Navistar, Inc. v. Testa (Slip Opinion) , 153 Ohio St. 3d 48 ( 2018 )


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  • [Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as
    Navistar, Inc. v. Testa, Slip Opinion No. 2018-Ohio-1895.]
    NOTICE
    This slip opinion is subject to formal revision before it is published in an
    advance sheet of the Ohio Official Reports. Readers are requested to
    promptly notify the Reporter of Decisions, Supreme Court of Ohio, 65
    South Front Street, Columbus, Ohio 43215, of any typographical or other
    formal errors in the opinion, in order that corrections may be made before
    the opinion is published.
    SLIP OPINION NO. 2018-OHIO-1895
    NAVISTAR, INC., APPELLANT, v. TESTA, TAX COMMR., APPELLEE.
    [Until this opinion appears in the Ohio Official Reports advance sheets, it
    may be cited as Navistar, Inc. v. Testa, Slip Opinion No. 2018-Ohio-1895.]
    R.C. 5751.53—Commercial-activity-tax credit—Board of Tax Appeals (“BTA”)
    properly carried out our instructions on remand—BTA’s decision holding
    that the original valuation allowance reported on taxpayer’s Amortizable
    Amount Report was not in compliance with generally accepted accounting
    principles affirmed.
    (No. 2015-2055—Submitted February 13, 2018—Decided May 16, 2018.)
    APPEAL from the Board of Tax Appeals, No. 2010-575.
    ____________________
    Per Curiam.
    {¶ 1} This case involves the commercial-activity-tax (“CAT”) credit
    prescribed by R.C. 5751.53, and it comes before us for a second time, following
    our remand in Navistar v. Testa, 
    143 Ohio St. 3d 460
    , 2015-Ohio-3283, 
    39 N.E.3d 509
    (“Navistar I”). In Navistar I, we concluded that the Board of Tax Appeals
    SUPREME COURT OF OHIO
    (“BTA”) had “ignored the testimony of Navistar’s experts, an omission that ma[de]
    the BTA’s decision unreasonable and unlawful.” 
    Id. at ¶
    7. We vacated the
    decision of the BTA and remanded the cause with the instruction that the BTA
    “determine, based on a consideration of all the evidence in accordance with
    [Navistar I], whether the valuation allowance originally reported on Navistar’s
    Amortizable Amount Report was or was not in compliance with GAAP” (generally
    accepted accounting principles). 
    Id. at ¶
    40. In its decision on remand, the BTA
    again upheld the tax commissioner’s reduction of Navistar’s CAT credit to zero,
    and Navistar has appealed for the second time.
    {¶ 2} In Navistar I, we noted that Navistar referred to the CAT credit as part
    of a “grand bargain” under which Ohio franchise-tax payers such as Navistar would
    support the enactment of the CAT and would receive a credit that allowed them to
    “retain[] some portion of the value of their Ohio deferred-tax assets such as NOLs”
    (net operating losses), which would otherwise be lost when the CAT replaced the
    former Ohio corporation franchise tax. 
    Id. at ¶
    10. The CAT credit consists of “a
    portion of the Ohio-apportioned NOLs on [the company’s] books at the end of [the
    company’s] 2004 fiscal year, which, when adjusted, furnished a total amount of
    credit that could be used to reduce CAT liabilities over a period of up to 20 years.”
    
    Id. at ¶
    11. Under R.C. 5751.53(A)(9) and (B), this potential credit is referred to as
    the “amortizable amount.” Navistar I at ¶ 12. One feature of the amortizable
    amount that was significant in Navistar I and is significant in the present appeal is
    that in determining the amortizable amount, the NOLs are reduced by a percentage
    called the valuation allowance, which is an “adjustment dictated by accounting
    principles that is made on the books from year to year to reflect the likelihood that
    the company will realize the tax benefit of the NOLs,” 
    id. {¶ 3}
    The factual and procedural background set forth in Navistar I is also
    relevant here. Navistar timely filed its Amortizable Amount Report, and in that
    report, it applied a valuation allowance of 62.4 percent; the total amortizable
    2
    January Term, 2018
    amount reported was $27,048,726. 
    Id. at ¶
    15-17. But the letter to the tax
    department that accompanied the Amortizable Amount Report stated that Navistar
    was undergoing a “restatement examination of its financial statements for the years
    2002, 2003, 2004, and 2005,” that “changes [would] occur to the 2002, 2003, and
    2004 financial statements as part of [the] examination,” and that such changes
    would impact the report. 
    Id. at ¶
    20. In December 2007, a “massive restatement”
    of the financials for the earlier years was noted in Navistar’s annual Form 10-K
    filed with the Securities and Exchange Commission. As noted in Navistar’s Form
    10-K, in light of the changes to the underlying financial statements, the restatement
    of the financials increased the applicable valuation allowance to 100 percent.
    Navistar I at ¶ 17. The tax commissioner adopted the 100 percent valuation
    allowance in his final determination, which effectively eliminated Navistar’s entire
    CAT credit, 
    id. at ¶
    18, and the BTA affirmed the tax commissioner’s
    determination. Navistar appealed the BTA’s decision, and in Navistar I, we
    clarified the applicable legal principles and, as mentioned above, we remanded the
    cause to the BTA for a full consideration of the evidence. Navistar now contends
    that the BTA failed to properly carry out our instructions on remand. For the
    reasons set forth below, we disagree.
    The BTA’s decision on remand
    {¶ 4} In its decision on remand, the BTA took as its starting point the Form
    8-K that Navistar filed with the Securities and Exchange Commission on April 6,
    2006, which states that “the company’s previously issued audited financial
    statements and the independent auditor’s reports thereon for the years ended
    October 31, 2002 through 2004, and all quarterly financial statements for periods
    after November 1, 2002 should no longer be relied upon because of errors in such
    financial statements.” The BTA noted that that filing occurred “more than 75 days
    before [Navistar filed] the June 2006 amortization report with the Tax
    Commissioner” and that therefore the Amortizable Amount Report itself was filed
    3
    SUPREME COURT OF OHIO
    in the context of Navistar’s own admission that the financial statements that
    undergirded the reported amortizable amount were unreliable. BTA No. 2010-575,
    2015 Ohio Tax LEXIS 4158, *7 (Nov. 30, 2015).
    {¶ 5} The BTA found that Navistar’s experts, Douglas Pinney and Beth
    Savage, “reviewed limited information, i.e., not all of Navistar’s underlying books
    and records” and that the testimony of both “reflects only the perception that each
    valuation allowance, as reported initially and upon restatement, was properly based
    upon Navistar’s books and records, as they existed at the time of each report’s
    submission.” (Emphasis sic.) 
    Id. at *8.
    The BTA drew the conclusion that “the
    valuation allowance set forth in the June 2006 report could not have complied with
    GAAP, because the historical financial information upon which that valuation was
    based, was unreliable and inaccurate, i.e., not GAAP compliant.” 
    Id. at *9.
                      The meaning of the term “books and records”
    {¶ 6} Before we consider Navistar’s objections to the BTA’s findings and
    its conclusion, we must clarify the term “books and records” as it is used in the
    BTA’s decision. As Pinney, one of Navistar’s experts, explained, “[f]inancial
    statements are derived from the books and records of a company, but the financial
    statements contain * * * footnote disclosures and other information that is typically
    not recorded in books and records.” Navistar’s other expert witness, Savage,
    testified that “[b]ooks and records would include everything that a company has
    and maintains to track their transactions.” When asked whether “books and records
    include financial statements,” she replied that “it’s more accurate to state that the
    books and records * * * are used to prepare the financial statements.”
    {¶ 7} Addressing the same subject, the tax commissioner’s expert, Ray
    Stephens, stated that “the books are used to prepare the financial statements and
    include the financial statements and the records or other qualifying information that
    are used to prepare the financial statements.” Although Stephens testified that from
    an accounting standpoint, the term “books and records” includes the valuation
    4
    January Term, 2018
    allowance, because that information is used to prepare the financial statement, the
    term broadly includes what Pinney characterized as “raw data” or “underlying
    data.” And Pinney articulated the important point that the underlying data “needs
    to be processed to be useful.”
    {¶ 8} The foregoing discussion demonstrates why it is important that we
    first recognize the different ways in which the term “books and records” is used.
    The term is sometimes used to mean the financial statements and high-level-
    accounting documents associated directly with preparing the financial statements,
    and it is sometimes used to mean the “raw data” that forms the factual foundation
    upon which the high-level-accounting documents and the financial statements are
    based. Using Pinney’s terminology, we will refer to the former types of books and
    records as the “processed data” and we will refer to the latter types as the “raw
    data.”
    {¶ 9} The BTA uses the term “books and records” in both ways. First, the
    BTA refers to “underlying books and records,” which the expert witnesses did not
    review, 2015 Ohio Tax LEXIS 4158 at *8. This refers to the raw data upon which
    the processed data, including the financial statements, are based.
    {¶ 10} Second, the BTA refers to the books and records as they “existed at
    the time of each [Form 10-K’s] submission.” (Emphasis deleted.) 
    Id. Here, the
    BTA is referring primarily to the processed data, which differed at the two points
    in time because of the restatement of the financials for the fiscal year ending
    October 31, 2004.
    {¶ 11} Likewise, in stating its conclusion that the original valuation
    allowance was not GAAP compliant, the BTA uses the phrase “historical financial
    information upon which [the original] valuation [allowance] was based.” 
    Id. at *9.
    Here, the BTA is again referring to the processed data, which were shown by the
    restatement of financials to be “unreliable and inaccurate.” 
    Id. 5 SUPREME
    COURT OF OHIO
    {¶ 12} The record indisputably supports the BTA’s finding that in important
    respects, the processed data upon which the original valuation allowance was
    determined were in error. When it filed its Form 8-K in 2006, Navistar proclaimed
    its financials for 2004 to be unreliable. In 2007, Navistar submitted its long-delayed
    Form 10-K for 2005, which for the first time “reflect[ed] restated consolidated
    financial statements for the years ended October 31, 2003 and 2004.” The restated
    financials for those years significantly modified the reported income, expenses, and
    liabilities that form the basis for projecting whether deferred tax assets could
    actually be used; for fiscal year 2004, the restatement indicates that the originally
    reported $311 million net income was incorrect and that the company actually had
    suffered a $35 million loss.
    {¶ 13} Supporting the BTA’s conclusion that the original valuation
    allowance was not GAAP compliant are Navistar’s own statements in its Form 10-
    K. In that form, Navistar relies on Financial Accounting Standards No. 109 for the
    proposition that “an important factor in determining whether a deferred tax asset
    will be realized is whether there has been sufficient taxable income in recent years.”
    (Emphasis added.) And in conjunction with that proposition, Navistar’s Form 10-
    K states that Navistar “reassessed [its] need for a valuation allowance and
    determined that [it had not applied Financial Accounting Standards] No. 109
    properly and that a full valuation allowance should be established for net U.S. and
    Canadian deferred tax assets based on the weight of positive and negative evidence,
    particularly our recent history of operating losses.” The BTA acted within its
    discretion in attaching weight to the pronouncements set forth in Navistar’s filings
    with the Securities and Exchange Commission. See HealthSouth Corp. v. Testa,
    
    132 Ohio St. 3d 55
    , 2012-Ohio-1871, 
    969 N.E.2d 232
    , ¶ 20 (“filings at the Securities
    and Exchange Commission possess indicia of reliability because they are generated
    during the course of business for business purposes and involve the assembling of
    6
    January Term, 2018
    data from business-record sources by persons who have a business duty to assemble
    such data”).
    {¶ 14} Of course, even though the processed data were corrected, the
    underlying raw data remained the same and were in existence at all relevant times.
    That point was elicited from Pinney on cross-examination. When confronted with
    the difference between the $76 million valuation allowance originally reported for
    2004 and the $2 billion valuation allowance reported in connection with the restated
    financial statements for 2004, Pinney testified that both valuation allowances were
    reasonable “at different points in time.” The examination proceeded as follows:
    Q:       But it’s for the same period, you would agree?
    A:       The— Because the assessment was made at a
    different point in time, that’s why I’m stating it that way.
    Q:       And it’s based upon both— or, based upon
    information that was in existence as of the fiscal year ending in
    2004, correct?
    A:       Well, not the subsequent period’s income and losses.
    That was not in existence as of * * * 10-31-2004.
    Q:       I’m * * * talking about information that was utilized
    to determine the restatement amounts and— as compared to the
    originally filed amounts.
    A:       Well, not all of— as I— as I stated, not all of the
    information, including the changed circumstances that is described
    elsewhere in the restated financial statement, that— that was not
    available as of the date the original assessment was made.
    Q:       The underlying data for it was available?
    A:       Yes.
    7
    SUPREME COURT OF OHIO
    (Emphasis added.) The reference to the “underlying data” in this testimony is, of
    course, a reference to what we are calling the raw data.
    {¶ 15} Expressed in terms of the distinction that we have drawn, the BTA
    concluded that the original valuation allowance was not GAAP compliant, given
    that the processed data on which the original valuation allowance was based were
    defective in certain respects that were material to the calculation of the original
    valuation allowance. And the essence of the BTA’s findings with regard to the
    testimony of Navistar’s experts is that (1) they opined that the valuation allowance
    was GAAP reasonable in light of the original processed data available to those who
    formulated the original valuation, (2) they did not testify that the original valuation
    allowance was reasonable under the processed data after restatement, and (3) they
    based their opinions on their review of the processed data and did not themselves
    review the raw data.
    The BTA’s findings are supported by reliable and probative evidence,
    and its conclusion is reasonable and lawful
    {¶ 16} Against this backdrop, we are now able to evaluate Navistar’s
    objections to the BTA’s findings and its conclusion. In doing so, we are mindful
    that we remanded the cause on a question of fact—whether Navistar’s “original
    valuation allowance was in compliance with GAAP,” Navistar I, 
    143 Ohio St. 3d 460
    , 2015-Ohio-3283, 
    39 N.E.3d 509
    , at ¶ 7. Accordingly, “[w]e must affirm the
    BTA’s findings of fact if they are supported by reliable and probative evidence,”
    and with respect to “the BTA’s determination of the credibility of witnesses and its
    weighing of the evidence,” we perform a highly deferential “abuse-of-discretion
    review on appeal.” HealthSouth Corp., 
    132 Ohio St. 3d 55
    , 2012-Ohio-1871, 
    969 N.E.2d 232
    , at ¶ 10.
    {¶ 17} First, Navistar maintains that the BTA erred in rejecting Pinney’s
    and Savage’s conclusions based on the fact that they had not reviewed all of
    Navistar’s relevant books and records. As Navistar asserts, Pinney’s and Savage’s
    8
    January Term, 2018
    review of Navistar’s processed data was extensive—and arguably, with respect to
    processed data, Pinney’s review was comprehensive in that he had reviewed what
    Navistar’s auditors relied on when calculating the original valuation allowance.
    But that does not controvert the BTA’s finding that he and Savage did not review
    the raw data. Accordingly, Navistar’s argument in this regard does not impugn the
    BTA’s decision.
    {¶ 18} Second, Navistar advances a legal argument as to why the BTA’s
    reasoning is faulty. Navistar asserts that under Navistar I, the BTA “could not use
    future events to decide whether the 2004 [valuation allowance] was GAAP
    compliant when it was made.” At oral argument, counsel for Navistar stated, “This
    court, we believe, has said, you do not look at the restatement financials.”
    {¶ 19} This claim of legal error must be considered in light of what we
    decided in Navistar I. During the first appeal, Navistar argued that “the tax
    commissioner lacked any authority to adjust the valuation allowance based on the
    restatement of financial statements that occurred after the June 2006 deadline for
    filing the Amortizable Amount Report.” See Navistar I, 
    143 Ohio St. 3d 460
    , 2015-
    Ohio-3283, 
    39 N.E.3d 509
    , at ¶ 33. We disagreed with this argument. 
    Id. at ¶
    34.
    Indeed, the essential basis for our remanding the cause lay in the possibility that the
    restated financials, along with the concomitant changed valuation allowance, might
    indeed establish that the original valuation allowance was not GAAP compliant—
    but in making the determination whether it was or was not GAAP compliant on
    remand, the BTA needed to take cognizance of the expert testimony that had been
    offered by Navistar.
    {¶ 20} Now the BTA has done so. It found that Navistar’s experts did not
    opine that the original valuation allowance could be deemed GAAP compliant
    based on the restated (corrected) financials. And it has concluded that the evidence
    before it establishes that the original valuation allowance was not GAAP compliant.
    Because the very purpose of our remand in Navistar I was for the BTA to determine
    9
    SUPREME COURT OF OHIO
    whether the original valuation allowance was unreasonable in light of all the
    evidence in the record, including the restated financials, we reject Navistar’s claim
    of legal error.
    {¶ 21} Third, although the BTA’s decision does not explicitly rely on the
    testimony of the tax commissioner’s expert, Stephens, Navistar draws the inference
    that the BTA tacitly did so. And indeed, Stephens’s testimony does support the
    BTA’s conclusion because Stephens opined, based on his own accounting
    expertise, that in light of the restated financials, the amortizable amount should be
    reduced to zero because the later valuation allowance was 100 percent. On cross-
    examination, Stephens testified that the 100 percent valuation allowance as
    determined by the auditor in connection with Navistar’s restated financials was the
    correct valuation allowance under GAAP. Stephens also expressed his opinion that
    the original valuation allowance was not GAAP compliant, based on Navistar’s
    own Form 10-K statement to that effect.
    {¶ 22} Navistar contends that in Navistar I, we “disagreed” with Stephens’s
    testimony. Quoting Navistar I, 
    143 Ohio St. 3d 460
    , 2015-Ohio-3283, 
    39 N.E.3d 509
    , at ¶ 25, Navistar asserts that we stated that Stephens “inappropriately ‘based
    his opinion concerning the GAAP-compliance of the initial valuation allowance on
    Navistar’s supposed admission that it was not in compliance with GAAP.’ ”
    {¶ 23} But Navistar misquotes our decision. We stated that Stephens had
    based his opinion on various things, including “his accounting knowledge.” 
    Id. And while
    we described the connection between Stephens’s opinion and the
    admission set forth in Navistar’s Form 10-K, we never stated that that connection
    was in any way “inappropriate.”
    {¶ 24} Equally misguided is Navistar’s allegation that the BTA was
    “hypocritical” in relying on Stephens’s testimony when it had rejected that of
    Pinney and Savage based on their having failed to review all of Navistar’s books
    and records. Navistar alleges that this was hypocritical because Pinney and Savage
    10
    January Term, 2018
    had reviewed more processed data than Stephens had. In fact, although he did not
    review as many processed data, Stephens did review the reported financial
    statements and notes, and his opinion regarding GAAP compliance reflects the
    application of his own expertise to the matter. The BTA was entitled to accord
    whatever weight to that opinion that it deemed appropriate.
    {¶ 25} Navistar additionally argues that Stephens’s opinion testimony is
    “irreparably damaged” by the fact that Stephens also took into consideration the
    complaint filed by Navistar against its former accountants in Illinois. Namely,
    Navistar characterizes any reliance by Stephens on the Illinois complaint as
    “impermissible” in light of our holding in Navistar I that the tax commissioner had
    waived his objection to the BTA’s having ruled that statements in the complaint
    would not be considered as admissions by Navistar. 
    143 Ohio St. 3d 460
    , 2015-
    Ohio-3283, 
    39 N.E.3d 509
    , at ¶ 37-39.
    {¶ 26} This argument is without merit. As we noted in Navistar I, the
    hearing examiner “admitted the complaint as evidence but rejected the tax
    commissioner’s argument that it constituted admissions against interest or
    statements by a party opponent,” and the hearing examiner “limited the tax
    commissioner’s use of the complaint in examining witnesses.” 
    Id. at ¶
    37. We
    construed this as a “ruling that precluded the use of the Illinois complaint as an
    admission.” 
    Id. at ¶
    38. Under Evid.R. 703, an expert may rely on facts “perceived
    by the expert or admitted in evidence at the hearing.” (Emphasis added.) Although
    the BTA ruled that the complaint would not itself be construed as an admission, the
    complaint was admitted into evidence. As a result, Stephens could properly rely
    on it under the evidentiary rules, which provide guidance at the BTA but are not
    controlling. See Plain Local Schools Bd. of Edn. v. Franklin Cty. Bd. of Revision,
    
    130 Ohio St. 3d 230
    , 2011-Ohio-3362, 
    957 N.E.2d 268
    , ¶ 20.
    {¶ 27} Fourth, Navistar argues that in reviewing the expert and lay
    testimony of Navistar’s witnesses, the BTA should have come across evidence
    11
    SUPREME COURT OF OHIO
    establishing that the restated financials were based not only on raw data in existence
    at the time Navistar filed its Amortizable Amount Report but also on information
    that became available only after the report was filed. For example, Navistar argues,
    although the raw data were available at all relevant times, the restated financials for
    fiscal year 2004 that Navistar submitted to the Securities and Exchange
    Commission in 2007 incorporated insight from later accounting periods when
    Navistar had concluded that it had a 100 percent valuation allowance.
    {¶ 28} We discern no reversible error in this regard. For one thing, Pinney
    testified—as previously discussed—that the “underlying data” was in fact in
    existence at the relevant times. Additionally, the pronouncements by Navistar in
    its Form 10-K and Stephens’s testimony furnish a sufficient basis for the BTA’s
    conclusion, even if some factors were considered in the restated financials that were
    not in existence at the time the Amortizable Amount Report was filed—quite
    simply, the BTA could reasonably have concluded, based on the exercise of its
    discretion as the finder of fact, that the influence of such other factors was
    inconsequential.
    {¶ 29} Also unavailing is Navistar’s contention that the subsequent history
    of Navistar’s actually realizing the value of net operating losses that accrued in
    earlier years establishes the propriety of the original partial valuation allowance for
    fiscal year 2004 as opposed to the later total valuation allowance. To accept this
    contention would violate the precept that we articulated in Navistar I: the tax
    commissioner may adjust the amortizable amount on audit but only to cure an
    inaccuracy or correct an error in the report of the amortizable amount. 
    Id. at ¶
    34.
    The issue before the BTA was the reasonableness of the valuation allowance in
    light of the corrected financial statements with respect to the fiscal year ending in
    2004, and events that occurred in subsequent years cannot retroactively justify a
    lesser valuation allowance if that lesser valuation allowance was unwarranted in
    12
    January Term, 2018
    light of the information properly considered in determining the valuation allowance
    for fiscal year 2004.
    Conclusion
    {¶ 30} In Navistar I, we held that the BTA’s “ignor[ing] the testimony of
    Navistar’s experts” was an omission that “ma[de] the BTA’s decision unreasonable
    and unlawful.” 
    143 Ohio St. 3d 460
    , 2015-Ohio-3283, 
    39 N.E.3d 509
    , at ¶ 7. In its
    decision on remand, the BTA explained why Navistar’s expert testimony did not
    demonstrate that the original valuation allowance was GAAP compliant. Thus, the
    BTA carried out our instruction on remand, and because its decision is reasonable
    and lawful, we affirm it.
    Decision affirmed.
    O’CONNOR, C.J., and O’DONNELL, FRENCH, DEWINE, and DEGENARO, JJ.,
    concur.
    KENNEDY and FISCHER, JJ., dissent.
    _________________
    Maryann B. Gall; and Vorys, Sater, Seymour & Pease, L.L.P., Anthony L.
    Ehler, and Steven L. Smiseck, for appellant.
    Michael DeWine, Attorney General, and Barton A. Hubbard, Assistant
    Attorney General, for appellee.
    _________________
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Document Info

Docket Number: 2015-2055

Citation Numbers: 2018 Ohio 1895, 100 N.E.3d 354, 153 Ohio St. 3d 48

Judges: Per Curiam

Filed Date: 5/16/2018

Precedential Status: Precedential

Modified Date: 1/12/2023