MacDonald v. Shaker Hts. Bd. of Income Tax Rev. (Slip Opinion)

[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as

MacDonald v. Shaker Hts. Bd. of Income Tax Rev., Slip Opinion No. 2015-Ohio-3290.]

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. 2015-OHIO-3290

MACDONALD ET AL., APPELLEES, v. SHAKER HEIGHTS BOARD OF INCOME TAX

REVIEW, APPELLEE; THE CITY OF SHAKER HEIGHTS ET AL., APPELLANTS.

[Until this opinion appears in the Ohio Official Reports advance sheets, it

may be cited as MacDonald v. Shaker Hts. Bd. of Income Tax Rev.,

Slip Opinion No. 2015-Ohio-3290.]

Taxation—Appeals——R.C. 5717.011—Standard of review for appeal to Board of

Tax Appeals pursuant to R.C. 5717.011 is de novo as to both facts and

law.

(No. 2014-0574—Submitted June 24, 2015—Decided August 19, 2015.)

APPEAL from the Court of Appeals for Franklin County, No. 13AP-71,

2014-Ohio-708.

____________________

SYLLABUS OF THE COURT

The standard of review for an appeal to the Board of Tax Appeals pursuant to

R.C. 5717.011 is de novo as to both facts and law.

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SUPREME COURT OF OHIO

O’NEILL, J.

{¶ 1} Before retiring as of December 31, 2006, William E. MacDonald III

was an executive of the former National City Corporation in Cleveland. National

City offered a “supplemental executive retirement plan” or “SERP” for its

executives. Although for some tax purposes the SERP constituted an “unqualified

deferred compensation plan,” MacDonald did not make contributions during his

employment to fund the plan. As he neared retirement, MacDonald selected an

option under that plan consisting not of a lump-sum payout but rather an annuity

that would make periodic payments designed to replace a percentage of his

income once he was no longer working.

{¶ 2} Because of MacDonald’s retirement and his SERP election, in

preparing MacDonald’s W-2 tax document, National City included an amount in

box 5 (the “Medicare wages” box) that reflected the present value of his future

annuity payments which was $9,107,014. But National City deliberately omitted

this amount from box 18 of the W-2, which is the “local wages” box pertaining to

municipal income tax, and accordingly the MacDonalds did not pay Shaker

Heights income tax on that amount.

{¶ 3} The substantive issue presented and decided below—first by the city

tax administrator, then by the municipal tax board, the Board of Tax Appeals

(“BTA”), and the Tenth District Court of Appeals, in that order—is whether, for

tax year 2006, the present value of MacDonald’s future annuity payments

qualifies as taxable wages or as a “pension” under a Shaker Heights ordinance

that exempts pensions from the municipal income tax. The city—both the tax

administrator and the municipal tax board—held that the amount at issue were

subject to municipal income tax. The BTA reversed, and the Tenth District

affirmed the BTA.

{¶ 4} On appeal to this court, the city sought to raise two issues: the

substantive issue whether the tax was properly levied on the benefits at issue, and

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a procedural issue whether the BTA violated a duty of deference to the

determination of the municipal tax board. We declined jurisdiction over the

substantive issue, but we accepted jurisdiction over the procedural issue. 139

Ohio St.3d 1470, 2014-Ohio-3012, 11 N.E.3d 1192.

{¶ 5} Accordingly, the substantive tax issue is not before this court, and

we consider only the standard of review that the BTA should employ when it

confronts an appeal pursuant to R.C. 5717.011 from a municipal income tax

review board. The appellants are the city of Shaker Heights, the income tax

administrator for the city, and the Regional Income Tax Agency (“RITA”), which

administers the municipal income tax on behalf of the city. For convenience, we

will refer to the appellants collectively as “the city.”

{¶ 6} The city argues that when the General Assembly enacted R.C.

5717.011 in 2003, authorizing appeal to the BTA in addition to the preexisting

right of appeal to the common pleas courts under R.C. Chapter 2506, the

legislature must have intended that the BTA review decisions of the municipal tax

boards using the same standard of review that applies under R.C. Chapter 2506.

We disagree. Because there is no indication of any such intent in R.C. 5717.011,

and because that section parallels the other statutes providing for appeals to the

BTA at R.C. 5717.01 and 5717.02, we hold that the BTA’s standard of review

under R.C. 5717.011 is de novo as to both facts and law. We therefore affirm the

judgment of the Tenth District Court of Appeals.

COURSE OF PROCEEDINGS BELOW

The tax assessment against the MacDonalds

{¶ 7} This case originated with the filing of the MacDonalds’ 2006

municipal income tax return. As discussed, MacDonald retired from his

executive position at National City as of December 31, 2006. He selected, as

indicated, a SERP annuity option, and as a result, its present value of $9,107,013

was reported on the W-2 form, but not as wages for municipal income tax

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purposes. RITA issued a tax assessment, which the MacDonalds contested. Their

initial appeal was unsuccessful; the municipal tax appeal board upheld the

assessment.

The BTA proceedings and decision

{¶ 8} The MacDonalds appealed to the BTA, which held a hearing on

September 9, 2010. On December 28, 2012, the BTA issued its decision, which

held that the amount at issue was exempt from taxation under the pension

exclusion in the Shaker Heights tax ordinance.

{¶ 9} The BTA did address the issue of its standard of review in passing.

The board cited Tetlak v. Bratenahl, 92 Ohio St.3d 46, 748 N.E.2d 51 (2001), for

the proposition that the municipal tax board’s findings should be presumed valid.

It also noted that this court had not yet ruled on the standard of review under the

newly enacted provision for appealing to the BTA rather than the common pleas

court. Id. at *2.

{¶ 10} Because the BTA had ruled in favor of the MacDonalds, it was

now the city’s turn to appeal, and it elected to appeal to the Tenth District Court

of Appeals. See R.C. 5717.04. The case was briefed and argued, and on February

27, 2014, the Tenth District issued its decision. In a two-to-one opinion for the

court, Judge Klatt recited the history of the case and the nature of the income at

issue and addressed the two assignments of error. The first assignment concerned

the merits, and the Tenth District affirmed the BTA’s approach and

determination. A second assignment objected to the BTA’s permitting further

testimony on appeal and its conducting “de novo review” of the municipal tax

board’s decision. Here the Tenth District held that the restrictive review under

R.C. Chapter 2506 did not apply because the BTA appeal statute, R.C. 5717.011,

had materially different language and should not be read as incorporating those

restrictions.

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January Term, 2015

{¶ 11} The city appealed to this court, seeking review on both points. We

accepted jurisdiction over the procedural issue only.

R.C. 5717.011 REFLECTS THE GENERAL ASSEMBLY’S INTENT TO MAKE DE NOVO

BTA REVIEW AVAILABLE IN MUNICIPAL INCOME TAX CASES

Before 2003, municipal income tax cases were appealable under R.C. Chapter

2506 to the common pleas courts, but not to the BTA

{¶ 12} R.C. Chapter 2506 generally provides for appeals to the common

pleas court from administrative decisions by officers and agencies, including

boards, of any political subdivision in Ohio. R.C. 2506.01(A). This has long

included appeals from decisions of municipal tax boards. See, e.g., May Dept.

Stores Co. v. Parma Taxation Div., 8th Dist. Cuyahoga App. No. 49844, 1985

WL 4353 (Dec. 12, 1985). Beginning in 2003, the legislature created an

alternative route of appeal to the BTA. R.C. 5717.011, Am.Sub.H.B. No. 95,

125th General Assembly, 150 Ohio Laws, Part II, 1894-1895.

{¶ 13} Appeals taken under R.C. Chapter 2506 go to the common pleas

court, and the hearing of the appeal “shall proceed as in the trial of a civil action,”

except that the court is confined to the evidentiary transcript created before the

administrative authority below unless one of five criteria is present—all of which

relate to some deficiency in the proceedings below. R.C. 2506.03(A). Finally,

the standard of review prescribed by R.C. Chapter 2506 is deferential on issues of

fact, though it is generally plenary on issues of law. See R.C. 2506.04:

[T]he [common pleas] court may find that the order, adjudication,

or decision is unconstitutional, illegal, arbitrary, capricious,

unreasonable, or unsupported by the preponderance of substantial,

reliable, and probative evidence on the whole record. Consistent

with its findings, the court may affirm, reverse, vacate, or modify

the order, adjudication, or decision, or remand the cause to the

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officer or body appealed from with instructions to enter an order,

adjudication, or decision consistent with the findings or opinion of

the court.

{¶ 14} The oft-quoted formulation of the standard of review under R.C.

2506.04 comes from a case that involved a common pleas court’s review of a

decision terminating the employment of a city employee:

[I]t is quite evident that the Court of Common Pleas must

weigh the evidence in the record, and whatever additional evidence

may be admitted pursuant to R.C. 2506.03, to determine whether

there exists a preponderance of reliable, probative and substantial

evidence to support the agency decision. We caution, however, to

add that this does not mean that the court may blatantly substitute

its judgment for that of the agency, especially in areas of

administrative expertise.

Dudukovich v. Lorain Metro. Housing Auth., 58 Ohio St.2d 202, 207, 389 N.E.2d

1113 (1979).

Even under R.C. Chapter 2506, an administrative agency’s construction of local

tax ordinances is reviewed de novo by the courts

{¶ 15} One aspect of R.C. 2506.04 must be noted at the outset. On its

face, the statute calls for review of the administrative decision for its

constitutionality and legality—and there is no restriction placed upon that power

of review. This contrasts with R.C. 2506.04’s treatment of factual issues, which

calls for review of the administrative decision to determine whether it is

“arbitrary, capricious, unreasonable, or unsupported by the preponderance of

substantial, reliable, and probative evidence on the whole record.” The appellate

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January Term, 2015

decisions in tax cases do not indicate that any deference is owed to the municipal

tax board on issues of law. See Cincinnati Bengals, Inc. v. Papania, 92 Ohio

App.3d 785, 787-788, 637 N.E.2d 330 (1st Dist.1993) (affirming the common

pleas court’s reversal of income tax assessment on the legal ground that the

income at issue constituted “intangible income” exempt from city tax pursuant to

the ordinance); Cincinnati Bell Tel. Co. v. Cincinnati, 1st Dist. Hamilton Nos. C-

950931, C-950932, and C-950933, 1996 WL 733154, *1 (Dec. 24, 1996) (“on

issues of law this court conducts a de novo review”), rev’d on other grounds, 81

Ohio St.3d 599, 693 N.E.2d 212 (1998); Wardrop v. Middletown Income Tax

Review Bd., 12th Dist. Butler No. CA2007-09-235, 2008-Ohio-5298, ¶ 14 (“The

trial court’s application of law to undisputed facts involves a ‘question of law’

that we may review under R.C. Chapter 2506”). Quite simply, neither the statute

nor the case law provides support for the city’s argument that any deference

would be owed by the common pleas court to the municipal tax board on a

question of law. As a result, even if the BTA’s standard of review under R.C.

5717.011 were equivalent to that of the common pleas court under R.C. 2506.04,

the BTA would still review legal issues without deference.

{¶ 16} It follows that the city’s main argument here is unavailing to the

extent that the BTA’s decision addressed a question of law. Here the BTA

construed and applied the Shaker Heights ordinance and determined that the

amount reported in Box 5 of MacDonald’s W-2 form that related to the SERP

constituted a “pension” under that ordinance. The BTA acted within the proper

sphere of its authority to review the determination of the municipal tax board in

light of its own interpretation of the local law.

R.C. 5717.011 tracks other BTA appeal statutes, and like them, it confers

authority on the BTA to conduct de novo review as to both law and facts

{¶ 17} At oral argument, the city’s counsel characterized the BTA’s

decision as a “factual determination” that the lump sum at issue constituted a

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“pension” under the local ordinance. As discussed, the BTA resolved the issue

before it based on legal grounds, by construing and applying the city’s ordinance

to essentially undisputed facts.

{¶ 18} But even if the BTA’s decision is seen as a factual finding, it would

still have been appropriate for the BTA to conduct a de novo review of the

determination of the municipal tax board. This conclusion arises from a reading

of two sources of legal authority: the statutes and the case law.

{¶ 19} The statute providing for appeals to the BTA from the boards of

revision, R.C. 5717.01, and the statute providing for appeals from the tax

commissioner, R.C. 5717.02(E), both contain language nearly identical to the

statute at issue here, R.C. 5717.011, which states:

The [BTA] may order the appeal to be heard upon the record and

the evidence certified to it by the tax administrator, but upon the

application of any interested party the [BTA] shall order the

hearing of additional evidence, and the [BTA] may make such

investigation concerning the appeal as it considers proper.

R.C. 5717.011(D).

{¶ 20} R.C. 5717.03(F) adds the following contours to the BTA’s

authority:

The orders of the [BTA] may affirm, reverse, vacate, modify, or

remand the tax assessments, valuations, determinations, findings,

computations, or orders complained of in the appeals determined

by the board, and the board’s decision shall become final and

conclusive for the current year unless reversed, vacated, or

modified [on appeal].

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January Term, 2015

{¶ 21} We have had occasion to fill in the blanks with case law. Unlike

the rulings on questions of law discussed previously, we have held that factual

issues in the tax area are confided to the administrative tribunals that are charged

by statute to hear and decide tax cases. See Health Care REIT, Inc. v. Cuyahoga

Cty. Bd. of Revision, 140 Ohio St.3d 30, 2014-Ohio-2574, 14 N.E.3d 1009, ¶ 19,

quoting Cuyahoga Cty. Bd. of Revision v. Fodor, 15 Ohio St.2d 52, 239 N.E.2d 25

(1968), syllabus (“ ‘The fair market value of [real] property for tax purposes is a

question of fact, the determination of which is primarily within the province of the

taxing authorities’ ”); accord Aluminum Co. of Am. v. Kosydar, 54 Ohio St.2d

477, 483, 377 N.E.2d 785 (1978). Moreover, the BTA itself constitutes one of

those “taxing authorities,” with an independent duty to weigh evidence and make

findings to which this court will defer. Strongsville Bd. of Edn. v. Cuyahoga Cty.

Bd. of Revision, 112 Ohio St.3d 309, 2007-Ohio-6, 859 N.E.2d 540, ¶ 22 (the

value of property for tax purposes is a question of fact that is primarily within the

province of the taxing authorities, and this court will ordinarily defer to the BTA

on that issue); Sapina v. Cuyahoga Cty. Bd. of Revision, 136 Ohio St.3d 188,

2013-Ohio-3028, 992 N.E.2d 1117, ¶ 15; Vandalia-Butler City Schools Bd. of

Edn. v. Montgomery Cty. Bd. of Revision, 130 Ohio St.3d 291, 2011-Ohio-5078,

958 N.E.2d 131, ¶ 13 (noting the duty of the BTA to independently weigh

evidence and reach its own independent judgment concerning property value). In

the same way, the BTA’s review of tax-commissioner determinations, factual as

well as legal, is de novo in character. Key Servs. Corp. v. Zaino, 95 Ohio St.3d

11, 16, 764 N.E.2d 1015 (2002), citing Higbee Co. v. Evatt, 140 Ohio St. 325,

332, 43 N.E.2d 273 (1942) (“The BTA hearing is de novo”). Also, “[t]he BTA

may investigate to ascertain further facts and make its own findings independent

of those of the Tax Commissioner.” Key Servs., id., citing Nestle Co., Inc. v.

Porterfield, 28 Ohio St.2d 190, 193, 277 N.E.2d 222 (1971).

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{¶ 22} R.C. 5717.011 was enacted in 2003 and was numbered so as to fall

between the statutes for appeals from decisions of boards of revision and the tax

commissioner, R.C. 5717.01 and 5717.02. It follows the form of words in those

two other appeal statutes, which have been construed to call for de novo review

and independent judgment by the BTA in the cases appealed to it. Moreover,

under appeal statutes outside R.C. Chapter 5717, the BTA possesses similar de

novo review authority in appeals from decisions of the county budget

commissions. See R.C. 5705.341, fourth paragraph (in a taxpayer appeal from the

budget commission to the BTA, the BTA has broad authority to modify the

budget commission’s action on the fixing of tax rates, and when it chooses to

modify the commission’s action, “[t]he findings of the board of tax appeals shall

be substituted for the findings of the budget commission * * *”); R.C. 5705.37 (in

an appeal by a taxing district, public library, park district, or nonprofit from a

decision of the county budget commission to the BTA, the BTA may, “in a de

novo proceeding, * * * modify any action of the commission”). An exception is

specifically noted in the statutes: R.C. 5747.53(G) (decisions of a county budget

commission involving an alternative method of apportionment may be appealed to

the BTA only “on the issues of abuse of discretion and failure to comply with the

formula”).

{¶ 23} Under all these circumstances, we conclude that in creating a right

to appeal to the BTA from municipal tax boards, and in not specifying any

limitation on the BTA authority on appeal, the General Assembly intended to

confer on the BTA the authority to conduct de novo review in the context of

appeals under R.C. 5717.011. It follows that the standard of review at the BTA in

this case was de novo both as to facts and law, and as a result, the city’s argument

in this appeal must fail. Whether the BTA’s decision in this case is understood

primarily as a legal ruling on what constitutes a “pension” under the city

ordinance, or as a fact-based application of the pension exclusion, the BTA

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properly exercised its own independent judgment in determining the facts and the

law.1 Without expressing any opinion on the substantive question of tax law, on

which we declined jurisdiction, we uphold the judgment below based on our

disposition of the issue of the BTA’s standard of review.

CONCLUSION

{¶ 24} For the foregoing reasons, we affirm the judgment of the Tenth

District Court of Appeals.

Judgment affirmed.

O’CONNOR, C.J., and PFEIFER, O’DONNELL, LANZINGER, KENNEDY, and

FRENCH, JJ., concur.

_________________________

Baker & Hostetler, L.L.P., Christopher J. Swift, Edward J. Bernert, and

Elizabeth A. McNellie, for appellees William and Susan MacDonald.

William M. Ondrey Gruber, Director of Law, for appellant Shaker Heights

and Matthew J. Rubino, Tax Administrator.

Amy L. Arrighi, for appellant Regional Income Tax Agency.

Zaino, Hall & Farrin, Richard C. Farrin, and Stephen K. Hall, urging

affirmance for amici curiae Ohio Chamber of Commerce and Ohio Society of

Certified Public Accountants.

Barbara A. Langhenry, Director of Law, and Linda A. Bickerstaff,

Assistant Director of Law, urging reversal for amicus curiae city of Cleveland.

_________________________

1

At oral argument, counsel for RITA properly disclaimed any contention that the BTA’s authority

to hear new evidence was restricted in the same manner as the common pleas court’s authority

under R.C. Chapter 2506. Under R.C. 2506.03(A), the common pleas court is “confined to the

transcript.” R.C. 5717.011(D) on its face requires the BTA, “upon the application of any

interested party,” to “order the hearing of additional evidence.” This authority to hear additional

evidence is also part of the neighboring BTA appeal statutes, and we have confirmed that it means

what is says. Brown v. Levin, 119 Ohio St.3d 335, 2008-Ohio-4081, 894 N.E.2d 35, ¶ 10-11.

11