Ralston Purina Company v. Leggett

• Decision Date: 30 May 2000
• Citation: 23 S.W.3d 697
• Parties: (Mo.App. E.D. 2000) . Ralston Purina Company, et al., Appellants, v. Ronald A. Leggett, Collector of Revenue, City of St. Louis, Missouri, Respondent. Case Number: ED76702 Missouri Court of Appeals Eastern District Handdown Date: 0
• Court: Missouri Court of Appeals

23 S.W.3d 697 (Mo.App. E.D. 2000)

This slip opinion is subject to revision and may not reflect the final opinion adopted by the Court.

Ralston Purina Company, et al., Appellants, v. Ronald A. Leggett, Collector of Revenue, City of St. Louis, Missouri, Respondent.

Case Number: ED76702

Missouri Court of Appeals Eastern District

Handdown Date: 05/30/2000

Appeal From: Circuit Court of the City of St. Louis, Hon. Philip D. Heagney

Counsel for Appellant: Thomas C. Walsh, John P. Barrie and Mark B. Leadlove

Counsel for Respondent: Patricia A. Hageman, James J. Wilson and Patricia L. Wendling

Opinion Summary: Appellants, Ralston Purina Company, Eveready Battery Company, Protein Technologies International, and approximately 70 executive and key employees of these corporations, ("appellants"), appeal the judgment of the Circuit Court of the City of St. Louis, holding that non-qualified stock options granted to employees as part of their compensation, are subject to the City of St. Louis' earnings tax. We affirm.

AFFIRMED.

Division One Holds: 1) The trial court did not err in holding that non-qualified stock options granted to employees as part of their compensation packages are subject to the City of St. Louis' earning tax. 2) The trial court did not err in finding that the Collector's method of valuing such income, as measured by the difference between the market price of the stock at the time of exercise and the market price of the stock at the time the options are granted is a permissible means of measuring such income.

Opinion Author: Gary M. Gaertner, Presiding Judge

Opinion Vote: AFFIRMED. Pudlowski and J. Dowd, JJ., concur.

Opinion:

Appellants, Ralston Purina Company,¹ Eveready Battery Company,² Protein Technologies International,³ and approximately 70 executive and key employees of these corporations, ("appellants"), appeal⁴ the judgment of the Circuit Court of the City of St. Louis, holding that non-qualified stock options granted to employees as part of their compensation, are subject to the City of St. Louis' earnings tax. We affirm.

In 1997, the 70 employee-appellants, executives, and key employees of Ralston,⁵ exercised non-qualified stock options ("stock options")⁶ previously granted to them under the 1988 Ralston Incentive Stock Plan. All of the individual appellants were employed in the City of St. Louis at all relevant times.

Generally, a non-qualified stock option consists of three significant events: 1) the granting of the stock option by the employer; 2) the vesting of the right to exercise the stock option; and 3) the exercising of the stock option by the employee. A non-qualified stock option is a right granted to an employee in exchange for services. The stock options granted to individual appellants, gave them the right to purchase a certain number of shares of Ralston's common stock at the grant price, which is equal to the fair market value of the common stock at the time of the granting of the stock options. No money is paid for the stock options and there is no capital outlay for the option. According to the Ralston plan, the purpose of granting stock options is to attract, retain, and motivate officers and other key employees who make important contributions to the success of the company.

Non-qualified stock options are earned from the time of grant and on a continuing basis as long as the employee remains employed with Ralston. Only current employees are eligible to receive a stock option grant, and they must remain employed for a substantial period of time in order for the options to vest. Some of the options vest based on the passage of time alone, and some of the options have performance measures associated with the vesting schedule. The stock options that are granted pursuant to the program may not be sold or encumbered. Under the plan, if an employee voluntarily terminates employment prior to vesting, the employee forfeits his or her option. If an employee, whose option has vested, voluntarily terminates employment, the employee will either forfeit the right to exercise the options or have a shortened period of time in which to exercise the options.

The stock options are not subject to the respective federal or Missouri state income tax when granted. However, each individual appellant receives ordinary income for federal and Missouri state income tax purposes, at the time the stock option is exercised, in an amount equal to the excess of the fair market value, at the date of the exercise over the grant price of common stock acquired ("option income"). The total option income from the 1997 stock option exercise totaled approximately $27.5 million, with individual option income ranging from approximately $3,500 to $6.1 million.

Prior to 1997, Ralston withheld and paid without protest Earnings Taxes to the City of St. Louis. However, on the 1997-option exercise income, Ralston paid the City taxes under protest. The option income amounts were deducted as expenses of compensation for Ralston for 1997, for purposes of federal and state income taxation, as well as for City earnings tax purposes. Within 90 days thereafter, appellants timely filed suit against City Collector, naming him as the defendant herein, pursuant to section 139.031, RSMo 1994.⁷

The case went to trial on July 21, 1998. On May 13, 1999, the trial court filed its Findings of Fact, Conclusions of Law, and Judgment. The trial court entered judgment for the City Collector, holding that non-qualified stock options granted to employees as part of their compensation packages, are subject to the City of St. Louis' earnings tax. The trial court also held that the Collector's method of valuing such income, as measured by the difference between the market price of the stock at the time of exercise, and the market price of the stock at the time the options are granted, is a permissible means of measuring such income.

Appellants appealed to the Supreme Court in each of the three consolidated cases. The appeals were transferred to this court by the Supreme Court.

On their sole point on appeal, appellants argue the trial court erred in ruling that appellants were liable for earnings tax based on the "spread" between the market price of the stock at the time of exercise, and the market price of the stock at the time the options are granted. Appellants argue that the spread is not earned income because it represents a gain in the stock price attributable to numerous market factors and does not constitute wages, commissions, and other compensation earned by appellants for work done or services performed or rendered in the City. We disagree.

In reviewing a court-tried case, appellate courts will sustain the judgment of the trial court unless there is no substantial evidence to support it, unless it is against the weight of the evidence, unless it erroneously declares the law, or unless it erroneously applies the law. Murphy v. Carron, 536 S.W.2d 30, 32 (Mo.banc 1976). "We accept the evidence and inferences favorable to the prevailing party and disregard all contrary evidence." Lake Cable, Inc. v. Trittler, 914 S.W.2d 431, 434 (Mo.App.E.D. 1996). While we defer to the trial court for findings of fact, we independently evaluate the court's conclusions of law. Id. We will reverse the trial court's judgment if it is based on an erroneous application of the law. Connor v. Bruce, 983 S.W.2d 625, 628 (Mo.App.S.D. 1999).

Section 92.110 authorizes the City of St. Louis:

to levy and collect, by ordinance, for general revenue purposes, an earnings tax on the salaries, wages, commissions and other compensation earned by its residents; on the salaries, wages, commissions and other compensation earned by nonresidents of the city for work done or services performed or rendered in the city.

Pursuant to the enabling statute, the City of St. Louis enacted section 5.22, which levies an earning tax on "salaries, wages, commissions, and other compensation" by City residents and by nonresidents of the City, for work done or services rendered in the City. Revised Code of the City of St. Louis (1994). Section 5.23 levies the companion payroll expense tax. Id.

Income subject to the earning tax...