Hickey v. City of Toledo

• Decision Date: 15 June 2001
• Docket Number: No. L-01-1009.,L-01-1009.
• Citation: 143 Ohio App.3d 781,758 NE 2d 1228
• Parties: HICKEY, Appellant, v. CITY OF TOLEDO, Appellee.
• Court: Ohio Court of Appeals

143 Ohio App.3d 781

758 NE 2d 1228

HICKEY, Appellant, v. CITY OF TOLEDO, Appellee.

No. L-01-1009.

Court of Appeals of Ohio, Sixth District, Lucas County.

Decided June 15, 2001.

Charles J. Hickey, pro se.

Barbara E. Herring, Director of Law, and Jeffrey S. Colturi, Assistant Director of Law, for appellee.

SHERCK, Judge.

This appeal comes to us from a judgment of the Lucas County Court of Common Pleas. There, a taxpayer appealed from the imposition of city income tax on monetary proceeds derived from the exercise of stock options. Because we conclude that the recognized gain from the sale of stock was nontaxable intangible income, we reverse.

In 1987, appellant, Charles J. Hickey, was a high-ranking official of Owens-Illinois Company ("0-I") when it was acquired by a subsidiary of the New York investment firm of Kohlberg, Kravis and Roberts. After the acquisition, Kohlberg took the company "private," meaning that O-I's shares would no longer be publicly traded. In the fall of 1987, the new company offered certain key O-I employees, including appellant, the opportunity for equity participation.

Appellant accepted the offer for equity participation, and on December 28, 1987, under a "subscription agreement" purchased 6,679 shares of O-I stock for $5 a share. With the stock purchase appellant also acquired 33,221 options to purchase additional shares of O-I stock at the same price. A separate "Stock Option Agreement" governing this acquisition was executed the day of the purchase agreement. The option agreement provided for the expiration of the options as follows:

"Section 3.2-Expiration of Option

"The Option may not be exercised to any extent by anyone after the first to occur of the following events:

"(a) The expiration of ten (10) years and one (1) day from the date the Option was granted; or

"(b) Until December 28, 1992, 120 days after the time of the Employee's Termination of Employment unless such Termination of Employment results from (i) his death, (ii) his permanent disability or (iii) his retirement at age 65 or over after having been employed by the Company or a Subsidiary for at least three (3) years after the date the Option was granted; or

"(c) After December 28, 1992, the time of the Employee's Termination of Employment unless such Termination results from death, disability or retirement as provided in paragraph (b) above; or

"(d) The expiration of one (1) year from the time of the Employee's Termination of Employment by reason of (i) his death, (ii) his permanent disability or (iii) his retirement at age 65 or over after having been employed by the Company or a Subsidiary for at least three (3) years after the date the Option was granted;

"* * *

On December 28, 1987, appellant was approximately six months from his sixtyfifth birthday. He did not, however, retire from O-I until December 31, 1989.

Shortly after his retirement, appellant entered into an "engagement agreement" with O-I to act as an attorney on retainer to the company for a two-year period commencing January 1, 1990. Concurrent with this agreement, O-I and appellant agreed to an "amendment" of the 1987 stock option agreement, which substituted the words "engagement agreement" for "employment" in the provisions of section 3.2.

According to appellant, he completed his legal work for O-I on June 28, 1991. On that date, appellant entered into a second amended stock option agreement with O-I. This agreement deleted references in the option agreement to "employment" and "engagement." In place of that language, this amended agreement added a provision making the options expire at "anytime at which appellant shall commit an Act Injurious to the Company." Another amendment defined "Act Injurious to the Company" as "unapproved competition" with O-I.

On January 14, 1997, appellant exercised his option on the 33,321 shares of O-I stock. Appellant purchased the shares for $166,605. On the date of purchase, the shares had a market value of $745,724. During this transaction, O-I withheld $13,030.17 for city of Toledo income tax. On April 14, 1998, appellant filed his Toledo income tax return, requesting a refund of the $13,000 as having been erroneously withheld. When Toledo's Tax Commissioner denied the request for a refund, appellant appealed the decision to the city's Income Tax Board of Review.

Although the board of review held a hearing on appellant's petition for a refund, the matter was principally presented through agreed stipulations of fact and agreed exhibits. The board of review, relying on Rice v. Montgomery (1995), 104 Ohio App.3d 776, 663 N.E.2d 389, found that the stock options had originally been given to appellant as compensation and were, therefore, taxable as income at the time of their exercise. Consequently, the board affirmed the Tax Commissioner's denial of appellant's application for refund.

Appellant appealed the board of review's decision to the Lucas County Court of Common Pleas, pursuant to R.C. Chapter 2506. The common pleas court granted appellant's request for a hearing to present additional evidence. Eventually, the court, in a fifty-four page decision, affirmed the prior administrative decision. From that judgment, appellant now brings this appeal, setting forth the following eight assignments of error:

"Procedural errors of Trial Court:

"Error No. 1: The plain language of Tol.Mun.Code sec. 1905.13 required the Board of Review to have Rules Of Procedure for the Appellant's hearing which the Board did not provide; the resulting decision was illegal under RC sec. 2506.04 and should not have been affirmed by the Trial Court.

"Error No. 2: A majority of members of the Board presented an appearance of unfairness and impartiality. Without an appearance of fairness and impartiality Federal due process requirements were violated; the resulting decision was unconstitutional under RC sec. 2506.04 and should not have been affirmed by the Trial Court. The Board hearing was not open to the public.

"Error No. 3: As the Board Hearing and Board decision are illegal or unconstitutional, pursuant to the plain language of RC sec. 2506.04 and applicable cases the Trial Court should not have given a presumption of correctness or any deference or weight to the Board's decision and should not have affirmed the Board's decision.

"Substantive errors of Trial Court:

"Error No. 4: Contrary to the requirements of Section 5, Article XII of the Ohio Constitution, the legislative intent of Tol.Mun Code sec 1905.03(A) and prior cases there is no specific and distinct language in Tol.Mun Code sec 1905.03(A) that would permit a tax on the value of stock options in the year when they are exercised rather than to tax stock options under the general rule that the value of taxable property is taxed in the year when it is received. RC sec 718.01(G) sic was violated by the City.

"Error No. 5: The Trial Court erred when it disregarded the binding legal effect of the Stipulation Of Facts, disregarded material paragraphs of such Stipulation defining the terms of the 1987, 1989 and 1991 stock option contracts and substituted its own construction of such contracts in holding that the 1987 Options continued in existence to 1997.

"Error No. 6: The Stipulation Of Facts corroborated by testimony, shows the 1987 Option contract expired on October 10, 1988. The 1987 Options could not have been and were not exercised in 1997.

"Error No. 7: Under Tol.Mun.Code sec. 1905.03(A) the 1991 Options were taxable, if at all, in 1991, the year when they were received as they were immediately exercisable, irrevocable and therefore vested in 1991. The 1991 Options had a fair market value of $10.37 per share when received determined by a generally accepted accounting method. The Trial Court in error failed to find the Statute of Limitations now bars additional assessments for 1991.

"Error No. 8: Conclusions: When viewed as a whole Errors No. 1 to No. 7 show the Trial Court abused its discretion. The abuse of discretion in Error No. 5 when viewed alone supports reversal. The preponderance of the evidence shows there is no tax liability for 1997."

I

In his first two assignments of error, appellant complains that the common pleas court should have reversed the board of review's tax determination because the board had not adopted procedures required by ordinance and because the composition of the board, which included the city Law Director and the city Director of Finance, created an appearance of impropriety.

For there to be reversible error of a decision made at any stage of any proceeding, it must operate to the prejudice of the party complaining of the error. Civ.R. 61; Cappara v. Schibley (1999), 85 Ohio St.3d 403, 408, 709 N.E.2d 117, 121, citing Hallworth v. Republic Steel Corp. (1950), 153 Ohio St. 349, 41 O.O. 341, 91 N.E.2d 690, paragraph three of the syllabus.

In this matter, appellant has failed even to allege prejudice from the improprieties which he suggests occurred. Furthermore, our own examination of the record fails to reveal any matter which appellant put forth for the board's consideration which was not considered or the inclusion of any matter to which appellant objected. Moreover, any impropriety at the administrative level was cured by the common pleas court when it agreed to accept additional testimony during the R.C. Chapter 2506 appeal. Accordingly, appellant's first and second assignments of error are not well taken.

II

In his third assignment of error, appellant argues that the common pleas court should not have afforded the board of review's decision any deference, because the decision was "illegal." Appellant insists that the decision was "illegal" because of the improprieties he enumerates in his first two assignments of error. As this assignment is dependent on the success of one or more of the prior two assignments of error, it, too, is not well taken.

III

Turning to appellant's "substantive" assignments of...