Ohio law requires nonresident individuals who own 20 percent or more of a closely held business (including partnerships, S corporations, and C corporations) to treat the sale of their ownership interest in the business as if they sold a portion of the underlying assets. This treatment results in nonresident individuals paying Ohio tax on the sale even though they sold intangible property, which generally has a tax situs in the seller’s state of residence.
On May 4, 2016, the Ohio Supreme Court in Corrigan v. Testa struck down the deemed asset sale treatment for nonresident individuals. Corrigan, a nonresident of Ohio, paid Ohio tax on his distributive share of income from a partnership. When Corrigan sold his interest in the partnership, Ohio imposed individual income tax on a portion of the gain from the sale of membership interests as if a portion of the underlying assets were sold. The Ohio Supreme Court ruled that the statute violates the due process clause of the 14th Amendment to the U.S. Constitution and ruled in favor of the taxpayer.
Ohio individual income tax has a four-year statute of limitations. Nonresident taxpayers subjected to Ohio income tax under these provisions should consider filing refund claims.