code and rule 5703-3-10 of the Ad-ministrative Code, and to assist in the efficient administration of the personal property tax, the tax com-missioner shall determine a composite annual allowance procedure for use in computing the true value ofsuch property. 1'he application of the composite annual allowance procedure to the original cost of tangi-ble personal property may be referred to as the'tme value computation' or the '302 computation.'

"(B) The valuation determined by the true value computation shall be the prima facie true value inmoney of the taxable tangible personal property."

The Supreme Court has repeatedly accepted the 302 computation as an appropriate method to value personal prop-

erty. As the court held in PPG Industries v. Kosydar (1981), 65 Ohio St.2d 80, 83, "this directive has been approved by

this court as a practical, reasonable and lawful method and device to achieve uniform valuation of plant equipment in

Ohio by prescribing annual depreciation rates in lieu of book dep*e*ciation for Ohio personal property [* 12] tax pur-

poses.Wheeling Steel Corp. v. Evatt [(1944), 143 Ohio St. 71] W.L. Harper Co. v. Peck (1954), 161 Ohio St.

300." See, also, Campbell Soup Co, v. Tracy (2000), 88 Ohio St.3d 473, 476 While application of the 302 computation

results in a prima facie tme value figure, the value reflected through its use is not absolute. A taxpayer that objects tothevse of the 302 computation can demonstrate, through competent and probative evidence, that a different result is

warranted. PPG Industries, supra; Gahanna Heights, Inc. v. Porterfield (1968), 15 Ohio St.2d 189.

In Towmotor Corp. v. Lindley (1981), 66 Ohio St.2d 53, the court set forth a two-prong test to be applied by this

board when considering a taxpayer's claim that the 302 computation does not reflect the true value of the personal prop-

erty:

"First, the board must determine if there exist special and unusual circumstances which require that the'302 Computation' not be used. If the board determines that such circumstances do exist, [* 13] the'302Computation' is inappropriate. If such circumstances do not exist the board must, second, determine ifthe rigid application of the'302 Computation' directive creates an unjust or unreasonable result in that

case. If so, the directive is inappropriate. *** " Id. at 54.

Thus, Rent-Way's burden in this case, i.e., proving that its property is overvalued when reported in accordance withthe commissioner's classification directives, may be met by any of three accepted methods. Rent Way may prove thatspecial or unusual circumstances exist, that the use of the 302 computation produces an unjust or unreasonable result, orRent-Way may offer direct evidence of the personalty's true value. RPS, Inc. (Jka Roadway Package System, Inc) v.

Tracy(Oct. 30, 1998), BTA. No. 1996-M-1209, unreported. Rent-Way has attempted to meet its burden by offering

evidence that the commissioner's rigid application of the 302 computation to its inveniory produced an unreasonable

result.In support of its position, Rent-Way presented the testimony of Mr. Cerezo, Rent-Way's internal audit supervisor,

concerning Rent-Way's business operations and tax liability, and Mr. [* 14] Gifford, director of property tax servicesfor PricewaterhouseCoopers (PWC), concerning the disposal analysis prepared by PWC. First, Mr. Cerezo testified thathe compiled the information for the disposal study by creating a database from Rent-Way's inventory management sys-tem which listed 152,962 disposed items over a 46-month period. The list indicated some information about each item,like the purchase date and disposal date, but did not, for example, contain information regarding the reason for the dis-posal. H.R., Vol. I at 52-53; 85-89. A summary of the list, which grouped disposals together by category, as well as thedatabase, was forwarded to PWC, which relied on the summary to make its study and recommendations to Rent-Way.Specifically, PWC performed an age of disposals study which "examined the ages of the assets disposed of based ontheir dollar year age, expired cost, and disposal proceeds," a turnover study which "examined the investment tumoverby comparing the disposal costs to the cost of investment," and an age of assets study which "examined the age of therental property assets which remained on hand." Appellant's Brief at 4. The study and summary were then presented

Appx. 116

2007 Ohio Tax LEXIS 523, *

Page 5

[* 15] to the Tax Commissioner as the basis for Rent-Way's position that a different class life should have been utilizedin determining Rent-Way's personal property tax liability. H.R., Vol II at 54.

As always, in reviewing the disposal study and associated testimony, we are mindful of the fact that this board isvested with wide discretion in determining the weight to be given to the evidence before it. See, e.g., Parma Hts. v. Wil-

kins, 105 Ohio St.3d 463, 467, 2005-Ohio-2818 (" [W]e always give wide discretion to the BTA in evaluating the credi-

bility of witnesses and the weight that should be given to any evidence presented to it."); Campbell Soup, supra, (quot-

ing from Strongsville Bd of Edn. v. Cuyahoga Cly. Bd ofRevision (1997), 77 Ohio St.3d 402, 405, "[w]e also affirm

the BTA's rulings on credibility of witnesses and weight attributed to evidence if the BTA has exercised sound discre-tion in rendering these rulings."). Having considered the study in its entirety, we fmd that it fails to provide probative,

credible evidence of the value of the subject property.

Most notably, at the outset, [* 16] we must remark that the credibility of the disposal study is clouded by the directfinancial interest PWC has in the subject appeal. PWC entered into a contingent fee agreement with Rent-Way underwhich PWC would receive 25 or 30% of any tax savings realized by Rent-Way as a result of the use of PWC's disposalstudy in the instant proceedings. H.R., Vol. I at 204-205. Specifically, Mr. Gifford testified that PWC's fee would be"based upon a percentage of tax savings. I believe it is 25, 30 percent." H.R., Vol. I at 205. We question the reliability ofPWC's study considering that it has such a vested interest in the outcome of this matter. In fact, we previously consid-ered a similar fact pattertt involving PWC where the taxpayer's counsel made the same arguments suggesting that thecredibility of PWC's conclusions was not affected by such a contingent arrangement, "i.e., the issue has generally onlyarisen in real property valuation appeals, [the employee of PWC] will not personally benefit from the contingency feearrangement which his employer has, PWC will lose money on its engagement even if it receives the maximum contin-gency fee, *** and it is unreasonable to assume that'one [* 17] of the four largest intetnational accounting firms,PricewaterhouseCoopers, would present false evidence for a fee that represents but a fraction of its total revenue."'

Choice One Communications of Ohio, Inc. v. Wilkins (June 9, 2006), BTA No. 2003-K-1461, 2004-K-409, unreported,

at 27. n2

n2 Although issued by this board after the merit hearing and briefmg took place herein, we find the reasoning inChoice One to be equally applicable to the instant facts.

Here, as in Choice One, we are unpersuaded by the taxpayer's protestations that PWC's conclusions were not af-fected by its contingent fee arrangement. "This board has consistently discounted the credibility/reliability of an expertwho personally acquires, or whose employer acquires, a pecuniary interest in litigation through a contingent fee ar-rangement. By acquiring such a direct interest in the litigation, the expert's ability to render an independent and unbi-ased opinion or evaluation is called into question. *** It simply cannot be overemphasized that the essential effective-ness of an expert depends not only upon his or her ability to persuade the trier of fact as to elements of basic compe-tence, but also [* 18] his or her ability to demonstrate unyielding impartiality." Choice One at 27, 32. We concluded that

"given appellant's admission that PWC is entitled to receive thirty percent of the tax savings which may be achievedthrough these appeals, even in the absence of the other flaws discussed herein, we find no basis for deviating from ourpreviously stated position on this subject and will therefore accord the PWC tax study no more than minimal weight."Id. at 32. See, also, Witt Co. v. Hamilton Cty. Bd ofRevision (1991), 61 Ohio St.3d 155; Keystone Powdered MetalCompany v. Zaino (Mar. 22, 2002), BTA No. 2000-A-749, unreported; La Spina v. SummitCty. Bd. ofRevision (Jan.

12, 1996), BTA No. 1994-T-1149, unreported. Based upon the foregoing, PWC's disposal study will not be accordedmore than minimal weight.

Further, upon our review of the disposal study, we are not persuaded by its conclusions. The study lists disposals bycategory, and no information on individual items was included. No distinction is made between the different types ofRent-Way's merchandise. No underlying records or details regarding the disposals were provided. Especially [* 191since PWC created the disposal stady using the summary figures supplied by Rent-Way, without reviewing any infor-mation regarding specific disposals, supporting documentation should have been provided for the conclusions made byRent-Way in its summary. See United Tel. Co. v. Tracy (1999), 84 Ohio St.3d 506; Anheuser-Busch Companies, Inc. v.

Zaino (Sept. 24, 2004), BTA No. 2003-K-699, unreported. Other examples of perceived flaws within the study include:1) the study includes items that were stolen, lost, or damaged, which would not accurately depict the useful life of theitems; any insurance reimbursements or other recovered costs should have been reflected in the study; 2) the study in-cludes items that were sold to Rent-Way employees, brand new, never having been rented, and, in addition, the pro-ceeds from such sales were not reflected, H.R., Vol. I at 103-104, 106-107; 3) the disposal study covered a period oftime when Rent-Way's policies dictated that certain merchandise within its inventory be disposed of, even if it still had

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2007 Ohio Tax LEXIS 523, *

remaining life/value, so that it could be replaced by merchandise Rent-Way deemed better suited for the market; such[*201 items, when disposed, were treated in the study in the same way as merchandise that was disposed of because ithad no remaining life/value. Arguably, such treatment does not reflect an accurate picture of the useful lives of some ofRent-Way's inventory, Exs. 5 and 6; H.R., Vol. I at 118-120; 4) the inconsistency in the disposal proceeds figures withinthe study raises concems over the accuracy of the information provided, S.T. at 54, 66; and 5) the purchase dates anddelete dates used in the study were averages, not the actual dates. H.R., Vol. I at 90.

Thus, the foregoing concems about the disposal study offered by Rent-Way further render it unreliable. Rent-Way

has failed to establish that application of the 302 computation created an unjust or unreasonable result in determiningthe value of its personal property. We also note that with the rent-to-own business, it is difficult to apply a disposalstudy to its practices as many of its "disposals" are due to sales and are not necessarily an indication of the items' useful

lives. We agree with the Tax Commissioner that generally, the disposal study prepared by PWC is more reflective of

how long it takes Rent-Way to sell the items [*21] in its inventory, not the average life of such property. H.R., Vol. II

at 84.

This board has previously considered similar facts in Keystone Powdered Metal Company v. Zaino (Mar. 22, 2002),

BTA No. 2000-A-749, unreported. Therein, the taxpayer attempted to justify deviating from the 302 computation invaluing its personal property by establishing the existence of special circumstances in its manufacturing process and, inthe altemative, that the application of the 302 computation created an unjust or unreasonable result. After unsuccess-fully arguing the former, the taxpayer presented a disposal study in support of the latter contention. In review of thedisposal study, this board held that "[a]t the outset, we must remark that the credibility of Mr. Russell's study is cloudedby his direct fmancial interest in the subject appeal. Specifically, Mr. Russell'would get 50 percent of what they [Key-stone] save including accumulated interest' *** We question the reliability of Mr. Russell's conclusions consideringthat he has such a personal stake in the outcome of this matter." Id. at 12. Further, in discussing the specifics of the sub-ject study, we stated "[n]o underlying records [*22] or details regarding the'disposals' in Mr. Russell's summary were

provided." Id. at 13. We then proceeded to detail a laundry list of perceived flaws in the study. Rent-Way attempts todistinguish the foregoing by contrasting the specific flaws in each case, which of course, are based on the very differenttaxpayers involved in the studies. However, the general concerns in both cases remain the same; first, the author of eachstudy had a direct interest in the outcome of the appeal, which significantly detracts from the credibility of the conclu-sions reached therein, and, second, even if the studies were able to be given substantive consideration, they are flawedand lack the documentation necessary to support the conclusions reached. In response, Rent-Way attempts to argue thatthe commissioner failed to audit the source documentation, and, as such, cannot now claim that the supporting docu-mentation was lacking, citing this board's decision in Oasis Corporation, f/k1a Ebco Manufacturing Co. v. Tracy (Sept.

21, 2001), BTA No. 1998-P-940, unreported, as support for its position. However, in Oasis, the taxpayer had filed itspersonal property tax return "based upon unaudited [*23] preliminary financial statements intended only for internaluse. *** When it discovered how the return had been prepared it notified the tax commissioner's representative that thereturn as originally filed was based upon inaccurate financial statements. It also pointed out that the return mistakenlyincluded non-Ohio inventory. The tax commissioner requested certain documents ***. Oasis Corporation forwarded thedocuments requested. Nonetheless, the tax commissioner issued a final assessment certificate of valuation based upon

the originally filed return." Id. at 2. We went on to hold that:

"The tax commissioner asserts in his brief that Oasis Corporation failed to meet its evidentiary burden.He complains that insufficient source documentation has been provided. But the record before us con-tains audited financial statements, worksheets, demonstrative exhibits and other explanatory documentsthat support Oasis Corporation's position. Financial statements and accounting worksheets prepared inthe ordinary course of business as part of the audit process are included in the record. A foundation hasbeen laid through the testimony of Mr. Wilson. These records have the force of probative [*24] evi-dence. The tax commissioner was free to probe other specific documents or accounts if he so desired. Hemight have conducted a field audit or utilized the discovery process if doubts or suspicions existed as tothe veracity of the evidence contained in the statutory transcript." (Footnotes omitted.) Id. at 8.

Unlike in Oasis, in the instant matter, there is no underlying documentation that has been provided by Rent-Way tosupport the position advocated through the use of its study. As such, we cannot rely upon the conclusions rendered

therein.

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2007 Ohio Tax LEXIS 523, *

Rent-Way also contends that the commissioner erred by taxing property that Rent-Way does not own, i.e., lease-hold improvements. However, while such concept was raised at the hearing before this board and addressed in post-hearing briefs, Rent-Way did not specifically identify the items that were improperly assessed nor did it offer any testi-mony from an individual(s) with personal knowledge about the use of and/or corresponding classification of such items.The taxpayer bears the burden of establishing any error on the Tax Commissioner's part. Having presented no specificevidence with regard to leasehold improvements that it argues [*25] were classified improperly, and consequently, im-

properly taxed, we fmd that Rent-Way has failed to meet its established burden. See Hatchadorian, supra; Kern, supra;

Kroger, supra; Alcan, supra.

Based upon the record before us, we find that appellant Rent-Way has failed to rebut the presumption of correct-ness of the Tax Commissioner's findings herein. Therefore, it is the decision and order of the Board of Tax Appeals thatthe decision of the Tax Commissioner must be and hereby is aft3rmed.

Appx. 119

Appx.120

The Mead Corporation, Appellant, vs. William W. Wilkins, Tax Commissioner of Ohio,Appellee.

CASE NO. 2005-T-787 (PERSONAL PROPERTY TAX)

STATE OF 01410 -- BOARD OF TAX APPEALS

2007 Ohio Tax LEXIS 857

June 15, 2007

COUNSEL:[*1]

APPEARANCES

For the Appellant - Vorys, Sater, Seymour & Pease, L.L.P., Anthony L. Ehler, 52 East Gay Street, P.O. Box 1008

Columbus, Ohio 43216-1008

For the Appellee - Marc Dann, Attorney General of Ohio, Jack McManus, Assistant Attorney General, TaxationSection, State Office Tower, 16th Floor, 30 East Broad Street, Columbus, Ohio 43215-3248

OPINION:

DECISION AND ORDER

Ms. Margulies, Mr. Eberhart, and Mr. Dunlap concur.

The Mead Corporation appeals from a final determination of the Tax Commissioner, in which the commissioner af-firmed a personal property tax assessment issued for tax year 2000. Mead claims that the commissioner erred by assess-ing the value of certain computer equipment as class life II property. Mead argues that a class life I designation pro-duces a more accurate true value. For the following reasons, we affirm the commissioner's determination.

Mead is a corporation engaged in the production of paper and packaging products. Mead is headquartered in Day-ton but has several facilities in other areas of the state. In filing its 2000 personal property tax return, Mead valued andreported its computer equipment using a class I depreciation table instead of the class II annual [*2] allowance pre-scribed by the Tax Commissioner for computer equipment. n I Although Mead applied different class life than pre-scribed, Mead did not file a written claim for a deduction from book value (Form 902) at the time it filed the return. n2

See R.C. 5711.18.

nl For tax year 2000, class life I applied to equipment with a group life range of less than six years. Class life IIequipment had a group life range of between 6 and 8.4 years. See Guidelines for Filing Ohio Personal Property

Tax Returns (2000 Ed.) at 9.

n2 The commissioner argues that there is no jurisdiction to consider Mead's specification of error because Meadfailed to make a written claim for a deduction in book value at the time it filed each return. In support, the com-

missioner relies on Willys-Overland Motors, Inc. v. Evatt (1943), 141 Ohio St.402. We disagree. The court

specified in Willys-Overland that the commissioner was without jurisdiction to consider a request for a deduc-tion from book value where the request was not made in writing at the time of filing and where the commis-sioner failed to assess any item in excess of the value reported. Id. at paragraph four of the syllabus. The instantmatter differs factually, as the commissioner did make a modification to Mead's personal property tax return andassessed Mead based upon those amendments. Cf. Avco Corp. v. Limbach (1990), 51 Ohio St.3d 147.

[*3]The commissioner audited Mead's return and ultimately revalued Mead's computer equipment using the class life II

annual allowance under his "302 computation." An assessment was issued, which Mead challenged pursuant to a peti-

Appx. 121

Page 2

2007 Ohio Tax LEXIS 857, *

tion for reassessment filed under R.C. 5711.31. Upon review, the commissioner issued the final determination now be-

fore us, in which he affinned the assessment.

Every taxpayer that engages in business within the state of Ohio must annually file a personal property tax returnwith the county auditor of each county where property used in the business is located. R.C. 5711.02. Under R.C.5711.03, the taxpayer must report "*** all taxable property *** as to ownership or control, valuation, and taxing dis-tricts as of the beginning of the first day of January, annually ***." R.C. 5711.18 provides the method for listing and

valuing tangible personal property:

"*** In the case of personal property used in business, the book value thereof less book depreciation atsuch time shall be listed, and such depreciated book value shall be taken as the true value of such prop-erty, unless the assessor finds that such depreciated book value is greater or less than the then true [*4]value of such property in money. Claim for any deduction from * * * depreciated book value of personalproperty must be made in writing by the taxpayer at the time of making his return[.]"

The commissioner is to administer the personal property tax laws, adopting any necessary rules "so that all taxableproperty shall be listed and assessed for taxation." R-C. 5711.09. Recognizing that it would be impractical to individu-ally value all personal property in Ohio, the Tax Commissioner has developed a formula to determine the true value ofsuch property. This is known as the "true value computation," or the "302 computation." W.L. Harper v: Peck (1954),

161 Ohio St. 300, at 303; Snider v. Limbach (1989), 44 Ohio St.3d 200. See, also, Ohio Adm. Code 5703-3-10 and

5703-3-11.

The Ohio Supreme Court briefly explained the 302 computation in Monsanto Co. v. Lindley (1978), 56 Ohio St.2d

59:

"This long standing directive provides for industry-wide uniformity in determining the true value of de-preciable property used in business by prescribing annual depreciation rates to be used in lieu of book[*5] depreciation. The annual depreciation rates prescribed in the directive vary according to the type ofbusiness or the nature of the equipment involved, and are expressed as percentages representing the al-lowable reduction to be taken each year from the original cost of a modified straight line depreciationformula, and the annual depreciation rates specified in the directive are to be used by the taxpayers inconjunction with this depreciation formula for calculating the reportable value of the depreciable prop-

erty." Id. at 59.

The Supreme Court has continuously accepted the 302 computation as an appropriate method for valuing personal

property. See PPG Industries v. Kosydar (1981), 65 Ohio St.3d 83 (holding that the 302 computation "has been ap-

proved by this court as a practical, reasonable and lawful method and device to achieve uniform valuation of plantequipment in Ohio by prescribing annual depreciation rates in lieu of book depreciation for Ohio personal property tax

purposes"). See, also, Wheeling Steel Corp. v. Evatt (1944), 143 Ohio St. 71, at paragraph one of the syllabus; W.L.

Harper, supra. [*61

The 302 computation creates a prime facie true value calculation. Tele-Media Co. v. Lindley (1982), 70 Ohio St.2d

284. However, the value reflected by the computation is not absolute. Monsanto, suprµ at 62. A taxpayer may chal-

lenge, through competent and probative evidence, the applicability of the 302 computation and show that a different

value is warranted:

"Moreover, the burden is on the taxpayer to show that the rate of depreciation arrived at under the '302'computation directive does not reflect the true value of its personal property. Westinghouse Elec. Corp. v.

Lindley (1980), 64 Ohio St.2d 31, 18 0.0.3d 212, 413 N.E.2d 1178; Gahanna Heights, Inc. v. Porterfield

(1968), 15 Ohio St.2d 189, 44 0.0.2d 156, 239 N.E.2d 30. There are two ways in which a taxpayer may

contest the commissioner's evaluation. PPG Industries v. Kosydar (1981), 65 Ohio St.2d 80, 19 0.O.3d

268, 417 N.E.2d 1385. The taxpayer may either ( 1) offer direct evidence of the [*7] property's truevalue, or (2) offer evidence that the applicable rate of depreciation does not accurately measure the prop-erty's true value, either because special or unusual circumstances exist or because a rigid application of

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2007 Ohio Tax LEXIS 857, *

Page 3

the directive will create an unjust or unreasonable result. /d at 83 ***." Jacob B. Sweeney Equipment

Trust v. Limbach (1991), 74 Ohio App.3d 82, at 86.

See, also, Campbell Soup Co. v. Tracy (2000), 88 Ohio St.3d 473, at 477, holding that the "burden is on taxpayersto show that they may deviate from the computation because special or unusual circumstances or conditions of use existor because evidence shows that its rigid application would be inappropriate."

In the matter before us, Mead argues that application of the 302 computation produces an unreasonable and unjustresult. n3 Appellant's Brief, at 5. Mead argues that the useful life of computer equipment was rapidly decreasingthroughout the late 1990s, In support, Mead has demonstrated that, overall, approximately eighty-four percent of itsoffice computer equipment was less than [*81 five years old by the time it filed its 2000 personal property tax return.Mead argues that this supports its claim that a useful life of six years or less, or a class life I designation, should be ap-

plied to its equipment. We disagree.

n3 The parties have waived an opportunity to present additional evidence before this board, choosing instead tohave us decide the matter upon the record certified to us by the commissioner. R.C. 5717.02.

The record establishes that, in 1998, Mead purchased a large amount of computer equipment as part of a projectknown as "Vision 2000." The purpose of the project was to address the so-called "Y2K" concerns that existed leadingup to 2000, to increase computer processing speed, and to standardize computer hardware and software throughoutMead's operations. S.T. 2; 11; 524. While this bulk computer update certainly affects the average age of computerequipment used in Mead's operations, we cannot conclude that the evidence establishes that the useful life of the equip-ment is itself less than six years. All we can conclude from the evidence is that Mead was in possession of relativelynew equipment for the tax year in question. The age shows no [*9] relationship to the equipment's lifespan.

Moreover, we can fmd no corroborating evidence to support Mead's claim that, for tax year 2000, its computerequipment had a shorter lifespan than that prescribed by the commissioner in his 302 computation. Mead has submittedto the commissioner some information pertaining to Mead's disposal of computer equipment. In reviewing this informa-tion, the commissioner concluded that the evidence, rather than showing a shorter useful life, supports the commis-

sioner's application of a class life II:

"In its Exhibit C of its submitted materials, the petitioner sent a summary of its computer equipment dis-posals by year for years 1996 through 2000. For 1996, the petitioner disposed of equipment purchased inyears 1978 through 1995, with the most disposals being for equipment purchased in 1989 and 1990.Equipment purchased in 1989 would be seven years old in 1996, and equipment disposed of in 1990would be six years old in 1996. As class life II has a life range of 6.0 to 8.4 years under the year 2000

Guidelines book, these disposals appear to fit well within class life II. For 1997 year disposals, the yearsof purchases with the most disposals [* 10] were 1987, 1988 and 1989, which are disposals of equipmentten, nine and eight years old. For year 1998 disposals, the year of purchases with the most disposals was1985 or thirteen year old equipment. Also for 1998 disposals, years of purchases with heavy disposalswere purchase years 1986, 1987, 1988 and 1989. These disposals would have been twelve, eleven, tenand nine years old, all older than the life range of 6.0 to 8.4 years of class life II. The 1999 and 2000 yeardisposals yield similar results. In year 2000 disposals, the purchase year with the greatest amount of dis-posals was 1991, or nine year old equipment." S.T. 2.

We have reviewed the evidence and agree with the commissioner that Mead has failed to demonstrate that theshorter class life I allowance should be applied to Mead's computer equipment for tax year 2000. In this regard, we re-mind Mead that it has the obligation to establish, through competent and probative evidence, its right to deviate from the

rates prescribed by the commissioner. Campbell Soup and PPG Industries, supra; Gahanna Heights, Inc. v Porterfield

(1968), 15 Ohio St.2d 189. The evidence before us does not [*11] support Mead's contention.

Mead next argues that the commissioner's 302 computation for tax year 2000 was not reflective of the generalcomputer industry. In support, Mead has submitted two articles, which recommend a replacement strategy for computerequipment that is less than that recognized for class life II property. We find neither study to be persuasive. Both studieswere issued in 2001, after the tax year in question. S.T. 492 and 497. Each deals only generally with computer replace-ment, and each is premised, in part, on conjecture about then current advances in the computer industry. We note, too,that one of the studies is based upon Microsoft's decision to retire certain servers and to phase out support for those

Appx.123

Page 4

2007 Ohio Tax LEXIS 857, *

servers. S.T. 497. This decision was announced in December of 2001, well after the filing in question. It invokes poten-tial consequences of a situation that did not exist during the tax year before us. While the two studies might be useful toMead in the development of its future replacement policies, we do not find them to be a reliable means to determine thecomputer class life for the specific tax listing date in issue in this appeal. Cf. Cincinnati Bell Telephone [* 12] Co. v.

Zaino (June 10, 2005), BTA Nos. 2003-K-765, 1612, unreported, at 46.

Finally, Mead notes that the commissioner adopted a new aging schedule for computer equipment in 2003, chang-ing the 302 computation to permit a revised class life I allowance on computer equipment. Mead argues the change in-dicates that the commissioner recognized that a class life II designation for computer equipment would lead to unrea-sonable and unjust results. The commissioner admits that this change was made in 2003 but stresses that the change wasmade three years after the filing of the return at issue. The commissioner argues that the valuation for Mead's computerequipment in tax year 2000, the year before us, was based on the 302 computation in place for 2000; it was not basedupon the 2003 computations, which would have been adjusted to reflect later developments in computer technology. We

agree with the commissioner.

Ohio. Adm. Code 5703-3-1 1(E) provides, "The commissioner shall review and, if necessary, modify the compositeannual allowance procedure, from time to time, to assure that such allowance procedure reflects current technology andbusiness experience." This authority enables the 302 [* 13] computation to mirror current trends on an industry-widebasis. Such modifications are necessary as business practices and technology change. However, the mere modificationof the 302 computation is not necessarily an admission that a prior computation was incorrect for the tax years to which

that prior computation applied.

We stress that we are concemed with Mead's filing for tax year 2000, not tax year 2003. Each tax year can be con-sidered independently, and, as such, when a class life determination is called into question, the burden is on the taxpayerto demonstrate that an adjustment should be made independent of any subsequent change in the annual allowance thatmay have arisen in later tax years. Here, Mead has provided no evidence that correlates the commissioner's 2003 modi-fication of the 302 computation to the annual allowance provided for 2000.

In summary, we find that Mead has failed to prove by competent and probative evidence that the commissioner'sfinal determination is in error. We further find that the detennina6on is supported by a preponderance of the record andis in accordance with law. Based upon all of the foregoing, we therefore affirm the Tax Commissioner's [* 14] final

determination.

Appx.l24

Page 1

2009 Ohio Tax LEXIS 1145, *

Trunkline Gas Company, Appellant, vs. William W. Wilkins, Tax Com-missioner of Ohio, Appellee. panhandle Eastem Pipe Line Company, AP-pellant, vs. William W. Wilkins, Tax Commissioner of Ohio, Appellee.

CASE NO. 2005-K-578 (PUBLIC UTILITY PERSONAL PROPERTYUTILITY PERSONAL PROP-ETAX); CASE NO. 2005-K-579RP YBTI^C

TAX)

STATE OF OHIO -- BOARD OF TAX APPEALS

2009 Ohio Tax LEXIS 1145

July 7, 2009, Entered

PRIOR HISTORY:Trunkline Gas Co. v. Wilkins, 2009 Ohio Tax LEXIS 308

(Ohio B.T.A., Mar. 3, 2009)

COUNSEL:[*1] APPEARANCES:

For the Appellants - Jones Day, Maryann B. Gall, Phyllis J. Shambaugh

For the Appellee - Richard Cordray, Attorney General of Ohio, Lawrence D. Pratt, Barton A.

Hubbard, Assistant Attorneys General

OPINION:

DECISION AND ORDER

Ms. Margulies, Mr. Johrendt, and Mr. Dunlap concur.Appellants, Trunkline Gas Company ("Trunkline") and Panhandle Eastern Pipe Line Company

("Panhandle"), filed appeals nl with this board challenging final determinations issued by the TaxCommissioner in which he modified assessments as originally issued for tax years 2002 and 2003,but denied the principal arguments advanced by appellants in their petitions for reassessment. Weproceed to consider these appeals based upon appellants' notices of appeal, the statutory transcriptscertified to this board by the Tax Commissioner, the record n2 of the hearing conducted with re-spect to these appeals, and the parties' post-hearing briefs. [*2] n3

nl While these appeals were initially consolidated only for purposes of hearing, the par-ties have treated the appeals collectively in their briefs and this board will do likewise in this

decision.n2 The hearing convened in these appeals took place over the course of two days, i.e.,

Apri125 and August 24, 2006. On October 4, 2006, this board granted a joint motion of theparties and ordered that corrected transcripts be prepared consistent with agreed errata sheets.

n3 Although not objected to, we note appellants included as attachments to their replybrief several documents apparently intended to have some evidentiary value which were not

Appx.125

f

2009 Ohio Tax LEXIS 1145, *Page 2

presented as exhibits during this board's hearing and which do not appear to have been in-cluded within the statutory transcripts certified by the commissioner. While the FERC orders,arguably, may have been included as legal authority, we find it appropriate to strike fromconsideration attachments 1 through 5. See, e.g., Columbus Bd ofEdn. v. Franklin Cty. Bd of

Revision (1996), 76 Ohio St.3d 13, 16-17.

[*3]Initially, we note that through their notices of appeal, Trunkline and Panhandle disputed on sev-

eral grounds n4 their classification as pipe-line companies n5 rather than natural gas companies forpurposes of establishing the applicable assessment rate, i.e., 88 percent versus 25 percent, used incalculating the amount of public utility personal property tax owed. See, generally, R.C. 5727.01(D)and 5727.111. The proceedings in these appeals were bifurcated in order to permit the parties topresent evidence and brief the non-classification issue which had been raised, while the remaining

issues were stayed pending resolution of Columbia Gas Transm. Corp. v. Zaino (July 28, 2006),

BTA No. 2003-K-1876, unreported, reversed sub nom. Columbia Gas Transm. Corp. v. Levin, 117

Ohio St.3d 122, 2008-Ohio-511, certiorari denied (2009), U.S. . Following the U.S. SupremeCourt's denial of the petition for certiorari filed in Columbia Gas Transm., appellants [*4] advised

this board they intended to present no additional evidence regarding the aforementioned classifica-tion issues. As such issues have not been further addressed within appellants' briefs, we consider

them to have been waived, see HealthSouth Corp, v. Levin, 121 Ohio St.3d 282, 2009-Ohio-584, at

P 18, fn. 2, or, alternatively, to have been resolved by virtue of the Ohio Supreme Court's decision in

Columbia Gas Transm., supra.

n4 Appellants not only challenged the commissioner's findings that they did not satisfythe statutory definition of a natural gas company, but they also raised a number of constitu-tional challenges which are beyond this board's jurisdiction, see, generally, MCI Telecommu-

nications Corp. v. Limbach (1994), 68 Ohio St.3d 195, and which were also considered and

rejected by the court in Columbia Gas Transm. Corp. v. Levin, 117 Ohio St.3d 122, 2008-

Ohio-511.

n5 Pertinent to the issues raised in appellants' notices of appeal and addressed by the court

in Columbia Gas Transm. Corp., supra, the commissioner described Tnmkline as "a'pipe-linecompany' as defined in R.C. 5727.01(D)(5). The petitioner operates a transcontinental inter-state pipeline system originating in the Texas and Louisiana Gulf Coast and travelling up intothe Midwestem states. The system has tie-ins to major Midwestern markets such as Chicago,Michigan, Memphis, and St. Louis. Its customers include large utility companies and indus-trial natural gas users. The petitioner provides an array of natural gas transportation and stor-age service for local distribution companies and industrial and commercial customers." BTANo. 2005-K-578, S.T. at 1. Panhandle was also considered "a 'pipe-line company' as definedin R.C. 5727.01(D)(5). The petitioner operates a 6,500-mile interstate gas pipeline systemoriginating in the Texas panhandle and Oklahoma, and travelling through Kansas, Missouri,Illinois, Indiana, Ohio and Michigan. The system has tie-ins to major Midwestern marketssuch as Chicago, Dayton, and Cincinnati. Its customers include large utility companies andindustrial natural gas users. The petitioner provides an array of natural gas transportation andstorage service for local distribution companies and industrial and commercial customers.".

BTANo. 2005-K-579, S.T. at I.

Appx. 126

2009 Ohio Tax LEXIS 1145, *

Page 3

In his final determination issued to Tnankline, the Tax Commissioner addressed the remainingnon-classification issue, in pertinent part, as follows:

"The petitioner [Trunkline Gas] and Panhandle Eastem Pipeline Company are relatedcorporations. Both were formerly wholly owned subsidiaries of CMS Energy Corpora-tion. Southem Union Company purchased both companies from CMS Energy Corpora-tion in June 2003. n6 Trunkline Gas and Panhandle Eastem Pipeline Company enteredinto an Ohio construction project together. The companies built a lateral pipeline inShelby and Logan Counties in Ohio ['the DP&L lateral line'] to serve Dayton Power &Light Company. Panhandle Eastern Pipeline Company paid for 65% of the cost of this

pipeline, and Trunkline Gas paid the other 35% of its cost. The petitioner also owns aconnection meter in Defiance County, Ohio that meters gas flows between a PanhandleEastern line and a Crossroads Pipeline Company line.

"Panhandle Eastern Pipeline Company reported its 65% of the cost of the DP&L lateralline on its 2002 and 2003 Ohio public utility property tax returns, [*6] and TrunklineGas reported its 35% of the cost of the DP&L lateral line on its 2002 and 2003 Ohiopublic utility property tax returns. The petitioner stated at the hearing that PanhandleEastem operates this jointly constructed line, and that the petitioner has no rights to op-erate this line.

"The petitioner now contends that it made a mistake in recording its share of the DP&Llateral line on its books and on its 2002 and 2003 Ohio public utility property tax re-turns as pipeline equipment (Mains) in Ohio. The petitioner contends that its cost forthe DP&L lateral line should have been recorded on its books as a'contribution in aidof construction', and not as Mains (pipeline equipment) as it originally recorded it, andalso contends that this cost is an intangible cost not subject to the public utility propertytax. Also, the petitioner argues that it cannot own pipeline equipment in Ohio because itdoes not have Federal Energy Regulatory Commission (FERC) approval to operate apipeline in Ohio. These contentions are not well taken.

"The petitioner has not met its burden of proof with regard to these contentions. Thepetitioner has not proven that its cost for 35% of the DP&L [*7] lateral line is an in-tangible asset. The DP&L lateral line is a tangible asset, a substantial length of pipelinecomprised of metal and other tangible materials. Although Panhandle Eastem and notthe petitioner operates this pipeline, it is clear that the petitioner owns 35% of the pipe-

line.

"The petitioner's representative writes in a September 3, 2003 letter that the petitionerintends to move the pipeline assets at issue from its current FERC account 367 (Mains)to FERC account 303 (Intangible Plant). Also, on October 1, 2003, the petitioner exe-cuted an 'assignment and conveyance' form in which it conveys its interest in the inter-connect meter facilities in Defiance County, Ohio to Panhandle Eastern. However, itshould be noted that both of these actions have occurred well after the December 31,2001 and December 31, 2002 lien dates at issue. On its 2002 and 2003 Annual Reports

Appx. 127

2009 Ohio Tax LEXIS 1145, *

Page 4

filed with the Department, the DP&L lateral line was reported in account 367, Mains.Similarly, the petitioner reported its Defiance County metering equipment in account369, Measuring & Regulating Station Equipment. Trunkline still owned the assignedequipment on the December 31, 2001 and December 31, [*8] 2002 tax lien dates. Fur-ther, it appears the petitioner has undertaken these actions recently (after the hearing onthis case) to bolster its arguments in this appeal, and that these actions are being drivenby its objective of exempting from property taxation all of the petitioner's Ohio equip-ment. As the petitioner conveyed the meter to sister corporation Panhandle EasternCorporation [sic] on October 1, 2003, well after the lien dates at issue, the meter wasstill owned by the petitioner on lien dates at issue ***.

"If the petitioner was granted its contention, the petitioner's sister corporation, Panhan-dle Eastem, would pay property tax on its 65% of the DP&L line, and the other 35% ofthe line owned by the petitioner would go untaxed. Such a result would be inequitableto other taxpayers that pay property tax on one hundred percent of the taxable value of

their assets." n7 BTA No. 2005-K-578, S.T. at 2-3.

n6 At the time of this acquisition, i.e., June 23, 2003, Trunkline's name was changed from

CMS Trunkline Gas Company, LLC to Trunkline Gas Company, LLC. Similarly, on June 23,

2003, Panhandle changed its name from Panhandle Eastem Pipeline Company to Panhandle

Eastem Pipeline Company, LLC, with its name again being changed on July 1, 2004 to Pan-

handle Eastem Pipeline Company, LP. Apr. 25, 2006 H.R. at 25-26.

[*9]

n7 In his final determination issued to Panhandle Eastern, the commissioner modified theassessments in order to "allocate the costs of the DP&L lateral pipeline from the taxing dis-tricts in which it was reported to the correct taxing districts in Logan and Shelby Counties

where the lateral is located." BTA No. 2005-K-579, at 4.

Through its notice of appeal, Trunkline specified the following as error:

"* ** The Commissioner, in his final deternination, erroneously found that as of taxlien dates, December 31, 2001 and December 31, 2002, Trunkline owned, operated andused tangible personal property located in Ohio. The taxable property of a public util-ity, as defined in R.C. 5727.06(A)(3)(a), includes only tangible personal property. Fur-ther, the tangible personal property must be used in business subject to public utility

property tax. United Telephone Co. of Ohio v. Tracy, 84 Ohio St. 3d 506 (1999). The

contribution-in-aid of construction erroneously reported by Trunkline on its 2002 and2003 annual reports of public utility property is intangible property, and is not 'taxableproperty' as defined in R.C. 5727.06(A)(3)(a), Further, Trunkline [*10] has no FERCauthority to operate any tangible personal property in Ohio and cannot use this property

in its business in Ohio.

Appx. 128

2009 Ohio Tax LEXIS 1145, *

"*** The Commissioner failed to order the Defiance County Auditor to refund, pursu-ant to the mandate of R.C. 5727.471(B)(1), the tax paid by Trunkline pursuant to erro-neously filed public utility personal property tax reports for tax years 2002 and 2003.***

"*** The Commissioner's reallocation of the DP&L Project and Crossroads Project n8to Logan and Shelby County is erroneous because Trunkline did not own, operate oruse tangible personal property in Ohio during tax years 2002 and 2003." (Numbered

paragraphs and footnote omitted.)

Page 5

n8 During this board's hearing, subsequently confirmed in their post-hearing brief, appel-lants indicated "they are not seeking any refund of public utility property tax relating to what

has been identified as the Crossroads meter." H.R. Vol. I, at 53.

The final determination issued to Panhandle was devoted primarily to the aforementioned classi-fication issues. However, the latter portion of the determination briefly acknowledged [* 11 ] the

reporting by it and Trunkline, respectively, of the 65% and 35% DP&L lateral line costs reflected

on their 2002 and 2003 public utility property tax returiis. The commissioner simply indicated thatrevised assessment certificates would be issued to Panhandle reallocating such costs to the appro-priate districts based upon information within the commissioner's possession. Through its notice ofappeal, Panhandle contested only its treatment as a pipe-line company, an issue which we have pre-

viously addressed. Accordingly, the remainder of our discussion will focus upon Trunkline's claims.

Annually; public utilities are required to file reports with the Tax Commissioner which will en-able him to "make any assessment or apportionment required under this chapter." R.C. 5727.08.

"[G]uided by the information contained in the report filed by the public utility and such other evi-dence and rules as will enable the commissioner to make these determinations," the commissioner isrequired to ascertain the "true value in money" of all such property required to be assessed. R.C.5727.10. Pertinent in this regard, the "taxable property" of a public utility includes "all tangible per-

sonal property [* 12] that on the thirty-first day of December of the preceding year was both located

in this state and *** owned by the public utility[.]" n9 R.C. 5727.06.

n9 As a further condition, property must also be "used in business" in order to be taxable.See, generally, R.C. 5709.01(B)(1). See, also, United Tel. Co. of Ohio v. Limbach (1994), 71

Ohio St.3d 369.

As previously noted, Trunkline claims it erroneously reported taxable public utility property inits 2002 and 2003 annual reports filed with the Tax Commissioner since as of the tax lien dates inquestion it did not own, operate, or use in its business any tangible personal property in Ohio. Insupport of its arguments, Trunkline presented the testimony of William W. Grygar, Panhandle's vicepresident of rates and regulatory affairs, and Joel Lopez, director of ad valorem tax of Southein Un-ion Company.

Grygar testified that Trunkline does not own or use pipeline or provide any natural gas transpor-tation services in Ohio. Rather, "Trunkline's pipeline system originates in the Gulf Coast in thestates of Texas [* 131 and Louisiana and also off-shore Louisiana. It then traverses in a northerly

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2009 Ohio Tax LEXIS 1145, *

direction through Louisiana, Arkansas, Mississippi, Tennessee, Illinois and Indiana and terminat[es]at the Indiana/Michigan border." H.R. Vol. I at 110. Grygar indicated that Trunkline is not subjectto regulation by the Public Utilities Commission of Ohio, but is instead regulated exclusively by the

Federal Energy Regulatory Commission ("FERC") and as such is not permitted to operate in Ohio.

Grygar indicated, however, that during the years in question Trunkline had made a "contribution

in aid of construction" ("CIAC")to Panhandle whereby Panhandle agreed to construct, own, and

operate the "DP&L lateral line " in Ohio n10 in order to provide natural gas transportation services

to Dayton Power & Light. Grygar testified that Trunkline's exclusive involvement in the DP&L lat-

eral was its CIAC,"an accounting transaction, where, in this case, Trunkline provided funds to Pan-

handle to defray some of the costs of constructing these laterals." H.R. Vol. I at 46. He also testified

that Trunkline acquired no ownership [* 14] interest in the DP&L lateral and that it received nofees, income, revenue, or return on its investment other than having "the opportunity to providetransportation service on its network of interstate pipelines, so it would deliver gas. It can providetransportation service and deliver the gas to Panhandle in Illinois, which is where Panhandle and

Trunkline interconnect." H.R. Vol. I at 47-48.

n10 The DP&L lateral line was comprised of the "Bellefontaine line," a pipeline con-structed in 1997 in Logan County running from Lake Station to Bellefontaine, and the "Har-din lateral," a pipeline constructed in 1998 in Shelby County running from Hardin Station to

Jackson Center.Lopez testified that as director of ad valorem tax for Southern Union Company, formerly CMS

Energy, he is involved in all aspects of the company's tax compliance responsibilities. When he be-gan with the company in 1999, he undertook a systematic review of property tax returns filed inevery state. Sometime in late 2003, he discovered that Trunkline haPfile annual reports in Ohiofor tax years 2002 and 2003 n11 in [* 15] which it reported taxable property. As it was his under-standing that Trunkline owned no pipeline in Ohio, he reviewed the company's reports and discov-

ered that Trunkline had listed its CIAC for the DP&L lateral in FERC account 367 rather than

FERC account 303. Lopez explained that the Department of Taxation requires annual returns to list

costs using the accounts system prescribed by FERC, with such costs being classified as related to

tangible or intangible property, divided by plant type, i.e., general, transmission, or distribution, andsubdivided even further into more specific categories. Lopez testified that Trunkline should havereported its CIAC associated with the DP&L lateral as intangible costs in FERC account 303 andnot FERC account 367, which is used to report costs associated with a transmission

"mains "

accourit, attributable to assets such as "valves, pipes, labor, cathodic protection, *** any g else

related to the physical installation of the pipe." H.R. Vol. I at 129.

nl l Trunkline's 2002 and 2003 reports were filed in Apri12002 and March 2003, respec-

tively.On August 22, 2003, Trunkline filed its second amended petition for reassessment [* 161 n12

for tax year 2002, in which it advised the department of the above-referenced claim and requestedthat taxes erroneously paid for that year be refunded. n13 Through a similar petition for reassess-ment filed on November 21, 2003, Trunkline advanced a similar claim with respect to the 2003 re-turn year. Trunkline also points out that in its 2004 annual report it reported no tangible property in

Ohio and that no assessment timely ensued.

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2009 Ohio Tax LEXdS 1145, *

Page 7

n12 Through its earlier petition, see S.T. Vol. 11, at 800-807, Trunkline challenged onlyits classification and percentage of true value at which its taxable property should have beenassessed, arguments which were reiterated in its subsequent filing. See S.T. Vol. II, at 773-781.

n13 Although R.C. 5727.471 allows the Tax Commissioner to direct a county auditor toeither refund taxes found to be overpaid or to credit such overpayments against fature taxeswhich may be charged to the public utility, Trunkline posits that the crediting provision is in-applicable because it is not a taxpayer in years subsequent to those in issue.

17]

Citing to the ownership history of Trunkline and Panhandle, the commissioner suggests in hisbrief that the parties to these appeals were involved in a "bit of a shell game" which "help[s] createconfusion as to which entity owns what company or property at any given time." Appellee's brief at11, 13. He also points to the absence of any documentation contemporaneous with the constructionof the DP&L lateral evidencing Panhandle`s exclusive ownership in such property or any of theterms and conditions associated with the financing arrangement claimed to exist by Trunkline. Inorder to qualify as CIAC, the commissioner posits that the construction must be for the benefit ofthe contributor and that the financial terms must have been established at the time of the contribu-tion, and in the absence of such evidence, the commissioner's findings must be affirmed. In the al-ternative; the commissioner has requested that should Trunkline's arguments be accepted, the mat-ters be remanded in order to permit him to increase the amount of tax owed by Panhandle.

In considering the sufficiency of an appellant's evidence, we must adhere to the court's mandate

expressed in cases such as Akan Aluminum Corp. v. Limbach (1989), 42 Ohio St.3d 121: [* 18]

"Absent a demonstration that the commissioner's findings are clearly unreasonable orunlawful, they are presumptively valid. Furthermore, it is error for the BTA to reversethe commissioner's determination when no competent and probative evidence is pre-sented to show that the commissioner's determination is factually incorrect. The find-ings of the Tax Commissioner are presumptively valid." Id at 124.

See, also, Nusseibeh v. Zaino, 98 Ohio St.3d 292, at PIO, 2003-Ohio-855; Cousino Construction

Co. v. Wilkins, 108 Ohio St. 3d 90, at P 11, 2006-Ohio- 162.

Despite the conunissioner's apparent suggestion to the contrary, we find no evidence appellantspurposefully schemed to create an ownership structure whereby public utility property would es-cape Ohio taxation. However, while Trunkline's witnesses appeared credible, we find their testi-mony, as well as the documentary evidence offered on Trunkline's behalf, insufficient to satisfy its

burden of proof.

Although it reported having taxable property in Ohio at the time it filed its annual reports,Trunkline asks that we now reverse the commissioner's [* 19] findings and confirm Panhandle'spurportedly exclusive construction, ownership, and operation of the DP&L lateral based almost ex-clusively upon a retrospective view of events, e.g., correspondence generated well after the period

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2009 Ohio Tax LEXIS 1145, *

in question, see BTA No. 2005-K-578, S.T. Vol. I at 18-21 (9/4/03 letter from Grygar) and BTANo. 2005-K-578, S.T. Vol. I at 38-39 (4/20/04 letter from DP&L's senior counsel),its 2004 returnreporting no taxable property in Ohio for the year following the ones in issue, and the testimony of

its witnesses surmising what had previously occurred.

n14 As referenced by the commissioner in his final determination, it appears worthy ofsome comment to note that at the time Tnmkline began advancing its arguments that it had notaxable property in Ohio, it assigned and conveyed to Panhandle its ownership interests in"certain metering and associated facilities" located in Defiance County, Ohio. BTA No. 2005-

K-578, S.T. Vol. I at 27-28.

It appears neither Grygar nor Lopez was directly involved in the claimed financing arrangementbetween Trunkline and Panhandle. [*20] Instead, it was only after meeting with department per-sonnel Grygar "determined and discovered" what Trunkline's involvement in the DP&L lateral had

been:

"[I]n 2003, I came up and appeared before Robert Koenig and we discussed these taxyears. In conjunction with those discussions, which were primarily centered aroundPanhandle -- But in conjunction with those discussions, we began looking at the re-cords and the tax forms that Trunkline had filed. And we looked into more detail intothis transaction and this transaction being the Panhandle/Trunkline transaction to con-

struct the Dayton Power & Light laterals.

"And we determined and discovered that Trunkline's involvement had been a contribu-

tion in aid of construction." H.R. Vol. I at 60-61.

Citing to the absence of billing statements, fees, and federal regulatory authority, Trunkline as-serts "the ,proof demanded by the Tax Commissioner doesn't exist and is not required by law." Ap-pellants' Reply Brief at 7. However, the record is replete with information demonstrating the sophis-ticated nature of the companies involved, their familiarity with accounting principles, and adherenceto federal and state regulatory and tax reporting [*21] requirements. Conspicuously absent, particu-larly in light of the not inconsequential dollar amounts involved, is documentation generated con-temporaneous with the construction of the DP&L lateral and the claimed CIAC financing arrange-ment setting forth the specific rights, responsibilities, and interests of the parties involved. Lopezconceded he did not know what Trunkline may have been entitled to in return for its contribution.See H.R. Vol. I at 171-172. Although Grygar testified as to the "opportunity" Trunkline received byvirtue of its financial "contribution," we question his ability to testify from personal knowledge in

this regard.

As noted by the court in Snider v. Limbach (1989), 44 Ohio St.3d 200:

"The BTA is granted great latitude in determining the weight to be given evidence andthe credibility of witnesses before it. It is not required to adopt the valuation fixed byany expert or witness. Value for tax purposes is a question of fact, and this finding isprimarily within the province of the taxing authorities. This court will not disturb such

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2009 OhioTax LEXIS 1145, *

Page 9

a decision unless it affirmatively appears from the record that such decision is unrea-

sonable [*22] or unlawful. Cardinal Federal S. & L. Assn. v. Bd. of Revision (1975),

44 Ohio St.2d 13, *** paragraphs two, three, and four of the syllabus."). Id. at 202.

(Parallel citations omitted.)

While this board appreciates the arguments advanced by Trunkline, the situation in which itfinds itself was created by its own doing, i.e., it reported taxable property in Ohio, failed to providedocumentation confirming theexistence of the CIAC at the time it was purportedly entered into,and instead offered what is tantamount to speculation by persons later reviewing the companies' re-cords. Based upon the totality of the record, we find the evidence provided insufficient to sustain a

reversal of the commissioner's findings.

Accordingly, it is the decision of this board tfiat appellants' specifications of error are not welltaken and they are therefore overruled. It is hereby ordered that the Tax Commissioner's final de-

terminations must be, and hereby are, affirmed.

Appx. 133

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AT7'ACFiMENY C

iieaithSoutta•s Asset Data Aiapear®ng in its Amended Fixeai Asset Detmii But Omitted in iis Exhibit 4

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