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Wednesday, July 11, 2012

Beaver Excavating Company et al. v. Richard A. Levin [Joseph W. Testa], Tax Commissioner of Ohio, Case no. 2011-1536
Tenth District Court of Appeals (Franklin County)

Ohio Trucking Association et al. v. Director Thomas Stickrath [Thomas Charles] et al., (Ohio Department of Public Safety), Case no. 2011-1757
Tenth District Court of Appeals (Franklin County)

Lori Leblanc et al. v. Wells Fargo Advisors, LLC, et al., Case nos. 2011-2073 and 2011-2160
Second District Court of Appeals (Montgomery County)

Does Imposing Ohio’s Commercial Activity Tax on Revenue From Motor Vehicle Fuel Sales Violate State Constitution?

Under Provision That Bars Use of ‘Tax on Fuel’ For Non-Highway Purposes

Beaver Excavating Company et al. v. Richard A. Levin [Joseph W. Testa], Tax Commissioner of Ohio, Case no. 2011-1536
Tenth District Court of Appeals (Franklin County)

ISSUE: Does the imposition of Ohio’s Commercial Activity Tax (CAT) on business revenues derived from the sale of motor vehicle fuel violate Section 5(a), Article XII of the Ohio Constitution, which prohibits the expenditure for non-highway purposes of  “moneys derived from fees, excises or license taxes relating to registration, operation or use of vehicles on public highways, or to fuels used for propelling such vehicles”?

BACKGROUND: Adopted in 2005 to replace the state’s former corporate franchise tax, Ohio’s CAT is a tax imposed on all businesses for the privilege of doing business in the state. The tax is calculated based on a business’ gross receipts, i.e., the total amount of revenue generated by a company during a given tax year, regardless of what business that company is in or what types of products or services it sells.

In the legislation adopting the CAT, the General Assembly specified that revenues generated by the tax would be allocated among three funds: the general revenue fund, a school district tangible property tax replacement fund, and a local government tangible property tax replacement fund.

This case involves a lawsuit filed against the state tax commissioner by a group of Ohio businesses that derive income from the sale of gasoline and other motor vehicle fuels.  The plaintiffs argue that, by including revenues that their businesses generate through the sale of motor vehicle fuels in their “gross receipts” subject to the CAT, the tax commissioner is acting in violation of Section 5(a), Article XII of the Ohio Constitution.  That provision, adopted by voters in a 1947 ballot initiative, requires that taxes imposed on motor vehicle owners and operators, including driver license fees, vehicle registration taxes and taxes on motor vehicle fuel, may only be expended for the construction, repair and maintenance of streets and highways, and certain other “highway purposes” specified in the amendment.

As the remedy for the state’s alleged unconstitutional application of the CAT, the plaintiffs sought a court  injunction ordering the tax commissioner to cease including their business revenues from the sale of motor vehicle fuel in the “gross receipts” on which their CAT liability is calculated.

Both the Franklin County Court of Common Pleas and Tenth District Court of Appeals rejected the plaintiffs’ arguments and upheld as constitutional the state’s inclusion of revenues from fuel sales in calculating gross business receipts subject to the CAT. The plaintiffs sought and were granted Supreme Court review of the Tenth District’s ruling.

Attorneys for Beaver Excavating and its fellow plaintiffs, supported by amicus curiae (friend of the court) briefs filed by more than a dozen business groups and trade associations, urge the court to reverse the lower courts’ decisions and hold that the CAT is unconstitutional as applied to business revenues from the sale of motor vehicle fuel under Section 5(a), Article XII.

They argue that the broad language of the 1947 ballot issue not only barred the use of taxes collected from consumers on the sale of gasoline for non-highway purposes, but also extended that restriction to any other tax “relating to ...motor vehicle fuels.”  Because the legislation creating the CAT mandates that CAT revenues be expended for specified non-highway purposes, while Section 5(a), Article XII requires that taxes “relating to” motor vehicle fuels may be expended only for highway purposes, they contend, there is a clear conflict between those provisions that renders application of the CAT to revenues from motor vehicle fuel sales unconstitutional and therefore unenforceable.

Attorneys for the tax commissioner cite this court’s 2009 holding in Ohio Grocers Assn. v. Levin that, because the CAT is a general tax assessed on the gross receipts of all Ohio business entities, regardless of the business they are engaged in and regardless what kinds of products or services they sell, imposing the CAT on the gross receipts of grocery stores was not an unconstitutional “tax on food.” 

They urge the court to follow the same line of reasoning in this case and affirm the Tenth District’s holding that a gross receipts tax for the privilege of doing business in this state is not transformed into a “tax on fuel” simply because some businesses’ revenues are generated by selling fuel rather than food or some other product.

If the court should find that assessment of the CAT on the plaintiffs’ fuel sales receipts is unconstitutional, the state argues that, under prior state and federal court decisions, the proper legal  remedy would not be to bar the state from collecting the CAT on motor vehicle fuel sales revenues, but rather to order that the state begin allocating  whatever portion of total CAT revenues are attributable to fuel sales to the “highway purposes” set forth in Section 5(a) Article XII.

Thomas B. Ridgley, 614.464.6229, for Beaver Excavating Company et al.

Stephen P. Carney, 614.466.8980, for the State Tax Commissioner.

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Suit Seeks Rollback of 2009 Increase In BMV Fee For Driver License Abstracts

Based on Alleged Unconstitutional Use of Revenue for Non-Highway Purpose

Ohio Trucking Association et al. v. Director Thomas Stickrath [Thomas Charles] et al., (Ohio Department of Public Safety), Case no. 2011-1757
Tenth District Court of Appeals (Franklin County)


BACKGROUND: From 1990 through June 2009, R.C. 4509.05 authorized the Ohio Bureau of Motor Vehicles (BMV) to collect a fee of $2 for a certified abstract (copy) of a driver’s license record listing a person’s recent traffic violations and accidents. All of the $2 fee was allocated to the “BMV Fund,” which pays the expenses of various BMV operations related to administering and enforcing state motor vehicle laws.

Effective July 1, 2009, the legislature amended R.C. 4509.05(B) to increase the driver license abstract fee to $5, and allocated the additional $3 in revenue to five new funds not directly related to highways or motor vehicle law administration or enforcement. 

The Ohio Trucking Association (OTA) and two insurance industry groups, whose members collectively obtain millions of driver license abstracts each year, filed suit in the Franklin County Court of Common Pleas. Their complaint alleged that the $3 add-on fee was unconstitutional under Section 5(a), Article XII of the Ohio Constitution, which requires that all fees, excises or license taxes relating to the operation of motor vehicles on public highways must be allocated for the construction, repair, or maintenance of streets and highways or for other specified highway-related uses.

The trial court entered judgment in favor of OTA and issued an injunction ordering that BMV cease and desist collection of the fee increase, but stayed its injunction pending an appeal by the state.  On review, the Tenth District Court of Appeals affirmed the ruling of the trial court, holding that the fee charged for a driver license abstract was sufficiently related to the operation of vehicles on public highways that it fell within the class of taxes and fees that the constitution requires to be used only for highway purposes.

The BMV sought and was granted Supreme Court review of the Tenth District’s decision.

Attorneys for the state argue that the constitutional provision invoked by the trial and appellate courts, Section 5(a), Article XII, was enacted as a ballot initiative in 1947 for the limited purpose of guaranteeing that driver license and vehicle registration fees and gasoline taxes collected by the state exclusively  from owners and operators of motor vehicles would be earmarked to pay for maintaining streets and highways used by the persons who paid those taxes.

They contend that the trial and appellate courts erred in finding that fees charged to trade associations and insurance companies by the BMV for providing information from state computer records are sufficiently  connected to the “use of public highways” to fall within the highway-use restriction of Section 5(a).

Even if the court holds that the 2009 legislation unconstitutionally allocated license-tax revenues for non-highway uses, they urge the justices to reverse the Tenth District’s holding invalidating the entire 2009 statute, and instead rule that the state is not barred from collecting the $3 additional fee, but is merely restricted to placing the revenue generated by that increase in the “BMV Fund,” all of which is expended for highway-related uses.

Attorneys for the OTA urge the court to affirm the Tenth District’s ruling that the 2009 legislation is unconstitutional on its face because it allocates revenues from a tax related to driver licensing and  use of public highways to non-highway purposes in clear violation of Section 5(a).  They contend that it is impossible to sever the portion of the law imposing the fee increase from the portion allocating revenues, because the surviving part of the 2009 enactment would provide no guidance on how the $3 increase should be expended for a constitutionally permissible highway purpose.

Lisa Pierce Reisz, 614.464.8353, for the Ohio Trucking Association.

Elisabeth A. Long, 614.387.0535, for Thomas Stickrath, Director, Ohio Department of Public Safety.

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Must IRA Owner Have ‘Substantially Complied’ With Beneficiary Change Policy When Strict Compliance Waived?

Where Owner Informed Custodian of Desired Change, But Died Without Returning Forms

Lori Leblanc et al. v. Wells Fargo Advisors, LLC, et al., Case nos. 2011-2073 and 2011-2160
Second District Court of Appeals (Montgomery County)

ISSUE: When the owner of an Individual Retirement Account (IRA) designates new beneficiaries on the custodian’s change-of-beneficiary form and signs the form, but fails to return it to the custodian before dying, if the custodian is sued over entitlement to the account proceeds and  waives strict compliance with its beneficiary change procedures, must the putative new beneficiaries still show that the decedent “substantially complied” with the custodian’s beneficiary change policy?

BACKGROUND: When John Burchfield of Dayton found that his marriage to Cynthia Burchfield was about to end in a divorce, he emailed Wells Fargo Advisers, the custodian of two IRA accounts in his name, and told his advisor that he wanted to change the beneficiaries of those accounts from Cynthia to his mother, Gloria Welch, and stepfather, Bruce Leland, with his sister, Lori LeBlanc, as contingent beneficiary.

Wells Fargo sent Burchfield the required change-of-beneficiary forms with the names of the putative new  beneficiaries filled in.  Burchfield signed the forms and placed them in an envelope, but did not return them to Wells Fargo before committing suicide. The signed forms were found among Burchfield’s personal papers.

Welch and LeBlanc filed suit in the Montgomery County Court of Common Pleas, seeking a declaratory judgment that the proceeds of the IRAs should be distributed to them because they were the intended beneficiaries of those accounts at the time of Burchfield’s death. Cynthia filed a cross-motion for summary judgment awarding the IRAs to her. Wells Fargo, which had been named as a defendant in the case, filed an interpleading stating that it would not oppose the distribution of the accounts to either claimant, indicating no interest in the outcome of the dispute, and offering to hold the IRA proceeds in trust or turn them over to the court pending the court’s determination of the proper beneficiary.

The court granted summary judgment in favor of Cynthia, holding that the change-of-beneficiary forms John had signed were of no legal consequence because, under the terms of Burchfield’s IRA contract, a change of beneficiary would only become effective if and when the account owner returned the signed forms to Wells Fargo. The trial court also found that the IRAs were “marital property” under Ohio domestic relations laws, and thus owned by Cynthia.  Based on that finding, the court held that Wells Fargo’s interpleading could not waive compliance with its change-of-beneficiary procedure or change the beneficiary of the IRAs without Cynthia’s consent.

Welch and LeBlanc appealed the trial court’s award of summary judgment.  On review, the Second District Court of Appeals agreed that the trial court erred in considering whether the IRAs were marital or separate property, because such analysis applies only in domestic relations cases, and John’s death had terminated the couple’s divorce proceedings. The court of appeals went on, however, to reject Welch and LeBlanc’s claim that by interpleading, Wells Fargo had waived enforcement of the change-of-beneficiary provision in its IRA contract with Burchfield.  And even if Wells Fargo had waived strict enforcement of its change-of-beneficiary policy, the Second District held that to establish a claim as the proper beneficiaries, Welch and LeBlanc still must show that Burchfield has “substantially complied” with the contract requirements, and they had not met that burden of proof.

The Second District certified that its rulings on the waiver and substantial compliance issues were in conflict with the Ninth District’s 2008 decision in a similar case, Kelly v. May Assoc. Federal Credit Union. The Supreme Court agreed to review the case to resolve the conflict between appellate districts.

Attorneys for Welch and LeBlanc argue that, once Wells Fargo had waived enforcement of the designation of beneficiary procedures set forth in Burchfield’s  IRA agreement, the trial court was no longer required to interpret or enforce the language of the IRA contract, but merely to determine what Burchfield’s “clearly expressed intention” was with regard to the IRA accounts at the time of his death. They assert that the evidence presented to the trial court strongly indicated Burchfield’s intention to change beneficiaries, but even if that evidence were found inconclusive, it raised a material question of fact that was sufficient to defeat Cynthia’s motion for summary judgment and allow Welch and LeBlanc to present their arguments to a judge or jury.

Attorneys for Cynthia Burchfield urge the court to affirm the Second District’s holding that the appellants did not meet their burden of showing that John had substantially complied with the Wells Fargo change-of-beneficiary procedures.  They point out that Burchfield’s email request for and apparent signing of the change forms from Wells Fargo demonstrates only that he considered taking that action at some time before his death, but argue that his failure to complete the transaction by mailing or delivering the forms to Wells Fargo, despite the opportunity to do so, suggests either that he had not made a final decision in the matter, or had decided not to go through with it.

In any case, they contend, prior court decisions have held that even if the custodian of an account waives strict compliance with a contract term, a finding of substantial compliance requires  proof that the account owner “did everything in his power” to comply with the contract terms.  In this case, they assert, such a showing was not and cannot be made, because there is no evidence that Burchfield attempted to complete the final step of the beneficiary-change process by attempting to mail or otherwise transmit the necessary forms to Wells Fargo.

James D. Brookshire, 937.339.0511, for Cynthia Burchfield.

David D. Brannon, 937.228.2306, for Gloria Welch and Lori LeBlanc.

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These informal previews are prepared by the Supreme Court's Office of Public Information to provide the news media and other interested persons with a brief overview of the legal issues and arguments advanced by the parties in upcoming cases scheduled for oral argument. The previews are not part of the case record, and are not considered by the Court during its deliberations.

Parties interested in receiving additional information are encouraged to review the case file available in the Supreme Court Clerk's Office (614.387.9530), or to contact counsel of record.