Time Warner Cable, Inc. v. Cincinnati

2020 Ohio 4207, 157 N.E.3d 941

• Court: Ohio Court of Appeals
• Decided: August 26, 2020
• Docket: C-190375
• Status: Published

Opinion

[Cite as Time Warner Cable, Inc. v. Cincinnati, 2020-Ohio-4207.]

IN THE COURT OF APPEALS FIRST APPELLATE DISTRICT OF OHIO HAMILTON COUNTY, OHIO

TIME WARNER CABLE, INC., & : APPEAL NO. C-190375 SUBSIDIARIES, TRIAL NO. 2017-1448 : Plaintiff-Appellee, : O P I N I O N. vs.

CITY OF CINCINNATI, :

and :

TED NUSSMAN, TAX : COMMISSIONER CITY OF CINCINNATI INCOME TAX : DIVISION :

Defendants-Appellants. :

Appeal From: Ohio Board of Tax Appeals

Judgment Appealed From Is: Affirmed

Date of Judgment Entry on Appeal: August 26, 2020

Eversheds Sutherland (US) LLP, Michael R. Nelson and Michael J. Hilkin, for Plaintiff-Appellee Time Warner Cable, Inc., & Subsidiaries,

Paula Boggs Muething, City Solicitor, and Shuva J. Paul, Assistant City Solicitor, for Defendants-Appellants City of Cincinnati and Ted Nussman. OHIO FIRST DISTRICT COURT OF APPEALS

BERGERON, Judge.

{¶1} Although nothing may be as certain as death and taxes, perhaps cable

bills fall in close behind. This case involves two of those three eventualities, with a

cable provider trying to escape certain taxation imposed by the city of Cincinnati.

More broadly, however, this case involves a clash between a municipality’s right to

tax pursuant to the constitutionally-engrained Home Rule Amendment and the

General Assembly’s ability to curtail that right. After careful review, we conclude

that aspects of the city’s municipal code must yield to the state statute, and we

accordingly affirm the judgment below.

I.

{¶2} In late 2014, Time Warner Cable, Inc., and various subsidiaries

(collectively, “Time Warner”) filed its city of Cincinnati income tax return for the

2013 tax year. After its initial filing in 2014, Time Warner subsequently amended its

return in 2015. Upon review of that filing, however, the city’s Department of

Finance Income Tax Division balked, notifying Time Warner that due to an

adjustment, it owed a large sum in outstanding taxes and penalties. Time Warner

protested, appealing this assessment to the local board of review as provided by

former Cincinnati Municipal Code 311-97. Although Time Warner initially

challenged three aspects of the city’s assessment, the parties managed to resolve two

of these issues, leaving the local board of review to sort out the interplay between the

Cincinnati Municipal Code 311-11’s and Regulation R11’s (promulgated to aid the

enforcement of Cincinnati Municipal Code Chapter 311) consolidated income tax

return requirements, on the one hand, and the mandates of R.C. 718.06, on the

other. The local board ultimately upheld the assessment, which required that Time

Warner’s consolidated return exclude certain subsidiaries that did not do business in

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Cincinnati from the 2013 filing, resulting in hundreds of thousands of dollars in

outstanding tax liability.

{¶3} The dispute, at its core, involves the federal tax concept of an

“affiliated group” entitled to file “consolidated” tax returns. At the risk of

oversimplifying these matters, the IRS permits “an affiliated group of corporations to

file a consolidated federal return. See 26 U.S.C. § 1501. This serves as a convenience

for the government and taxpayers alike.” Rodriguez v. FDIC, __U.S.__, 140 S.Ct.

713, 716, 206 L.Ed.2d 62 (2020). The consolidated filing essentially simplifies the

tax reporting process, particularly for corporations with subsidiaries scattered across

geographic boundaries (like Time Warner) and it enables an “affiliated group” to

offset losses by certain corporate family members against others. In this case, Time

Warner sought to file a consolidated return with the city that mirrored the affiliated

group that it used for its federal tax filing, but the city objected. Pointing to its

ordinance, it told the cable conglomerate that its “affiliated group” could only

encompass affiliated corporate entities actually doing business in Cincinnati.

{¶4} Unsatisfied with the local board’s disposition of this question, Time

Warner next turned to the Ohio Board of Tax Appeals (“BTA”) for relief as provided

by R.C. 5707.011, maintaining that the municipal code and accompanying regulation

conflicted with former R.C. 718.06. Time Warner asserted that the General

Assembly enjoyed the right to limit the municipal tax authority, and that it

effectuated exactly that by virtue of the plain language of the statute that enabled

Time Warner to file a consolidated filing replicating the members in its federal

consolidated return. Before the BTA, the city of Cincinnati and Ted Nussman, Tax

Commissioner for the City of Cincinnati Income Tax Division (collectively, the “City”)

countered that no such conflict existed because former R.C. 718.06 did not expressly

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preempt the municipal ordinance, and therefore, the ordinance constituted a valid

exercise of local taxation (with a nod to the Home Rule Amendment). The BTA,

however, ultimately agreed with Time Warner, finding that the statute’s plain

language expressly required that a municipality accept a consolidated return from an

affiliated group of corporations where the affiliated group as a whole (and not each

individual corporation) was subject to the municipality’s income tax.

{¶5} The City then commenced this appeal, framing a single assignment of

error. Insisting that the BTA erred by reversing the decision of the local board of

review, the City maintains that no express conflict existed between former Cincinnati

Municipal Code 311-11 and Regulation R11 with former R.C. 718.06 and that Time

Warner must file in accordance with those local requirements.

II.

{¶6} In reviewing a decision of the BTA, we generally do not sit as a de novo

trier of fact, but where, as here, our task entails statutory construction, this

constitutes a legal issue that we decide de novo on appeal. New York Frozen Foods,

Inc. v. Bedford Hts. Income Tax Bd. of Rev., 150 Ohio St.3d 386, 2016-Ohio-7582,

82 N.E.3d 1105, ¶ 8; Gesler v. Worthington Income Tax Bd. of Appeals, 138 Ohio

St.3d 76, 2013-Ohio-4986, 3 N.E.3d 1177, ¶ 10. Therefore, under the circumstances

presented here, we need not defer to the BTA’s determination, but rather undertake

our review de novo.

A.

{¶7} We begin our statutory interpretation journey with a prefatory stop at

Article XVIII, Section 3 of the Ohio Constitution, known as the “Home Rule

Amendment,” which allows municipalities to exercise “all powers of local self-

government.” Central to this self-governing authority lies the power to tax. Gesler at

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¶ 18; Cincinnati Bell Tel. Co. v. Cincinnati, 81 Ohio St.3d 599, 605, 693 N.E.2d 212

(1998), quoting Zielonka v. Carrel, 99 Ohio St. 220, 227, 124 N.E. 134 (1919) (“The

municipal taxing power is one of the ‘powers of local self-government’ expressly

delegated by the people of the state to the people of municipalities.”). But this power

is not absolute (as the City readily acknowledges), as the Ohio Constitution also

allows the General Assembly to pass laws “to limit the power of municipalities to levy

taxes,” Article XVIII, Section 13, Ohio Constitution, and to “restrict [municipal]

power of taxation[.]” Article XIII, Section 6, Ohio Constitution. These provisions

help frame the debate, as our “analysis turns on whether the General Assembly

exercise[d] its power to limit or restrict the municipal taxing authority” through

former R.C. 718.06. Gesler at ¶ 19.

{¶8} But the Supreme Court teaches us that, in exercising its power to

restrict or limit municipal taxation, the General Assembly must do so expressly.

Cincinnati Bell at 599 (“The taxing authority of a municipality may be preempted or

otherwise prohibited only by an express act of the General Assembly.”). Such a

requirement flows from the constitutional division of labor: “the Constitution

presumes that both the state and municipalities may exercise full taxing powers,

unless the General Assembly has acted expressly to preempt municipal taxation,

pursuant to its constitutional authority to do so.” Id. at 607. Therefore, the power to

preempt is not implicated “merely by virtue of the state’s entering a particular area of

taxation[.]” Panther II Transp., Inc. v. Seville Bd. of Income Tax Rev., 138 Ohio

St.3d 495, 2014-Ohio-1011, 8 N.E.3d 904, ¶ 11, citing Cincinnati Bell at 605. In other

words, no concept of implied preemption exists for purposes of regulating the

municipal taxing authority by the General Assembly. Id. at ¶ 20 (“[I]n the context of

Cincinnati Bell’s reasoning, the requirement of ‘an express act of restriction’ means

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only that the state does not preempt local taxes merely by enacting a similar tax of its

own.”).

{¶9} With the analytical table set, we now turn to the dueling statutory and

municipal code provisions. Former R.C. 718.06 (in effect during time periods

germane to this appeal) provided:

[A]ny municipal corporation that imposes a tax on the income or net

profits of corporations shall accept for filing a consolidated income tax

return from any affiliated group of corporations subject to the

municipal corporation’s tax if that affiliated group filed for the same

tax reporting period a consolidated return for federal income tax

purposes pursuant to section 1501 of the Internal Revenue Code.

On the other side of the ledger, former Cincinnati Municipal Code 311-11(a) allowed

an affiliated group of corporations to file a consolidated return if that affiliated group

filed “for the same taxable year a consolidated return for federal income tax purposes

pursuant to Section 1501 of the Internal Revenue Code.” The ordinance further

explained, however, “[o]nly corporations subject to the tax imposed by this chapter

may be included in such consolidated return filed for Municipal income tax

purposes.” Former Cincinnati Municipal Code 311-11(a). Underscoring the point,

Regulation R11 provided that “[a] consolidated return must include all companies

that are so affiliated and that conduct business in the Municipality.” Former

Regulation R11(A). The municipal code thus sharply limited the array of entities that

could constitute part of a corporation’s “affiliated group.”

{¶10} In the City’s eyes, this limitation ushers in no conflict with former R.C.

718.06 because the General Assembly failed to spell out all of the details for an

“affiliated group” in the statute (an omission that the legislature corrected in a

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subsequent enactment, 2014 Sub.H.B. 5). Bolstering this point, the City focuses on

two aspects of the statute (1) the use of the indefinite article “a” before the phrase

“consolidated income tax return,” and (2) the phrase “subject to the municipal

corporation’s tax” as a restrictive modifier.

{¶11} In addressing the City’s assertions, we are reminded that “[t]he first

rule of statutory construction requires courts to look at the statute’s language to

determine its meaning. * * * Courts may not delete words used or insert words not

used.” Cincinnati Community Kollel v. Testa, 135 Ohio St.3d 219, 2013-Ohio-396,

985 N.E.2d 1236, ¶ 25. Therefore, while we acknowledge the statute’s use of “a

consolidated income tax return,” we must also read that in conjunction with the

phrase “from any affiliated group of corporations subject to the municipal

corporation’s tax,” and the statute’s anchoring these points with “pursuant to section

1501 of the Internal Revenue Code.” See Hauser v. Dayton Police Dept., 140 Ohio

St.3d 268, 2014-Ohio-3636, 17 N.E.3d 554, ¶ 9 (noting that in construing statutes,

courts do not pick out one sentence and disassociate it from context but construe the

statute as a whole). Construing these aspects together, the statute ultimately

identifies what type of consolidated return the City shall accept for filing, i.e., a filing

from “any affiliated group of corporations” so long as that “affiliated group filed for

the same tax reporting period a consolidated return for federal income tax

purposes[.]” While the City imagines a multitude of “affiliated groups” within a

corporation structure, the statute links the affiliated group to the one that made a

federal income tax filing, refuting the City’s interpretation. In our case, there is no

dispute that the “affiliated group” presented by Time Warner comported with the

affiliated group that filed a consolidated federal return. The statute blesses this exact

maneuver and requires that municipalities “shall accept” such a return, whereas the

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municipal code (in these circumstances) proscribes it. That showcases the direct

conflict between the two.

{¶12} Endeavoring to portray harmony rather than conflict, the City features

the phrase “subject to the municipal corporation’s tax” as ratifying that the

consolidated return may include only those entities doing business in the City by

modifying the word “corporation” in this manner. But we are unconvinced by the

City’s grammatical parsing—after all, its conceptualization of “affiliated group”

would render the General Assembly’s later reference to the affiliated group having

filed as such for federal purposes during the same taxable year meaningless. See

State ex rel. Carna v. Teays Valley Local School Dist. Bd. of Edn., 131 Ohio St.3d

478, 2012-Ohio-1484, 967 N.E.2d 193, ¶ 19 (courts should avoid a construction of a

statute that would render a provision meaningless or superfluous). The later

reference to affiliated group by the statute as “that affiliated group” indicates that the

affiliated group filing a consolidated return for municipal purposes is synonymous

with the group filing for federal income tax purposes, not merely some subset of

corporations subject to the municipal tax. That also strikes us as the most logical

reading of the statute.

{¶13} We find our conclusion supported further by the General Assembly’s

particular utilization of “affiliated group” and reference to the Internal Revenue

Code. While the General Assembly neglected to define “affiliated group” in former

R.C. 718.06, it represents a term of art for federal tax purposes. See 26 U.S.C. 1504

(defining “affiliated group” as certain includible corporations connected through

stock ownership with a parent company). In construing a statute, we must generally

assign words their common usage, but “[w]ords and phrases that have acquired a

technical or particular meaning * * * shall be construed accordingly.” R.C. 1.42;

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Youngstown Sheet & Tube Co. v. Lindley, 56 Ohio St.2d 303, 309, 383 N.E.2d 903

(1978) (applying the long-standing federal treatment of term to undefined statutory

term); Hoffman v. State Med. Bd. of Ohio, 113 Ohio St.3d 376, 2007-Ohio-2201, 865

N.E.2d 1259, ¶ 26 (noting that, in construing statutes, where a word has a technical

definition the statute shall be construed accordingly). Thus, the conspicuous

appropriation of “affiliated group” while referencing federal tax principles further

elucidates the statute’s purpose, reinforcing our conclusion in the preceding

paragraph. Conversely, the City’s vision of “affiliated group” requires a definition cut

from whole cloth.

{¶14} Based on the statute’s plain language, we find that the General

Assembly took clear and affirmative measures to limit the City’s authority to impose

the income tax in the manner it sought. Cincinnati Bell, 81 Ohio St.3d at 606, 693

N.E.2d 212 (municipal power to levy tax is to be considered valid “unless the General

Assembly has acted affirmatively by exercising its constitutional prerogative.”); S.B.

Carts, Inc. v. Put-in-Bay, 161 Ohio App.3d 691, 2005-Ohio-3065, 831 N.E.2d 1052, ¶

11 (6th Dist.) (ordinance was valid exercise of taxing power where General Assembly

had not acted affirmatively to limit that power). This represents an appropriate

exercise of the General Assembly’s constitutional power, which extends to not only

limit the imposition of taxes but “endows the General Assembly with the capability to

circumscribe the imposition, raising, and collection of a municipal tax.” City of

Athens v. Testa, 2019-Ohio-277, 119 N.E.3d 469, ¶ 44 (10th Dist.) (interpreting the

word “levy” in Article XVIII, Section 13, Ohio Constitution to permit the General

Assembly to limit municipal power to impose, collect, and administer taxes);

Cincinnati Imaging Venture v. City of Cincinnati, 116 Ohio App.3d 1, 4, 686 N.E.2d

528 (1st Dist.1996) (General Assembly allowed to regulate the levy and collection of

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municipal tax as well as limiting the imposition of those taxes). To that point, the

City does not protest that the General Assembly exceeded its constitutional bounds

here.

{¶15} In short, the City urges us to adopt a construction of former R.C.

718.06 that would render aspects of the statute a hollow letter. But we “must

presume that the language chosen by the General Assembly was intended to be

effective.” State ex rel. Cincinnati Enquirer v. Pike Cty. Coroner’s Office, 153 Ohio

St.3d 63, 2017-Ohio-8988, 101 N.E.3d 396, ¶ 22; Griffith v. Aultman Hosp., 146

Ohio St.3d 196, 2016-Ohio-1138, 54 N.E.3d 1196, ¶ 18 (in interpreting a statute, the

court’s paramount concern is legislative intent, which should be sought first from the

language of the statute and the words used). Thus, the statute expressly preempts

aspects of former Cincinnati Municipal Code 311-11, because it specifically required

municipalities to accept a consolidated income tax return from the same affiliated

group which filed for federal income tax purposes.

B.

{¶16} Alternatively, the City posits that former R.C. 718.06 impermissibly

compels the City to exercise a power of taxation. Contrary to the City’s contention,

however, it already exercised its power of taxation by imposing an income tax under

Cincinnati Municipal Code Chapter 311. Former R.C. 718.06 constituted a valid

limitation on that power, rather than any sort of impermissible compulsion. See

New York Frozen Foods, Inc., 150 Ohio St.3d 386, 2016-Ohio-7582, 82 N.E.3d 1105,

at ¶ 30 (“Former R.C. 718.06 did limit local taxing authority[.]”).

{¶17} Similarly (relying on 90-year-old caselaw) the City contends that the

statute unlawfully forces it to exercise extraterritorial power by taxing beyond its

borders. Even if former R.C. 718.06 required a municipality to tax extraterritorially

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(which strikes us as a dubious proposition), a municipality may act extraterritorially

where granted such authority by statute. Springfield v. All Am. Food Specialists,

Inc., 85 Ohio App.3d 464, 469, 620 N.E.2d 120 (2d Dist.1993) (territorial limitations

of the Home Rule Amendment may be overcome where expressly granted by

statute). Prudential Co-op. Realty Co. v. City of Youngstown, 118 Ohio St. 204, 211-

212, 160 N.E. 695 (1928) (ordinance constitutional where statute conferred on

municipality extraterritorial authority); Tatco Dev., Ltd. v. Montgomery Cty., Ohio,

2d Dist. Montgomery No. 18387, 2001 WL 28674, *6 (Jan. 12, 2001) (municipality

may only exercise extraterritorial authority if granted such by the legislature). As we

already concluded above, the statute requires the City to accept a consolidated filing

from an affiliated group that filed as such for federal purposes, negating any

concerns that the City might transgress the limits of its authority.

{¶18} Finally, the City asserts that even if Time Warner “submitted the

consolidated return it preferred * * * it would still have to abide by the City’s

accounting and apportionment methods” under Regulation R11. But to the extent

that Regulation R11 limited the filing of a consolidated return by an affiliated group,

it too stands in conflict with R.C. 718.06 and suffers the same preemptive fate.

Regardless, we need not ponder the nuances of Time Warner’s tax liability with the

City—we need only decide the statutory interpretation question presented to us.

{¶19} In light of the preceding analysis, we affirm the decision of the BTA

and overrule the City’s sole assignment of error.

Judgment affirmed.

MYERS, P.J., and CROUSE, J., concur.

Please note: The court has recorded its own entry this date.