By Chris Mehrmann and Leah Robinson

The Ohio Supreme Court held that the Due Process Clause of the U.S. Constitution precluded Ohio from taxing a nonresident individual on an apportioned share of his gain from the sale of a limited liability company that conducted business in the state. During the relevant time period, Ohio Rev. Code § 5747.212 required any investor owning at least 20% of a pass-through entity to treat gain or loss from the sale of the entity as business income, which is apportioned using the state’s standard three-factor formula. The court held that section 5747.212 was unconstitutional as applied to the seller, because the gain arising from the sale lacked the requisite connection with Ohio under the Due Process Clause. In so holding, the court explained that the seller was not part of the entity’s unitary business because the seller merely provided “stewardship” services, rather than actively managing the business. Corrigan v. Testa, Slip Op. No. 2016-Ohio-2805 (Ohio May 4, 2016).