Willacy v. Cleveland Bd. of Income Tax Rev. (Slip Opinion)

[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as
Willacy v. Cleveland Bd. of Income Tax Rev., Slip Opinion No. 2020-Ohio-314.]

NOTICE
This slip opinion is subject to formal revision before it is published in an
advance sheet of the Ohio Official Reports. Readers are requested to
promptly notify the Reporter of Decisions, Supreme Court of Ohio, 65
South Front Street, Columbus, Ohio 43215, of any typographical or other
formal errors in the opinion, in order that corrections may be made before
the opinion is published.

SLIP OPINION NO. 2020-OHIO-314
WILLACY, APPELLANT, v. CLEVELAND BOARD OF INCOME TAX REVIEW ET
AL., APPELLEES.

[Until this opinion appears in the Ohio Official Reports advance sheets, it
may be cited as Willacy v. Cleveland Bd. of Income Tax Rev., Slip Opinion No.
2020-Ohio-314.]
Municipal income tax—Stock options employee received as compensation while
working in Cleveland were not exercised until after employee retired and
moved out of state—Exercise of stock options generated taxable qualifying
wages under Cleveland Codified Ordinances—Cleveland properly imposed
income tax on the stock-option income.
(No. 2018-0794—Submitted July 9, 2019—Decided February 4, 2020.)
APPEAL from the Board of Tax Appeals, No. 2017-513.
_______________________
Per Curiam.
{¶ 1} Appellant, Hazel M. Willacy, was employed by the Sherwin-Williams
Company in Cleveland from 1980 until she retired in 2009 and moved to Florida.
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During Willacy’s employment, Sherwin-Williams compensated her, in part, with
stock options. When she exercised some of those options in 2014 and 2015,
Cleveland collected income tax on their value. Willacy appeals from the denial of
her claim for refunds. This case presents the question whether Cleveland may tax
the options as income when Willacy did not work or live in the city during the tax
years at issue.
{¶ 2} Willacy primarily argues that Cleveland’s imposition of the tax violated
due process. She also raises nonconstitutional arguments. We conclude that
Willacy’s arguments lack merit and hold that Cleveland properly taxed the
compensation she received in 2014 and 2015.
I. FACTS AND PROCEDURAL HISTORY
{¶ 3} In 2007, when Willacy was working in Cleveland, Sherwin-Williams
granted her options to purchase 2,715 shares of Sherwin-Williams common stock at
$63.44 a share. The terms of the grant created a nine-year window for Willacy to
exercise the options: she could first exercise them after one year, and they would
expire on the tenth anniversary of the grant date. In 2009, Willacy retired and became
a Florida resident.
{¶ 4} In 2014, Willacy exercised the options by purchasing 315 shares at the
option price and immediately selling them at a market price of $192.646 a share,
generating proceeds of more than $40,000. As required under Cleveland Codified
Ordinances 191.1302(a), Sherwin-Williams withheld Willacy’s municipal income-
tax obligation (2 percent of the proceeds) and paid it to Cleveland. In 2015, Willacy
again exercised her options by purchasing 1,800 shares at the option price and
immediately selling them at a market price of $275 a share, generating proceeds of
more than $377,000. Sherwin-Williams again withheld Willacy’s municipal income-
tax obligation. There is no dispute that Willacy did not live or work in Cleveland in
2014 or 2015.

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{¶ 5} Willacy sought refunds from Cleveland based on the fact that she had
resided in Florida during tax years 2014 and 2015. Cleveland’s income-tax
administrator, appellee Nassim M. Lynch, denied the refund requests. Willacy
appealed that decision to appellee Cleveland Board of Income Tax Review, which
affirmed the denial of the refunds. She then appealed to the Board of Tax Appeals
(“BTA”), which also affirmed the denial. Willacy appealed the BTA’s decision to
the Tenth District Court of Appeals, and we granted her petition to transfer the appeal
to this court under former R.C. 5717.04, 2017 Am.Sub.H.B. No. 49. 153 Ohio St.3d
1485, 2018-Ohio-3867, 108 N.E.3d 83.
II. ANALYSIS
{¶ 6} Willacy raises three propositions of law. In her first proposition, she
argues that Cleveland’s tax laws, as applied to her, violate the Due Process Clause of
the United States Constitution and the Due Course of Law Clause of the Ohio
Constitution. Her second proposition of law reiterates some of those due-process
arguments and also raises separate nonconstitutional arguments addressing why, in
her view, Cleveland lacked authority to tax her 2014 and 2015 stock-option income.
Willacy’s third proposition of law asserts an additional nonconstitutional argument.
A. Standard of review
{¶ 7} We must determine whether the BTA’s decision is reasonable and
lawful. R.C. 5717.04. In doing so, we defer to the BTA’s factual findings, so long
as they are supported by reliable and probative evidence in the record. Am. Natl. Can
Co. v. Tracy, 72 Ohio St.3d 150, 152, 648 N.E.2d 483 (1995). But we review legal
issues de novo. Pi In The Sky, L.L.C. v. Testa, 155 Ohio St.3d 113, 2018-Ohio-
4812, 119 N.E.3d 417, ¶ 11. Because Willacy is not challenging the BTA’s factual
findings, our review is de novo.

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B. Nonconstitutional issues
1. Willacy’s exercise of the stock options generated taxable
“qualifying wages”—not nontaxable “intangible income”
{¶ 8} Cleveland imposes its income tax on “all qualifying wages, earned
and/or received * * * by nonresidents of the City for work done or services performed
or rendered within the City or attributable to the City.” Cleveland Codified
Ordinances 191.0501(b)(1). See also Cleveland Codified Ordinances 191.0101(a)
(levying municipal income tax on “qualifying wages”). Under Cleveland Codified
Ordinances 191.031501, qualifying wages include “compensation arising from the
sale, exchange or other disposition of a stock option, the exercise of a stock option,
or the sale, exchange or other disposition of stock purchased by the stock option.”
See also former R.C. 718.03(A)(2)(b)(ii), 2012 Am.Sub.H.B. No 386, eff. June 11,
2012 (now R.C. 718.01(R)(2)(b)) (defining “qualifying wages” to include
compensation attributable to the exercise of employee stock options unless exempted
by ordinance or resolution). Regulation 3:01(B)(8), promulgated by Cleveland’s tax-
administration authority, provides that when a stock option is exercised, “regardless
of the treatment by the Internal Revenue Service, the employer is required to withhold
on the difference between the fair market value upon sale, exchange, exercise or other
disposition of the stock option and the amount paid by the employee to acquire the
option. The entire difference shall be allocated to and taxable by the employment
city.”1
{¶ 9} Willacy does not dispute that she received the stock options in 2007 as
compensation for employment services she provided to Sherwin-Williams. Thus,

1. Willacy argues that Regulation 3:01(B)(6) applies instead of Regulation 3:01(B)(8). Regulation
3:01(B)(6) applies when “compensation [was] paid or received in property,” while Regulation
3:01(B)(8) applies when “[s]tock options [were] given as compensation.” Because Regulation
3:01(B)(8) is the more specific rule, it applies here. See MacDonald v. Cleveland Income Tax Bd.
of Rev., 151 Ohio St.3d 114, 2017-Ohio-7798, 86 N.E.3d 314, ¶ 27 (“when there is a conflict
between a general provision and a more specific provision in a statute, the specific provision
controls”).

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under Cleveland law, Willacy’s stock options were taxable qualifying wages when
she exercised them in 2014 and 2015. And consistent with Cleveland law, Sherwin-
Williams withheld and paid to Cleveland Willacy’s tax obligation, calculated based
on the difference between the option price and the exercise price.
{¶ 10} This is a settled approach to imposing income tax on stock options. In
Commr. of Internal Revenue v. LoBue, 351 U.S. 243, 247, 76 S.Ct. 800, 100 L.Ed.
1142 (1956), the court concluded that when an employer transfers options to an
employee based on the services the employee has provided, the transfer constitutes
compensation. And in Rice v. Montgomery, 104 Ohio App.3d 776, 663 N.E.2d 389
(1st Dist.1995), a municipality had measured the value of stock options based on the
difference between the option and market prices at the time the options were
exercised. The First District Court of Appeals upheld that method of valuing the
stock options, explaining:

Quantifying the value of a stock option at the time of its grant is a
complex task, subject to the vagaries of market forecast and
compounded by the fact that no ready market can exist for
nontransferable stock options. The I.R.S. resolves the difficulty of
valuing a nontransferable stock option by waiting until the option is
exercised, at which time there is a recognition of income equal to the
difference between the option price and the fair market value of the
stock at the time of the exercise. At the moment that the income is
recognized, a fair market value can be assigned to the stock option.
***
We find nothing in the general law of Ohio or in the
[municipality’s] tax ordinance and regulations which precludes the
city taxing authority from employing the same methodology of
valuing a stock option as does the I.R.S.

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Id. at 781. Other Ohio courts have followed the same approach. See Salibra v.
Mayfield Hts. Mun. Bd. of Appeal, 10th Dist. Franklin No. 14AP-890, 2016-Ohio-
276, ¶ 22-23; Wardrop v. Middletown Income Tax Rev. Bd., 12th Dist. Butler No.
CA2007-09-235, 2008-Ohio-5298, ¶ 43-47; Hartman v. Cleveland Hts., 8th Dist.
Cuyahoga No. 66074, 1994 WL 422284, *4 (Aug. 11, 1994).
{¶ 11} Willacy nevertheless argues that her income does not constitute
qualifying wages but rather is “intangible income” derived from the sale of intangible
property. Intangible income, unlike qualifying wages, is exempt from income
taxation under state law and Cleveland municipal law. See former R.C.
718.01(H)(3), 2013 Am.Sub.H.B. No. 51, eff. July 1, 2013 (now R.C. 718.01(C)(2))
(generally prohibiting municipal taxation of “intangible income”); former R.C.
718.01(A)(5), 2013 Am.Sub.H.B. No. 51, eff. July 1, 2013 (now R.C. 718.01(S))
(defining “intangible income” to include “income yield, interest, capital gains,
dividends, or other income arising from the ownership, sale, exchange, or other
disposition of intangible property”); Cleveland Codified Ordinances 191.0901(i)
(exempting “[i]nterest, dividends, gains, and other revenue from intangible property
described in [former] R.C. 718.01(A)(5)”); Cleveland Codified Ordinances
191.031001 (“ ‘intangible income’ means that income specified in R.C. [former]
718.01(A)(5)”).
{¶ 12} Willacy primarily relies on Hickey v. Toledo, 143 Ohio App.3d 781,
787, 758 N.E.2d 1228 (6th Dist.2001), in which the Sixth District Court of Appeals
stated that a “stock option is intangible property.” But she fails to acknowledge that
the Hickey court, relying on Rice, went on to state that “when stock options are
received by an employee as compensation, they may be properly taxed as
compensation.” Id. Because Willacy does not dispute that she earned the options as
compensation, she has not shown that her proceeds should be classified as intangible
income.

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{¶ 13} Willacy also suggests that the profit from the options must be
classified as intangible income based on her status as a nonresident retiree. But she
provides no support for the proposition that the classification of income may change
based on the recipient’s change in employment status and residency. We therefore
reject this argument.
2. Cessante ratione legis cessat et ipsa lex is a common-law principle
that cannot be used to abrogate municipal ordinances
{¶ 14} As explained above, Cleveland law provides that stock-option
compensation is taxed at the time the options are exercised. In her third proposition
of law, Willacy argues that we should “abolish” that law because, she contends,
“advances in the fields of economics and accounting” (i.e., development of the
“Black-Scholes algorithm” and the “binomial options pricing model”) now allow
options to be valued when they are granted, thus making it unnecessary to wait until
options are exercised before taxing them. She invokes the maxim cessante ratione
legis cessat et ipsa lex (when the reason for a legal rule ceases, the law itself must
cease). In response, appellees argue that based on how Willacy’s wages were
reported, it could not have taxed her differently, and that in any event, it uses a “far
superior” method than the method she proposes.
{¶ 15} We need not determine whether valuation and taxation at the time of
the grant was possible or preferable, because the cessante ratione principle is rooted
in common law and does not apply to applications of statutory law. See Funk v.
United States, 290 U.S. 371, 383-385, 54 S.Ct. 212, 78 L.Ed. 369 (1933). In all of
the cases that Willacy cites in which we relied on cessante ratione, we cited the
maxim in concluding that a common-law rule either should be abandoned or held not
to apply under the facts presented. See Lathrop Co. v. Toledo, 5 Ohio St.2d 165, 176,
214 N.E.2d 408 (1966); Borland’s Lessee v. Marshall, 2 Ohio St. 308, 316-317
(1853); Simmons v. State, 7 Ohio 116, 117 (1835). Although Willacy also cites a
court-of-appeals case that did involve the applicability of a statute, that court did not

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endorse the abrogation of legislation altogether (as Willacy would have us do). See
Grogan Chrysler-Plymouth, Inc. v. Gottfried, 59 Ohio App.2d 91, 95, 392 N.E.2d
1283 (6th Dist.1978), fn. 4. In Grogan, the court simply concluded that the statute
did not apply under the facts presented. Id.
{¶ 16} We have long refrained from assuming a legislative role. See, e.g.,
Morris Coal Co. v. Donley, 73 Ohio St. 298, 303-304, 76 N.E. 945 (1906). Contrary
to what Willacy suggests, the cessante ratione principle is not a license for us to
abolish parts of the Cleveland tax code simply because factual assumptions and
policy considerations underlying the law may have changed since its enactment.
Accordingly, we reject Willacy’s third proposition of law.
3. Willacy forfeited her remaining nonconstitutional arguments
{¶ 17} Willacy also argues that Cleveland must refund the tax under the
doctrine of res judicata because the city issued such refunds to her in earlier tax years,
that the tax is barred by a statute of limitations, and that Cleveland has not properly
adopted its Rules and Regulations. She failed to preserve these arguments before the
BTA. We therefore will not consider them. See Buckeye Internatl., Inc. v. Limbach,
64 Ohio St.3d 264, 267, 595 N.E.2d 347 (1992).
C. Constitutional issues
{¶ 18} In her first proposition of law, Willacy argues that multiple Cleveland
ordinances and regulations, as applied to her, violate federal and state due-process
protections by taxing income she received in tax years when she was not employed
or present in Cleveland. Relatedly, in her second proposition of law, Willacy invokes
Cleveland Codified Ordinances 191.0901(m), which provides that Cleveland’s
income tax “shall not be levied on * * * [c]ompensation and net profits, the taxation
of which is prohibited by the United States Constitution.”
{¶ 19} “Since 1887, this court has equated the Due Course of Law Clause in
Article I, Section 16 of the Ohio Constitution with the Due Process Clause of the
Fourteenth Amendment to the United States Constitution.” State v. Aalim, 150 Ohio

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St.3d 489, 2017-Ohio-2956, 83 N.E.3d 883, ¶ 15. Willacy does not argue that we
should separately analyze the federal and state constitutional provisions. Thus,
although she invokes the Ohio Constitution, our analysis is guided by caselaw
applying the federal Due Process Clause.
1. Collateral estoppel does not bar Cleveland from defending
the constitutionality of its tax laws
{¶ 20} Willacy first argues that collateral estoppel bars appellees’ arguments
concerning the due-process issue because, according to Willacy, we rejected those
arguments in Hillenmeyer v. Cleveland Bd. of Rev., 144 Ohio St.3d 165, 2015-Ohio-
1623, 41 N.E.3d 1164, and Saturday v. Cleveland Bd. of Rev., 142 Ohio St.3d 528,
2015-Ohio-1625, 33 N.E.3d 46. Collateral estoppel “precludes the relitigation, in a
second action, of an issue that has been actually and necessarily litigated and
determined in a prior action.” Whitehead v. Gen. Tel. Co., 20 Ohio St.2d 108, 112,
254 N.E.2d 10 (1969), overruled in part on other grounds, Grava v. Parkman Twp.,
73 Ohio St.3d 379, 653 N.E.2d 226 (1995). As Willacy and the appellees did not
previously litigate these claims in a prior action, collateral estoppel does not apply.
2. Cleveland’s taxation of Willacy’s income satisfies the
Due Process Clause’s twofold test
{¶ 21} Article XVIII, Section 3 of the Ohio Constitution authorizes
municipalities to impose an income tax. Angell v. Toledo, 153 Ohio St. 179, 91
N.E.2d 250 (1950), paragraph one of the syllabus. But that authority is limited by
the Due Process Clause, which requires a municipality to have jurisdiction before
imposing a tax. See Miller Bros. Co. v. Maryland, 347 U.S. 340, 342, 74 S.Ct. 535,
98 L.Ed. 744 (1954). We have referred to a municipality’s attempt to impose a tax
outside the scope of its jurisdiction as “extraterritorial taxation.” Hillenmeyer at
¶ 39-40.
{¶ 22} The Due Process Clause establishes a “twofold test” for determining
whether a taxing authority exceeded its jurisdiction. T. Ryan Legg Irrevocable Trust

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v. Testa, 149 Ohio St.3d 376, 2016-Ohio-8418, 75 N.E.3d 184, ¶ 64; Hillenmeyer at
¶ 40. Due process first requires “some definite link, some minimum connection”
between the local taxing authority “and the person, property or transaction it seeks to
tax.” Miller Bros. at 344-345. Second, it demands the presence of a rational
relationship between the income taxed by the jurisdiction and the income-producing
activity or property within that jurisdiction. See Moorman Mfg. Co. v. Bair, 437 U.S.
267, 273, 98 S.Ct. 2340, 57 L.Ed.2d 197 (1978). These inquiries involve distinct but
related concerns: While the former focuses on the presence of either in personam
jurisdiction over the taxpayer or in rem jurisdiction over her income or property, the
latter focuses on how much of a nonresident’s income the local taxing authority may
fairly reach.
{¶ 23} It is well established that regardless of the taxpayer’s residency status,
the first prong is satisfied when a state or locality imposes taxes on income arising
from work performed within the jurisdiction. In such cases, there is a sufficient
connection between the taxing entity and the taxed party. Hillenmeyer, 144 Ohio
St.3d 165, 2015-Ohio-1623, 41 N.E.3d 1164, at ¶ 42.
{¶ 24} The second part of the due-process test requires a determination of the
extent to which the nonresident’s income “is fairly attributable either to property
located in the state or to events or transactions which, occurring there, are subject to
state regulation and which are within the protection of the state and entitled to the
numerous other benefits which it confers.” Internatl. Harvester Co. v. Wisconsin
Dept. of Taxation, 322 U.S. 435, 441-442, 64 S.Ct. 1060, 88 L.Ed. 1373 (1944). The
question under this prong is whether the income sought to be taxed is fairly
attributable to the taxpayer’s activities in the taxing jurisdiction. Id. at 442. This
second prong comes up most prominently in cases in which the taxpayer has income
from multiple jurisdictions. In such cases, the taxing jurisdiction can reach only the
portion of the income that is reasonably associated with activity in that jurisdiction.
See Hillenmeyer at ¶ 46.

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{¶ 25} We confronted these due-process requirements in Couchot v. Ohio
State Lottery Comm., 74 Ohio St.3d 417, 659 N.E.2d 1225 (1996), a case involving
a Kentucky resident who won the Ohio lottery, with the prize payable in 20 annual
installments. Id. at 418. After redeeming his winning ticket in Columbus, Couchot
apparently never returned to Ohio. We upheld the tax against Couchot’s due-process
challenge, explaining that for a state to trigger its taxing power over a nonresident,
“there must be a connection between the state and what it seeks to tax, created in part
by the event or transaction that generated the gain.” Id. at 426. We found such a
connection because Couchot’s income arose from his participation in Ohio’s lottery.
See id. at 422, 426. We likewise determined that Couchot’s income was fairly
attributable to Ohio, because the state had incurred “social and governmental costs
* * * in generating the income of which Couchot [was] the fortunate beneficiary.”
Id. at 423. And we reached this conclusion despite the fact that the payments would
be made over a 20-year period. Id. at 425.
{¶ 26} More recently, we expressly applied the twofold test in addressing a
due-process challenge in Hillenmeyer, a case involving Cleveland’s imposition of
income tax on a nonresident professional football player. 144 Ohio St.3d 165, 2015-
Ohio-1623, 41 N.E.3d 1164, at ¶ 1-2, 40. Hillenmeyer’s minimum connection with
Cleveland was not at issue; he had engaged in income-producing activities by playing
games in the city. See id. at ¶ 1. That meant that Cleveland had jurisdiction over the
portion of his compensation that was earned for services performed in the city. Id. at
¶ 43. The main question in Hillenmeyer concerned whether Cleveland had fairly
determined the portion of Hillenmeyer’s income that was attributable to his work in
the city. See id. at ¶ 44. On that question, we held that “compensation must be
allocated to the place where the employee performed the work.” Id. at ¶ 45. We
concluded that Cleveland’s method for taxing nonresident professional athletes
violated due process because it imposed income tax on “compensation earned while
[the taxpayer] was working outside Cleveland.” Id. at ¶ 49.

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{¶ 27} Under this well-established standard, we conclude that Cleveland’s
taxation of Willacy’s stock-option income does not violate the Due Process Clause.
Here, the income came from work she performed in Cleveland, and she thus satisfies
the minimum-connection requirement. Because all the stock-option income was
compensation for that work, all the stock-option income is fairly attributable to her
activity in Cleveland.
{¶ 28} Notwithstanding this body of law, Willacy argues that due process
prohibits Cleveland from taxing a nonresident’s compensation if the nonresident did
not receive the income in the same tax year as the income-producing activities that
generated the income. But the claim that a due-process problem arises because of a
time gap between the income-producing activity and the imposition of a tax on
compensation for that activity has no basis in law, precedent, or common sense. The
fact that income was not received until some period after the income-producing work
was performed does not change the fact that the income arose from the income-
producing work. Once it was established that Willacy’s earnings from exercising the
options were compensation for her work in Cleveland, any due-process requirements
were satisfied. In fact, Willacy’s proposed rule is inconsistent with settled law
providing that the income-producing event (e.g., earning compensation) need not
coincide with the taxable event (e.g., receiving income). See MacLaughlin v.
Alliance Ins. Co., 286 U.S. 244, 250, 52 S.Ct. 538, 76 L.Ed. 1083 (1932) (“Congress,
having constitutional power to tax the gain, and having established a policy of taxing
it, may choose the moment of its realization and the amount realized, for the
incidence and the measurement of the tax” [citation omitted]); Couchot, 74 Ohio
St.3d at 426, 659 N.E.2d 1225 (“A state, having the power to tax by virtue of the
circumstance from which the income is derived, may choose the time the income is
received as the incidence and measurement of the tax”).
{¶ 29} In essence, what Willacy received was deferred compensation for her
Cleveland-based work. Neither the form of the compensation—stock options—nor

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the timing of the compensation—after she left the state—undercuts the fact that it is
fairly attributable to her work in Cleveland and hence subject to taxation by the city.
{¶ 30} Willacy resists this result by arguing that Cleveland lacks jurisdiction
over her property or activities because, she says, the property at issue (the stock
options) and her activities (her investment management) both were in Florida where
she resided. She cites the maxim mobilia sequuntur personam, which provides that
intangible property is taxed at the residence of the owner. See Goodyear Tire &
Rubber Co. v. Tracy, 85 Ohio St.3d 615, 619, 710 N.E.2d 686 (1999). Under this
theory, her residency when the stock appreciated is what matters. In the same vein,
she argues that Cleveland taxed her postretirement investment-management activity.
{¶ 31} Both arguments require an improper classification of Willacy’s
income. As discussed above, the income at issue is “qualifying wages,” not
“intangible income.” Mobilia sequuntur personam does not apply here, because
Cleveland is not taxing income derived from the sale of intangible property; it is
taxing Willacy’s compensation. And Willacy’s income-producing activity was the
work she performed in Cleveland to earn the options; the decisions she made while
in Florida did not generate the income. Accordingly, we reject Willacy’s argument
that Cleveland lacks jurisdiction.
{¶ 32} In a similar mode, Willacy suggests that most of the earnings are not
attributable to her Cleveland-based work, because much of the accrual in value of the
stock occurred after she moved to Florida. But this argument also fails. What
Willacy was given as compensation for her work were options. Like many assets,
options can vary in value over time. But this variability in value does not make them
less attributable to the work performed. The decision when to exercise the options
and thus pay taxes on her compensation was Willacy’s. Willacy could have exercised
the options and paid tax on their value any time after one year from the date they
were granted. The fact that Willacy chose to wait to exercise the options does not
change the fact that she earned the options through her work in Cleveland. Because

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the options were granted for work performed in Cleveland, it does not offend notions
of due process for Cleveland to tax the options based on the date that Willacy chose
to exercise the options.
{¶ 33} Willacy argues that it would have been preferable to tax the options in
the year that they were granted. But this is a policy argument, not a matter of due-
process. In retrospect, after a stock’s value has increased, many taxpayers would
prefer to have paid taxes based on the value of the option on the date it was granted.
But stocks do not always go up. Taxing a nontransferable option in the year it is
granted means that the taxpayer is forced to pay taxes on an asset that is not
generating any cash, and which the taxpayer cannot sell to pay the tax bill. The
alternative—taxing the value at the time the option is exercised—avoids that problem
but potentially results in higher taxes if the stock price goes up. There may be
sensible policy arguments for preferring one of these tax schemes over the other. But
that is not for this court to decide. And Willacy has pointed to no authority—and we
can find none—that suggests that due process requires a jurisdiction to make one of
these policy choices rather than the other. Indeed, courts in other jurisdictions have
rejected arguments similar to those Willacy makes here. See Allen v. Commr. of
Revenue Servs., 324 Conn. 292, 321-322, 152 A.3d 488 (2016); Ralston Purina Co.
v. Leggett, 23 S.W.3d 697, 701 (Mo.App.2000); See also Marchlen v. Mt. Lebanon,
560 Pa. 453, 460-461, 746 A.2d 566 (2000).
{¶ 34} We also reject Willacy’s related argument that Cleveland’s employer-
withholding requirement violates due process. This argument fails because the
United States Supreme Court has approved this type of indirect collection of a
nonresident’s tax obligation. See Internatl. Harvester, 322 U.S. at 444, 64 S.Ct.
1060, 88 L.Ed. 1373 (recognizing that “some practically effective device [may] be
necessary in order to enable the state to collect its tax,” such as “by imposing on the
corporation the duty to withhold the tax”).

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III. CONCLUSION
{¶ 35} We hold that Cleveland’s taxation of Willacy’s compensation in 2014
and 2015 was required under municipal law and did not violate her due-process
rights. We therefore affirm the decision of the BTA.
Decision affirmed.
O’CONNOR, C.J., and KENNEDY, FRENCH, DEWINE, DONNELLY, and
STEWART, JJ., concur.
FISCHER, J., dissents, with an opinion.
_________________
FISCHER, J., dissenting.
{¶ 36} Because I believe that due process requires some minimal
geographic and temporal connection between the state and the person or thing being
taxed and that such a connection is missing here, I respectfully dissent.
I. Background
{¶ 37} Options have a long and storied history dating back to at least the
17th century when Dutch tulip farmers started utilizing contracts that would give
buyers, in exchange for a premium paid upfront, the right—but not the obligation—
to purchase a future shipment of flower bulbs at a fixed price. Thompson, The
tulipmania: Fact or artifact?, 130 Public Choice 99, 101 (January 2007).
{¶ 38} Though the underlying assets are more complicated today than
flower bulbs, options continue to operate in much the same way and play an
increasingly important role in the modern economy. Banerji, Investors Flock to
Options Bets, Wall Street Journal (Sept. 30, 2019) (“Assets under management for
mutual and exchange-traded funds that use options strategies have jumped 24% this
year * * *. They hit a record $22 billion at the end of August”). Stock options, for
example, let companies provide their employees an attractive and alternative form
of compensation. See von Lilienfeld-Toal and Ruenzi, CEO Ownership, Stock
Market Performance, and Managerial Discretion, 69 Journal of Finance 1013

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(June 2014) (finding that companies run more efficiently and generate larger returns
for investors when their chief executive officers have equity in the company).
{¶ 39} When used as a form of compensation, however, stock options can
introduce certain constitutional concerns when tax time comes if the person being
taxed at the local level no longer resides in the city or state—that is, within the
jurisdiction—where the options were granted. This case illustrates the problems
inherent in those circumstances.
{¶ 40} In 2007, the Sherwin-Williams Company granted appellant, Hazel
Willacy, options to purchase 2,715 shares of its common stock at a strike price of
$63.44 a share. Long before exercising these options, Willacy retired and moved
to Florida. It was only after Willacy had resided in Florida for five years that the
city of Cleveland attempted to collect 2 percent of the proceeds when Willacy
exercised her options in 2014 and 2015.
{¶ 41} Believing that it was unconstitutional for a city that she did not reside
or work in to tax her, Willacy asked appellee the city’s tax administrator for a
refund. The tax administrator denied her request, and Willacy unsuccessfully
appealed the denial to appellee Cleveland Board of Income Tax Review and then
to the Board of Tax Appeals.
{¶ 42} The majority opinion ultimately concludes, as did the Board of Tax
Appeals, that the imposition of this tax on Willacy does not violate due process. I
respectfully disagree.
II. Analysis
{¶ 43} That states have the power to impose a tax on people, property, and
activities within their borders is without question. Shaffer v. Carter, 252 U.S. 37,
51-52, 40 S.Ct. 221, 64 L.Ed. 445 (1920); see also Hamilton, The Federalist No.
33 at 205 (Clinton Rossiter Ed.1961) (“the individual states * * * retain an
independent and uncontrollable authority to raise revenue to any extent of which
they may stand in need, by every kind of taxation, except duties on imports and

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exports”). Pursuant to Article XVIII of the Ohio Constitution, Ohio’s
municipalities also have the power to levy taxes. Thompson v. Cincinnati, 2 Ohio
St.2d 292, 294, 208 N.E.2d 747 (1965).
{¶ 44} The Due Process Clause of the Fourteenth Amendment to the United
States Constitution, nonetheless, places an important limit on the otherwise broad
power to tax by imposing several prerequisites that must be met before the state or
one of its municipalities may levy a tax. Hillenmeyer v. Cleveland Bd. of Rev., 144
Ohio St.3d 165, 2015-Ohio-1623, 41 N.E.3d 1164, ¶ 40. Among the prerequisites
is the requirement that there exist a “ ‘minimum connection, between a state and
the person, property or transaction it seeks to tax.’ ” Id., quoting Miller Bros. Co.
v. Maryland, 347 U.S. 340, 344-345, 74 S.Ct. 535, 98 L.Ed. 744 (1954).
{¶ 45} The sufficiency of this connection is determined by applying the test
announced in Internatl. Shoe Co. v. Washington, 326 U.S. 310, 66 S.Ct. 154, 90
L.Ed. 95 (1945), and asking whether the imposition of the tax would “ ‘offend
“traditional notions of fair play and substantial justice.” ’ ” Quill Corp. v. North
Dakota, 504 U.S. 298, 306-307, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992), overruled
on other grounds, South Dakota v. Wayfair, Inc., 585 U.S. __, __, 138 S.Ct. 2080,
2092-2093, 201 L.Ed.2d 403 (2018), quoting Internatl. Shoe at 316, quoting
Milliken v. Meyer, 311 U.S. 457, 463, 61 S.Ct. 339, 85 L.Ed. 278 (1940). In this
case, that means asking whether the person or thing subject to the municipal tax,
enjoys the benefits and protection of the laws of the municipality. It is on this
point—the sufficiency of the connection—that I respectfully disagree with the
majority opinion.
{¶ 46} The majority opinion concludes that Cleveland’s taxation of Willacy
was constitutional because “the income came from work she performed in
Cleveland” and “thus satisfies the minimum-connection requirement.” Majority
opinion at ¶ 27.

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{¶ 47} The problem I see here is the gap in time between when Sherwin-
Williams awarded Willacy the options as compensation and when Cleveland chose
to impose its tax. After all, as our sister court in Connecticut once observed, “it is
implicit in the due process test that the benefits afforded by the state * * * must
generally span the time period during which the income was earned, and not solely
antedate that time period without any continuing effect.” Chase Manhattan Bank
v. Gavin, 249 Conn. 172, 202-203, 733 A.2d 782 (Conn.1999).
{¶ 48} Several cases from the United States Supreme Court and this court
support the idea that, for a minimum connection to exist, the imposition of the tax
must occur as close in time as possible to the nonresident-taxpayer’s use and
enjoyment of the benefits and protections afforded by the municipality.
{¶ 49} In Shaffer, the United States Supreme Court stated that “[i]ncome
taxes are a recognized method of distributing the burdens of government, favored
because [they require] contributions from those who realize current pecuniary
benefits under the protection of the government * * *.” (Emphasis added.) Id., 252
U.S. at 51, 40 S.Ct. 221, 64 L.Ed. 445. The word “current” clearly does not apply
in this case.
{¶ 50} Likewise, in Internatl. Harvester Co. v. Wisconsin Dept. of Taxation,
322 U.S. 435, 64 S.Ct. 1060, 88 L.Ed. 1373 (1944), Justice Jackson—the author of
the United States Supreme Court’s opinion in Miller Bros., 347 U.S. 340, 74 S.Ct.
535, 98 L.Ed. 744, which guides this court’s analysis—specifically objected to a
state taxing a nonresident stockholder’s dividend “merely because some time in the
past a portion of the surplus [from which the dividend was paid] was earned in the
state.” (Emphasis added.) Internatl. Harvester, 322 U.S. at 445-451, 64 S.Ct. 1060,
88 L.Ed. 1373 (Jackson, J., dissenting).
{¶ 51} Finally, even in Hillenmeyer, in which this court concluded that a
municipality may constitutionally tax a nonresident’s compensation for services
performed within that locale, id., 144 Ohio St.3d 165, 2015-Ohio-1623, 41 N.E.3d

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1164, at ¶ 43, the taxes at issue were imposed in the same tax years in which the
taxpayer actually performed the services for which he was compensated, id. at ¶ 1.
{¶ 52} Thus, while “[t]he simple but controlling question is whether the
state has given anything for which it can ask return,” Wisconsin v. J.C. Penney Co.,
311 U.S. 435, 444, 61 S.Ct. 246, 85 L.Ed. 267 (1940), due process necessarily
implies that there is a temporal limit on when the state (or the municipality) can
make that request and impose a tax on a nonresident and his or her income.
{¶ 53} Contrary to appellees’ assertion, the fact that Cleveland’s decision
on the timing of the tax is consistent with the United States Supreme Court’s
decisions in Commr. of Internal Revenue v. Smith, 324 U.S. 177, 182, 65 S.Ct. 591,
89 L.Ed. 830 (1945), and Commr. of Internal Revenue v. LoBue, 351 U.S. 243, 248-
250, 76 S.Ct. 800, 100 L.Ed. 1142 (1956), is of no consequence. The same is true
of the decision of the First District Court of Appeals in Rice v. Montgomery, 104
Ohio App.3d 776, 663 N.E.2d 389 (1st Dist.1995).
{¶ 54} Neither Smith nor LoBue addressed the timing of the tax under the
Due Process Clause in holding that it was proper for the government to tax the
difference in value between the option price and the share price at the time the
options were exercised. This makes sense since the issue in those cases was the
imposition of the federal income tax and jurisdiction was a given because the
federal government’s jurisdiction is nationwide. In this case, however, the
jurisdiction of the municipality was not a given, so the timing of the tax necessarily
matters for due-process purposes.
{¶ 55} Rice is also distinguishable from the present case based on the simple
fact that the taxpayers in that case were residents of the municipality that imposed
the tax at the time they exercised their options. Rice at 778-779.
{¶ 56} Consequently, without running afoul of the Due Process Clause,
Smith, LoBue, and Rice cannot form the basis for upholding the imposition of such

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a tax on a nonresident. But see Allen v. Commr. of Revenue Servs., 324 Conn. 292,
152 A.3d 488 (2016).
{¶ 57} In this case, there was clearly a connection between the city and the
compensation in 2007, the year the options were granted. At that time, Willacy
worked in the city and enjoyed the benefits and protections afforded by the
municipality while she did so. Cleveland, however, chose not to impose its tax
then. Instead, it waited until Willacy exercised her options.
{¶ 58} While Cleveland’s decision to wait to impose the tax may have made
sense given the city ordinances, it does not make sense from a constitutional
perspective. By 2014 and 2015, the two tax years in question, Willacy had long
since retired and moved to a different state. In those years, Willacy therefore
enjoyed neither the benefits nor the protection afforded by Cleveland and its laws.
Additionally, any relationship between the benefits the city conferred and the
increase in the value of the stock in those intervening five years is speculative at
best.
{¶ 59} Given this gap in time and Willacy’s status as a nonresident, I find
it very difficult to say that a minimum connection between Willacy, the income,
and the city existed such that the requirements imposed by the Due Process Clause
were satisfied here. Any way you slice it, such extraterritorial taxation is surely
inconsistent with “ ‘traditional notions of fair play and substantial justice,’ ”
(emphasis added) Internatl. Shoe, 326 U.S. at 316, 66 S.Ct. 154, 90 L.Ed. 95,
quoting Milliken v. Meyer, 311 U.S. 457, 463, 61 S.Ct. 339, 85 L.Ed. 278 (1940).
See Pennoyer v. Neff, 95 U.S. 714, 24 L.Ed. 565 (1877), overruled in part, Shaffer
v. Heitner, 433 U.S. 186, 97 S.Ct. 2569, 53 L.Ed.2d 683 (1977) (a state has personal
jurisdiction over a nonresident when that person is physically present in that state)
and Rose v. Himely, 8 U.S. 241, 277, 2 L.Ed. 608 (1808), overruled in part, Hudson
v. Guestier, 10 U.S. 281, 3 L.Ed. 224 (1810) (“It is repugnant to every idea of a
proceeding in rem, to act against a thing which is not in the power of the sovereign

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under whose authority the court proceeds”); see also Declaration of Independence,
July 4, 1776 (“Governments are instituted among Men, deriving their just powers
from the consent of the governed”).
III. Conclusion
{¶ 60} Because the Due Process Clause requires a minimum connection
between a government and the people, property, and transactions it seeks to tax, I
would hold that an Ohio municipality cannot reach back in time and across state
lines to tax the income of a nonresident. To hold otherwise, in my opinion,
sanctions the “seizure of property * * * under pretext of taxation where there is no
jurisdiction or power to tax” and permits “a denial of due process of law.” Miller
Bros., 347 U.S. at 342, 74 S.Ct. 535, 98 L.Ed. 744.
{¶ 61} Therefore, I respectfully dissent.
_________________
Aubrey B. Willacy; and Buckingham, Doolittle & Burroughs, L.L.C., and
Steven A. Dimengo, for appellant.
Barbara A. Langhenry, Cleveland Director of Law, and Linda L.
Bickerstaff, Assistant Director of Law, for appellees
_________________

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