On May 25, 2021, the Ohio Supreme Court (“Court”) issued its decision in Willacy v. Cleveland Bd of Income Tax Review, 2021-Ohio-1734. If the name sounds familiar, it’s likely because the Court decided a similar case in February 2020 (“Willacy I”) discussed in an earlier SALT Buzz. Both cases involve the exercise of stock options by Hazel Willacy, a retired employee of Sherwin-Williams Company in Cleveland, Ohio, who moved to Florida prior to exercising the options. In the more recent decision (“Willacy II”), the Court again denied Ms. Willacy’s claim that the income from the stock option exercise – this time her 2016 exercise rather than her 2014-15 exercises – was not subject to Cleveland municipal income tax because Ms. Willacy did not live or work in Cleveland in the year of exercise.
In Willacy II, the Court rejected all three propositions of law from Ms. Willacy’s appeal. The first was that Cleveland’s assessment was time-barred by Cleveland Codified Ordinance 191.1701, which limits the issuance of an assessment to within three years of when the city income tax was due. Since the taxable event was the exercise of the options in 2016, as distinguished from the income-producing activity, which ended in 2009, the 2017 assessment was not untimely. The second proposition of law was that the assessment violates Ms. Willacy’s due process rights under the U.S. and Ohio constitutions, and that Willacy I, which rejected this claim, should be overruled. The Court did not find Ms. Willacy’s arguments that Willacy I was wrongly decided to be persuasive, nor did it accept her attempt to factually distinguish the cases. The third proposition of law was that Cleveland may not tax her 2016 stock-option income under the collateral-estoppel aspect of the doctrine of res judicata. In the Court’s words, this doctrine “may be used to bar relitigation of an issue that was decided in an administrative proceeding if the proceeding was ‘of a judicial nature.’” Willacy II, ¶ 18 (internal citation omitted). Although Willacy was issued refunds in 2010, 2011, and 2012 of tax paid on her stock-option income, she was not able to show in the current litigation “that there were any administrative proceedings resembling a judicial trial concerning [those years] or that Cleveland issued the refunds in response to a judgment or adjudication.” In the absence of such a showing, the Court found that collateral estoppel does not apply to Cleveland’s actions.
In Willacy I, Justice Fischer wrote a lengthy dissent, explaining his view that the gap in time between the earning of Ms. Willacy’s stock-options and the exercise of those options while living well outside the taxing jurisdiction is sufficient to make the city’s imposition of the tax at the later date violative of constitutional due process. In Justice Fischer’s view, “due process necessarily implies that there is a temporal limit on when the state (or the municipality) can . . . impose a tax on a nonresident and his or her income.” Willacy I, ¶ 52. In Willacy II, Justice Fischer again dissents, noting that after the passage of seven years since the income was earned, with at least one state line and “about a thousand miles” between Willacy and the city of Cleveland, “any connection here between Willacy and the city of Cleveland was less than minimal, it was nonexistent.” Willacy II, ¶ 27. In a colorful answer to the question of whether Cleveland may nonetheless tax this income, Justice Fischer writes: “Because this is not the Marvel Cinematic Universe, and, unlike Thanos, the city of Cleveland is bound by the rules of time, space, and the Due Process Clause, I believe the answer to that question is still a resounding no.” Willacy II, ¶ 25. The other six justices, however, did not see a violation of either metaphysics or due process, and the assessment was upheld.
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