In its recent ruling in MacDonald v. Cleveland Income Tax Board of Review,¹ the Ohio Board of Tax Appeals (BTA) reversed the City of Cleveland Income Tax Board of Review's decision and held that amounts reported in Box 5 of an individual income taxpayer's Form W-2 attributable to a Supplemental Executive Retirement Plan (SERP) was a pension benefit exempted by the Cleveland Income Tax Ordinance.

The taxpayer was a resident of the City of Shaker Heights and had been employed by a Cleveland-based bank until his retirement at the end of 2006. The taxpayer qualified for benefits under the bank's SERP and elected to receive SERP benefits in 2007. The present value of the SERP benefit was included in Medicare wages (Box 5) of the taxpayer's 2006 Form W-2. When the taxpayer filed his municipal income tax returns, he calculated his liability on the amount reported in local wages (Box 18) of the Form W-2 (i.e., excluding the SERP benefit). The City of Cleveland recalculated the taxpayer's Ohio local income tax liability by including as taxable income the amount appearing in Box 5.

In issuing its decision, the BTA was influenced by its prior decision in MacDonald v. City of Shaker Heights,² which was upheld by the Franklin County Court of Appeals.³ Ohio Rev. Code Sections 718.01(F) and 718.03(A)(2)(c) (which is part of the law authorizing the imposition of Ohio municipal income taxes) provides that cities can only tax "qualifying wages," which are further defined as those appearing in Box 5 of the Form W-2, including amounts attributable to nonqualified deferred compensation plans, unless such plans are specifically exempt under local ordinance. Cleveland, along with many other Ohio municipalities, does not exempt amounts attributable to nonqualified deferred compensation plans, but the Cleveland ordinance exempts pension benefits from tax and does not limit the exemption to "qualified" pension plans. Based on testimony and other evidence provided, the BTA concluded that the SERP was a pension within the meaning of the local ordinance and that the general inclusion of nonqualified deferred compensation within the local tax base in the Ohio Revised Code does not trump the specific exclusion for pensions under the local ordinance.

Implications

The City of Cleveland is expected to appeal the BTA's decision to the Supreme Court of Ohio (Court). If the Court takes the case, there may finally be a definitive decision on the issue of the treatment of this type of income. Currently, many other cities are actively pursuing the taxation of this type of income as they do not believe that the decisions previously discussed are binding on them. Affected taxpayers should continue to monitor the status of this litigation.

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ENDNOTES

¹ MacDonald v. Cleveland Income Tax Board of Review, Case No. 2009-1130 (Ohio Bd. Tax App. April 20, 2016).

² MacDonald v. City of Shaker Heights, Case No. 2008-K-1883 (Ohio Bd. Tax App. Dec. 28, 2012). See {Tax Alert 2013-414}.

³ MacDonald v. Shaker Heights Income Tax Board of Review, 2014-Ohio-708. See {Tax Alert 2014-442}.