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Nonresident of Connecticut Subject To Tax on Exercise of Stock Options

01.09.17 | SALT Chat

I had a hard time with this decision[1]. Not with the result, but with the fact that it found its way to the Connecticut Supreme Court. Apparently, the Court felt the same way as the opinion uses the word “absurd” five times and “bizarre” two times.

Meet the Allens.

Mr. Allen received significant amounts of stock options during periods when he was both a resident of and employed in Connecticut. The options were exercised and income recognized several years later when the Allens were no longer residents of Connecticut. The Allens argued that since they were no longer residents of Connecticut, they didn’t owe any tax to the State. The State argued (and the Supreme Court agreed) that since the options were given to Mr. Allen as compensation for work performed in Connecticut, tax was clearly owed.

 While I guess everyone is entitled to their day in court, this case brings back nightmares I had of obscure law school exam questions with no connection to reality. The methodology used to source nonresident income from stock options is literally all over the place (grant to vest, grant to exercise, whatever is fair . . .) and can lead to inconsistent results and “bizarre” and “absurd” instances of multiple state taxation on the same income. Clearly the method of allocation amongst the states needs to be fixed and some uniformity set forth. But, I am not aware of any state tax practitioners that still believe Connecticut must keep its hands off the money.

Executive compensation issues require not only careful federal tax planning, but state planning as well. Issues such as apportionment amongst the states, interaction of state tax credits and timing issues need to be examined. But even more importantly, you need to understand your client’s plans, hopes and dreams for the future. Knowing when and if there are any plans to retire or relocate can play a critical role in tax decisions to be made currently.

If you have questions about the state tax consequences of compensation, contact me at WBerkowitz@BerdonLLP.com or your Berdon advisor.

Wayne Berkowitz, a tax partner and head of the State and Local Tax Group at Berdon LLP, advises on the unique requirements of governments and municipalities across the nation.

[1] Allen v. Commissioner of Revenue Services, SC19567 (Conn. 2017)