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Congressman wins refund of Ohio tax penalty, pt.1

Tax policy is often  slow to evolve. A new section of the federal tax code or Ohio tax statutes may be added or an older section amended, but after this change, there may be little in the way of interpretative guidance from the Internal Revenue Service or the Ohio Department of Taxation. The agencies may take years to issue regulations, and tax practitioners may suggest strategies to taxpayers that can take advantage of the lack of clear guidance.

When the IRS or the Ohio tax commissioner finally issues guidance, there can be issues with tax obligations that arose during the period of uncertainty. The tax authority may revisit prior tax filings and in some cases, may perform a tax audit and impose a demand on a taxpayer for taxes it determines were owed from that period.

Such a case occurred when the Ohio Tax commissioner reversed a position on the taxation of income from an "electing small business trust" (ESBT). The taxpayer, an Ohio Congressman, received payments from a Subchapter S corporation whose shares were held in an ESBT.

With a Subchapter S, income from the corporation is not taxed at the corporate level, but instead "passes through" to the shareholder and is taxed in a manner similar to a partnership. This has the advantage of eliminating the "double taxation" that occurs when income is taxed to a Subchapter C corporation and then taxed again when distributed to the shareholders.

In 2000, there was a dispute in Ohio if this income from an ESBT was taxable to the shareholder. The Department of Taxation imposed a tax on the taxpayer based on its audit that found income $13,730,440 from the ESBT. The taxpayer had asserted a $247,336 loss. The department also imposed a penalty.

The case was recently resolved by an Ohio Supreme Court decision, after years of litigation, which we will look at next week.


Source:, "U.S. Rep. Jim Renacci wins back almost $360,000 in Ohio Supreme Court tax case," Sabrina Eaton, June 15, 2016

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