Franklin L. Hartman v. City of Cleveland Heights
| Decision Date | 11 August 1994 |
| Docket Number | 94-LW-4245,66074 |
| Parties | FRANKLIN L. HARTMAN, Plaintiff-Appellant v. CITY OF CLEVELAND HEIGHTS, Defendant-Appellee |
| Court | Ohio Court of Appeals |
Civil appeal from Common Pleas Court Case No. 237504.
FOR PLAINTIFF-APPELLANT: ERIC H. ZAGRANS, ESQ., CYNTHIA L CORBETT, ESQ., 2600 Bank One Center, 600 Superior Avenue East, Cleveland, Ohio 44114.
FOR DEFENDANT-APPELLEE: R. TODD HUNT, ESQ., Assistant Director of Law, City of Cleveland Heights, 40 Severance Circle, Cleveland, Heights, Ohio 44118.
Plaintiff Franklin L. Hartman appeals from the judgment of the trial court which affirmed the determination of the Cleveland Heights Board of Tax Appeals that Hartman's exercise of a stock option given by his employer is subject to municipal taxation. For the reasons set forth below, we affirm.
The record reveals that the plaintiff is a resident of the City of Cleveland Heights (hereafter referred to as the "city") and that he is employed by Cleveland-Cliffs, Inc. in Cleveland, Ohio (hereafter referred to as "Cleveland-Cliffs"). In 1987, Cleveland-Cliffs granted plaintiff an option to purchase shares of its common stock. On June 13, 1988, Hartman purchased 1,415 shares of the common stock pursuant to the option. It is undisputed that in accordance with the terms of the option, plaintiff paid less for the stock than the market price quoted on the New York Stock Exchange, and it is also undisputed that plaintiff retained the stock throughout 1988.
Plaintiff subsequently filed his 1988 federal income tax return and declared as income the difference between the market value of the stock on the day he purchased it and the price he paid pursuant to the terms of his option. This sum was also included on plaintiff's W-2 Wage and Tax Statement prepared by Cleveland-Cliffs. Hartman did not report this sum as part 'of his 1988 earnings on his municipal income tax return, however.
On September 14, 1990, the city's income tax division informed plaintiff that it considered plaintiff's exercise of the option to be "compensation earned" which was therefore subject to municipal income tax. Plaintiff paid the assessed tax under protest and asserted that the option yielded an unrealized gain derived from "intangible property" which was therefore excluded from the city's definition of taxable income. On October 15, 1991, the city's tax administrator affirmed the city's determination.
On October 21, 1991, plaintiff appealed to the city's Board of Tax Appeals. In his post-hearing brief, plaintiff maintained that his employer's grant of the stock option represented the grant of an "intangible property right" which is not income under the city's tax code. Plaintiff further maintained that his exercise of the stock option did not constitute taxable "compensation *** earned and accrued" because "[i]ncome, if any, in this case accrues only when the stock is sold and the proceeds of the sale are fixed and ascertainable." In its post-hearing brief, the city maintained that pursuant to its municipal ordinance, "all salaries, wages, commissions, and other compensation earned and received, or earned and accrued" are subject to taxation, and "other compensation" is specifically defined to include "Non-qualified stock options" such as the one at issue. The city further relied upon the Rice v. Montgomery (March 26, 1990), Hamilton C.P. No. A-8906983, unreported, in which the court determined that income gained from an employee's exercise of stock options constitutes earned compensation which may be taxed by a municipality.
The Board of Tax Appeals concluded that plaintiff's exercise of the stock option was earned compensation which was subject to taxation by the city, and on August 20, 1992, plaintiff appealed the decision of the Board of Tax Appeals to the court of common pleas, in accordance with R.C. 2506.01. The matter proceeded upon the transcript of the prior administrative proceedings and the arguments of counsel, and on July 29, 1993, the trial court affirmed the decision of the Board of Tax Appeals. Plaintiff now appeals to this court, and presents three assignments of error for our review.
Plaintiff's first assignment of error states:
O.R.C SECTION 718.01(F) PROHIBITS MUNICIPAL TAXATION OF "INCOME ARISING FROM THE OWNERSHIP, SALE, EXCHANGE OR OTHER DISPOSITION OF INTANGIBLE PROPERTY" SUCH AS A STOCK OPTION.
With regard to procedure, we note that in appeals brought pursuant to R.C. Chapter 2506, the trial court is limited to a determination of whether the order appealed from is unconstitutional, illegal, arbitrary, capricious, unreasonable, or unsupported by the preponderance of substantial, reliable and probative evidence on the whole record. Roseman v. Reminderville (1984), 14 Ohio App.3d 124, 128.
With regard to whether the exercise of the stock options was improperly taxed, and hence whether the order appealed from was illegal, we note that the City of Cleveland Heights Income Tax Rules and Regulations provide in relevant part as follows:
With regard to the precise character of an employee's exercise of a stock option which he has received from his employer, we note that in Rice v. Montgomery, supra, [reversed on other grounds, (Jan. 22, 1992), Hamilton App. No. C-900350 unreported] the court held that an employee's receipt of stock options from his employer was a form of compensation which could be taxed by a municipality without violation of R.C. 718.01(F). The court stated:
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