Ohio upholds municipal tax of stock options


On May 25, 2021, the Ohio Supreme Court ruled that the income from a taxpayer’s exercise of stock options earned while employed in, and a resident of the City of Cleveland (City) was subject to municipal income tax, even though the taxpayer was not an employee or a resident of the City when the options were exercised.1






While employed at Sherwin-Williams, Hazel Willacy was granted 2,715 compensatory stock options. At the time of the grant in 2007, Willacy both worked and resided within the City. Willacy retired and moved to Florida in 2009 without having exercised any of the options. She exercised 2,115 of the options in 2014 and 2015 and immediately resold the shares at market prices. Willacy exercised the remaining 600 options in 2016 and realized income of almost $125,000. As required by City income tax regulations, Sherwin-Williams withheld and remitted income taxes on the proceeds to the City, which Willacy protested on the grounds that she was neither living nor working in the City at the time of exercise, and sought a refund of the withheld amount. In prior litigation between Willacy and the City, the Ohio Supreme Court ruled in favor of the City for the stock options exercised in 2014 and 2015 (Willacy I).2 The instant case, Willacy II, addressed the exercise of stock options in 2016. The Ohio Board of Tax Appeals (BTA) held that the City’s taxation of Willacy’s 2016 income was proper. Willacy appealed the BTA’s decision to the Ohio Supreme Court.




City could tax stock option income after taxpayer moved from state


The Ohio Supreme Court followed its prior decision in Willacy I and held that the City could impose municipal income tax on the stock options that Willacy exercised in 2016. Willacy protested the City’s taxation of the stock options that she exercised in 2016 on three fronts. First, she argued that taxation of the income was barred under Cleveland Codified Ordinance 191.1701 (CCO 191.1701) because the City failed to bring suit within the prescribed three-year period following the later of the due date or actual filing date. However, the Ohio Supreme Court disagreed with this argument and followed its reasoning in Willacy I that the income-producing event of earning compensation did not need to coincide with the taxable event of receiving income. As such, the City was not statutorily required to tax the income within three years of 2007 (the year of grant). Rather, the City could tax the stock option income in 2016, the year it was realized. Given that the City’s tax administrator made the assessment in November 2017, the Court ruled the assessment was valid and timely under CCO 191.1701.

Second, Willacy argued that the tax administrator of Cleveland violated the Due Process Clause of the United States Constitution and the Due Course of Law Clause of the Ohio Constitution since the City taxed her income in a year in which she did not work in the City. The Court had previously ruled against Willacy on this matter in Willacy I, where it decided that the City met the twofold test for determining whether a taxing authority exceeded its jurisdiction. The first test, the requirement of a minimum connection between the City and Willacy, was met as the stock option income subject to tax was due to work performed in the City. The second test, the requirement of a rational relationship between the income that was subject to tax and the income-producing activity, was met because the compensation was allocated to the City, the place where the employee performed the work. In making this argument, Willacy both contested the ruling in Willacy I and tried to distinguish the facts between the cases by asserting that the stock options exercised in Willacy II were not compensatory as in Willacy I. The Court, however, was unmoved by these arguments.

Third, Willacy argued that the City was bound by the collateral estoppel doctrine of res judicata.3 Under res judicata (“a matter judged”), once a matter has received final judgment, the same parties cannot re-litigate the same claims again. In order for res judicata to be invoked, the previously litigated claims raised (or that could have been raised) must be identical; the litigating parties must be the same; and the previously litigated claim must have received a final judgment on its merits. Collateral estoppel is an aspect of res judicata that prevents the same parties from re-litigating the same issues a second time. In prior years, the City refunded tax amounts similarly withheld on the exercise of stock options while Willacy was no longer a resident of the City. However, in these years (2010–2012), there were no judicial proceedings underlying the refunded taxes, and there was no evidence that the refunded amounts resulted from a judgment or adjudication. As such, the Court ruled that it was impermissible to invoke res judicata on the previous refunds, as her exercise of stock options in those years was not litigated in a proceeding of a judicial nature.




Dissenting opinion


One dissenting justice opined that the taxation of Willacy’s income from 2016 violates the Due Process Clause, explaining “that there must be ‘some minimal geographic and temporal connection’ between an Ohio municipality, the person, and the income it seeks to tax.” According to the justice, the connection between Willacy and the City was “nonexistent” because by the time the City imposed its tax in 2016, Willacy had not been a resident or worker in the City for over seven years. The justice encouraged the legislature “to put a stop to extraterritorial taxation like this.”






The outcome of Willacy II is unsurprising, as other cases within and outside Ohio have considered and concluded similarly on option exercise cases.4 On July 1, 2021, the Ohio Governor signed the fiscal year 2022-2023 budget, which provides clarification of the previous temporary employer withholding requirement.5 The budget legislation partially reverses the previous temporary employer withholding requirements enacted on March 27, 2020 by H.B. 197, Sec. 29, which requires employers to withhold employee wages at the employee’s “principal place of work” during the COVID emergency, meaning the employee’s historic office work location instead of the employee’s physical location when working from home. The budget provides that for the 2021 tax year, employee withholding should mirror the location where the work is being completed, which in many instances is remotely from the employee’s residence as a result of workers no longer commuting to their principal place of business during the continued pandemic precautions. Further, Willacy II deeply underscores the need for clarity, as it suggests that it will have ramifications for current and deferred compensation alike.



Willacy v. Cleveland Bd. of Income Tax Review, Ohio Supreme Court, No. 2020-0795, May 25, 2021.
Willacy v. Cleveland Bd. of Income Tax Review, 151 N.E.3d 561 (Ohio 2020).
Whitehead v. Gen. Tel. Co., 254 N.E.2d 10 (Ohio 1969), overruled in part on other grounds, Grava v. Parkman Twp., 653 N.E.2d 226 (Ohio 1995).
Salibra v. Mayfield Hts. Mun. Bd. of Appeal, 58 N.E.3d 452 (Ohio Ct. App. 2016); Wardrop v. Middletown Income Tax Rev. Bd., Ohio Court of Appeals, 12th App. Dist., No. CA2007-09-235, Oct. 13, 2008; Hartman v. Cleveland Hts., Ohio Court of Appeals, 8th App. Dist., No. 66074, Aug. 11, 1994.
5 H.B. 110, Laws 2021.





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