MacDonald v. Cleveland Income Tax Bd. of Rev. (Slip Opinion)
2017 Ohio 7798
| Ohio | 2017Background
- William E. MacDonald III, a long‑time National City executive, began receiving benefits in 2007 under the bank’s supplemental executive retirement plan (SERP) paid as a joint‑survivorship annuity.
- The SERP was an unfunded, nonqualified deferred‑compensation plan (a general unsecured promise to pay) intended to top up retirement benefits to a target percentage of pay.
- For 2006 Medicare purposes the annuity’s present value ($9,107,013.16) was reported on MacDonald’s W‑2 box 5; federal income tax is paid as annuity payments are received.
- Cleveland assessed city income tax (2%) on the present value reported in box 5; the MacDonalds protested and administratively lost, then appealed to the Board of Tax Appeals (BTA).
- The BTA held the SERP payments are pensions excluded from Cleveland’s income tax under Cleveland Codified Ordinances 191.0901(d); the Ohio Supreme Court affirmed.
Issues
| Issue | Plaintiff's Argument (MacDonald) | Defendant's Argument (Cleveland) | Held |
|---|---|---|---|
| Whether the SERP is a "pension" excluded from Cleveland income tax | SERP is a pension: fixed periodic retirement payments to MacDonald and spouse | SERP is merely compensation tied to employment and thus taxable | Held: SERP is a pension and excluded under the ordinance |
| Whether tax administrator regulations can narrow the ordinance's pension exclusion | Pension exclusion in ordinance controls; regulations cannot override ordinance | Regulations limit "pension" to distributions reported on Form 1099‑R, excluding SERP | Held: Regulations cannot supersede or alter an ordinance; the limiting rule is invalid to the extent it conflicts |
| Whether the ordinance's definition of "qualifying wages" (including nonqualified deferred comp) makes SERP taxable | Specific pension exclusion controls over the more general qualifying‑wages definition | Qualifying‑wages definition (referring to 26 U.S.C. 3121(v)(2)(C)) makes present value taxable | Held: Specific pension exclusion governs; qualifying‑wages provision does not override it |
| Whether state law or prior municipal election forces taxation of the SERP | City may choose not to tax particular income; pension exclusion satisfies state rules | City elected to tax on a qualifying‑wages basis under former R.C. Chapter 718 and must tax nonqualified deferred comp | Held: Pension exclusion is consistent with state law and Gesler prevents state from forcing a city to tax income it exempted |
Key Cases Cited
- Gesler v. Worthington Income Tax Bd. of Appeals, 138 Ohio St.3d 76 (2013) (municipalities cannot be compelled by state law to tax income they have chosen not to tax)
- Nestle R&D Ctr., Inc. v. Levin, 122 Ohio St.3d 22 (2009) (administrative rules cannot provide definitive construction that conflicts with statute)
- Hillenmeyer v. Cleveland Bd. of Rev., 144 Ohio St.3d 165 (2015) (tax administrator may fill gaps where ordinance is silent, but cannot override explicit ordinance terms)
- Hoover Universal, Inc. v. Limbach, 61 Ohio St.3d 563 (1991) (an administrative rule that conflicts with a municipal ordinance is invalid)
- Athens Home Tel. Co. v. Peck, 158 Ohio St. 557 (1953) (same principle on limits of administrative rulemaking)
- United States v. Calamaro, 354 U.S. 351 (1957) (declining to defer to administrative rule that added to statutory text)
- MacDonald v. Shaker Hts. Income Tax Bd. of Rev., 144 Ohio St.3d 105 (2015) (BTA may review municipal tax‑board decisions de novo; addressed related procedural issues)