Ohio executive retirement plan not subject to municipal tax

The Ohio Supreme Court upheld an Ohio appellate court decision finding a supplemental executive retirement plan (SERP) to be a pension benefit that was not subject to the municipal income tax imposed by the city of Shaker Heights, Ohio.

The SERP was a nonqualified deferred compensation plan that was intended to supplement the taxpayer’s qualified retirement plan. The SERP was unfunded before the taxpayer’s retirement and did not represent a salary deferral. Rather, the SERP, in conjunction with the qualified plan, provided an income replacement ratio of approximately 60% of preretirement income as a benefit upon retirement, after taking into account the other benefits receivable by the taxpayer, including Social Security.

At the appellate court level, the taxpayer had contended that the SERP benefit was a pension and, therefore, exempt from municipal taxation pursuant to the Codified Ordinances of the City of Shaker Heights. The Ohio Board of Tax Appeals (BTA) concluded that the SERP benefit was a pension and thus exempt from municipal tax. The city appealed the decision, arguing that the SERP benefit did not qualify as a pension as the term “pension” is used in the local income tax ordinance.

The appellate court affirmed the BTA decision, stating that the decision was not unreasonable or unlawful. The court noted that the BTA did not conclude that the taxpayer’s SERP benefit was a pension solely because the taxpayer’s former employer treated the SERP as a pension. The BTA’s decision also notes the testimony stating that “a pension is any plan sponsored by an employer that provides for post-retirement income that’s designed to supplement their income for life.” The SERP in question met this definition. The BTA also noted that the taxpayer’s SERP benefit was not specifically funded by his former employer prior to the taxpayer’s retirement and that none of the taxpayer’s cash salary was deferred to fund the SERP benefit.

The city appealed the appellate court’s decision raising two issues: the substantive issue of whether the municipal tax was properly levied on the benefits at issue, and a procedural issue of whether the BTA violated a duty of deference to the determination of the municipal tax board. The Supreme Court declined jurisdiction over the substantive issue, but accepted jurisdiction over the procedural issue.

The city’s argument was that when the statute allowing appeals to the BTA rather than just to the common pleas court was enacted, the legislative intent was that the BTA review decisions of the municipal tax boards using the same standard of review that applies under R.C. Chap. 2506. The High Court was not swayed by this argument and held that the BTA’s standard of review is de novo as to both facts and law. Therefore, the Supreme Court affirmed the judgment of the appellate court. (MacDonald v. City of Shaker Heights Income Tax Board of Review, Ohio Supreme Court, No. 2015-Ohio-3290, August 19, 2015.)

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