in the supreme court of ohio...brief of appellees christopher j. swift (0025763) barbara a....
TRANSCRIPT
IN THE SUPREME COURT OF OHIO
William E. MacDonald, III and ) Susan W. MacDonald, ) Case No. 2016-0778 ) Appellees, ) Ohio Board of Tax Appeals ) Case No. 2009-1130 vs. ) ) City of Cleveland Income Tax Board ) of Review, et al., ) ) Appellants. )
BRIEF OF APPELLEES
Christopher J. Swift (0025763) Barbara A. Langhenry, Esq. (0038838) Baker & Hostetler LLP Director of Law Key Tower Linda L. Bickerstaff, Esq. (0052101) 127 Public Square, Suite 2000 Assistant Director of Law Cleveland, Ohio 44114-1214 City of Cleveland (216) 621-0200 205 W. St. Clair Avenue (216) 696-0740 FAX Cleveland, Ohio 44113 [email protected] (216) 664-4406 (216) 420-8299 FAX [email protected] Edward J. Bernert (0025808) Elizabeth A. McNellie (0046534) Counsel for Appellants, City of Cleveland Baker & Hostetler LLP Income Tax Board of Review and 65 East State Street, Suite 2100 Nassim M. Lynch Columbus, Ohio 43215 (614) 228-1541 (614) 462-2616 FAX [email protected] [email protected] Attorneys for Appellees, William E. MacDonald III and Susan W. MacDonald
Supreme Court of Ohio Clerk of Court - Filed September 06, 2016 - Case No. 2016-0778
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TABLE OF CONTENTS
I. Introduction ..........................................................................................................................1
II. Statement of Facts ................................................................................................................3
III. Statement of the Case ...........................................................................................................5
IV. Law and Argument ..............................................................................................................6
Proposition of Law ...............................................................................................................6
A Municipal Tax Exemption Is Determined By Ordinance. The Exemption’s Scope Is Not Limited By Regulations That Add Restrictions Not Reflected By Ordinance. Ransom & Randolph Co. v. Evatt, 142 Ohio St. 398 (1944), syl. ¶ 4, approved and followed. ..............................................................................................................................6
A. The Court’s Review Of Legal Issues Is De Novo Under MacDonald I. The Court’s Role In Interpreting A Municipal Tax Ordinance Is Not Diminished Because The Issue Is Municipal Law. .....................................................................6
B. Cleveland Has A Pension Exemption That Is Identical To That Of Shaker Heights. ....................................................................................................................8
C. The BTA’s Decision Was Well Reasoned And Should Be Affirmed. ....................9
1. The BTA correctly determined that the National City SERP was a pension as a matter of fact. The evidence supports the BTA’s conclusion ....................................................................................................9
2. The BTA did not commit any procedural errors. .......................................11
3. The BTA correctly determined that the SERP was a pension under the Cleveland Code. .........................................................................................12
4. The BTA correctly determined that the National City SERP was an exempt pension under Cleveland Law despite being part of qualifying wages and being a nonqualified deferred compensation plan. ..................14
a. The SERP is classified as qualifying wages and a pension. ..........14
b. The SERP is nonqualified deferred compensation and a pension. ..........................................................................................16
c. Wardrop Supports the BTA’s Decision. ........................................18
D. The Distinction Between Qualified And Nonqualified Plans Is Neither Reflected In The Cleveland Code Nor Determinative For This Purpose. .............19
E. The Qualifier “Not In The Nature Of Compensation” In Cleveland Code 191.0901 Does Not Apply To Pensions. ................................................................20
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TABLE OF CONTENTS CONTINUED
Page
F. Cleveland Law As Enacted By The Cleveland City Council Controls. ................21
G. National City Did Not Agree That The SERP Was Not A Pension And No Basis Exists For Claiming That The MacDonalds Are Estopped From Claiming The Exemption. ......................................................................................27
H. Taxation Of The National City SERP Benefit Violates Federal Law. ..................28
IV. Conclusion .........................................................................................................................31
V. CERTIFICATE OF SERVICE ..........................................................................................32
VI. APPENDIX
a. Current City Charter ........................................................................................... Appx. 1
b. Chapter 5, City Council, § 24 Powers, Terms and Vacancies ........................... Appx. 2
c. Prior City of Cleveland Code of Ordinances ...................................................... Appx. 3
d. The Cleveland City Record, December 7, 1966 ................................................. Appx. 7
e. Section 115.0901(1966) ...................................................................................... Appx. 9
f. Codified Ordinances of the City of Shaker Heights ......................................... Appx. 14
g. Shaker Heights Section 111.0901 relevant to 2006 .......................................... Appx. 15
h. Current R.C. 718.01 .......................................................................................... Appx. 17
i. Current R.C. 718.03 .......................................................................................... Appx. 29
j. Former 4 U.S.C. 114 ......................................................................................... Appx. 32
k. MacDonald v. Shaker Hts. Income Tax Bd. of Rev., BTA No. 2008-K-1883 (Dec. 23, 2012), unreported. ............................................................................ Appx. 35
l. Extract of Brief of the City of Cleveland As Amicus Curiae in Support of Appellees in MacDonald v. Shaker Hts. Income Tax Bd. of Rev., BTA No. 2008-K-1883. .................................................................................... Appx. 36
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TABLE OF AUTHORITIES
Page(s)
Cases
Cincinnati v. DeGolyer, 26 Ohio App.2d 178 (1st Dist. 1969) .....................................................24
State ex rel. Cities Service Oil Co. v. Orteca, 63 Ohio St.2d 295 (1980) ......................................28
State ex rel. Cleveland v. State Bd. of Tax Appeals, 143 Ohio St.3d 1496, 2015-Ohio-4468, 39 N.E.3d 1268 .....................................................................................................12
Hillenmeyer v. Cleveland Bd. of Review, 144 Ohio St.3d 165, 2015-Ohio-1623, 41 N.E.3d 1164 .......................................................................................................................25, 26
Estate of Hughes v. Lindley, 8th Dist. Cuyahoga No. 41671, 1980 WL 355170 (May 22, 1980).........................................................................................................................22
Independent Ins. Agents of Ohio v. Fabe, 63 Ohio St.3d 310 (1992) ............................................20
Ladd v. City of Oregon and Oregon Income Tax Bd. of Rev., BTA No. 2008-K-2371, 2011 WL 1352651 (Mar. 29, 2011) ...............................................................................25
MacDonald v. Shaker Hts. Income Tax Bd. of Rev., BTA No. 2008-K-1883 (Dec. 28, 2012) ..............................................................................................................................1, 24
Ransom & Randolph Co. v. Evatt, 142 Ohio St. 398 (1944) .....................................................6, 25
Robinson v. Tax Comm. of Indian Hills, 61 Ohio Misc.2d 95 (C.P. 1989) ...................................22
Strongsville Bd. of Edn. v. Wilkins, 108 Ohio St.3d 115, 2006-Ohio-248, 841 N.E.2d 303 ...............................................................................................................................11
United States v. Martin, 438 F.3d 621 (6th Cir. 2006) ..................................................................21
Wardrop v. Middletown Income Tax Review Bd., 12th Dist. Butler No. CA2007-09-235, 2008-Ohio-5298........................................................................................18, 19, 24, 25
Statutes
4 U.S.C. § 114, Pub. L. 104-95 ......................................................................................................29
Cleveland Code § 191.0302 .............................................................................................................2
Cleveland Code § 191.0318 ...........................................................................................................14
Cleveland Code § 191.0501 ...........................................................................................................14
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TABLE OF AUTHORITIES CONTINUED
Page
Cleveland Code § 191.0901 ................................................................................................... passim
Federal Treasury Regulation, 26 CFR Ch. I (4-1-10 Edition) .......................................................19
Internal Revenue Code § 3121(v)(2)(C) ................................................................................ passim
R.C. 718 .............................................................................................................................14, 15, 26
R.C. 5717.011 ..................................................................................................................................8
Other Authorities
Form 1099R ...................................................................................................................................22
IN THE SUPREME COURT OF OHIO
William E. MacDonald, III and ) Susan W. MacDonald, ) Case No. 2016-0778 ) Appellees, ) Ohio Board of Tax Appeals ) Case No. 2009-1130 vs. ) ) City of Cleveland Income Tax Board ) of Review, et al., ) ) Appellants. )
BRIEF OF APPELLEES
I. Introduction
Appellees William and Susan MacDonald are entitled to the Cleveland pension
exemption for the 2006 present value of then future payments from the National City Bank
Supplemental Executive Retirement Plan (“SERP”). Cleveland Codified Ordinances
(“Cleveland Code”) 191.0901(d) exempts “pensions” from municipal tax. The SERP is a
pension. Regulations of the Central Collection Agency cannot supersede the Cleveland Code
and destroy its pension exemption.
This Court has considered issues involving Mr. MacDonald’s pension before. In
MacDonald v. Shaker Hts. Income Tax Bd. of Rev. BTA No. 2008-K-1883 (Dec. 28, 2012),
unreported,1 aff’d, 10th Dist. Franklin No. 13 AP-71, 2014-Ohio-708; aff’d 144 Ohio St.3d 105,
2015-Ohio-3290, 41 N.E.3d 376 (“MacDonald I”), the City of Shaker Heights appealed the
decision from the Tenth District Court of Appeals that Mr. MacDonald’s disputed income was a
1 Appellees’ Appendix at 36.
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pension and therefore exempt under the Shaker Heights municipal pension exemption. The
Shaker Heights’ exemption for pensions is identical to that of the Cleveland Code. Shaker
Heights and the Regional Income Tax Authority (“RITA”) appealed to this Court on two
grounds: one substantive and one procedural.
The Court declined to take the substantive issue but accepted the procedural question.
After considering the procedural issue, this Court unanimously affirmed the Tenth District Court
of Appeals’ decision against Shaker Heights and RITA. The Court found that the Ohio Board of
Tax Appeals (“BTA”) properly applied a de novo standard of review on both the facts and the
law. The Court expressed no opinion on the substantive question. MacDonald I, 2015-Ohio-
3290, ¶ 23.
Cleveland brings this case to the Court and seeks review of both the substantive and the
procedural questions. Appellants seem undaunted that the procedural question was disposed of
by MacDonald I. As to the substantive question (whether the SERP is a pension), admittedly,
this appeal concerns Cleveland and not Shaker Heights law; however, the two municipalities’
ordinances use identical language when providing the pension exemption, a fact ignored in
Appellants’ Brief. In addition, as the BTA correctly noted, MacDonald I concerned the same
“employee/employer, same tax year, same income and the same SERP.” Appellants’ Appendix
at 2. And, the substantive issue was fully addressed by the Tenth District Court of Appeals,
which unanimously found that the SERP was a pension under an identical municipal ordinance.
MacDonald I, 2014-Ohio-708, ¶ 18.
The Cleveland Tax Administrator2 and the Cleveland Income Tax Board of Review
(“Board of Review”) (collectively, “Appellants”) nevertheless insist that Cleveland law is
2 The Cleveland “Administrator” means the Commissioner of the Division of Taxation who is also referred to as the Tax Administrator. Cleveland Code 191.0302
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different. Specifically, they claim that the Cleveland City Council intended to tax this type of
pension despite the fact that the City Council through 2006 had never amended the Cleveland
Code to limit or restrict the pension exemption in any way. Because the limitations on the
pension exemption that Appellants seek are not found in the Cleveland Code, those restrictions
are not applicable to deny the exemption.
Appellants cannot deny that the language of the Cleveland pension exemption relevant to
2006 was the same language used in the first enactment of the Cleveland municipal income tax
in 1966. Appellees’ Appendix at 9. Appellants, however, seek to fundamentally and unilaterally
change the Cleveland Code’s scope and substantially limit the pension exemption by imposing
requirements to qualify for the exemption that are not in the Cleveland Code.
II. Statement of Facts
The pertinent facts are generally not in dispute. MacDonald was employed by National
City Corporation for thirty-eight years until his retirement on December 31, 2006. Appellees’
Suppl. at 84-86. At the time of his retirement, MacDonald was vice-chairman of National City
and qualified for benefits under several retirement plans including the company's SERP, which
was a Non-Contributory Retirement Plan. MacDonald received SERP payments beginning in
2007 in the form of a joint and survivor annuity that will cease upon the second death of either of
the MacDonalds. Appellees’ Suppl. at 63-64. MacDonald received no payment under the SERP
for 2006, the tax year in question. The present value of MacDonald's SERP benefit not
previously reported was included in Box 5 of his 2006 federal Form W-2, Medicare, wages, and
tips, in order to make the current value of future payments subject to the Medicare tax while not
being subject to any federal income tax or further Social Security taxes in 2006. Appellees’
Suppl. at 43. The MacDonalds jointly filed their 2006 city income tax return, calculating their
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tax liability on the amount reported in Box 18 of Form W-2, entitled “local wages, tips, etc.”
Appellees’ Suppl. at 43.
Patty Emond, former manager of National City’s executive compensation program,
testified that National City implemented its SERP in order “[t]o provide competitive pension
benefits to executives.” Appellees’ Suppl. at 77.3 She explained that SERPs became popular in
the 1980s when federal tax law changes established limits on the amount of annual compensation
that could be used in calculating benefits for employee pension plans and, as a result, companies
sought ways to provide benefits through supplemental plans. Appellees’ Suppl. at 77. The
SERP is a defined benefit plan where the employer provides a specific benefit or sets forth a
specific formula used to derive such benefit. Appellees’ Suppl. at 8, 20. In this instance, a
targeted replacement ratio of approximately 60% of pre-retirement income was established as the
intended benefit, derived from a calculation that takes into consideration salary, bonuses, and
total years of service, limited in part by Social Security compensation and MacDonald’s
qualified pension plan benefit. Appellees’ Suppl. at 39-42.
Ms. Emond distinguished the SERP from other deferred compensation programs in place,
both qualified and nonqualified. As Ms. Emond testified: National City also “offer[ed] a
qualified deferred compensation plan which would be the 401(k) plan that allowed for deferrals
of salary and bonus.” Appellees’ Suppl. at 79. National City withheld city income tax on the
forms of deferred compensation received by MacDonald as required by Cleveland law; National
City did not withhold on the SERP benefits because those benefits were an unfunded obligation
to pay future pension benefits to MacDonald and were not an elective deferral that would be
subject to tax. Appellees’ Suppl. at 63-64, 43, 10. Ms. Emond also described how National City
3 At the hearing before the BTA in this case, Ms. Emond affirmed her testimony from the MacDonald I. The excerpts from her testimony are from MacDonald I, as affirmed by the testimony before the BTA below.
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reported its SERP as a pension plan in its 2006 annual report to its shareholders. Appellees’
Suppl. at 10-11. Ms. Emond’s testimony reflects the stated purpose of the National City SERP:
1.2 Purpose. The purpose of the SERP is to provide for the payment of certain pension, disability and survivor benefits in addition to benefits which may be payable under other plans of the Corporation. The Corporation intends and desires by the provisions of the SERP to recognize the value to the Corporation of the past and present service of employees covered by the SERP and to encourage and assure their continued service to the Corporation by making more adequate provision for their future security than other plans of the Corporation provide.
Appellants’ Suppl. at 32.
When discussing the present value of MacDonald’s SERP benefit appearing in Box 5 of
McDonald’s 2006 W-2, Appellants consistently characterize that amount as income that had
been deferred by MacDonald, but that statement is incorrect. Ms. Emond testified specifically
that there were no deferrals before MacDonald’s retirement. Appellees’ Suppl. at 23. In fact, no
deferrals were possible because MacDonald could not elect to receive the funds before
retirement and the pension was not funded. Judge Klatt, writing for the Tenth District Court of
Appeals in MacDonald I, correctly concluded that this SERP “did not represent a salary
deferral.” 2014-Ohio-708, ¶ 4.
Appellants make legal arguments as facts on pages 2 through 6 of their Brief. This
approach reflects Appellants’ erroneous position that the interpretations of the municipal tax law
by the Tax Administrator, the Central Collection Agency, and Board of Review all must be taken
as facts.
III. Statement of the Case
The MacDonalds paid Cleveland municipal income tax upon their taxable income for
2006, including income for which they elected deferral. At issue is whether Cleveland tax is due
on the contested amount appearing in Box 5 of their W-2 that was attributed to them based on
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their participation in the SERP. This benefit was not paid in 2006. Appellants are the Cleveland
Board of Review and Nassim M. Lynch, the Cleveland Tax Administrator. CCA (The Central
Collection Agency) is not listed as a party but referenced as the source of regulations.
Patty Emond testified at the BTA hearing and was subject to cross-examination by
Appellants’ counsel. The MacDonalds accept divisions C and D of Appellants’ Statement of
Facts on pages 9-12 of the Brief of Appellants as the Statement of the Case.
IV. Law and Argument
Proposition of Law
A Municipal Tax Exemption Is Determined By Ordinance. The Exemption’s Scope Is Not Limited By Regulations That Add Restrictions Not Reflected By Ordinance. Ransom & Randolph Co. v. Evatt, 142 Ohio St. 398 (1944), syl. ¶ 4, approved and followed.
A. The Court’s Review Of Legal Issues Is De Novo Under MacDonald I. The Court’s Role In Interpreting A Municipal Tax Ordinance Is Not Diminished Because The Issue Is Municipal Law.
Several of Appellants’ Propositions of Law should be considered together because they
all seek to have this Court defer to the local taxing authorities on matters of law:
Proposition of Law No. 1: the issue is municipal law and not state law.
Appellants’ Brief at 17. That observation is correct but the BTA understood and
articulated that it was deciding the Cleveland Code’s scope. Contrary to
Appellants’ argument, it is not appropriate to conclude that any interpretation of
the ordinance that does not mirror the Board of Review’s opinion must be
rejected.
Proposition of Law No. 2: the BTA does not have carte blanche to ignore the law.
Appellants’ Brief at 22. Once again no one suggests that the BTA can ignore the
law—state or municipal. Likewise, it does not follow that the BTA’s
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interpretation is wrong because that conclusion contradicts the conclusion reached
by the Cleveland Board of Review. More to the point, at this stage of the appeal,
the BTA’s legal conclusions are subject to de novo review by this Court. As a
result, Appellants’ argument is an alternate way of arguing that this Court must
accept any legal position advanced by the Tax Administrator, the Central
Collection Agency or the Board of Review. Neither the BTA nor this Court,
however, owes a duty of deference to either one.
Proposition of Law No 4: the BTA acts in an appellate capacity. Appellants’
Brief at 27. This observation, while true, is advanced to support an argument that
was explicitly rejected by the Court in MacDonald I: contrary to Appellants’
position, the BTA should not defer to the Board of Review on legal questions and
neither does this Court. The Court’s decision in MacDonald I means that neither
the BTA nor this Court have a limited standard of review on legal questions.
Proposition of Law No. 5: decisions of the Board of Review are presumptively
valid. Appellants’ Brief at 28. The Board of Review’s decision is entitled to a
presumption of correctness, meaning that the burden of proof is on the party
challenging that decision. Contrary to Appellants’ position, this Court found in
MacDonald I that the BTA determined both factual and legal questions based on
its independent judgment and owed no deference to the Board of Review.
MacDonald I, 2015-Ohio-3290, ¶ 23.
Proposition of Law No.12: BTA’s authority was limited to determining whether
the Board of Review acted properly. Appellants’ Brief at 43. Yet again the
argument that the BTA cannot apply independent judgment was specifically
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rejected in MacDonald I. Per the Court’s decision, the BTA was not limited to
reviewing the manner in which the Board of Review’s decision was reached.
Rather, the BTA was required, under R.C. 5717.011, to independently determine
whether the Board of Review’s decision was correct.
Appellants again and again return to their overarching theme that the ordinance’s
interpretation should reflect the position of the local taxing authorities. This Court already
rejected that position in MacDonald I, including considering these same arguments made in
MacDonald I by Appellants in the role of an amicus. Appellants do not argue that the Court
should reconsider MacDonald I, but simply proceed as if MacDonald I did not really mean that
the proper standard of review is de novo, and that R.C. 5717.011 provides only a limited review
of local tax issues.
MacDonald I, however, is clear. Deference is not owed to the legal position of the
municipalities’ taxing authorities under any legal theory, including Home Rule. Municipal
Home Rule does not diminish a court’s authority to interpret the law when a municipal ordinance
is to be interpreted rather than a state statute. Municipal Home Rule is fully honored because the
Cleveland ordinance as passed by City Council is the focus of the appeal. Contrary to
Appellants’ arguments, the normal rules of statutory construction apply to the Court’s review of
the municipal ordinance.
B. Cleveland Has A Pension Exemption That Is Identical To That Of Shaker Heights.
Appellants do not deny that a pension exemption exists in Cleveland Code 191.0901(d).
Appellants do not deny that the same SERP at issue here was found to be a pension in
MacDonald I under Shaker Heights law. Appellants seek to distinguish MacDonald I on the
basis that it involved Shaker Heights rather than Cleveland law.
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Yet, Appellants never compare the relevant sections of the Cleveland Code and the
Shaker Heights Codified Ordinances. The Shaker Heights and Cleveland ordinances, however,
are virtually identical:
Section 111.0901(c) of the Shaker Heights Codified Ordinances:
The tax provided for herein shall not be levied on the following:
(c) Proceeds of insurance paid by reason of the death of the insured, pensions, disability benefits, annuities, or gratuities not in the nature of compensation for services rendered from whatever source derived.4
Section 191.0901(d) of the Cleveland Code:
The tax provided for in this chapter shall not be levied on the following:
(d) Proceeds of insurance paid by reason of the death of the insured; pensions, disability benefits, annuities, or gratuities not in the nature of compensation for services rendered from whatever source derived.
The substitution of the comma for the semicolon after “insured” does not affect this issue.
Under the current Charter of the City of Cleveland, § 24:
“[t]he legislative powers of the City, except as reserved to the people by this Charter, shall be vested in a Council….”
Ultimately, if the City Council (in marked contrast to Appellants and the Central Collection
Agency) wanted to eliminate or limit the pension exemption, then the City Council could have
acted and could have repealed or limited the scope of the pension exemption. The long-standing
Cleveland pension exemption, however, has not been repealed by the City Council.
C. The BTA’s Decision Was Well Reasoned And Should Be Affirmed.
1. The BTA correctly determined that the National City SERP was a pension as a matter of fact. The evidence supports the BTA’s conclusion.
The BTA relied on the testimony of Patty Emond, the former senior vice president
responsible for executive compensation for National City. Ms. Emond testified that the SERP
4 Appellees’ Appendix at 15-16.
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was designed to create retirement benefits and to allow the company to reach a targeted salary
replacement amount in retirement for certain employees whose salary exceeded an amount for
which the replacement value could not be reached by providing benefits under a qualified
pension plan. Appellees’ Suppl. at 8. Because of the dollar limits provided under federal
income tax law, the remainder of the benefit was provided under the nonqualified plan. The
classification of the plan as nonqualified did not alter the federal or state income tax implications
to the recipient. Instead, the difference between the qualified and nonqualified plan was the
timing of the deduction available to National City as the employer. Unlike a qualified plan, the
employer cannot deduct the benefit until paid to the employee. Thus, National City had no
deduction for the SERP amount for MacDonald in 2006 because he received no payments in
2006.
Ms. Emond further described the SERP as providing retirement benefits as a pension plan
and testified specifically that the SERP was reported in the financial reports of National City as a
pension under Generally Accepted Accounting Principles (“GAAP”). Appellees’ Suppl. at 11.
This GAAP reporting is in contrast to non-pension, deferred compensation arrangements that are
reported separately from pensions. The SERP was reported under Financial Accounting
Standard Statement (“FAS”) 87, which applied to pensions, not FAS 106, which addressed
deferred compensation plans. Appellees’ Suppl. at 34.
Ms. Emond described an essential difference that exists between the SERP and deferred
compensation plans. The SERP had to meet the specific legal requirements, which do not apply
to deferred compensation plans, because the SERP is a pension. The fact that the benefits were
limited to a small number of employees and described as a “top hat” plan did not alter the
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essential fact that the SERP was designed and actually operated as a pension providing
retirement benefits to National City employees.
Because the BTA found that the National City SERP was a pension and the Court does
not substitute its finding for the BTA on factual matters, the Court should accept the finding that
the National City SERP qualifies factually as a pension. Strongsville Bd. of Edn. v. Wilkins, 108
Ohio St.3d 115, 2006-Ohio-248, 841 N.E.2d 303, ¶7. That determination was reasonable and
lawful. MacDonald I, 2014-Ohio-708, ¶ 18.
2. The BTA did not commit any procedural errors.
Significantly, Appellants do not dispute that factually the SERP is a pension. Instead,
Appellants make procedural arguments that the facts as found by the BTA should be ignored.
First, Appellants renew an argument that was rejected in MacDonald I that the BTA must defer
to the record made by the Board of Review. Appellants’ Brief, Proposition of Law No. 12 at 43.
To the contrary, the BTA does not defer to the Board of Review and the BTA properly makes
factual findings de novo.
Second, Appellants argue that presentation of facts was irrelevant and done to avoid
Cleveland law. Contrary to Appellants’ position, the facts remain relevant as they must be
applied to any legal determination, and the BTA correctly made factual findings.
Appellants also argue that the transcript of Ms. Emond’s testimony from MacDonald I is
hearsay and should not have been admitted. This transcript is not hearsay, however, because it
was not offered apart from Ms. Emond’s live testimony. Rather, she affirmed the statements in
the transcript in the current proceeding by her live testimony. Further, Appellants had been
provided copies of the transcripts in advance of the hearing. All of Ms. Emond’s testimony,
including the portion from the transcripts affirmed at hearing, was subject to cross examination.
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Accordingly, Ms. Emond’s adoption of the transcript during the hearing meant that it was not a
statement made out of court, and the transcript’s use did not prejudice Appellants in any way.
Appellants wrongly object to Ms. Emond’s testimony on the erroneous assumption that
she was opining on Cleveland tax law. Contrary to Appellants’ claim, Ms. Emond was not
testifying about the implications of municipal income tax. See Appellees’ Suppl. at 27.
Appellants also object to the BTA considering any facts at all, on the asserted basis that
the sole focus of the BTA, according to Appellants, must be limited to Appellants’ interpretation
of the Cleveland Code.5 Appellants’ argument for suppression of the facts is articulated on page
30 of their Brief: “No amount of witness testimony can modify, amend, supersede or change the
plain language of what Cleveland’s Income Tax Ordinance and the Ordinance’s Rules and
Regulations state.” No facts were presented or relied upon for this purpose. Rather, factual
determinations were made to apply the law to the facts of this matter, i.e., whether the SERP is a
pension exempted from tax by Cleveland law. In other words, the BTA properly took evidence
to determine if the SERP was a pension as that term is properly interpreted under Cleveland law.
The proposition that the Board erred by not deciding this matter in a vacuum is absurd and
should be rejected.
3. The BTA correctly determined that the SERP was a pension under the Cleveland Code.
A majority of the BTA also found that the National City SERP was a pension under
Cleveland Code 191.0901(d). The majority found that the SERP met the express terms of the
Cleveland Code, and that the BTA should follow MacDonald I (in which the same ordinance
5 Appellants filed writs of Procedendo and Mandamus demanding that the BTA conduct a factual hearing while awaiting the ultimate decision in MacDonald I. This Court dismissed the appeal as moot. State ex rel. Cleveland v. State Bd. of Tax Appeals, 143 Ohio St.3d 1496, 2015-Ohio-4468, 39 N.E.3d 1268. It is ironic, therefore, that while Appellants demanded a separate factual hearing in this case, when the hearing was conducted, Appellants argue that the facts should be ignored and the factual hearing should not have gone forward.
13
language was at issue). Appellants’ Appendix at 3. The BTA rejected the arguments that the
exemption was inapplicable because (i) National City’s reporting of the SERP’s present value in
Box 5 of IRS Form W-2 made that amount taxable qualifying wages or (ii) the SERP was a
nonqualified deferred compensation plan.
Applying the ordinary meaning of “pension” in Cleveland Code 191.0901(d) means that
the SERP, which is a pension as a matter of fact, qualifies for the Cleveland pension exemption.
The Cleveland Code does not limit the exemption to pensions that are qualified plans under the
federal income tax and the Cleveland Code otherwise does not restrict the pension exemption in
any way that disqualifies the SERP from pension treatment.
The BTA was justified in following its earlier unanimous decision and the Tenth District
Court of Appeals’ opinion in MacDonald I that the SERP was a pension. That court
unanimously affirmed the BTA on this point.
Both appellants [Shaker Heights and RITA] and the MacDonalds presented evidence and advanced arguments that supported their respective positions. The BTA examined all the evidence presented at hearing and reflected in the record. Based upon this evidence the BTA concluded that the MacDonald’s SERP benefit listed in box 5 of their form W-2 is a pension and therefore, that amount must be deducted from the MacDonalds’ income in calculating the taxable qualifying wage. This determination is not unreasonable or unlawful.
MacDonald I, 2014-Ohio-708, ¶ 15
The City of Cleveland participated in MacDonald I as amicus before the BTA, the Tenth
District Court of Appeals, and before this Court. Appellants’ amicus brief was telling in that it
conceded the dispositive effect of a decision in favor of MacDonald in MacDonald I. After
describing the overlapping nature of the cases, Appellants’ brief conceded: “The [BTA] decision
in the instant case [MacDonald I] could therefore clearly have a dispositive effect on Taxpayer’s
appeal in the Cleveland case and Cleveland’s ability to defend against the refund claims alleged
14
therein.” Appellees’ Appendix at 51. Since the adverse decision, however, Appellants now
argue that MacDonald I is “irrelevant.”
4. The BTA correctly determined that the National City SERP was an exempt pension under Cleveland Law despite being part of qualifying wages and being a nonqualified deferred compensation plan.
The BTA and the Tenth District Court of Appeals correctly rejected two arguments that
Appellants renew here. Just because the SERP may also be described as qualifying wages and/or
deferred compensation does not mean that it is not an exempt pension.
a. The SERP is classified as qualifying wages and a pension.
First, contrary to Appellants’ argument, the reporting of the SERP amount in Box 5 of the
2006 W-2 as “qualifying wages” did not defeat the pension exemption. As the BTA correctly
found, the concept of “qualifying wages” is derived from R.C. Chapter 718. Appellants’
Appendix at 3. This state statute prohibited taxing compensation that was not “qualifying
wages.” This state law provision was inserted in order to advance uniformity among the
municipalities because different municipalities were using different starting points for
determining taxable compensation.
The Cleveland Code mirrors this uniform starting point in § 191.0318, which defines
taxable income as “all qualifying wages, net profits and other income from whatever sources
derived as set forth in § 191.0501 and the Rules and Regulations as taxable.” The reference to
the state law standard of “qualifying wages” in Cleveland law does not distinguish this case from
MacDonald I. The “qualifying wages” standard applies to both Shaker Heights and Cleveland.
The express reference in Cleveland law only reinforces the use of the qualifying wages standard.
The common “qualifying wages” standard applicable to both Shaker Heights and Cleveland
supports reliance on MacDonald I and does not present a basis for distinguishing between the
two cases.
15
The reason that the SERP amount6 can be “qualifying wages” and an exempt pension was
that qualifying wages could be made exempt by municipal ordinance or resolution in former R.C.
718.03(A)(2)7 in subdivision (c):
(c) Deduct any amount attributable to a nonqualified deferred compensation plan or program described in section 3121(v)(2)C) of the Internal Revenue Code if the compensation is included in wages and has, by resolution or ordinance, been exempted from taxation by the municipal corporation.
Appellants’ Appendix at 94.
In Cleveland, just like the situation in Shaker Heights, the pension exemption brings the
SERP, which meets the criteria of “qualifying wages,” within the state-permitted exclusion. In
other words, the pension exemption is permitted and the municipal-level pension exemption
means that the SERP amount can be both qualifying wages and a pension.
Appellants renew the argument rejected in MacDonald I and in the BTA decision below
that the pension exemption in Cleveland Code 191.0901 does not meet the terms of former R.C.
718.03(A)(2)(c). That state statute, however, allowed the municipal pension exemptions,
including the exemption in Cleveland, to qualify as a local exemption that is permitted by the
state requirement of qualifying wages. The state statute recognized municipal ordinances that
pre-existed the enactment of the state provision or that were enacted after the state statute. The
BTA was fully justified in finding that the pension exemption of Cleveland Code 191.0901
means that the SERP can be both “qualifying wages” and an exempt pension as a matter of
Cleveland municipal tax law.
6 The reference to SERP “amount” reflects the fact that the amount calculated by reference to future payments appears in the Box 5 of the W-2 for 2006. No 2006 SERP contributions or payments were made to MacDonald and no deduction was taken for this amount by National City in 2006 as would be true of a payment. 7 This statute was amended after the tax year at issue here. This language now appears in R.C. 718.01(R)(1)(c).
16
b. The SERP is nonqualified deferred compensation and a pension.
The argument that the National City SERP is not a pension because it is nonqualified
deferred compensation was also properly rejected by the BTA below. The BTA correctly
recognized that while the National City SERP “falls within the ambit of a nonqualified deferred
compensation plan, we do not find such designation mandates its exclusion from an accepted
definition of pension . . . .” (Emphasis sic.) Appellants’ Appendix at 3. “We determined, and
the court of appeals agreed, that this SERP constituted a pension in MacDonald I, and we find no
evidence to the contrary herein and no basis to conclude otherwise.” Appellants’ Appendix at 3-
4.
Appellants never explain why nonqualified deferred compensation plans can, in their
view, never qualify as pensions. The state statute permitting the local exemptions is premised on
the amount being treated as nonqualified deferred compensation. Former R.C. 718.03;
Appellants’ Appendix at 94 (“Deduct any amount attributable to a nonqualified deferred
compensation plan or program described in section 3121(v)(2)C) of the Internal Revenue Code
if the compensation is included in wages and has, by resolution or ordinance, been exempted
from taxation by the municipal corporation”). (Emphasis added.)
Moreover, a closer examination of the elements inherent in “nonqualified deferred
compensation” shows why the BTA was entirely correct to reject Appellants’ argument.
An elective deferred compensation plan can be taxed. That is, a wage-earner can be
taxed in the year of deferral if the plan is elective—meaning that the employee could elect to
receive the wages in the year of deferral. Thus, an election to receive income in a future year
does not prevent the income from being taxed by the municipality in the earlier year. The
implication of taxing an elective deferral before receipt of the income is a well-accepted
17
principle that was honored by National City and MacDonald. In fact, all of his 2006 income that
was elective deferred compensation was subject to tax and was subject to withholding in 2006.
But as Ms. Emond described without contradiction at hearing, the SERP was not elective.
MacDonald could not elect to receive the SERP income before his retirement because the benefit
was not funded by National City and MacDonald could not have received the benefits until after
his retirement. Appellees’ Suppl. at 21. Also, the SERP was not a general obligation of National
City but one covered by detailed federal pension requirements. Appellees’ Suppl. at 11. Further,
under GAAP, the SERP was a pension and not deferred compensation. Appellees’ Suppl. at 11.
The Tenth District Court of Appeals correctly concluded that the National City SERP was non-
elective in MacDonald I. 2014-Ohio-708, ¶18.
The BTA was not misled by Appellants’ argument that because payments were made
after retirement, the plan should be automatically classified as taxable deferred compensation
because of the delay in the payments. Appellants’ argument proves too much because all
pensions represent a deferral of (delay in the receipt of) payment until after retirement. Thus, to
say that the pension is not a pension and instead deferred compensation is both factually wrong
and contrary to a basic understanding of important differences between deferred compensation
plans and pensions.
The BTA properly concluded that some, but not all, deferred compensation plans are
pensions for Cleveland purposes and that the National City SERP was both a nonqualified
deferred compensation plan and a pension. The BTA focused on the criteria that distinguish
those deferred compensation plans that are taxable and those that are not. The BTA decision on
the pivotal point that the SERP is a non-taxable pension while also being nonqualified deferred
compensation should be upheld.
18
c. Wardrop Supports the BTA’s Decision.
The BTA and Tenth District Court of Appeals were also correct in determining that
Wardrop v. Middletown Income Tax Review Bd., 12th Dist. Butler No. CA2007-09-235, 2008-
Ohio-5298, does not support Appellants. In that case, the Twelfth District Court of Appeals
determined that the AK Steel SERP was not a pension under the Middletown ordinance.
Applying the reasoning of the Wardrop opinion here, however, supports the conclusion that the
National City SERP was a pension. The different results are directly attributable to differences
between the Middletown and Cleveland Codes.
The Wardrop Court’s analysis reflects a close examination of the Middletown Ordinance
and the AK Steel Plan. The Court’s analysis was as follows:
In any event, to determine whether payments made under AK Steel's SERP plan are taxable by Middletown, we need only to examine the language of the plan and the city tax code. Article I of the SERP plan itself identifies it as "an unfunded deferred compensation arrangement maintained by the Company for the purpose of providing supplemental retirement benefits for a select group of management or highly compensated employees[.] "Middletown's code authorizes a tax on "qualifying wages, commissions, other compensation, and other taxable income[.]" MCO § 890.03(a)(2). The code defines "other compensation" to include "earnings designated as deferred compensation." MCO § 890.02(a)(26) (emphasis added). Because the SERP plan describes itself as a "deferred compensation arrangement" and Middletown's ordinances impose a tax on "earnings designated as deferred compensation," the trial court correctly concluded that SERP payments are not exempt from municipal taxation.
(Emphasis added.) Id. ¶ 39.
Cleveland does not want this Court to apply the Twelfth District’s analysis, but instead to
expand the Wardrop decision to mean that all SERPs should be taxable, irrespective of the
municipal ordinances’ terms. But unlike the Cleveland Ordinance, the Middletown Ordinance
disqualified a plan from being a pension if the plan designated itself as a deferred compensation
19
plan. Those differences account for the determination that the AK Steel plan was taxable in
Middletown while the National City SERP was exempt in both Shaker Heights and Cleveland.
The BTA’s decision properly reflects the analysis in Wardrop, is supported by the Tenth District
Court of Appeals in MacDonald I, and should be upheld.
D. The Distinction Between Qualified And Nonqualified Plans Is Neither Reflected In The Cleveland Code Nor Determinative For This Purpose.
The distinction under federal income tax law between qualifying and nonqualifying plans
is not a valid basis to determine whether the SERP is a pension for Cleveland tax purposes. In
any event, even the federal Treasury Regulation for nonqualified plans calls a plan virtually
identical to the National City SERP a “pension.” Appellees’ Appendix at 35.
Moreover, contrary to Appellants’ claim, the Cleveland Code does not limit retirement
plans to those that are qualified plans. Nothing in the Cleveland Code distinguishes between
qualified and nonqualified plans. If the Cleveland City Council wanted to limit the pension plan
to qualified plans, then it was the prerogative of the City Council and not Appellants to make that
determination.
It should also be noted that the pension exemption at issue first enacted in 1966 pre-dates
the introduction of qualifying versus non-qualifying plans. This distinction between qualified
and nonqualified plans first arose in the 1980s. Appellees’ Suppl. at 77. The sole difference
between the two designations is the benefit levels. The difference does not alter the taxability for
federal income tax purposes of payments to employees. Instead, the differences relate to the
timing of the deduction for the employer. Appellees’ Suppl. at 34-35. The distinction between
qualified and nonqualified plans is not a valid means of distinguishing between exempt pensions
and other pensions. Therefore, each are equally entitled to be classified as pensions.
Distinguishing between qualified and nonqualified plans is not a principled basis to distinguish
20
among retirement plans absent a clear distinction in the controlling law. The BTA here and the
Tenth District Court of Appeals in MacDonald I were correct in rejecting that distinction.
E. The Qualifier “Not In The Nature Of Compensation” In Cleveland Code 191.0901 Does Not Apply To Pensions.
Appellants also argue that the phrase “not in the nature of compensation” limits the
pension exemption. For context, the language of Cleveland Code 191.0901 is as follows:
The tax provided for in this chapter shall not be levied on the following:
….
(d) Proceeds of insurance paid by reason of the death of the insured; pensions, disability benefits, annuities, or gratuities not in the nature of compensation for services rendered from whatever source derived.
Appellants repeat the argument no fewer than seven times, at pages 5, 21, 25, 32, 34, 39,
and 42 of their Brief. At no time, however, do Appellants ever analyze the language in context
and Appellants’ argument cannot withstand scrutiny. For the reasons set forth below, that
qualifier applies only to gratuities and not to pensions.
First, the rule of the last antecedent dictates the outcome. Under that rule, “referential
and qualifying words and phrases, where no contrary intention appears, refer solely to the last
antecedent.” Independent Ins. Agents of Ohio v. Fabe, 63 Ohio St.3d 310, 314 (1992). Here,
this means that “not in the nature of compensation for services rendered from whatever source
derived” refers solely to “gratuities,” and not any of the other items in the list.
A case from the Sixth Circuit addressed a similar issue: “Assume that a state legislature
directs a commission that oversees the sale and distribution of certain food and beverage
products to promulgate regulations governing the sale of ‘alcoholic, caffeinated, and other
beverages that the commission considers to be addictive.’ The most natural reading of such a
statute is that the commission must regulate the sale of both alcoholic and caffeinated beverages.
21
The concluding phrase ‘and other beverages that the commission considers to be addictive’
allows the commission to regulate the sale of additional beverages.” This reading comports with
the rule of the last antecedent. The phrase “that the commissions considers to be addictive”
should ordinarily be read as modifying only the noun or phrase that it immediately follows.
United States v. Martin, 438 F.3d 621, 630-31 (6th Cir. 2006).
Second, the qualifier is a necessary addition to “gratuities” to ensure the proper taxation
of income that should be taxed. While gifts are not subject to municipal income tax, a tip paid to
a service provider such as a wait staff is subject to tax. Also, “good will offerings” may be taxed
when the recipient receives the gratuities for services rendered.
Third, all pensions are in the nature of compensation because one earns a pension as
compensation for working for an employer. Because all pensions are in the nature of
compensation, Appellants’ logic would read all pensions out of the exemption, rendering the
ordinance’s use of the word “pension” a nullity. The Court should not read the Cleveland Code
to achieve such an absurd result.
F. Cleveland Law As Enacted By The Cleveland City Council Controls.
Even though Appellants argue repeatedly that Cleveland law controls, Appellants reject
the law enacted by City Council. Instead, they seek to substitute rules imposed by the Central
Collection Agency. When the regulations of the Central Collection Agency do not conform to
the Cleveland Code, however, the regulations must yield.
Appellants rely on the regulation of the Central Collection Agency, § 2.30, which reads
as follows:
Pensions means distributions from retirement plans as reported on Federal Form 1099R, or its equivalent or successor form, in the year paid, and which are designed to provide primarily for the retirement income of employees. Pension distributions are not taxable; contributions to pension plans, retirement plans, deferred
22
compensation plans, as well as any other type of deferred compensation arrangement or income deferral arrangement or plan, are taxable in the year the income is earned and deferred.
Appellants’ Appendix at 82.
The BTA applied the language of the Central Collection Agency regulation that defined
“pensions” as arrangements, “which are designed to provide primarily for the retirement income
of employees.” The testimony made clear that the SERP meets this description. Appellants rely
on two other aspects of this Central Collection Agency regulation as authority for denying the
exemption: (1) the benefit must be reported on federal Form 1099R, which means that the plan
must be a qualified plan because only qualified plan benefits are reported on federal Form
1099R; and (2) benefits are only exempt in the year of distribution—the year in which the benefit
is paid. The BTA correctly rejected both of these arguments because these restrictions are not
contained in and unlawfully restrict the Cleveland Code. (In any case, as noted below, the
regulation referencing taxation in the year in which contributions are made cannot apply.)
Fundamentally, “the power and discretion vested in a legislative taxing body requires that
the inclusion or exclusion of items for taxation purposes be based on an evaluation of political
and social considerations ‘by the legislative authority imposing the tax.’” Robinson v. Tax
Comm. of Indian Hills, 61 Ohio Misc.2d 95, 99 (C.P. 1989), quoting Estate of Hughes v. Lindley
8th Dist. Cuyahoga No. 41671, 1980 WL 355170, at *4 (May 22, 1980).
The purported requirement that the distribution must be reported on IRS Form 1099R
would limit the pension exemption by rules set by the Appellant taxing authorities as only
qualifying pensions are reported on Form 1099R. (Form 1099R for 2006 appears in Appellants’
23
Suppl. at 85.) The Cleveland Code does not contain this limitation of the term “pensions,”8 and
Appellants’ argument should be rejected as a non-legislative attempt to diminish the pension
exemption.
The second aspect of the Central Collection Agency regulation is an attempt to limit the
exemption as being applicable only when the benefit is being distributed, i.e. the benefit is paid.
This purported limitation was correctly rejected for several reasons. First, Appellants are not
even applying the Regulation’s express language. The last sentence of 2.30 is triggered by a
contribution to the plan. As the uncontradicted testimony shows, National City did not make a
contribution to the SERP in 2006 for MacDonald.
Moreover, contrary to Appellants’ argument, a “distribution” is not the definition of a
pension. The pension is the retirement plan created by the plan documents. The distribution is
made pursuant to the plan documents. The distribution is not the pension but a pension payment.
Attempting to define the pension by each distribution is nothing less than an additional limitation
on the exemption for pensions. It is a naked attempt by Appellants to impose additional tax on
SERPs that is inconsistent with an exemption for all pensions.
Furthermore, the amount reported in 2006 was a calculation of the present value of the
pension payments that were to be made in the future. It strains credulity to claim that an item of
income is exempt from tax upon payment, but that the same income is not exempt, and is in fact
taxable, the year before payments begin. The argument that the calculation of the current value
of future payments makes the pension taxable contradicts both the Cleveland Code (the Code
does not reference payments) and the regulation (in the absence of contribution during the year
in question).
8 Indeed, the distinction between qualifying and non-qualifying pensions did not exist in 1966 when Cleveland City Council enacted the pension exemption. Therefore, no argument could be made that the legislative taxing authority “evaluated the political and social consideration” in putting this limitation on the pension exemption.
24
In addition, Appellants’ description of the regulation does not even conform to the
procedures employed by Appellants (and the Central Collection Agency). Appellants argue that
under that regulation, even contributions to non-elective qualified plans would be taxable at the
time of deferral. Of course, Cleveland does not tax contributions to non-elective qualified
pension plans
At page 21 of Appellants’ Brief, they state that the “regulations are very consistent with
the ordinance.” Appellants, however, cannot show how the Central Collection Agency’s
regulations reflect the Code’s unrefined exemption for “pensions.” The discussion above shows
that the regulations are actually significantly different and contrary to the Cleveland Code. The
BTA was correct in rejecting Appellants’ reliance on regulations to the extent that the regulations
change the Cleveland Code’s meaning.
The law is settled that a municipal income tax regulation cannot add terms to a municipal
income tax ordinance. In MacDonald I, the BTA cited Wardrop v. City of Middletown Income
Tax Review Bd., 12th Dist. Butler No. CA2007-09-235, 2008-Ohio-5298, for that conclusion:
It is beyond dispute, however, that the Superintendent of Taxation, who is charged with promulgating rules and regulations to define and amplify Middletown's tax ordinance, cannot add to or exceed the plain language of the ordinance itself.
BTA No. 2008-K-1883, at 10. Appellees’ Appendix at 45. In Wardrop, the appellate court
found that the City was without power to tax nonresident income that was earned “as a result of
employment within” the City pursuant to the regulation, but was not “for work done or services
performed or rendered in the City” as required by the Ordinance.
Similarly, in Cincinnati v. DeGolyer, 26 Ohio App.2d 178, 182 (1st Dist. 1969), the court
of appeals reversed a decision of a municipal court declining to convict an individual for failure
25
to pay municipal income tax. The municipal court held that because the regulations converted
the income tax liability into a civil debt, the Ohio Constitution prohibited imprisonment for
failure to pay. In reversing, the court of appeals reasoned that the provision in the regulation that
taxes “become…a debt due the city from the taxpayer[,]” was “not in the ordinance, and exceeds
the authority granted the tax commissioner by the ordinance.”
In Ladd v. City of Oregon and Oregon Income Tax Bd. of Rev., BTA No. 2008-K-2371,
2011 WL 1352651 (Mar. 29, 2011), the BTA concluded that “the city's informal adoption of a
“rule of thumb” (defining metropolitan area for purposes of IRS Form 2106) constitutes an
improper restriction upon the terms set forth in the city's code.” Id. at *4, citing Wardrop, 2008-
Ohio-5298, at ¶ 24.
In the context of state taxation, this Court held in Ransom & Randolph Co. v. Evatt, 142
Ohio St. 398 (1944), paragraph 4 of the syllabus, that “[w]hile the Tax Commissioner has the
power under the statutes of this state to enact rules to facilitate the work of his department, such
rules may not enlarge or restrict statutes exempting intangible property from taxation.”9 This
long line of authority means that the Central Collection Agency may not impose restrictions on
the application of the pension exemption that are not set forth in the Cleveland Code.
Appellants’ reliance on Hillenmeyer v. Cleveland Bd. of Review, 144 Ohio St.3d 165,
2015-Ohio-1623, 41 N.E.3d 1164, does not contradict these prior decisions. Rather, this Court
was referencing an application of the ordinance, not its modification by regulation. It is
unreasonable to suggest that the Court thereby suggested that Cleveland City Council had
abdicated or could abdicate its taxing power to the Central Collection Agency as Appellants now
assert. Instead, Appellants take this Court’s statement in that case wholly out of context. ¶ 19-
9 The Rules and Regulations that are referenced are those of the Central Collection Agency.
26
20. Nothing in Hillenmeyer or other decisions of the Court authorize the local taxing authority to
administratively rewrite ordinances or to enlarge the scope of taxable income.10 Rather,
regulations that are consistent with the Cleveland Code are valid, but the regulation cited by
Appellant would impermissibly impose restrictions that are not contained in § 191.0901 of the
Cleveland Code.
Further, the specific state statute authorizing the exemption—former R.C.
718.03(A)(2)(c)—specially referenced municipalities’ resolutions and ordinances as providing
the basis for exempting nonqualified deferred compensation:
(c) Deduct any amount attributable to a nonqualified deferred compensation plan or program described in section 3121(v)(2)(C) of the Internal Revenue Code if the compensation is included in wages and has, by resolution or ordinance, been exempted from taxation by the municipal corporation.
(Emphasis added.) In contrast, in current R.C. 718.03(B)(2), the General Assembly permits municipalities to
impose certain requirements by ordinance, resolution or rule:
(2) Notwithstanding division (B)(1) of this section [relating to withholding requirements], a municipal corporation may require, by resolution, ordinance, or rule, an employer, agent of an employer, or other payer to do any of the following;
[The state statute then recites several options related to timing and
method of withholding that the municipality can impose on employers by municipal resolution, ordinance, or rule.]
(Emphasis and bracketed material added.)
Consequently, when the Legislature intends to allow municipal rules to impact taxation,
the Legislature uses explicit language to so state. As noted, the language in the current statute,
R.C. 718.01(R)(1)(c), continues to permit exemptions for nonqualified deferred compensation,
10 Any attempt by Cleveland City Council to grant that authority to the taxing agencies would be an unlawful delegation of legislative authority.
27
but only by reference to pre-existing resolutions and ordinances, not rules. Because the state
law’s express language states that the municipality could not provide the pension exemption by
rule, the local taxing authority cannot, by rule, eliminate the pension exemption provided by
ordinance. This conclusion is especially true when the rule contradicts the ordinance, as the
Central Collection Agency regulation at issue here does.
G. National City Did Not Agree That The SERP Was Not A Pension And No Basis Exists For Claiming That The MacDonalds Are Estopped From Claiming The Exemption.
Appellants’ Proposition of Law No. 13, raises an “estoppel” argument beginning at page
44 of their Brief. This claim dramatically displays the reason why the municipal tax law must
reflect the law as enacted by the legislative authority, and why the taxing authorities are
constrained from making law by administrative fiat. Appellants cast the argument as estoppel
but no authority is proffered for such waiver by MacDonald and no such authority exists.
Appellants’ waiver assertion is based on a letter signed by undersigned counsel, then
representing several of Cleveland’s larger employers. The context for this letter is important and
not explained by Appellants. The Central Collection Agency had sought to impose a
withholding obligation on employers providing SERPs or other types of benefit plans, contrary
to the law. Appellants, however, omit that the Central Collection Agency had previously and
specifically acknowledged that SERPs are exempt pensions. Appellees’ Suppl. at 87-96. When
the Central Collection Agency abruptly changed its policy, without seeking City Council
approval, great uncertainty naturally arose. Those employers then sought to cooperate with the
taxing authorities, while preserving the rights of the taxpayers. 11
Appellants also do not faithfully set forth the parties’ agreement. Appellants suggest that
employers acceded to the Central Collection Agency’s abrupt reversal of policy in addressing
11 Therefore, if estoppel has any application here, it would be against Appellants.
28
how deferred compensation would be taxed. The employers did no such thing. The final clause
of the agreement (indented paragraph beginning on page 45 of the Appellants’ Brief) gets to the
heart of the matter. Income tax would be withheld “unless otherwise exempted by federal, state
or local law.” The employers did not agree to withhold on exempt pensions, and the agreement
was to be construed in a manner consistent with local law, including the pension exemption.
The doctrine of estoppel cannot apply for multiple other reasons. The MacDonalds were
not a party to or involved in the 1997 letter agreement. See e.g., State ex rel. Cities Service Oil
Co. v. Orteca, 63 Ohio St.2d 295, 299 (1980) (noting that equitable estoppel applies when the
party’s conduct induced change position). Furthermore, the letter agreement did not address the
issue before this Court. The 1997 letter agreement did not reference SERPs, but it did reference
retirement benefits. It referenced benefits because the Cleveland taxing authority at that time
claimed to have the right to tax retirement benefits (from both qualified and nonqualified
pensions) at the time of deferral, under an administrative rule. While this rule was invalid (as are
the current Central Collection Agency regulations here), the 1997 letter agreement was reached
to address only the timing of the tax, i.e., at the time of deferral or payment, limited of course to
benefits that were taxable at all under Cleveland law. The 1997 letter agreement intentionally
and expressly reserved the companies’ rights to assert an exemption if provided “by federal,
state, or local law.” Qualified and nonqualified pensions were and are exempt under local
Cleveland law. Estoppel does not apply.12
H. Taxation Of The National City SERP Benefit Violates Federal Law.
MacDonald has consistently presented an alternative argument for immunity from tax
based on a federal statute that protects non-residents of a state from being subject to a tax on
12 Ultimately, even if differences in interpretation of the agreement exist, that potential source of misunderstanding simply further affirms the need to adhere to the law as enacted by City Council, rather than informal agreements or regulations promulgated by the taxing authority.
29
retirement benefits. Neither the BTA nor the Court of Appeals addressed this issue in
MacDonald I or in the BTA decision below because both the BTA and the Tenth District Court
of Appeals found the exemption was available under local law. The same is true here. The
Court need not reach this issue because the contested amount was exempt from Cleveland tax
under Cleveland law. The federal law defense, however, is preserved.
Federal law limits the imposition of a municipal income tax on certain pension income of
nonresidents. 4 U.S.C. § 114, Pub. L. 104-95, commonly known as the “Moving Statute.”13
Appellees’ Appendix at 32. The federal statute prohibits the taxation of any plan, program or
arrangement that meets defined conditions (which qualifying conditions unquestionably
encompass the National City SERP) when the beneficiary is a nonresident.
By its express terms, the federal Moving Statute applies to municipalities as political
subdivisions of the state as the statute defines “State” as follows:
(b) For purposes of this section—
(3) The term “State” includes any political subdivision of a State….
The federal statute defines “retirement income” in 4 U.S.C. § 114(b)(1)(I)(i) and (ii) as “any
income from:”
* * *
I. Any plan, program, or arrangement described in Section 3121(v)(2)(C) of the Code, if such income –
(i) is part of a series of substantially equal periodic
payments (not less frequently than annually . . .) made for –
I) the life or life expectancy of the recipient (or
the joint lives or joint life expectancies of
13 Cleveland objects to the reference to the federal statute as the “Moving Statute” but that is the name normally applied throughout the United States.
30
the recipient and the designated beneficiary of the recipient), or
II) a period of not less than 10 years…
(Emphasis added.)
The SERP provides retirement income from a plan described in Section 3121(v)(2)(C) of
the Internal Revenue Code with payments being provided over the beneficiaries’ joint lives.
The income that is exempt is “any income from . . . any plan program or arrangement
described in section 3121(v)(2)(C) of the Internal Revenue Code” when the payments under the
plan are made as part of periodic payments or when the payments are made under an excess
benefit plan after termination of employment. The exempt income is defined in relation to an
enumerated plan. The Moving Statute uses the payments (periodic versus lump sum) to define
the type of plan that generates retirement income potentially exempt under the Moving Statute.
The income to be exempt must arise from certain types of plans, which includes the National
City SERP.
The “plan” that is referenced in the federal statute cannot reasonably be described as a
part or series of periodic payments or a single payment; the payments are made pursuant to the
plan. It is the plan that qualifies for exemption. While the method of payment contemplated
under the plan is relevant to the determination of whether the plan qualifies for exemption, it is
the plan that produces the income that is exempt. Any focus on the payments fundamentally
misconstrues the statute. The SERP plan qualifies for the Moving Statute exemption.
MacDonald did not receive any payment from the SERP in 2006 but had income for
Medicare purposes. That income was exempt under the Moving Statute because it was
retirement income even though it was not yet a retirement payment (distribution). The income
attributable to MacDonald in 2006 is entitled to federal immunity from local income taxation.
31
IV. Conclusion
The National City SERP is a pension under the Cleveland Code. In two decisions
applying identical municipal pension exemption ordinances (Shaker Heights and Cleveland), the
BTA found that this same SERP is exempt under both ordinances. The BTA decision below is
reasonable and lawful.
In MacDonald I, the Franklin County Court of Appeals affirmed the BTA’s finding under
the Shaker Heights ordinance. This Court declined to hear the pension issue on appeal. No
reason exists to fashion a different rule for this same pension under the Cleveland Code. The
BTA’s decision below should be affirmed.
Respectfully submitted,
/s/ Christopher J. Swift Christopher J. Swift (0025763) Baker & Hostetler LLP Key Tower 127 Public Square, Suite 2000
Cleveland, Ohio 44114 Telephone: (216) 621-0200 Facsimile: (216) 696-0740 [email protected] Edward J. Bernert (0025808) Elizabeth McNellie (0046534)
Baker & Hostetler LLP 65 East State Street, Suite 2100 Columbus, Ohio 43215 Telephone: (614) 228-1541 Facsimile: (614) 462-2616 [email protected] Attorneys for Appellants William and Susan MacDonald
32
CERTIFICATE OF SERVICE
The undersigned hereby certifies that a copy of the foregoing Brief of Appellees was
served electronically and by regular United States mail on Barbara A. Langhenry, Director of
Law, City of Cleveland and Linda L. Bickerstaff, Assistant Director of Law, 205 W. St. Clair
Avenue, Cleveland, Ohio 44113, Attorneys for Appellants City of Cleveland Income Tax Board
of Review and Nassim M. Lynch, on this 6th day of September, 2016.
/s/ Edward J. Bernert Edward J. Bernert (0025808)
One of the attorneys for William and Susan MacDonald
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