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Illinois Tool Works, Inc. v. Lindley, 70 Ohio St.2d 175, 436 N.E.2d 220, 24 O.O.3d 280

Facts

Illinois Tool Works, Inc. (ITW) is an out-of-state corporation that was required to pay a franchise tax for doing business in Ohio. For the tax years 1973 and 1974, ITW sought to exclude the value of personal property it owned but rented to a lessee using the property in Ohio from its property factor. ITW also wanted to include income from the sale of treasury bills in its sales factor. The Tax Commissioner denied both requests, leading ITW to appeal to the Board of Tax Appeals, which ruled in favor of ITW.

Issue

Whether the value of property owned by the taxpayer and rented to a lessee using the property in its trade or business must be included in the computation of the taxpayer's property factor, and whether the sale of treasury bills purchased at discount and sold at par value must be included in the computation of the sales factor.

Two issues are involved in this appeal. First, whether the value of property owned by the taxpayer and rented to a lessee which uses the property in its trade or business must be included in the computation of the taxpayer's property factor pursuant to R.C. 5733.05(B)(2)(a). Second, whether the sale of treasury bills purchased at discount and subsequently sold at par value must be included in the computation of the sales factor pursuant to R.C. 5733.05(B)(2)(c).

Rule

The property factor is a fraction where the numerator is the average value of the corporation's real and tangible personal property owned or rented and used in the trade or business in the state during the taxable year, and the denominator is the average value of all the corporation's real and tangible personal property owned or rented and used in the trade or business everywhere during such year.

The formula for computing the property factor is set forth in R.C. 5733.05(B)(2)(a), which provides in relevant part: 'The property factor is a fraction the numerator of which is the average value of the corporation's real and tangible personal property owned or rented, and used in the trade or business in this state during the taxable year, and the denominator of which is the average value of all the corporation's real and tangible personal property owned or rented, and used in the trade or business everywhere during such year.'

Analysis

The court found that ITW was not required to include the value of the rental property in its property factor because the lessee was the one using the property in its trade or business. The court reasoned that the statute allows for the property to be attributed to either the owner or the lessee, and since the lessee was required to include the rental value in its own property factor, ITW should not be penalized by having to include the same property in its own calculation. Regarding the treasury bills, the court noted that the Tax Commissioner's argument about the nature of the sale was not properly before the court, as it was not raised in the notice of appeal.

We find merit in ITW's arguments in the following reasoning of the Board of Tax Appeals: 'The question then arises: can a lessor and a lessee both ‘use’ the property in a trade or business at the same time, and therefore have the same property included in each of their property factor formulas for franchise tax purposes? The Board must read (R.C.) 5733.05(B)(2)(a) in a reasonable manner. Two people cannot each ‘own’ the same property at 100% of its value, and neither, do we think can a lessor and lessee.'

Conclusion

The court affirmed the decision of the Board of Tax Appeals, allowing ITW to exclude the value of the rental property from its property factor and to include the sale of treasury bills in its sales factor.

The decision of the Board of Tax Appeals, being neither unreasonable nor unlawful, is therefore affirmed.

Who won?

Illinois Tool Works, Inc. prevailed in the case because the court agreed with its interpretation of the tax statutes, allowing it to exclude the rental property value and include treasury bill sales.

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