The Supreme Court of Ohio ruled today that a Worthington couple is entitled to a refund plus interest from the City of Worthington for income tax they paid over several years on investment income that was not subject to taxation under former city ordinances. In a unanimous decision authored by Justice Terrence O’Donnell, the court overturned a decision by the Ohio Board of Tax Appeals.
 
James and Angeline Gesler filed city income tax returns in 2005, 2006, and 2007 that included income of more than $2.9 million through the exercise of stock options provided to Mr. Gesler as compensation for work he did for clients in his business as a certified public accountant. The amount of tax paid on this income was estimated to be $60,000.

After questioning whether he owed this tax, Mr. Gesler paid it and concluded that he and his wife had in fact not been required to report the stock option income on their return, and they filed a request for a refund plus interest. The request was denied by the city, and the Geslers appealed this decision to the City of Worthington Income Tax Board of Appeals. After a hearing and consideration of briefs from both sides, the board denied the refund, and the Geslers appealed to the Ohio Board of Tax Appeals, which upheld the decision to deny the Geslers a refund. They appealed to the Ohio Supreme Court.

A provision of the former Worthington income tax law, Cod. Ord. 1703.01(c)(1), imposes a 2 percent income tax on “the net profits earned on and after January 1, 2004, of all unincorporated businesses, professions or other activities conducted by residents of the City ….” Former Cod. Ord. 1701.15 defines “net profit” as “for a taxpayer other than an individual, the adjusted federal taxable income and ‘net profit’ for a taxpayer who is an individual means the individual’s profit, other than amounts required to be reported on Schedule C, Schedule E, or Schedule F.” Since income from stock options is reported on Schedule C of the federal income tax form, Mr. Gesler reasoned that the city ordinance explicitly exempted this income from the definition of net profit and therefore was not subject to the income tax.

The Board of Tax Appeals ruled that former Cod. Ord. 1701.15 was unlawful because it was “in direct contravention” with a provision of Ohio state law, R.C. 718.01(A)(7), and “the Ohio General Assembly’s expression must be deemed to govern the present situation.”

Former R.C. 718.01(E) states “... no municipal corporation may tax or use as the base for determining the amount of the net profit ... an amount other than the net profit required to be reported by the taxpayer on schedule C ....”

The Supreme Court concluded that the BTA’s decision was unreasonable and unlawful.  The court also noted however in its opinion that the ordinance in question has since been amended to include Schedule C income.  

Justice O’Donnell wrote, “since the imposition of a municipal tax is an exercise of a power of local self-government and the General Assembly does not limit or restrict the exercise of municipal taxing authority in this case, we need not determine whether a conflict exists between the former Worthington ordinances and the state statutory provisions.”

He concluded: “The former Worthington ordinances at issue excluded Schedule C income from the definition of net profits, and therefore, the Geslers’ Schedule C income for the years at issue is excluded from municipal tax … Accordingly, we reverse the determination of the BTA as being unreasonable and unlawful and order that the Geslers are entitled to the refund they seek, together with statutory interest.”

2012-2105. Gesler v. Worthington Income Tax Bd. of Appeals, Slip Opinion No. 2013-Ohio-4986.

View oral argument video of this case.

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