[This opinion has been published in Ohio Official Reports at
85 Ohio St.3d 350.]
DUPEE ET AL., APPELLANTS, v. TRACY, TAX COMMR., APPELLEE.
[Cite as Dupee v. Tracy, 1999-Ohio-382.]
Taxation—Income tax—Distributive share income nonresident shareholders of an
Ohio S corporation receive and report as part of their federal adjusted
gross income is subject to Ohio personal income tax.
(No. 98-255—Submitted February 10, 1999—Decided April 28, 1999.)
APPEAL from the Board of Tax Appeals, No. 96-K-300.
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{¶ 1} Appellants, David B. Dupee and Katherine O. Dupee, contest the
Board of Tax Appeals’ ruling which denied their claims for Ohio income tax
refunds for the years 1989, 1990, and 1991. The stipulated facts reveal that during
the tax years in question, appellants were Florida residents who were shareholders
of and received salaries from an Ohio corporation, Olsten of Cincinnati, Inc.
(“Olsten”). Olsten operated under a subchapter “S corporation” election, and for
each tax year, the corporation filed form IT-1120-S “Notice of S Corporation
Status” with the Ohio Department of Taxation.
{¶ 2} In filing their federal and Ohio tax returns, appellants included their
distributive shares of Olsten income in their federal and Ohio adjusted gross
income. Appellants also apportioned their distributive share of Olsten’s income to
Ohio on their original Ohio tax returns. However, appellants subsequently claimed
that they were entitled to a nonresident credit and filed refund claims to exclude all
of the Olsten distributive share income from Ohio income taxation. The
commissioner disallowed the refund claims.
{¶ 3} Appellants appealed the commissioner’s Final Determination to the
Board of Tax Appeals (“BTA”). The BTA affirmed the commissioner’s order,
holding that since Olsten was designated an S corporation, the income the
SUPREME COURT OF OHIO
corporation generates is considered to be earned or received by appellants and is
treated as personal income to appellants.
{¶ 4} The cause is now before this court upon an appeal as of right.
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Katz, Teller, Brant & Hild and William F. Russo, for appellants.
Betty D. Montgomery, Attorney General, and Robert C. Maier, Assistant
Attorney General, for appellee.
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FRANCIS E. SWEENEY, SR., J.
{¶ 5} In this case, we are asked to decide whether the distributive share
income nonresident shareholders of an Ohio S corporation receive and report as
part of their federal adjusted gross income is subject to Ohio personal income tax.
For the reasons that follow, we answer this question in the affirmative.
Accordingly, we affirm the decision of the BTA.
{¶ 6} R.C. 5747.02 imposes an income tax on every individual residing in
or earning or receiving income in Ohio. Appellants contend that they are not
subject to Ohio income tax because, as residents of Florida, they could not have
earned or received S corporation income generated in Ohio. Instead, appellants
claim that their distributive share of the S corporation’s income was earned or
received by Olsten. Consequently, appellants claim that they are entitled to
nonresident tax refunds under R.C. 5747.05(A).
{¶ 7} In making these arguments, appellants ignore the distinguishing
characteristic of an Ohio S corporation and the effect an S corporation election has
on individual shareholder income tax liability. Essentially, an S corporation is
considered a “flow-through” entity whereby the income and losses of the business
are nontaxable to the corporation, but instead flow through to the individual
shareholders. In Ardire v. Tracy (1997), 77 Ohio St.3d 409,
674 N.E.2d 1155, fn.
1, we discussed this concept when we stated:
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January Term, 1999
“Subchapter S of the Internal Revenue Code (Section 1361 et seq., Title 26,
U.S.Code) permits the owners of qualifying corporations to elect a special tax status
under which the corporation and its shareholders receive conduit-type taxation that
is comparable to partnership taxation. For tax purposes, a Subchapter S
corporation differs significantly from a normal corporation in that the profits
generated through the S corporation are taxed as personal income to the
shareholders. The taxable income of an S corporation is computed essentially as
if the corporation were an individual. Section 1363, Title 26, U.S.Code. Items of
income, loss, deduction, and credit are then passed through to the shareholders on
a pro rata basis and are added to or subtracted from each shareholder’s gross
income. See, generally, Section 1366, Title 26, U.S.Code.” (Emphasis added.)
{¶ 8} The fact that appellants are nonresident shareholders of an Ohio
corporation does not render them incapable of earning or receiving income in Ohio.
The character of a shareholder’s S corporation income remains the same for
residents and nonresidents. The Internal Revenue Code provides, in Section
1366(b), Title 26, U.S.Code, that “[t]he character of any item included in a
shareholder’s pro rata share [of the S corporation’s income] shall be determined as
if such item were realized directly from the source from which realized by the
corporation, or incurred in the same manner as incurred by the corporation.” Thus,
the shareholder’s income is treated the same as that of the corporation regardless of
whether the shareholders are residents or nonresidents. In this case, since the
income was generated in an Ohio business activity by an S corporation, the income
is taxable as personal income to appellants.
{¶ 9} Section 1366(c), Title 26, U.S.Code provides further support that
Ohio’s adjusted gross income includes distributive share income derived from an
Ohio S corporation. This section provides that “[i]n any case where it is necessary
to determine the gross income of a shareholder for purposes of this title, such gross
income shall include the shareholder’s pro rata share of the gross income of the
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corporation.” Since R.C. 5747.01(A) defines “adjusted gross income” as adjusted
gross income under the Internal Revenue Code, Ohio’s definition of “adjusted gross
income” includes the shareholder’s distributive share of income generated by an
Ohio S corporation.1
{¶ 10} Consequently, by virtue of the S election, we find that the
distributive share income that was generated in an Ohio business activity is income
earned or received by appellants, nonresident shareholders of the S corporation, and
is taxable to them as individual shareholders. Thus, S corporation income listed in
the shareholders’ federal adjusted gross income must also be listed in their Ohio
adjusted gross income.
{¶ 11} Appellants also argue that their distributive share income is
nonbusiness income and that it is to be allocated to their state of domicile pursuant
to R.C. 5747.20(B)(6). Furthermore, they state that the General Assembly’s failure
to include S corporations in R.C. 5747.22 should be interpreted to mean that an S
corporation shareholder’s distribution is not business income.
{¶ 12} We have held that “[f]ailure to include errors in the notice of appeal
to the BTA results in the BTA’s lack of jurisdiction over the errors and the court’s
inability to review such errors.” Buckeye Internatl., Inc. v. Limbach (1992), 64
Ohio St.3d 264, 267,
595 N.E.2d 347, 349. The notice of appeal to the BTA
essentially listed as error the issue of whether nonresident shareholders of Ohio S
corporations earn or receive such income in Ohio and are subject to Ohio tax. Since
the notice of appeal did not specify the above remaining arguments, we are without
jurisdiction to address them.
1. The legislative history behind Ohio’s treatment of S corporations also supports this conclusion.
In 1985, the General Assembly, in Am.Sub.S.B. No. 121, made several changes to R.C. Chapter
5747. 141 Ohio Laws, Part I, 306. Prior to this time, S corporations were subject to franchise taxes.
However, Am.Sub.S.B. No. 121 exempted S corporations from the franchise tax and amended the
provision that excluded S corporation distributive share income from Ohio adjusted gross income.
See former R.C. 5733.01(C), 5747.01(A), 5747.01(S)(5).
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January Term, 1999
{¶ 13} For the above reasons, we find that the decision of the BTA is neither
unlawful nor unreasonable. Accordingly, we affirm the decision of the BTA.
Decision affirmed.
MOYER, C.J., DOUGLAS, RESNICK, PFEIFER, COOK and LUNDBERG
STRATTON, JJ., concur.
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