JEFFERSON ALLEN et al. v. COMMISSIONER OF REVENUE SERVICES, SC 19567

Judicial District of New Britain

 

      Taxation; Whether Taxation of Nonresident Taxpayer’s Income from Exercise of Qualified Stock Options Granted as Compensation for Work Performed in Connecticut Violates Due Process When Taxpayer was not Working in Connecticut at Time Stock Options Exercised; Whether Claim for Tax Refund Untimely Under General Statutes § 12-732.  The plaintiffs, Jefferson Allen and Evita Allen, lived in Connecticut from 1990 to 2001 and in 2005.  During those times, Jefferson Allen worked in Connecticut for companies that compensated him in part by granting him nonqualified stock options.  He exercised the stock options in 2002, 2006 and 2007, when the plaintiffs did not live in Connecticut.  The plaintiffs filed Connecticut tax returns for those years and paid taxes on the stock option income.  They later amended the returns and sought refunds, claiming that, as Jefferson Allen was not a Connecticut resident when he exercised the stock options, the resulting income was not taxable in this state.  The defendant denied their requests for refunds and the plaintiffs appealed.  The trial court rendered judgment in favor of the commissioner, upholding the determination that the plaintiffs were not entitled to tax refunds.  In finding that the plaintiffs were not entitled to refunds for 2006 and 2007, the trial court rejected their claim that it was unconstitutional for the state of Connecticut to tax the income that the nonresident plaintiffs derived from the exercise of the nonqualified stock options.  The court held that the income was properly taxable by Connecticut because there was no dispute that the stock options were granted to Jefferson Allen as a form of compensation for work he performed in Connecticut.  The plaintiffs appeal, claiming that their constitutional rights to due process were violated by the taxation of the income from the exercise of the stock options because there is no “minimum connection” between that income and the state of Connecticut.  The plaintiffs claim that the stock options had no readily ascertainable value at the time that they were received, that the plaintiffs did not reside in Connecticut when the options were exercised, and that the options’ value at the time that they were exercised had nothing to do with Jefferson Allen’s work in Connecticut.  The plaintiffs also claim that the trial court wrongly interpreted § 12-711 (b)-18 (a) of the Regulations of Connecticut State Agencies as permitting the taxation of any income derived from a nonresident’s exercise of qualified stock options as long as the taxpayer was working in Connecticut during the year that the stock options were granted.  They argue that the regulation is ambiguous and should be construed as permitting Connecticut taxation only when the taxpayer is also working in Connecticut in the year that the qualified stock options are exercised.  Finally, the plaintiffs contend that the trial court wrongly determined that they were not entitled to a refund for the 2002 tax year because their claim for a refund for that year was untimely in that it was not filed with the commissioner within the three year limitation period in General Statutes § 12-732.  They claim that the trial court erred in construing § 12-732’s limitation period as implicating its subject matter jurisdiction and in rejecting their claim that an ongoing tax audit equitably tolled the time period for filing a request for a refund for 2002.