Nonresident Taxpayers May Be Eligible for Refunds of Ohio Tax for Gain on the Sale of a Business Interest

The Ohio Supreme Court’s decision in Corrigan v. Testa.1 has led the Ohio Department of Taxation (“Department”) to issue refunds to nonresident taxpayers who have previously paid tax on the capital gain from the sale of a business interest that is conducted within the state.

Under R.C. 5747.212, amended in 2002, tax is imposed on a capital gain realized by an out-of-state investor in a pass-through entity if that investor held a 20% or greater interest in the entity during a three-year period. The statute imposed the tax on the gain based on the apportioned percentage of the entities business conducted in the state.

In the case, Mr. Corrigan, a resident of Connecticut, owned 79% of an LLC that produced sanitary ware, with plants in Texas and California, but conducted business in all 50 states. Corrigan’s role in the company’s management was as “an investor who bought companies with the intention of providing financing and strategic expertise to grow the company for an eventual exit via a sale to a third party”.2 Corrigan stressed in his argument to the Department that he did not participate in the active management of the business’s day-to-day operations. In 2004, Corrigan sold his interest in the business realizing a capital gain that was sourced outside of Ohio, specifically since he was not a resident within the state. Ohio then assessed Mr. Corrigan for the gain that should have been apportioned to Ohio under R.C. 5747.212.

The Court noted the difference in treatment for business and non-business income for nonresidents in its opinion. Business income is the income from the regular course of a trade or business and apportioned by the percentage of the business’s property, payroll, and receipts located in Ohio.3 Ohio nonbusiness income includes capital gains from the sale of intangible personal property, which is sourced to the domicile of the taxpayer. 4

The Court concluded that while Mr. Corrigan availed himself of Ohio’s protection and benefits with respect to the LLC’s income during his ownership, the opposite was true for the gain that resulted from the sale of his intangible interest in the business. The Court held that Corrigan’s intangible ownership interest did not avail him of Ohio’s protections and benefits in any direct way and therefore R.C. 5747.212, as applied to Mr. Corrigan, violated the Due Process Clause of the Fourteenth Amendment of the Constitution. It’s important to note, that the court held that R.C. 5747.212 was unconstitutional as it applied to Mr. Corrigan and not on its face. The Court noted, conceivably, that a taxpayer may engage in conduct with or through a business entity where the imposition of the statute would not be unconstitutional – mainly if the taxpayer establishes a unitary relationship with the business.

What does this mean for taxpayers?

Mainly, nonresident taxpayers who sourced the gain on the sale of their partnership interest in a business that was being conducted in Ohio should analyze their factual situations in order to determine if there is a potential refund opportunity under the state’s four year statute of limitation. Strong consideration should be given to the level of involvement that taxpayer had in the business’s Ohio operations and whether the taxpayer would be considered “unitary” with the business. Additionally, the Corrigan decision raises planning opportunities around the sale of an interest in a business, whether that being the type of sale (asset v. intangible) or taxpayer residency considerations.

Have questions on how the Corrigan decision may affect your Ohio state taxes? Reach out to the State and Local Tax team at Schneider Downs.


[1] Corrigan v. Testa, 149 Ohio St.3d 18, 2016-Ohio-2805, 2016.

[2] Id.

[3] Ohio R.C. 5747.01(B); R.C. 5747.21(B).

[4] Ohio R.C. 5747.20(B)(2)(c)

You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2021 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

our thoughts on
The American Families Plan – Proposed $1.8 Trillion Spending and Tax Plan
Florida Enacts Sales and Use Tax Economic Nexus
International, Tax BY Vicky Lu
FBAR Deadline/Extension Clarification
Introduction to The American Jobs Plan and The Made in America Tax Plan
Tax Credits for Electric Vehicle Charging Stations
2021 Standard Mileage Rates
Register to receive our weekly newsletter with our most recent columns and insights.
Have a question? Ask us!

We’d love to hear from you. Drop us a note, and we’ll respond to you as quickly as possible.

Ask us
contact us
Map of Pittsburgh Office
Pittsburgh

One PPG Place, Suite 1700
Pittsburgh, PA 15222

contacts[email protected]
p:412.261.3644     f:412.261.4876

Map of Columbus Office
Columbus

65 East State Street, Suite 2000
Columbus, OH 43215

[email protected]
p:614.621.4060     f:614.621.4062

Map of Washington Office
Washington, D.C.

1660 International Drive, Suite 600
McLean, VA 22102

[email protected]
p:571.380.9003