In this case, the Ohio Board of Tax Appeals (BTA) held that the City of Shaker Heights (City) could not impose its income tax on $9,107,013.16 of nonqualified deferred compensation plan benefits that were subject to Social Security withholding tax and included in Box 5 of a taxpayer’s IRS Form W-2 for 2006, the year in which the taxpayer retired from National City Corporation (NCC). The taxpayer obtained the benefits at issue from a Supplemental Executive Retirement Plan (SERP) maintained by NCC.
Ohio Revised Code (RC) 718.01(H)(10) (RC 718.01(F)(10) for the tax year at issue in MacDonald) provides that no municipal corporation may tax “employee compensation that is not ‘qualifying wages’ as defined in [RC] 718.03.” Qualifying wages are defined in RC 718.03(A) as those wages, within the meaning of Section 3121(a) of the Internal Revenue Code of 1986, as amended, that are subject to Social Security withholding tax. Such wages are generally reported in Box 5 of a taxpayer’s IRS Form W-2. Qualifying wages therefore include nonqualified deferred compensation plan benefits that are subject to Social Security withholding tax, except where a municipal corporation has, under RC 718.03(A)(2)(c), exempted such amounts from taxation pursuant to resolution or ordinance.
It was uncontested in MacDonald that the SERP was a nonqualified deferred compensation plan and that the taxpayer’s SERP benefits were subject to Social Security withholding tax upon his retirement from NCC in 2006. It was also uncontested that the City had not, by resolution or ordinance, expressly exempted from its income tax nonqualified deferred compensation plan benefits that were subject to Social Security withholding tax. Notwithstanding the lack of an express exemption for nonqualified deferred compensation plans, the taxpayer asserted that his SERP benefits constituted a pension and were therefore exempt from City income tax on that basis, because the City’s codified income tax ordinances excluded pension benefits from taxation.
The City did not define the meaning of “pension” in its codified income tax ordinances or otherwise, so the BTA looked to the language of the SERP, which stated that its purpose was to “provide for the payment of certain pension, disability and survivor benefits in addition to benefits which may be payable under other plans . . . .” Because the SERP described itself as a supplemental pension plan and the City exempted pensions from its income tax, the BTA held that the SERP was a nontaxable pension, even though it was also a nonqualified deferred compensation plan that the City had not expressly excepted from taxation.
In reaching this holding, the BTA distinguished Wardrop v. City of Middletown Income Tax Review Board, Butler County App. No. CA2007-09-235 (Oct. 13, 2008). The 12th District Court of Appeals held in Wardrop that a nonqualified deferred compensation plan was not a pension, within the meaning of the City of Middletown’s codified income tax ordinances, and was therefore subject to Middletown income tax. The BTA attributed the differing holdings in MacDonald and Wardrop to the fact that, unlike the SERP, the nonqualified deferred compensation plan at issue in Wardrop did not identify itself as a pension.
It remains to be seen whether the BTA’s holding in MacDonald will be sustained on appeal. An affirmance would allow codified municipal income tax ordinances that call for the taxation of nonqualified deferred compensation plan benefits as qualifying wages to be disregarded where these ordinances also exempt, but do not define, pension benefits. An affirmance would thus violate the cannon of statutory construction that potentially conflicting statutes must be interpreted so that each is given effect and that neither is rendered meaningless. The BTA could have followed this cannon in MacDonald by holding that the exemption from City income tax for pension benefits does not extend to amounts that, like the SERP benefits, are subject to City income tax as qualifying wages under RC 718.03. The BTA did not, however, analyze a reconciliation of the City’s codified income tax ordinances that would have given meaning to each of the ordinances at issue, rather than making one of the ordinances devoid of any meaning, which is the precise effect of the holding in MacDonald. This cannon was recognized by the 12th District Court of Appeals in Wardrop, which noted that it would be ignoring the provisions of the Middletown codified income tax ordinances that mandated taxation of nonqualified deferred compensation plan benefits were it to hold that the nonqualified deferred compensation plan was a tax-exempt pension under the Middletown codified income tax ordinances.
It is interesting to note that Ohio House Bill 5, the municipal income tax overhaul bill introduced on January 30, 2013, would, if enacted, amend RC 718.01 to provide that pension benefits are exempt from municipal income tax, except to the extent that the benefits are included in qualifying wages, whether as nonqualified deferred compensation plan benefits or otherwise. Thus, under Ohio HB 5, the SERP benefits at issue in MacDonald would be subject to municipal income tax.
In light of the present uncertainty engendered by MacDonald, a municipal corporation that exempts pensions from its income tax but that intends to tax nonqualified deferred compensation plan benefits should consider an amendment of its codified income tax ordinances to adopt the approach set forth in Ohio HB 5 and clarify that, for purposes of the municipal corporation’s income tax, a pension does not include amounts that are subject to taxation as qualifying wages under RC 718.03.