[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as
Navistar, Inc. v. Testa, Slip Opinion No. 2018-Ohio-1895.]




                                        NOTICE
     This slip opinion is subject to formal revision before it is published in an
     advance sheet of the Ohio Official Reports. Readers are requested to
     promptly notify the Reporter of Decisions, Supreme Court of Ohio, 65
     South Front Street, Columbus, Ohio 43215, of any typographical or other
     formal errors in the opinion, in order that corrections may be made before
     the opinion is published.



                         SLIP OPINION NO. 2018-OHIO-1895
        NAVISTAR, INC., APPELLANT, v. TESTA, TAX COMMR., APPELLEE.
  [Until this opinion appears in the Ohio Official Reports advance sheets, it
  may be cited as Navistar, Inc. v. Testa, Slip Opinion No. 2018-Ohio-1895.]
R.C. 5751.53—Commercial-activity-tax credit—Board of Tax Appeals (“BTA”)
        properly carried out our instructions on remand—BTA’s decision holding
        that the original valuation allowance reported on taxpayer’s Amortizable
        Amount Report was not in compliance with generally accepted accounting
        principles affirmed.
    (No. 2015-2055—Submitted February 13, 2018—Decided May 16, 2018.)
              APPEAL from the Board of Tax Appeals, No. 2010-575.
                               ____________________
        Per Curiam.
        {¶ 1} This case involves the commercial-activity-tax (“CAT”) credit
prescribed by R.C. 5751.53, and it comes before us for a second time, following
our remand in Navistar v. Testa, 143 Ohio St.3d 460, 2015-Ohio-3283, 39 N.E.3d
509 (“Navistar I”). In Navistar I, we concluded that the Board of Tax Appeals
                             SUPREME COURT OF OHIO




(“BTA”) had “ignored the testimony of Navistar’s experts, an omission that ma[de]
the BTA’s decision unreasonable and unlawful.” Id. at ¶ 7. We vacated the
decision of the BTA and remanded the cause with the instruction that the BTA
“determine, based on a consideration of all the evidence in accordance with
[Navistar I], whether the valuation allowance originally reported on Navistar’s
Amortizable Amount Report was or was not in compliance with GAAP” (generally
accepted accounting principles). Id. at ¶ 40. In its decision on remand, the BTA
again upheld the tax commissioner’s reduction of Navistar’s CAT credit to zero,
and Navistar has appealed for the second time.
       {¶ 2} In Navistar I, we noted that Navistar referred to the CAT credit as part
of a “grand bargain” under which Ohio franchise-tax payers such as Navistar would
support the enactment of the CAT and would receive a credit that allowed them to
“retain[] some portion of the value of their Ohio deferred-tax assets such as NOLs”
(net operating losses), which would otherwise be lost when the CAT replaced the
former Ohio corporation franchise tax. Id. at ¶ 10. The CAT credit consists of “a
portion of the Ohio-apportioned NOLs on [the company’s] books at the end of [the
company’s] 2004 fiscal year, which, when adjusted, furnished a total amount of
credit that could be used to reduce CAT liabilities over a period of up to 20 years.”
Id. at ¶ 11. Under R.C. 5751.53(A)(9) and (B), this potential credit is referred to as
the “amortizable amount.” Navistar I at ¶ 12. One feature of the amortizable
amount that was significant in Navistar I and is significant in the present appeal is
that in determining the amortizable amount, the NOLs are reduced by a percentage
called the valuation allowance, which is an “adjustment dictated by accounting
principles that is made on the books from year to year to reflect the likelihood that
the company will realize the tax benefit of the NOLs,” id.
       {¶ 3} The factual and procedural background set forth in Navistar I is also
relevant here. Navistar timely filed its Amortizable Amount Report, and in that
report, it applied a valuation allowance of 62.4 percent; the total amortizable




                                          2
                                January Term, 2018




amount reported was $27,048,726. Id. at ¶ 15-17. But the letter to the tax
department that accompanied the Amortizable Amount Report stated that Navistar
was undergoing a “restatement examination of its financial statements for the years
2002, 2003, 2004, and 2005,” that “changes [would] occur to the 2002, 2003, and
2004 financial statements as part of [the] examination,” and that such changes
would impact the report. Id. at ¶ 20. In December 2007, a “massive restatement”
of the financials for the earlier years was noted in Navistar’s annual Form 10-K
filed with the Securities and Exchange Commission. As noted in Navistar’s Form
10-K, in light of the changes to the underlying financial statements, the restatement
of the financials increased the applicable valuation allowance to 100 percent.
Navistar I at ¶ 17. The tax commissioner adopted the 100 percent valuation
allowance in his final determination, which effectively eliminated Navistar’s entire
CAT credit, id. at ¶ 18, and the BTA affirmed the tax commissioner’s
determination. Navistar appealed the BTA’s decision, and in Navistar I, we
clarified the applicable legal principles and, as mentioned above, we remanded the
cause to the BTA for a full consideration of the evidence. Navistar now contends
that the BTA failed to properly carry out our instructions on remand. For the
reasons set forth below, we disagree.
                         The BTA’s decision on remand
       {¶ 4} In its decision on remand, the BTA took as its starting point the Form
8-K that Navistar filed with the Securities and Exchange Commission on April 6,
2006, which states that “the company’s previously issued audited financial
statements and the independent auditor’s reports thereon for the years ended
October 31, 2002 through 2004, and all quarterly financial statements for periods
after November 1, 2002 should no longer be relied upon because of errors in such
financial statements.” The BTA noted that that filing occurred “more than 75 days
before [Navistar filed] the June 2006 amortization report with the Tax
Commissioner” and that therefore the Amortizable Amount Report itself was filed




                                         3
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in the context of Navistar’s own admission that the financial statements that
undergirded the reported amortizable amount were unreliable. BTA No. 2010-575,
2015 Ohio Tax LEXIS 4158, *7 (Nov. 30, 2015).
       {¶ 5} The BTA found that Navistar’s experts, Douglas Pinney and Beth
Savage, “reviewed limited information, i.e., not all of Navistar’s underlying books
and records” and that the testimony of both “reflects only the perception that each
valuation allowance, as reported initially and upon restatement, was properly based
upon Navistar’s books and records, as they existed at the time of each report’s
submission.” (Emphasis sic.) Id. at *8. The BTA drew the conclusion that “the
valuation allowance set forth in the June 2006 report could not have complied with
GAAP, because the historical financial information upon which that valuation was
based, was unreliable and inaccurate, i.e., not GAAP compliant.” Id. at *9.
                  The meaning of the term “books and records”
       {¶ 6} Before we consider Navistar’s objections to the BTA’s findings and
its conclusion, we must clarify the term “books and records” as it is used in the
BTA’s decision. As Pinney, one of Navistar’s experts, explained, “[f]inancial
statements are derived from the books and records of a company, but the financial
statements contain * * * footnote disclosures and other information that is typically
not recorded in books and records.” Navistar’s other expert witness, Savage,
testified that “[b]ooks and records would include everything that a company has
and maintains to track their transactions.” When asked whether “books and records
include financial statements,” she replied that “it’s more accurate to state that the
books and records * * * are used to prepare the financial statements.”
       {¶ 7} Addressing the same subject, the tax commissioner’s expert, Ray
Stephens, stated that “the books are used to prepare the financial statements and
include the financial statements and the records or other qualifying information that
are used to prepare the financial statements.” Although Stephens testified that from
an accounting standpoint, the term “books and records” includes the valuation




                                         4
                                 January Term, 2018




allowance, because that information is used to prepare the financial statement, the
term broadly includes what Pinney characterized as “raw data” or “underlying
data.” And Pinney articulated the important point that the underlying data “needs
to be processed to be useful.”
         {¶ 8} The foregoing discussion demonstrates why it is important that we
first recognize the different ways in which the term “books and records” is used.
The term is sometimes used to mean the financial statements and high-level-
accounting documents associated directly with preparing the financial statements,
and it is sometimes used to mean the “raw data” that forms the factual foundation
upon which the high-level-accounting documents and the financial statements are
based. Using Pinney’s terminology, we will refer to the former types of books and
records as the “processed data” and we will refer to the latter types as the “raw
data.”
         {¶ 9} The BTA uses the term “books and records” in both ways. First, the
BTA refers to “underlying books and records,” which the expert witnesses did not
review, 2015 Ohio Tax LEXIS 4158 at *8. This refers to the raw data upon which
the processed data, including the financial statements, are based.
         {¶ 10} Second, the BTA refers to the books and records as they “existed at
the time of each [Form 10-K’s] submission.” (Emphasis deleted.) Id. Here, the
BTA is referring primarily to the processed data, which differed at the two points
in time because of the restatement of the financials for the fiscal year ending
October 31, 2004.
         {¶ 11} Likewise, in stating its conclusion that the original valuation
allowance was not GAAP compliant, the BTA uses the phrase “historical financial
information upon which [the original] valuation [allowance] was based.” Id. at *9.
Here, the BTA is again referring to the processed data, which were shown by the
restatement of financials to be “unreliable and inaccurate.” Id.




                                         5
                               SUPREME COURT OF OHIO




       {¶ 12} The record indisputably supports the BTA’s finding that in important
respects, the processed data upon which the original valuation allowance was
determined were in error. When it filed its Form 8-K in 2006, Navistar proclaimed
its financials for 2004 to be unreliable. In 2007, Navistar submitted its long-delayed
Form 10-K for 2005, which for the first time “reflect[ed] restated consolidated
financial statements for the years ended October 31, 2003 and 2004.” The restated
financials for those years significantly modified the reported income, expenses, and
liabilities that form the basis for projecting whether deferred tax assets could
actually be used; for fiscal year 2004, the restatement indicates that the originally
reported $311 million net income was incorrect and that the company actually had
suffered a $35 million loss.
       {¶ 13} Supporting the BTA’s conclusion that the original valuation
allowance was not GAAP compliant are Navistar’s own statements in its Form 10-
K. In that form, Navistar relies on Financial Accounting Standards No. 109 for the
proposition that “an important factor in determining whether a deferred tax asset
will be realized is whether there has been sufficient taxable income in recent years.”
(Emphasis added.) And in conjunction with that proposition, Navistar’s Form 10-
K states that Navistar “reassessed [its] need for a valuation allowance and
determined that [it had not applied Financial Accounting Standards] No. 109
properly and that a full valuation allowance should be established for net U.S. and
Canadian deferred tax assets based on the weight of positive and negative evidence,
particularly our recent history of operating losses.” The BTA acted within its
discretion in attaching weight to the pronouncements set forth in Navistar’s filings
with the Securities and Exchange Commission. See HealthSouth Corp. v. Testa,
132 Ohio St.3d 55, 2012-Ohio-1871, 969 N.E.2d 232, ¶ 20 (“filings at the Securities
and Exchange Commission possess indicia of reliability because they are generated
during the course of business for business purposes and involve the assembling of




                                          6
                                January Term, 2018




data from business-record sources by persons who have a business duty to assemble
such data”).
       {¶ 14} Of course, even though the processed data were corrected, the
underlying raw data remained the same and were in existence at all relevant times.
That point was elicited from Pinney on cross-examination. When confronted with
the difference between the $76 million valuation allowance originally reported for
2004 and the $2 billion valuation allowance reported in connection with the restated
financial statements for 2004, Pinney testified that both valuation allowances were
reasonable “at different points in time.” The examination proceeded as follows:


               Q:       But it’s for the same period, you would agree?
               A:       The— Because the assessment was made at a
       different point in time, that’s why I’m stating it that way.
               Q:       And it’s based upon both— or, based upon
       information that was in existence as of the fiscal year ending in
       2004, correct?
               A:       Well, not the subsequent period’s income and losses.
       That was not in existence as of * * * 10-31-2004.
               Q:       I’m * * * talking about information that was utilized
       to determine the restatement amounts and— as compared to the
       originally filed amounts.
               A:       Well, not all of— as I— as I stated, not all of the
       information, including the changed circumstances that is described
       elsewhere in the restated financial statement, that— that was not
       available as of the date the original assessment was made.
               Q:       The underlying data for it was available?
               A:       Yes.




                                          7
                             SUPREME COURT OF OHIO




(Emphasis added.) The reference to the “underlying data” in this testimony is, of
course, a reference to what we are calling the raw data.
       {¶ 15} Expressed in terms of the distinction that we have drawn, the BTA
concluded that the original valuation allowance was not GAAP compliant, given
that the processed data on which the original valuation allowance was based were
defective in certain respects that were material to the calculation of the original
valuation allowance. And the essence of the BTA’s findings with regard to the
testimony of Navistar’s experts is that (1) they opined that the valuation allowance
was GAAP reasonable in light of the original processed data available to those who
formulated the original valuation, (2) they did not testify that the original valuation
allowance was reasonable under the processed data after restatement, and (3) they
based their opinions on their review of the processed data and did not themselves
review the raw data.
     The BTA’s findings are supported by reliable and probative evidence,
                   and its conclusion is reasonable and lawful
       {¶ 16} Against this backdrop, we are now able to evaluate Navistar’s
objections to the BTA’s findings and its conclusion. In doing so, we are mindful
that we remanded the cause on a question of fact—whether Navistar’s “original
valuation allowance was in compliance with GAAP,” Navistar I, 143 Ohio St.3d
460, 2015-Ohio-3283, 39 N.E.3d 509, at ¶ 7. Accordingly, “[w]e must affirm the
BTA’s findings of fact if they are supported by reliable and probative evidence,”
and with respect to “the BTA’s determination of the credibility of witnesses and its
weighing of the evidence,” we perform a highly deferential “abuse-of-discretion
review on appeal.” HealthSouth Corp., 132 Ohio St.3d 55, 2012-Ohio-1871, 969
N.E.2d 232, at ¶ 10.
       {¶ 17} First, Navistar maintains that the BTA erred in rejecting Pinney’s
and Savage’s conclusions based on the fact that they had not reviewed all of
Navistar’s relevant books and records. As Navistar asserts, Pinney’s and Savage’s




                                          8
                                January Term, 2018




review of Navistar’s processed data was extensive—and arguably, with respect to
processed data, Pinney’s review was comprehensive in that he had reviewed what
Navistar’s auditors relied on when calculating the original valuation allowance.
But that does not controvert the BTA’s finding that he and Savage did not review
the raw data. Accordingly, Navistar’s argument in this regard does not impugn the
BTA’s decision.
       {¶ 18} Second, Navistar advances a legal argument as to why the BTA’s
reasoning is faulty. Navistar asserts that under Navistar I, the BTA “could not use
future events to decide whether the 2004 [valuation allowance] was GAAP
compliant when it was made.” At oral argument, counsel for Navistar stated, “This
court, we believe, has said, you do not look at the restatement financials.”
       {¶ 19} This claim of legal error must be considered in light of what we
decided in Navistar I. During the first appeal, Navistar argued that “the tax
commissioner lacked any authority to adjust the valuation allowance based on the
restatement of financial statements that occurred after the June 2006 deadline for
filing the Amortizable Amount Report.” See Navistar I, 143 Ohio St.3d 460, 2015-
Ohio-3283, 39 N.E.3d 509, at ¶ 33. We disagreed with this argument. Id. at ¶ 34.
Indeed, the essential basis for our remanding the cause lay in the possibility that the
restated financials, along with the concomitant changed valuation allowance, might
indeed establish that the original valuation allowance was not GAAP compliant—
but in making the determination whether it was or was not GAAP compliant on
remand, the BTA needed to take cognizance of the expert testimony that had been
offered by Navistar.
       {¶ 20} Now the BTA has done so. It found that Navistar’s experts did not
opine that the original valuation allowance could be deemed GAAP compliant
based on the restated (corrected) financials. And it has concluded that the evidence
before it establishes that the original valuation allowance was not GAAP compliant.
Because the very purpose of our remand in Navistar I was for the BTA to determine




                                          9
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whether the original valuation allowance was unreasonable in light of all the
evidence in the record, including the restated financials, we reject Navistar’s claim
of legal error.
        {¶ 21} Third, although the BTA’s decision does not explicitly rely on the
testimony of the tax commissioner’s expert, Stephens, Navistar draws the inference
that the BTA tacitly did so. And indeed, Stephens’s testimony does support the
BTA’s conclusion because Stephens opined, based on his own accounting
expertise, that in light of the restated financials, the amortizable amount should be
reduced to zero because the later valuation allowance was 100 percent. On cross-
examination, Stephens testified that the 100 percent valuation allowance as
determined by the auditor in connection with Navistar’s restated financials was the
correct valuation allowance under GAAP. Stephens also expressed his opinion that
the original valuation allowance was not GAAP compliant, based on Navistar’s
own Form 10-K statement to that effect.
        {¶ 22} Navistar contends that in Navistar I, we “disagreed” with Stephens’s
testimony. Quoting Navistar I, 143 Ohio St.3d 460, 2015-Ohio-3283, 39 N.E.3d
509, at ¶ 25, Navistar asserts that we stated that Stephens “inappropriately ‘based
his opinion concerning the GAAP-compliance of the initial valuation allowance on
Navistar’s supposed admission that it was not in compliance with GAAP.’ ”
        {¶ 23} But Navistar misquotes our decision. We stated that Stephens had
based his opinion on various things, including “his accounting knowledge.” Id.
And while we described the connection between Stephens’s opinion and the
admission set forth in Navistar’s Form 10-K, we never stated that that connection
was in any way “inappropriate.”
        {¶ 24} Equally misguided is Navistar’s allegation that the BTA was
“hypocritical” in relying on Stephens’s testimony when it had rejected that of
Pinney and Savage based on their having failed to review all of Navistar’s books
and records. Navistar alleges that this was hypocritical because Pinney and Savage




                                          10
                               January Term, 2018




had reviewed more processed data than Stephens had. In fact, although he did not
review as many processed data, Stephens did review the reported financial
statements and notes, and his opinion regarding GAAP compliance reflects the
application of his own expertise to the matter. The BTA was entitled to accord
whatever weight to that opinion that it deemed appropriate.
       {¶ 25} Navistar additionally argues that Stephens’s opinion testimony is
“irreparably damaged” by the fact that Stephens also took into consideration the
complaint filed by Navistar against its former accountants in Illinois. Namely,
Navistar characterizes any reliance by Stephens on the Illinois complaint as
“impermissible” in light of our holding in Navistar I that the tax commissioner had
waived his objection to the BTA’s having ruled that statements in the complaint
would not be considered as admissions by Navistar. 143 Ohio St.3d 460, 2015-
Ohio-3283, 39 N.E.3d 509, at ¶ 37-39.
       {¶ 26} This argument is without merit. As we noted in Navistar I, the
hearing examiner “admitted the complaint as evidence but rejected the tax
commissioner’s argument that it constituted admissions against interest or
statements by a party opponent,” and the hearing examiner “limited the tax
commissioner’s use of the complaint in examining witnesses.” Id. at ¶ 37. We
construed this as a “ruling that precluded the use of the Illinois complaint as an
admission.” Id. at ¶ 38. Under Evid.R. 703, an expert may rely on facts “perceived
by the expert or admitted in evidence at the hearing.” (Emphasis added.) Although
the BTA ruled that the complaint would not itself be construed as an admission, the
complaint was admitted into evidence. As a result, Stephens could properly rely
on it under the evidentiary rules, which provide guidance at the BTA but are not
controlling. See Plain Local Schools Bd. of Edn. v. Franklin Cty. Bd. of Revision,
130 Ohio St.3d 230, 2011-Ohio-3362, 957 N.E.2d 268, ¶ 20.
       {¶ 27} Fourth, Navistar argues that in reviewing the expert and lay
testimony of Navistar’s witnesses, the BTA should have come across evidence




                                        11
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establishing that the restated financials were based not only on raw data in existence
at the time Navistar filed its Amortizable Amount Report but also on information
that became available only after the report was filed. For example, Navistar argues,
although the raw data were available at all relevant times, the restated financials for
fiscal year 2004 that Navistar submitted to the Securities and Exchange
Commission in 2007 incorporated insight from later accounting periods when
Navistar had concluded that it had a 100 percent valuation allowance.
       {¶ 28} We discern no reversible error in this regard. For one thing, Pinney
testified—as previously discussed—that the “underlying data” was in fact in
existence at the relevant times. Additionally, the pronouncements by Navistar in
its Form 10-K and Stephens’s testimony furnish a sufficient basis for the BTA’s
conclusion, even if some factors were considered in the restated financials that were
not in existence at the time the Amortizable Amount Report was filed—quite
simply, the BTA could reasonably have concluded, based on the exercise of its
discretion as the finder of fact, that the influence of such other factors was
inconsequential.
       {¶ 29} Also unavailing is Navistar’s contention that the subsequent history
of Navistar’s actually realizing the value of net operating losses that accrued in
earlier years establishes the propriety of the original partial valuation allowance for
fiscal year 2004 as opposed to the later total valuation allowance. To accept this
contention would violate the precept that we articulated in Navistar I: the tax
commissioner may adjust the amortizable amount on audit but only to cure an
inaccuracy or correct an error in the report of the amortizable amount. Id. at ¶ 34.
The issue before the BTA was the reasonableness of the valuation allowance in
light of the corrected financial statements with respect to the fiscal year ending in
2004, and events that occurred in subsequent years cannot retroactively justify a
lesser valuation allowance if that lesser valuation allowance was unwarranted in




                                          12
                                  January Term, 2018




light of the information properly considered in determining the valuation allowance
for fiscal year 2004.
                                     Conclusion
          {¶ 30} In Navistar I, we held that the BTA’s “ignor[ing] the testimony of
Navistar’s experts” was an omission that “ma[de] the BTA’s decision unreasonable
and unlawful.” 143 Ohio St.3d 460, 2015-Ohio-3283, 39 N.E.3d 509, at ¶ 7. In its
decision on remand, the BTA explained why Navistar’s expert testimony did not
demonstrate that the original valuation allowance was GAAP compliant. Thus, the
BTA carried out our instruction on remand, and because its decision is reasonable
and lawful, we affirm it.
                                                                Decision affirmed.
          O’CONNOR, C.J., and O’DONNELL, FRENCH, DEWINE, and DEGENARO, JJ.,
concur.
          KENNEDY and FISCHER, JJ., dissent.
                                _________________
          Maryann B. Gall; and Vorys, Sater, Seymour & Pease, L.L.P., Anthony L.
Ehler, and Steven L. Smiseck, for appellant.
          Michael DeWine, Attorney General, and Barton A. Hubbard, Assistant
Attorney General, for appellee.
                                _________________




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