Court News Ohio
Court News Ohio
Court News Ohio

Tuesday, March 8, 2016

James B. and Tina D. Renacci v. Joseph W. Testa, Tax Commissioner of Ohio, Case no. 2014-1893
Ohio Board of Tax Appeals

Dayton Public Schools Board of Education v. Georgia G. Cox, Case no. 2015-0494
Second District Court of Appeals (Montgomery County)

Are Taxpayers Entitled to Refund of Penalty Charged for Not Paying Taxes on Trust Income?

James B. and Tina D. Renacci v. Joseph W. Testa, Tax Commissioner of Ohio, Case no. 2014-1893
Ohio Board of Tax Appeals


  • Did taxpayers act with willful neglect and without good faith, or did they act reasonably, when they didn’t follow the state tax commissioner’s 2000 advisory about the taxation of income generated from an electing small business trust (ESBT)?
  • If taxpayers acted reasonably, are they entitled to a refund of penalties and interest paid?
  • Was tax commissioner’s waiver of part of the penalties for those taxpayers who paid all taxes related to ESBT income and also waived their appeal rights an abuse of discretion and a violation of the due process rights of other taxpayers who didn’t pay the taxes at the time?
  • Did the Ohio Board of Tax Appeals have jurisdiction to consider taxpayers’ request for refund of penalties and interest?

In 1998, James B. Renacci set up a trust that held stock shares in three corporations and qualified for a tax shelter referred to as an electing small business trust (ESBT). Effective on Dec. 25, 2000, Renacci, as the trust’s grantor, converted the ESBT to another type of trust, and the ESBT was closed. He filed paperwork with government tax authorities regarding this conversion.

Earlier that year, in January 2000, the state’s tax commissioner issued an “information release,” or advisory, about ESBTs. The advisory stated that income generated from trusts qualifying as ESBTs had to be reported as taxable income on the grantor’s personal tax return beginning in 2000.

Renacci, now a U.S. congressman from Wadsworth, and his wife didn’t report the $13.9 million in income produced by the ESBT on their personal tax return for 2000. The return was audited, and the state tax department informed the Renaccis in May 2003 that they owed $1.4 million in taxes, interest, and penalties.

The Renaccis requested a reassessment, which the tax commissioner denied. While the couple’s appeal was pending, the Ohio Supreme Court ruled in a case involving these types of trusts. The Court held in Knust v. Wilkins (2006) that income produced from a particular ESBT was taxable income for the trust’s grantor rather than through the trust itself.

In April 2007, the Renaccis paid $140,000 toward the assessed taxes and interest. The tax commissioner offered that month to reduce the Renaccis’ $293,876 penalty if they paid the taxes, interest, and lesser penalty within two weeks. While they weren’t able to meet that deadline, they paid $814,650 in August and $425,400 in December.

Meanwhile, in November 2007, the Supreme Court decided in Lovell v. Levin that trust grantors have to pay income taxes on ESBTs that were closed before Dec. 29, 2000.

The Renaccis withdrew their appeal early in 2008. Later that year, they paid the full penalty of $359,822, which included interest, and then the next year filed a claim for a refund, or “abatement,” of the penalty. The tax commissioner denied the request. On appeal, the Board of Tax Appeals agreed in 2014 with the commissioner’s determination. The Renaccis decided to appeal the decision regarding the penalty to the Ohio Supreme Court.

Taxpayers Contend They Adequately Disclosed Income
The Renaccis argue the tax commissioner’s 2000 policy change regarding ESBTs wasn’t rooted in any change to federal or state law. Several taxpayers challenged the advisory in the courts, and the Renaccis note those lawsuits were ongoing during the course of their appeal.

The Renaccis dispute the tax commissioner’s finding that they acted with willful neglect and not in good faith when filing their 2000 tax return. For one, they reasonably relied on relevant information and made a “full and timely disclosure” of the ESBT conversion and profits through paperwork submitted to tax authorities, they write in their brief. And, when Knust was decided in 2006, it didn’t clearly apply to their situation, they maintain, so they continued with their claims.

They argue they acted reasonably when excluding the trust income from their personal income tax return, and the tax commissioner abused his authority by not refunding the penalty. In addition, they assert, the commissioner’s proposed reduction in the penalty under certain conditions as well as his refusal to refund the penalty were “takings” without the required due process. In their view, the specifics of how the 2000 advisory applied to certain taxpayers who had legally been using the ESBT tax shelter wasn’t settled until the Court ruled in Lovell in 2007. They ask the Court to refund the penalty of $359,822.

Tax Authorities View Failure to Pay as Unreasonable
The tax commissioner notes the Renaccis are no longer challenging that they owed income taxes on the $13.9 million produced by the trust. The couple lost their appeal on that issue, and their claim that they acted in good faith and reasonably when filing their 2000 tax return, given the Knust and Lovell Supreme Court decisions, doesn’t hold up, the commissioner contends. The commissioner maintains the Renaccis didn’t follow the explicit instructions provided in the 2000 advisory, as well as in subsequent updates.

The Renaccis’ submission of materials regarding the ESBT conversion to tax authorities didn’t properly notify those officials of the taxable income generated from the trust, the commissioner explains, stressing the Renaccis were required to disclose the income on their personal tax return. Instead, the couple reported nothing about the $13.9 million and instead listed their federal adjusted gross income that year as a loss of nearly $170,000, the commissioner asserts.

The commissioner argues he treated the Renaccis the same as all other taxpayers who had been using ESBTs as tax shelters and was within his authority to offer reduced penalties. The Renaccis’ actions reflect willful neglect with no reasonable justification and mandate the imposition of a penalty, the commissioner concludes.

- Kathleen Maloney

Docket entries, memoranda, briefs (including amicus briefs), and other information about this case may be accessed through the case docket.

Representing James B. and Tina D. Renacci: Steven Dimengo, 330.376.5300

Representing Joseph W. Testa, tax commissioner, from the Ohio Attorney General’s Office: Barton Hubbard, 614.466.5967

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In Arbitration Cases, Must Parties Receive Appeal Notice Within Three Months?

Dayton Public Schools Board of Education v. Georgia G. Cox, Case no. 2015-0494
Second District Court of Appeals (Montgomery County)


  • When appealing an arbitration award, does R.C. 2711.13 require the adverse party must receive the notice of appeal within the specified three-month time period?
  • Did a woman appealing an arbitration award comply with R.C. 2711.13 when the clerk of courts mailed the notice of appeal to the adverse party on the last day, even though the woman did not attach proof of service?

Georgia Cox, a special education teacher at Meadowdale High School in Dayton, was accused in October 2012 of striking a student confined to a wheelchair. Cox was notified that the Dayton Public Schools Board of Education was considering whether to fire her because of the incident. Under the collective bargaining agreement between the board of education and teachers’ union, Cox chose to have her possible termination decided through arbitration. The arbitrator decided the board had good cause to fire Cox.

The arbitrator’s decision and award was issued on Dec. 10, 2013. Exactly three months later, on March 10, 2014, Cox filed a request to set aside or adjust the award in common pleas court. Cox requested the clerk of courts serve the Dayton school board with her motion and she didn’t attach a separate “proof of service,” verifying she was serving the notice by the deadline. Cox then sent the board’s attorney a copy of the notice the next day.

The board of education received Cox’s notice a few days later. The board filed a motion in the trial court to reject Cox’s appeal arguing it didn’t meet the strict requirements of R.C. 2711.13, which requires the opposition in an arbitration to receive the notice within three months. The board argued that Cox’s appeal notice had to be received by March 10 in order for the case to move forward.

The trial court agreed with the school board and dismissed Cox’s case. She appealed to the Second District Court of Appeals, which reversed the trial court. The Second District found that Cox complied with court rules by having the clerk of courts send the notice, and that the deadline Cox needed to meet was to send the notice within three months. The appellate court determined that R.C. 2711.13 doesn’t require the actual delivery or receipt within three months, but only that it be sent. The board appealed to the Ohio Supreme Court, which agreed to hear the case.

Law Requires Receipt Within Three Months, Board Argues
The Dayton school board notes that Ohio encourages the private settlement of grievances through arbitration and the Ohio General Assembly has provided “limited and narrow” judicial review of arbitration awards. The board points to the language of R.C. 2711.13 that states: “Notice of a motion to vacate, modify, or correct an award must be served upon the adverse party or his attorney within three months after the award is delivered to the parties in interest, as prescribed by law for service of notice of a motion in an action.”

The school board focuses on two phrases in the law, “within three months,” and “as prescribed by law for service of notice of a motion in an action.” The board asserts the word “notice” in state law implies the concept of “receipt of notice” meaning the notice has to be received within the three-month period, which would have been March 10 in Cox’s case. Citing the Ohio Supreme Court’s 2011 Welsh Dev. Co. v. Warren Cty. Reg’l Planning Commission decision, the board argues that a person is served when the actual delivery is made to the intended target, usually a party to a lawsuit.

Regarding the “as prescribed by law” phrase, the board argues that an appeal of an arbitration award doesn’t follow the rules for filing an initial complaint in a court of law, but is a special procedure that follows the rules of filing motions in Ohio courts. Those rules are governed by Rule 5 (Civ.R. 5) of the Ohio Rules of Civil Procedure, and the board asserts that Cox has to follow all rules of Civ.R. 5 to appeal the arbitration. Civ.R. 5(B) lists ways in which a party can serve a motion on the other parties, including mailing it. The board suggests the rule allows a motion to be left with the clerk of courts only when the party doesn’t have the address of those who need to be served. However, it argues the clerk of courts has no other role in mailing the motion for a party.

Additionally, Civ.R. 5(B)(4) requires every served document be accompanied by a completed proof of service statement that needed to contain the date and manner describing how Cox was serving notice to the school board, and that statement needed to be signed by Cox. The board argues Cox didn’t follow the rules by having the clerk send it and not attaching the proof of service.

The board notes that four Ohio appeals courts have addressed the issue of the requirement of actual receipt within three months and the majority share the board’s opinion. The board suggests the case most similar to this is City of Cleveland v. Laborers Internatl. Union Local 1099, in which the city of Cleveland had the clerk of courts send the notice and didn’t attach proof of service. In its 2009 City of Cleveland decision, the Eighth District Court of Appeals concluded the city failed to comply with R.C. 2711.13 and dismissed its appeal.

“Only strict compliance with the requirements of R.C. Chapter 2711, specifically R.C. 2711.13, will protect the contractual arbitral process and the awards obtained through it,” states the brief filed by the board. “It is only fair that a party know at the earliest moment that an award it presumes to be valid and fully enforceable is actually under attack.”

Cox Asserts Rules Followed
Cox argues she followed the rules and noted the Second District doesn’t agree with the board’s assertion that the notice has to be received within the three-month period. The Second District ruled that Civ.R. 5(B)(2)(c) allows for mailing to the person’s last known address and that service is completed upon mailing. The Second District concluded the clerk of courts mailed the notice by the March 10 deadline, and the rule doesn’t require Cox be the one that mails it. The Second District didn’t address whether the proof of service needed to be attached.

Cox additionally challenges whether the three-month clock started on Dec. 10, the day the arbitrator rendered the decision against her and notified the parties of the decision by email. Court decisions have found for the purpose of an appeal, the clock starts on the date the arbitrator transmits the finding to the parties by email. Cox argues she didn’t receive an email that day and was notified a week later. She insists she filed her appeal well within the three-month deadline.

Friend-of-the-Court Brief
An amicus curiae brief supporting the school board’s position has been submitted by Ohio Education Association (OEA). The OEA expressed its concern with Second District “judicially” expanding the statute of limitations in the law governing arbitration awards. The union focuses its criticism with Cox’s lack of compliance with the proof of service requirement.

“The resolution of grievances through arbitration should not be disturbed without strict compliance with the statutory framework for challenging such awards,” the OEA brief states.

- Dan Trevas

Docket entries, memoranda, briefs (including amicus briefs), and other information about this case may be accessed through the case docket.

Representing Dayton Public Schools Board of Education: Beverly Meyer, 937.224.5300

Georgia Cox: pro se, No phone listed

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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.

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