Title: MacDonald v. Cleveland Income Tax Board of Review

State: ohio

Issuer: Ohio Supreme Court

Document:

[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as 
MacDonald v. Cleveland Income Tax Bd. of Rev., Slip Opinion No. 2017-Ohio-7798.] 
 
 
 
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. 2017-OHIO-7798 
MACDONALD ET AL., APPELLEES, v. CLEVELAND INCOME TAX BOARD OF 
REVIEW ET AL., APPELLANTS. 
[Until this opinion appears in the Ohio Official Reports advance sheets, it 
may be cited as MacDonald v. Cleveland Income Tax Bd. of Rev., Slip Opinion 
No. 2017-Ohio-7798.] 
Taxation—Supplemental executive retirement plan was not taxable under city’s 
income-tax ordinances—Board of Tax Appeals’ decision affirmed. 
(No. 2016-0778—Submitted June 21, 2017—Decided September 26, 2017.) 
APPEAL from the Board of Tax Appeals, No. 2009-1130. 
_________________ 
DEWINE, J. 
{¶ 1} This appeal presents the question whether a corporate executive’s 
supplemental executive retirement plan (“SERP”) is subject to Cleveland’s income 
tax.  Upon retirement, the executive became entitled to receive benefits from the 
plan, which will be paid from an annuity over the course of his and his wife’s lives.  
The city of Cleveland sought to tax the present value of those future payments at 
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the time of the retirement.  A Cleveland ordinance, however, exempts “pensions” 
from the city income tax.  Because we conclude that the SERP constitutes a 
pension, we hold that the city income tax does not apply. 
{¶ 2} In the proceeding below, the Board of Tax Appeals (“BTA”) reached 
the same conclusion that we do today.  Thus, we affirm the BTA’s decision. 
I.  BACKGROUND 
{¶ 3} William E. MacDonald III retired from National City Corporation in 
2006, after having worked there for 38 years.  As one of the bank’s top executives, 
MacDonald was entitled to participate in National City’s SERP. 
{¶ 4} Common in the corporate world, a SERP is used to supplement the 
benefits received by executives under traditional plans, such as qualified defined-
benefit or defined-contribution (401(k)) plans.  For federal-tax purposes, a SERP is 
considered 
a 
“nonqualified 
deferred-compensation 
plan.” 
 
26 
U.S.C. 
3121(v)(2)(C).  The payments are “nonqualified” in the sense that the plan is not 
entitled to receive the favorable tax treatment accorded to qualified plans under the 
Internal Revenue Code. 
{¶ 5} Because payments from “qualified” plans are limited by federal tax 
law, the SERP provides additional benefits in order that covered executives may 
receive a targeted percentage of their pay upon retirement.  A SERP is sometimes 
referred to as a “top-hat plan” because it is typically limited to a small number of 
highly compensated employees. 
{¶ 6} Although considered to be a “nonqualified deferred-compensation” 
plan under federal tax law, MacDonald’s SERP did not involve any deferral of 
current wages owed or the set-aside of any amounts in a segregated account by the 
employer.  Rather, the SERP was an unfunded promise to pay—in other words, a 
general, unsecured obligation on the part of the employer. 
{¶ 7} MacDonald’s SERP was designed to allow him to receive 
approximately 60 percent of the compensation he had received in his top-earning 
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3
years, after taking into account Social Security and other retirement benefits.  Under 
the terms of his SERP, MacDonald and his wife, Susan W. MacDonald, began 
receiving payments in 2007 from a joint-survivorship annuity. 
{¶ 8} MacDonald was required to pay federal Medicare tax on the present 
value of the annuity payments for the 2006 tax year.  The present value was 
calculated to be $9,107,013.16 and was reported in box 5 of MacDonald’s W-2 
form.  MacDonald was not required to pay federal income tax on the SERP in 2006; 
instead, federal income tax will be imposed on payments as they are made over the 
MacDonalds’ retirement years. 
{¶ 9} National City did not withhold and remit city income tax on the SERP.  
Ultimately, the city assessed $182,140.26 in taxes on the SERP, which represented 
the application of the city’s 2 percent tax on the present value of the annuity 
payments, which had been reported in box 5.  The MacDonalds protested the 
assessment, asserting that the SERP was not subject to city tax. 
{¶ 10} In September 2008, the city’s tax administrator issued an 
administrative ruling rejecting the MacDonalds’ assertion and upholding the 
assessment.  The MacDonalds appealed to the Cleveland Income Tax Board of 
Review (“review board”), which also upheld the assessment.  The MacDonalds then 
appealed to the BTA.  The BTA looked to Cleveland Codified Ordinances 
191.0901(d), which excludes pensions from the city income tax.  Reasoning that 
the SERP fell within the “commonly accepted definition of pension,” the BTA 
found that the SERP was not subject to the tax and reversed the review board’s 
decision.  The review board and Cleveland’s tax administrator, Nassim M. Lynch, 
have appealed to this court.  Lynch, through the Central Collection Agency, 
administers the income-tax laws of the city.  For convenience, we will refer to 
appellants collectively as “Cleveland” or “the city.” 
{¶ 11} The proceeding below was actually the second time the BTA had 
considered the taxability of the MacDonalds’ SERP.  The city of Shaker Heights 
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had also sought to impose its income tax on the SERP.  The BTA determined that 
the SERP was not taxable under the Shaker Heights code, and the Tenth District 
Court of Appeals affirmed that decision.  See MacDonald v. Shaker Hts. Income 
Tax Bd. of Rev., 10th Dist. Franklin No. 13AP-71, 2014-Ohio-708.  We accepted a 
discretionary appeal from the court of appeals’ decision as to the scope of the 
BTA’s review but declined jurisdiction over the substantive issue of the taxability 
of the SERP.  MacDonald v. Shaker Hts. Income Tax Bd. of Rev., 144 Ohio St.3d 
105, 2015-Ohio-3290, 41 N.E.3d 376, ¶ 4.  In this appeal, we squarely confront the 
taxability of the SERP under the ordinances and regulations of the city of 
Cleveland. 
II.  ANALYSIS 
{¶ 12} We review the decision of the BTA to determine whether it is 
reasonable and lawful.  R.C. 5717.04.  In doing so, we review de novo the BTA’s 
construction of Cleveland’s ordinances and regulations.  See Gesler v. Worthington 
Income Tax Bd. of Appeals, 138 Ohio St.3d 76, 2013-Ohio-4986, 3 N.E.3d 1177, 
¶ 10.  We find nothing unreasonable or unlawful about the BTA’s decision. 
A.  The SERP Is a Pension 
{¶ 13} The MacDonalds’ argument for affirmance is straightforward.  They 
rely upon Cleveland Codified Ordinances 191.0901(d)’s exclusion of pension 
benefits: 
 
The tax provided for in this chapter shall not be levied on the 
following: * * * [p]roceeds 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. 
 
January Term, 2017 
 
5
(Emphasis added.)  We will call this provision the “pension exclusion.”   The 
MacDonalds maintain that the SERP is a pension and that therefore it is excluded 
from taxable income. 
{¶ 14} Cleveland counters that the pension exclusion does not apply to the 
SERP for four reasons: (1) the SERP is compensation for services rendered, (2) the 
SERP does not qualify as a pension under the tax administrator’s Rules and 
Regulations, (3) the SERP is taxable as a nonqualified deferred-compensation plan 
under Cleveland ordinances, and (4) the SERP is taxable as a matter of state law. 
{¶ 15} We address each of the city’s arguments in turn. 
1. Cleveland’s compensation-for-services-rendered argument 
{¶ 16} We start our analysis with the pension exclusion.  Cleveland’s 
income-tax ordinances unambiguously exclude “pensions” from the city income 
tax.  Black’s Law Dictionary provides the following definition of “pension”: “[a] 
fixed sum paid regularly to a person (or to the person’s beneficiaries), esp. by an 
employer as a retirement benefit.”  Black’s Law Dictionary 1315 (10th Ed.2014).  
Webster’s Third New International Dictionary includes the following definition: “a 
fixed sum paid regularly to a person * * *: one paid under given conditions to a 
person following his retirement from service (as due to age or disability) or to the 
surviving dependents of a person entitled to such a pension.” Webster’s Third New 
International Dictionary 1671 (2002).  Under either definition, the SERP plainly is 
a pension.  It is a sum of money regularly paid to the MacDonalds as a retirement 
benefit.  An ordinary speaker of the English language would have little difficulty 
in concluding that what the MacDonalds received from National City was a 
pension. 
{¶ 17} Such an understanding of the term is reinforced when the pension 
exclusion is read as a whole.  The language of the ordinance has broad reach, 
evincing an intent to reach a multitude of retirement, death, and disability payments.  
The exclusion is phrased to encompass all those amounts that are themselves “not 
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in the nature of compensation for services rendered” but instead substitute for such 
compensation upon death, disability, or retirement.  Cleveland Codified Ordinances 
191.0901(d). 
{¶ 18} Cleveland characterizes the SERP as compensation for services 
rendered and thus suggests that the exclusion does not apply.  What Cleveland 
apparently means is that because MacDonald received the SERP by virtue of his 
having been employed by National City, the SERP retirement benefit is “in the 
nature of compensation for services rendered.”  But this argument stretches the 
meaning of the phrase much too far.  Virtually any pension—including a traditional 
qualified defined-benefit plan, which Cleveland admittedly does not tax—comes 
about as a result of someone having performed services for an employer.  Plainly, 
if the pension exclusion is to have any application at all, the phrase “in the nature 
of compensation for services rendered” must have a more limited scope than 
Cleveland would give it. 
{¶ 19} By its terms, the purpose of McDonald’s SERP was 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.”  Thus, under 
the plain language of the pension exclusion in the Cleveland income-tax ordinance, 
the SERP is exempt from taxation. 
2.  Cleveland’s regulation-based argument 
{¶ 20} Cleveland argues that the definition of “pension” is limited by the 
tax administrator’s Rules and Regulations in effect in 2006: 
 
2:30  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, 
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7
deferred 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. 
* * * 
6:03  Insurance and Annuity Proceeds, Certain Employee 
Benefits and Gifts. 
(A) The following additional items are specifically 
exempted from the tax imposed by this ordinance: 
* * * 
2.  Distributions from pension plans reported to the payee on 
Federal Form 1099-R or substantive equivalent. 
* * * 
(B)  The following items are not exempt from the tax 
imposed by the ordinance (this is not an exhaustive list): 
* * * 
2.  Deferred compensation of any kind, whether deferred 
under a retirement plan or under any other type of compensation 
arrangement or contract, including any qualified or nonqualified 
deferrals made by an employer or the employee or both. 
 
As a nonqualified deferred-compensation plan, the SERP was not reported on Form 
1099-R.  Internal Revenue Service, Instructions for Forms 1099-R and 5498, 
https://www.irs.gov/pub/irs-pdf/i1099r.pdf (accessed Aug. 23, 2017).  Thus, 
Cleveland argues, it does not qualify as a pension. 
{¶ 21} The problem with Cleveland’s argument is that it requires that we 
hold that the tax administrator had the power to adopt rules that supersede an 
ordinance passed by city council.  Under Cleveland Codified Ordinances 
191.2303(a), the tax administrator may (with the approval of the review board) 
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adopt and enforce “rules and regulations relating to any matter or thing pertaining 
to the collection of taxes and the administration and enforcement of the provisions 
of this chapter, including provisions for the re-examination and correction of 
returns.”  This section, however, does not provide the administrator with the power 
to change the terms of ordinances.  The limiting definition of “pension” adopted by 
the tax administrator goes beyond the “collection of taxes” and the “administration 
and enforcement” of Cleveland Codified Ordinances Chapter 191 and works a 
substantive change regarding what is taxable. 
{¶ 22} At oral argument, Cleveland’s counsel asserted that the Rules and 
Regulations had been first promulgated by the tax administrator and then adopted 
and incorporated into the city ordinance.  It is true that in 2004—with the applicable 
regulations already in place—city council amended its ordinance, adding a 
reference to the Rules and Regulations in the definition of “taxable income”: 
“ ‘Taxable income’ means all qualifying wages, net profits and all other income 
from whatever source derived set forth in Section 191.0501, and the Rules and 
Regulations as taxable.”  (Emphasis added.)  Cleveland Codified Ordinances 
191.0318.  But as counsel conceded, city council did not vote to ratify the specific 
Rules and Regulations promulgated by the tax administrator.  And we are not 
convinced that mere reference to the Rules and Regulations is sufficient to allow 
the tax administrator to make taxable what an ordinance specifically says is not 
taxable. 
{¶ 23} We were confronted with a somewhat similar situation in Nestle 
R&D Ctr., Inc. v. Levin, 122 Ohio St.3d 22, 2009-Ohio-1929, 907 N.E.2d 714.  
There, an administrative rule authorized the director of the Department of 
Development to “adopt rules necessary to implement” a tax credit for the creation 
of new jobs.  The issue before us concerned the proper reading of a statute, R.C. 
5733.12(B), which provided the limitation period for filing for a tax refund for 
creating new jobs.  We held that while the statutory authorization for rule 
January Term, 2017 
 
9
promulgation “surely confers authority on the Department of Development to 
establish reasonable deadlines for submitting documentation, we do not read that 
provision as authorizing the Director of Development to provide the definitive 
construction of R.C. 5733.12(B).”  Id. at ¶ 40.  Similarly, we do not read either 
Cleveland Codified Ordinances 191.2303 or 191.0318 as authorizing the tax 
administrator to make a definitive determination as to what is taxable. 
{¶ 24} A rulemaker possesses only the authority granted it by a legislative 
body; an administrative rule that conflicts with a municipal ordinance is invalid.  
See Hoover Universal, Inc. v. Limbach, 61 Ohio St.3d 563, 569, 575 N.E.2d 811 
(1991); Athens Home Tel. Co. v. Peck, 158 Ohio St. 557, 562, 110 N.E.2d 571 
(1953).  In United States v. Calamaro, 354 U.S. 351, 358-359, 77 S.Ct. 1138, 1 
L.Ed.2d 1394 (1957), the court declined to defer to a treasury-department 
regulation in construing who was covered by a tax imposed by the Internal Revenue 
Code.  The regulation, which expanded the universe of who was covered by the tax, 
was “no more than an attempted addition to the statute of something which [was] 
not there.”  Id. at 359.  The same goes here: the Rules and Regulations attempt to 
expand the tax by adding to the ordinance “something which is not there”—in this 
case, a requirement that only those pensions reported on federal Form 1099-R are 
subject to the exclusion. 
{¶ 25} Contrary to the city’s claim, our decision in Hillenmeyer v. 
Cleveland Bd. of Rev., 144 Ohio St.3d 165, 2015-Ohio-1623, 41 N.E.3d 1164, does 
not compel a different result.  In that case, we held that the tax administrator’s 
rulemaking authority extended to spelling out a formula for applying the city’s 
income tax to nonresidents who performed a portion of their work in the city.  Id. 
at ¶ 20.  But in Hillenmeyer, the ordinance was silent about the manner in which 
taxes should be levied against nonresidents.  Here, in contrast, the ordinance 
specifically provides that anything that is a pension is beyond the scope of the 
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income tax.  The tax administrator’s rulemaking authority does not allow him to 
dictate otherwise. 
3.  Cleveland’s ordinance-based argument 
{¶ 26} Cleveland’s further attempt to avoid the pension exclusion rests on 
the definition of “qualifying wages” in Cleveland’s Codified Ordinances.  For tax 
year 2006, Cleveland imposed taxes on “all qualifying wages, earned and/or 
received * * * by nonresidents of the City for work done or services performed or 
rendered within the City or attributable to the City.”  Cleveland Codified 
Ordinances 191.0501(b)(1).  The ordinance defined “qualifying wages” to include 
“compensation attributable to a nonqualified deferred compensation plan or 
program as defined in section 3121(v)(2)(C) of the Internal Revenue Code.”  
Cleveland Codified Ordinances 191.031501.  The SERP is a nonqualified deferred-
compensation plan for purposes of 26 U.S.C. 3121(v)(2)(C).  Thus, Cleveland 
argues, the ordinance makes the present value of the SERP immediately taxable. 
{¶ 27} The two Cleveland income-tax ordinances are at odds.  One—
Cleveland Codified Ordinances 191.031501—would seem to make the SERP 
taxable because it falls within the definition of “qualifying wages.”  The other 
ordinance—Cleveland Codified Ordinances 191.0901(d) (the pension exclusion)—
says that the SERP is not taxable.  In reconciling this conflict, we turn to the familiar 
rule of statutory construction that when there is a conflict between a general 
provision and a more specific provision in a statute, the specific provision controls.  
Scalia & Garner, Reading Law: The Interpretation of Legal Texts 183 (2012).  See 
R.C. 1.51.  The canon rests on the rationale that “ ‘[t]he particular provision is 
established upon a nearer and more exact view of the subject than the general, of 
which it may be regarded as a correction.’ ”  Scalia & Garner, Reading Law at 183, 
quoting Jeremy Bentham, A Complete Code of Laws, in 3 The Works of Jeremy 
Bentham 210 (John Bowring Ed.1843).  Here, the more general definition of 
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“qualifying wages” is limited by the specific provision, which excludes pensions 
from the broad definition. 
{¶ 28} Adoption of Cleveland’s interpretation of the ordinances would have 
the effect of making the pension exclusion largely, if not completely, superfluous.  
Quite simply, the definition of “qualifying wages” in the ordinance refers to the 
definition of “wages” in 26 U.S.C. 3121 that is used for the so-called payroll or 
FICA taxes that fund Social Security and Medicare benefits.  That definition 
broadly includes “all remuneration for employment” for purposes of the FICA tax 
base, subject to the exclusion of items prescribed in 26 U.S.C. 3121(a)(1) through 
(a)(23).  These exclusions include the benefits a retiree receives from a qualified 
pension plan, 26 U.SC. 3121(a)(5)(A), as well as an employer’s payments made 
“on account of sickness or accident disability,” 26 U.S.C. 3121(a)(4).  These same 
benefits are excluded by the pension exclusion.  If, as Cleveland argues, 26 U.S.C. 
3121’s definition of “wages” is fully controlling, there would be no need for the 
separate pension exclusion. 
{¶ 29} The city counters that the BTA’s decision finding the SERP 
nontaxable “renders meaningless” the income-tax-ordinance provisions levying the 
city tax on nonqualified deferred compensation.  See Cleveland Codified 
Ordinances 191.0501(b)(1) and 191.031501.  But this is not the case.  In fact, the 
record shows that National City offered its executives the opportunity to defer a 
portion of their wages or bonuses to be paid later, and this deferred compensation 
would be “nonqualified deferred compensation” subject to the city’s taxation.  Such 
a deferred amount would be included as “qualifying wages” because it is 
“compensation attributable to a nonqualified deferred compensation plan or 
program” under Cleveland Codified Ordinances 191.031501.  And because it is 
clearly not a pension, it would not be excluded under Cleveland Codified Ordinance 
191.0901(d).  Thus, the deferred amount would be taxable. 
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{¶ 30} We conclude that the definition of “qualifying wages” in Cleveland 
Codified Ordinances 191.031501 does not override the exclusion of the SERP from 
the city income tax as a pension in Cleveland Codified Ordinances 191.0901(d). 
4.  Cleveland’s state-law argument 
{¶ 31} Cleveland also argues that because the city had elected to tax on a 
qualifying-wages basis under former R.C. Chapter 718, it was required by state law 
to impose its income tax on the SERP.  Under former R.C. Chapter 718, “qualifying 
wages” were defined as those wages included in 26 U.S.C. 3121(a), subject to 
certain adjustments.  See former R.C. 718.03(A), Am.Sub.H.B. No. 95, 150 Ohio 
Laws, Part I, 396, 638.1  The chapter excluded from “qualifying wages” 
 
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. 
 
Former R.C. 718.03(A)(2)(c), 150 Ohio Laws, Part I, at 639. 
{¶ 32} As Cleveland reads the statute, because the city taxes on a 
qualifying-wages basis, it is required to tax “amount[s] attributable to a 
nonqualified deferred compensation plan” unless it specifically excludes those 
amounts by ordinance.  But the city has excluded these amounts by ordinance—the 
pension exclusion exempts the SERP at issue from taxation.  Further, even if the 
pension exclusion somehow did not satisfy the requirement of the state statute, our 
decision in Gesler, 138 Ohio St.3d 76, 2013-Ohio-4986, 3 N.E.3d 1177, would 
prevent the imposition of the tax.  There, we held that although the General 
                                                 
1 R.C. Chapter 718 was comprehensively rewritten in 2014.  2014 Sub.H.B. No. 5 (effective Mar. 
23, 2015).  We rely on the version of the law that was in force in 2006. 
January Term, 2017 
 
13 
Assembly can restrict a city’s power to tax, it “cannot command [a city] to impose 
a tax [on specific income] when [the city] has chosen not to tax that income.”  Id. 
at 21-22. 
B.  Cleveland’s Additional Arguments Lack Merit 
{¶ 33} Cleveland raises a number of other arguments that we can dispose of 
quickly.  It challenges certain procedural aspects of the BTA proceeding, arguing 
generally that the BTA failed to afford appropriate deference to the decision of the 
review board.  But in MacDonald v. Shaker Hts. Income Tax Bd. of Rev., 144 Ohio 
St.3d 105, 2015-Ohio-3290, 41 N.E.3d 376, we specifically held that the BTA has 
authority to review municipal-tax-board decisions de novo as to both facts and law.  
Id. at ¶ 23.  We also conclude that the BTA did not abuse its discretion in allowing 
Patricia Emond to testify regarding background information about the SERP or in 
considering the testimony she gave in the Shaker Heights case.  See Orange City 
School Dist. Bd. of Edn. v. Cuyahoga Cty. Bd. of Revision, 74 Ohio St.3d 415, 416-
417, 659 N.E.2d 1223 (1996).  Further, we are not persuaded that the BTA restricted 
Cleveland’s home-rule authority under Ohio Constitution, Article XVIII, Section 
3, when it applied Cleveland’s ordinances to determine whether the SERP was a 
pension.  In short, we find no error in the review undertaken by the BTA here. 
{¶ 34} Finally, Cleveland contends that the MacDonalds are estopped from 
contesting the tax assessment because in 1997 their counsel in this case signed a 
settlement letter on behalf of National City and other corporate clients that allegedly 
acknowledges that a SERP like the one at issue here is subject to city taxation.  
There is some dispute as to what type of retirement benefits that agreement covered; 
but regardless, the MacDonalds cannot be estopped by an agreement to which they 
were not a party. 
III.  CONCLUSION 
{¶ 35} For the foregoing reasons, we conclude that the BTA correctly 
reversed the review board’s decision. 
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Decision affirmed. 
O’CONNOR, C.J., and O’DONNELL, KENNEDY, FRENCH, O’NEILL, and 
FISCHER, JJ., concur. 
_________________ 
 
Baker & Hostetler, L.L.P., Christopher J. Swift, Edward J. Bernert, and 
Elizabeth A. McNellie, for appellees. 
 
Barbara A. Langhenry, Cleveland Director of Law, and Linda L. 
Bickerstaff, Assistant Director of Law, for appellants. 
_________________