Willacy v. Cleveland Bd. of Income Tax Rev. (Slip Opinion)

[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as
Willacy v. Cleveland Bd. of Income Tax Rev., Slip Opinion No. 2021-Ohio-1734.]
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. 2021-OHIO-1734WILLACY, APPELLANT, v. CLEVELAND BOARD OF INCOME TAX REVIEW
ET AL., APPELLEES.
[Until this opinion appears in the Ohio Official Reports advance sheets, it
may be cited as Willacy v. Cleveland Bd. of Income Tax Rev., Slip Opinion No.
2021-Ohio-1734.]
Municipal income tax—Stock options employee received as compensation while
working in Cleveland were not exercised until after employee retired and
moved out of state—Exercise of stock options generated taxable qualifying
wages under Cleveland Codified Ordinances—Court defers to Board of Tax
Appeals’ factual findings when they are supported by reliable and probative
evidence—Equitable estoppel is not ordinarily available as a remedy
against tax assessments—Cleveland properly imposed income tax on the
stock-option income.
(No. 2020-0795—Submitted March 2, 2021—Decided May 25, 2021.)
APPEAL from the Board of Tax Appeals, No. 2018-758.
_______________________
SUPREME COURT OF OHIO
Per Curiam.
{¶ 1} This is the second appeal involving Cleveland’s taxation of income that
appellant, Hazel M. Willacy, received by exercising stock options. Willacy earned
the options in 2007 from her former employer when she was working in Cleveland,
but she did not realize any income until she exercised the options after she moved
from Ohio and had stopped working in the city. In Willacy v. Cleveland Bd. of
Income Tax Rev., 159 Ohio St.3d 383, 2020-Ohio-314, 151 N.E.3d 561 (“Willacy I”),
we held that Cleveland properly taxed the stock-option income that Willacy realized
in 2014 and 2015. This appeal involves the stock-option income that she realized in
2016.
{¶ 2} The Board of Tax Appeals (“BTA”) found that Cleveland’s taxation of
Willacy’s 2016 income was proper. Willacy appeals the BTA’s decision, raising
three propositions of law. Because Willacy’s propositions of law lack merit, we
affirm the BTA’s decision.
Facts and Procedural History
{¶ 3} In 2007, when Willacy was working in Cleveland, the Sherwin-
Williams Company granted her options to purchase 2,715 shares of Sherwin-
Williams common stock. Willacy retired and moved to Florida in 2009, without
having exercised any of the options. She exercised 2,115 of the options in 2014 and
2015 and immediately resold the shares at market prices. In Willacy I, we held that
Cleveland properly taxed the income Willacy realized from those transactions.
Willacy I at ¶ 9, 27, 35.
{¶ 4} Willacy exercised the remaining 600 options in 2016. Her exercise of
those options generated almost $125,000 of income. Sherwin-Williams withheld
Willacy’s municipal-income-tax obligation—about $2,500—and paid it to
Cleveland.
{¶ 5} Willacy sought a refund based on the fact that she had not lived or
worked in Cleveland in 2016. Cleveland’s tax administrator, appellee Nassim M.
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Lynch, denied the request and issued an assessment. Willacy appealed the tax
administrator’s decision to appellee Cleveland Board of Income Tax Review, which
affirmed the denial of the refund. Willacy then appealed to the BTA, which also
affirmed the denial. Willacy appealed to this court as of right.
Analysis
{¶ 6} We must determine whether the BTA’s decision is “reasonable and
lawful.” R.C. 5717.04. In doing so, we must defer to the BTA’s factual findings, so
long as they are supported by “reliable and probative” evidence in the record. Am.
Natl. Can Co. v. Tracy, 72 Ohio St.3d 150, 152, 648 N.E.2d 483 (1995). We review
legal issues de novo. Cincinnati v. Testa, 143 Ohio St.3d 371, 2015-Ohio-1775, 38
N.E.3d 847, ¶ 15.
Cleveland’s tax assessment is not time-barred
{¶ 7} In her first proposition of law, Willacy argues that Cleveland’s taxation
of her 2016 stock-option income is barred under Cleveland Codified Ordinance
191.1701, which provides:
All taxes imposed by this chapter shall be collectible, together
with any interest and penalties thereon, as other debts of like amount
are recoverable, including, but not limited to, collection by suit. Any
suit shall be brought within three (3) years after the city income tax
was due or the return was filed, whichever is later. Except in the case
of fraud, of omission of twenty-five percent (25%) or more of taxable
income required to be reported, or of failure to file a return, no
additional assessment shall be made after three (3) years from the time
the city income tax was due or the city income tax return was filed,
whichever is later.
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SUPREME COURT OF OHIO
Willacy contends that this provision precluded the tax administrator from making an
assessment more than three years after Sherwin-Williams granted the stock options
in 2007.
{¶ 8} Willacy’s argument lacks merit. Cleveland Codified Ordinance
191.1701 prohibits Cleveland from making an assessment more than three years
“from the time the city income tax was due or the city income tax return was filed,
whichever is later.” Under Cleveland Codified Ordinances 192.03(b)(1) and
192.06(hh)(2)(B), the income from Willacy’s remaining 600 options was taxable
when she exercised the options in 2016. And under Cleveland Codified Ordinances
191.1101(a) and 191.1301(a), her 2016 taxes on that income were due in April 2017.
The tax administrator made his assessment in November 2017, well within the three-
year limitations period.
{¶ 9} In arguing that her taxes were due when she earned the options in 2007,
Willacy assumes that Cleveland may tax income only in the year in which the
income-producing activity occurs. But we already have made clear that “the income-
producing event (e.g., earning compensation) need not coincide with the taxable
event (e.g., receiving income).” Willacy I, 159 Ohio St.3d 383, 2020-Ohio-314, 151
N.E.3d 561, at ¶ 28. Under Cleveland law, Willacy’s remaining options became
taxable when she exercised them in 2016. Her first proposition of law therefore lacks
merit.
Cleveland’s tax assessment does not violate Willacy’s due-process rights
{¶ 10} In her second proposition of law, Willacy argues that Cleveland
violated the Due Process Clause of the United States Constitution and the Due Course
of Law Clause of the Ohio Constitution by taxing her stock-option income in a year
that she did not work in the city. In Willacy I, we held that Cleveland’s taxation of
Willacy’s income satisfied due process. Willacy I at ¶ 21-34. Willacy acknowledges
that her second proposition of law fails under the authority of Willacy I, but she
argues that the prior decision should be overruled.
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January Term, 2021
{¶ 11} Willacy offers little support for her claim that Willacy I was wrongly
decided. She relies on North Carolina Dept. of Revenue v. The Kimberley Rice
Kaestner 1992 Family Trust, ___ U.S. ___, 139 S.Ct. 2213, 204 L.Ed.2d 621 (2019),
to argue that Cleveland may tax her only in the years when she worked in the city.
But Kaestner held only that North Carolina could not tax trust income when the only
connections to the state were trust beneficiaries who were residents of the state but
who had not received distributions, had no right to demand trust income, and were
uncertain ever to receive any. Id. at ___, 131 S.Ct. at 2221. Kaestner did not address
the situation presented in this case.
{¶ 12} Willacy also argues that we should overrule Willacy I because she
“was not afforded a full and fair opportunity to present her case” in Willacy I. She
argues that she was “hampered by being compelled to litigate in a venue far from”
her home and by being compelled to litigate questions concerning events that took
place in 2007. She also contends that she was denied a hearing before the tax
administrator concerning her 2014 and 2015 taxes. Willacy did not raise these
alleged errors in Willacy I, and she has not shown that they would have had any
impact on our decision. We therefore will not revisit the constitutional issues decided
in Willacy I on this basis.
{¶ 13} Willacy next argues that Willacy I is factually distinguishable because
this case involves her exercise of incentive stock options that generated intangible
income, not of nonqualified stock options that generated qualifying wages. See
Willacy I, 159 Ohio St.3d 383, 2020-Ohio-314, 151 N.E.3d 561, at ¶ 11-13, 30-33.
See also 26 U.S.C. 83; 26 U.S.C. 422. To establish this fact, Willacy relies only on
her own affidavit in which she asserted that the 2007 grant consisted of 1,424
incentive stock options and 1,291 nonqualified stock options. She reasons that
because the options she exercised in 2014 and 2015 were treated as nonqualified
stock options in Willacy I, the remaining options must be incentive stock options.
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SUPREME COURT OF OHIO
{¶ 14} The board of review did not give weight to Willacy’s affidavit and
found that Willacy had been issued only nonqualified stock options. Willacy did not
contest that factual determination at the BTA, and the BTA found that Willacy’s
exercise of her remaining stock options generated qualifying wages in 2016. Willacy
thus failed to preserve this argument for our review. See Buckeye Internatl., Inc. v.
Limbach, 64 Ohio St.3d 264, 267, 595 N.E.2d 347 (1992). Moreover, evidence in
the record supports the BTA’s finding that the options were nonqualified stock
options—namely, Willacy’s W-2 for tax year 2016 in which Sherwin-Williams
reported the income as ordinary income derived from nonstatutory stock options. We
must defer to the BTA’s finding because it is supported by reliable and probative
evidence in the record. See Am. Natl. Can Co., 72 Ohio St.3d at 152, 648 N.E.2d
483. The material facts in this case therefore do not differ from those in Willacy I.
{¶ 15} Finally, Willacy argues that an intervening change to Regulation
3:01(B)(8), issued by Cleveland’s Division of Taxation Central Collection Agency,
makes this case different from Willacy I. Regulation 3:01(B)(8) was amended,
effective January 1, 2016, to provide that an employer
is not required to withhold municipal income tax with respect to an
individual’s disqualifying disposition of an incentive stock option if,
at the time of the disqualifying disposition, the individual is not an
employee of either the corporation with respect to whose stock option
has been issued or of such corporation’s successor entity.
Willacy suggests that this part of Regulation 3:01(B)(8) applies to her because she
was no longer employed by Sherwin-Williams when she realized income from the
exercise of her stock options in 2016. But as just discussed, Willacy’s exercise of
those remaining stock options in 2016 was not a disqualifying disposition of incentive
stock options. And even if it were, Regulation 3:01(B)(8) would not render her
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January Term, 2021
income nontaxable; it only would relieve Sherwin-Williams of the duty to withhold
her tax obligation. The change to Regulation 3:01(B)(8) simply does not apply in
this case.
{¶ 16} Because Willacy has not shown that we should overrule Willacy I or
that Willacy I does not apply, we reject her second proposition of law.
Cleveland’s tax assessment is not barred under the doctrine of res judicata
{¶ 17} In her third proposition of law, Willacy argues that Cleveland may not
tax her 2016 stock-option income because the city refunded the amounts Sherwin-
Williams had withheld when she received stock-option income in 2010, 2011, and
2012. She contends that Cleveland is bound to follow its past practice because the
earlier refunds involved the same issue presented here. She invokes the collateral-
estoppel aspect of the doctrine of res judicata.
{¶ 18} Collateral estoppel “precludes the relitigation, in a second action, of
an issue that has been actually and necessarily litigated and determined in a prior
action.” Whitehead v. Gen. Tel. Co., 20 Ohio St.2d 108, 112, 254 N.E.2d 10 (1969),
overruled in part on other grounds, Grava v. Parkman Twp., 73 Ohio St.3d 379, 653
N.E.2d 226 (1995). The doctrine may be used to bar relitigation of an issue that was
decided in an administrative proceeding if the proceeding was “of a judicial nature.”
Superior’s Brand Meats, Inc. v. Lindley, 62 Ohio St.2d 133, 403 N.E.2d 996 (1980),
syllabus.
{¶ 19} In arguing that Cleveland is estopped from taxing her stock-option
income, Willacy contends that it is irrelevant that the parties did not litigate the issue
in 2010, 2011, or 2012, because collateral estoppel applies to judgments entered by
agreement. But Willacy has not shown that there were any administrative
proceedings resembling a judicial trial concerning tax years 2010, 2011, or 2012, or
that Cleveland issued the refunds in response to a judgment or adjudication.
Willacy’s third proposition of law fails because the question whether she owed taxes
based on her exercise of stock options in 2010, 2011, or 2012 was not litigated in a
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proceeding of a judicial nature. See Am. Soc. for Metals v. Limbach, 59 Ohio St.3d
38, 39, 569 N.E.2d 1065 (1991).
{¶ 20} Willacy nevertheless argues that collateral estoppel applies because
Cleveland could have denied her requests and litigated the issue in prior years. She
relies on Aspinwall v. Mentor Bd. of Tax Rev., 146 Ohio App.3d 466, 2001-Ohio-
8896, 766 N.E.2d 1034 (11th Dist.), in which the court held that “[t]he doctrine of
res judicata is applicable to quasi-judicial decisions by administrative agencies from
which no appeal is taken.” Id. at ¶ 13. Res judicata applied against the taxpayers in
Aspinwall because they did not challenge an adverse decision when they had an
opportunity to do so. Aspinwall is distinguishable because Willacy and Cleveland
were not adversaries in 2010, 2011, and 2012—Willacy simply asked for refunds and
the city gave them to her.
{¶ 21} Willacy also argues that we validated her collateral-estoppel theory in
Christian Voice of Cent. Ohio v. Testa, 147 Ohio St.3d 217, 2016-Ohio-1527, 63
N.E.3d 1153. But we did no such thing. In fact, we expressly declined to address
the taxpayer’s collateral-estoppel argument in that case. See id. at ¶ 3-4, 39.
{¶ 22} With her third proposition of law, Willacy is attempting to bind the
tax administrator not to a judgment or an adjudication rendered against the city but
to the city’s own actions in voluntarily issuing refunds in prior years. Cleveland’s
prior conduct alone cannot support the application of collateral estoppel—the
doctrine binds a party to a prior adjudication of a tribunal, not to its own unilateral
action. A party, to be sure, may be equitably estopped based on its prior conduct, but
equitable estoppel ordinarily is not available as a remedy against tax assessments.
See Crown Communication, Inc. v. Testa, 136 Ohio St.3d 209, 2013-Ohio-3126, 992
N.E.2d 1135, ¶ 21.
{¶ 23} We reject Willacy’s third proposition of law because she has not
shown that collateral estoppel applies to prevent taxation of her 2016 income based
on Cleveland’s actions in 2010, 2011, or 2012.
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January Term, 2021
Conclusion
{¶ 24} We hold that Cleveland’s taxation of Willacy’s 2016 compensation
was required under municipal law and did not violate her due-process rights. We
therefore affirm the decision of the BTA.
Decision affirmed.
O’CONNOR, C.J., and KENNEDY, DEWINE, DONNELLY, STEWART, and
BRUNNER, JJ., concur.
FISCHER, J., dissents, with an opinion.
_________________
FISCHER, J., dissenting.
{¶ 25} Once again, we are asked to decide whether an Ohio municipality
may tax whomever it likes, wherever it likes, and whenever it likes. To be precise,
we are asked to decide once more whether the city of Cleveland can “reach back in
time and across state lines to tax the income of a nonresident.” Willacy v. Cleveland
Bd. of Income Tax Rev. (“Willacy I”), 159 Ohio St.3d 383, 2020-Ohio-314, 151
N.E.3d 561, ¶ 60 (Fischer, J., dissenting). Because this is not the Marvel Cinematic
Universe, and, unlike Thanos, the city of Cleveland is bound by the rules of time,
space, and the Due Process Clause, I believe the answer to that question is still a
resounding no.
{¶ 26} The Due Process Clause of the Fourteenth Amendment to the United
States Constitution requires a “minimum connection, between [the taxing entity]
and the person, property or transaction it seeks to tax.” Miller Bros. Co. v.
Maryland, 347 U.S. 340, 344-345, 74 S.Ct. 535, 98 L.Ed. 744 (1954). As I have
said before, I believe this means that there must be “some minimal geographic and
temporal connection” between an Ohio municipality, the person, and the income it
seeks to tax. Willacy I at ¶ 36 (Fischer, J., dissenting).
{¶ 27} In this case, as in Willacy I, I find it very hard to say that such a
connection was present between Willacy, the income that is being taxed, and the
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city of Cleveland. After all, by the time the city imposed its tax in 2016, Willacy
had not been a resident or worker there for over seven years. In fact, by that time,
Willacy was about a thousand miles away, residing in another state. Consequently,
any connection here between Willacy and the city of Cleveland was less than
minimal, it was nonexistent.
{¶ 28} Of course, it does not have to be this way. Despite the fact that the
majority opinion finds that the city of Cleveland’s practice is constitutionally
sound, the General Assembly is also free to put a stop to extraterritorial taxation
like this. Article XIII, Section 6, and Article XVIII, Section 13, Ohio Constitution.
There are models for doing just that, see, e.g., 4 U.S.C. 114, and I would encourage
the General Assembly to review those statutes and take up this issue. Until then,
based on my view of the Due Process Clause and the limits it places on a
government’s ability to tax, I must respectfully dissent.
_________________
Aubrey B. Willacy, for appellant.
Barbara A. Langhenry, Cleveland Director of Law, and Donna M. Busser
and William E. Gareau Jr., Assistant Directors of Law, for appellees.
_________________
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