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Tax Law

Cleveland Gets Personal Taxing Nonresident Retiree’s Stock Options

The Ohio Board of Tax Appeals (BTA) affirmed the Cleveland Board of Income Tax Review’s (Board) decision that it properly denied a refund claim of municipal income tax paid on income from stock options that a nonresident was granted while working in the city but exercised after she retired and moved to Florida. Willacy v. Cleveland Bd. of Income Tax Review, No. 2018-758 (Ohio BTA May 27, 2020).

The taxpayer in this BTA decision received options from her employer for work performed in Cleveland. Such options vested after one year of receipt, but would expire on the tenth anniversary of the grant date. Following her retirement in 2009, the taxpayer established tax residency in Florida. Thus, by the time the taxpayer exercised the options in 2016 and immediately sold the stock, she was neither employed nor resident in Ohio. The taxpayer’s employer withheld Cleveland municipal income tax on the full amount of income from the 2016 exercise of the options, i.e., the difference between the fair-market-value at the time of exercise and the taxpayer’s strike price of the options. The taxpayer then filed a refund claim with the Board.

The BTA first disposed of the taxpayer’s statutory and constitutional challenges that were recently addressed by the Ohio Supreme Court with respect to the taxpayer’s exercise of options in the 2014 and 2015 tax years. In Willacy v. Cleveland Bd. of Income Tax Review, 2020 Ohio 314 (2020) (Willacy I), the Ohio Supreme Court held in a per curiam opinion that exercising stock options generated taxable compensation – “qualifying wages” – for purposes of the Cleveland municipal income tax in the year the options were exercised. In so doing, the state supreme court rejected the taxpayer’s argument that the option income was intangible that should be sourced to her out-of-state domicile, citing the federal tax treatment of income from the exercise of options as compensatory, as well as prior Ohio case law reaching a similar conclusion. The majority in Willacy I also rejected the taxpayer’s federal and Ohio Due Process Clause challenges, as the taxpayer earned the options from work performed entirely in Cleveland prior to her 2009 retirement and those options were exercisable as early as 2008. The Ohio Supreme Court explained in Willacy I, “the income came from work she performed in Cleveland, and she thus satisfies the [Due Process Clause’s] minimum-connection requirement. Because all the stock-option income was compensation for that work, all the stock-option income is fairly attributable to her activity in Cleveland.”

In addition to the substantive arguments based on the Willacy I decision, the BTA also rejected the taxpayer’s res judicata and estoppel arguments, specifically noting that “estoppel generally does not apply against the state, though it may be applied “in a very limited context” where the taxing authority committed himself in writing over an extended period of time to a particular construction of tax law as applied to the taxpayer.” Citing Crown Commc’n, Inc. v. Testa, 992 N.E.2d 1135, 1140–41 (Ohio 2013).

 

Willacy v. City of Cleveland, No. 2018-758 (Ohio BTA May 27, 2020).