Refund opportunity for nonresidents with stock option income

On August 17, 2006, New York’s Tax Appeals Tribunal rejected the Tax Department’s long-standing formula used to calculate the portion of stock option income that is taxable to nonresidents. This methodology, which was promulgated in TSB-M-95(3)I, required nonresidents to allocate stock option income to New York based on a ratio of days worked in New York State during the option’s “grant-to-exercise” period.

In rejecting this approach, the Tribunal held that any allocation of income to New York must be limited to the year the stock option income was realized. According to the Tribunal, the Tax Department had no authority to authorize a multiple-year test.

This ruling may present a refund opportunity for nonresidents who paid tax to New York on stock option income using the “grant-to-exercise” rule. Taxpayers who are considering the exercise of options in 2006 might want to limit their time in New York for the rest of the year.

Hodgson Russ filed amicus curiae briefs with the Tax Appeals Tribunal in this litigation. Click here for a copy of the Tribunal’s decision in E. Randall Stuckless and Jennifer Olson, DTA NO. 819319 - www.nysdta.org/Decisions/819319.2.dec.htm.