Opinion ID: 4206175
Heading Depth: 2
Heading Rank: 1

Heading: The SERP Is a Pension

Text: {¶ 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. 4 January Term, 2017 (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 5 SUPREME COURT OF OHIO 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, 6 January Term, 2017 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.