1. State Taxation of Executive Compensation “Touching All the Bases”
Presented by:
Christopher J. Sullivan Paul Buchman
Rath, Young and Pignatelli, P.C. Tyco International (U.S.), Inc.
One Capital Plaza Yamato Road
Concord, N.H Boca Raton, Fl
(603) (561)

2. Play Ball!!!
Fundamentally, this breakout is about the Personal Income Tax Obligations of Executives/Employees
However, this is also an Employer Issue due to Employer Withholding Requirements
Increasingly, corporate tax departments are being asked to deal with these issues to design pro-active solutions and to manage withholding audits and personal audits

3. Executive Comp Baseball Our Schedule
America’s Game is Growing
Spring Training Issues—The Basics
Resident Versus Non-Resident Taxation
Regular Season Issues—The Long Season
Income Sourcing Challenges
Income Forms Challenges (Wages versus Other Compensation)
Issues for the Manager—All Season Long
Appeals to the Umpires
Appeals to the Commissioner

4. America’s Game is Growing
Increased State Revenue Needs
Increased Political Attractiveness of Exporting Tax to Non-Residents
Increased Multi-State Nature of Business
Increased Employee Travel
Increased Service Economy
Increased Technology (e.g. telecommuting)
Increased Forms of Executive Compensation
Increased Executive Income
Increased Corporate Regulatory Requirements (SOX)

5. Spring Training The Basic Takeaway
Residents of a state generally taxed on entire income
Generally, there are two types of residents
Domiciled in the state
Statutory Resident of the state
Non-residents of a state are generally only taxed on income properly sourced to state
Usually defined as anyone other than a resident

6. Spring Training The First Ground Ball Like Paul Buchman, is Derek Jeter a Florida Resident?

7. Spring Training Grounders
Specifics of Derek Jeter Case in New York
2001 through 2003 Tax Years at Issue
Jeter--Claims Florida residency since 1994
(Note: Jeter’s Yankees Debut—May 29, 1995)
Jeter--Filed New York Non-Resident Tax Returns for the Tax Years
Largely no dispute over baseball salary because it is New York source income
Dispute over other income—e.g. endorsement income, personal appearance income, signing bonus.

8. Spring Training Grounders
Specifics of Derek Jeter Case in New York
Burden on NYS to demonstrate New York residency because it concedes Jeter was a Florida resident prior to Burden on party asserting change.
NY claims Jeter is a NY Resident for Tax Years
Ownership of an Apartment at Trump Towers (10/01)
Personal Items Near and Dear Kept in NY
Community Involvement in non-Florida jurisdictions
Business Ties
Public Statements Regarding Love for New York
KEY POINT: NYS attempting to show Jeter is domiciled in NY, because likely much tougher case under statutory resident criteria (183 day rule).

9. Spring Training Grounders Domicile
Virtually Every State With an Income Tax Taxes Entire Income of Those “Domiciled” in State
Note: No broad based income tax in AK, FL, NH, NV, SD, TN, TX, WA, WY
Basic Agreement Among States—Domicile is the place where a person has his true fixed and permanent home or principal establishment to which, whenever he is absent, he has the intention of returning
Domicile is generally fact and intent driven
Union of act and intent, actions speak louder than words
Domicile, once attained, is generally not lost by absence since intent to return is critical.
Generally only one domicile (but can be statutory resident in more than one state).

10. Spring Training Grounders Common Domicile Factors
Property ownership and residence
Location of Bank Accounts
Qualification for unemployment insurance
State of previously filed tax returns
State of Voting
State of Driver’s License
State of Vehicle Registration
Professional License Registration
Location of Memberships and Affiliations
State of Will Execution

11. Spring Training Fly Balls Statutory Resident
Much more variation among statutory definition of resident
Common Principles
Permanent Place of Abode
Time Spent in State—183 days/6 months is most common
Hawaii—200
Idaho—270
New Mexico--185
“Other than a temporary or transitory purpose”
Importance of and/or in statutory tests
Risk of Double Taxation—taxpayers may meet definition of resident in more than one state
American Payroll Association Testimony Helpful

12. Spring Training Fly Balls Statutory Resident
California--Resident includes: (i) every individual in the state for other than a temporary or transitory purpose and; (ii) every individual domiciled in the state who is outside the state for temporary or transitory purposes. Cal. Rev. & Tax Code 17014(a). Residence is presumed for those who spend more than 9 months in the state. Cal. Rev. & Tax Code
New York--Resident includes generally individuals: (i) domiciled in the state and (ii) not domiciled in the state but who maintain a permanent place of abode in the state and spend more than 183 days out of the year in the state. N.Y. Tax Law sec. 605(b)(1).

13. Regular Season Issues Non-Resident Taxation
States may generally tax the income of non-residents when income is earned in that state
California—Tax on income of individual non-residents “derived from sources in [California]”
New York—“derived from or connected with New York sources”
Risk of double taxation—all income taxed in state of residence and sourced income taxed in state of non-residence

14. Regular Season Issues Credits
Credits alleviate some double taxation issues but likely not constitutionally required and are matter of legislative grace
Credits don’t help Buchman (FL and NJ)
All States with an income tax generally permit residents to take credit for taxes paid to other states
Selected states that provide credits for non-residents for taxes paid to other states
California, Indiana, Michigan, Minnesota, Oregon, Virginia, West Virginia
Selected states that do not provide credits for non-residents
Connecticut, Illinois, Maryland, Massachusetts, Missouri, New Jersey, New York, Ohio, Pennsylvania

15. Regular Season Issues Non-Resident Taxation (How the Game is Played)
Typical Fact Pattern: Individual lives in NJ, and regularly works in the company’s NY office and travels / works at the company’s offices in various states – CT, CA, IL & GA
The individual is subject to personal income tax in NY as a nonresident
The individual is also subject to tax in NJ – his/her state of domicile
The individual may also be subject to PIT in the other states
Generally, the individual allocates income to the nonresident state based on services performed within and without that state
Many states employ “days in/days out” test to allocate income
Telecommuting and “Convenience of the Employer”
Note: Current appeal to the Commissioner on these issues
H.R. 1360—Telecommuter Tax Fairness Act of 2007

16. Regular Season Issues Non-Resident Taxation
Typical Executive Income
Wages / Bonus
Stock options
Restricted Stock
Deferred Income
Consistent Issue Among Each Category of Income
When was the income recognized for federal purposes?
When did the income vest?
How is the income allocated?

17. Regular Season Issues Non-Resident Taxation Wages / Bonus
Income earned wholly in the work state
All wage income fully reportable to work state as non-resident income
Income reportable to domicile state – with credit for taxes paid to other jurisdictions if applicable
Income earned partly within and without the state
Allocation of wages based on days worked within and without
Record keeping
Calendar
Transportation receipts
Credit card receipts
Withholding tax requirements

18. Regular Season Issues Non-Resident Taxation Stock Options
Consistent issues among states
What portion of the income / gain can the nonresident state tax as compensation?
How is the income allocated?
When does the recognition event occur – income for federal purposes?
New York Guidance
Michealson, 67 NY 2d 579 (1986) – Established the rule for determining the portion of the option income that is NY based compensation.
TSB-M-95(3)I (1995) – Explains allocation method for NY option compensation
Stuckless, , NY Tax Appeals Tribunal, (8/17/2006) – Allows alternative allocation method
TSB-M-06(7)I (2006) – Applies to tax year 2005 and prior
NYS Regulation: NYCRR (Revised )
TSB-M-07(7)I (2007) – Interprets NYCRR 132.4
Significant Option Events:
Grant → Vest /Exercise → Sale

19. Regular Season Issues Non-Resident Taxation Nonstatutory Stock Options
Example: Nonresident employee lives in CT and works in NY - also performs services outside NY for employer
Option Granted in 2006 at $15 / share and vests in 3 years
Option Vests in 2009 and employee exercises NSO - the FMV of stock at the date of exercise is $25 / share
Sale in 2010 employee sells the stock for $50 / share
Nonresident Employee’s “workday fraction” – the percentage of time worked in NY is 60% from 2006 through 2009
Employee’s workday fraction for tax year 2010 is 75%.
NY Compensation from the nonstatutory stock option:
$10 / share is ordinary compensatory income subject to allocation – (difference between the grant price of $15 and FMV of $25 at exercise date)
The remaining $25 /share of gain / further appreciation after the exercise is not subject to tax in NY
Allocation Period
Percentage of time worked in NY beginning with the date the option was granted and ending with date the option vested – can span multiple tax years
Amount subject to NY Tax: $6 / share is ($10 of compensation X workday fraction of 60% for 2006–09)
Services performed after the shares are exercisable are not taken into account for allocating option income

20. Regular Season Issues Non-Resident Taxation Restricted Stock
Restricted Stock: A grant of company stock in which the recipient's rights in the stock are restricted until the shares vest
In general, the value of a restricted stock award is taxable as compensation for federal income tax purposes in the year the rights of the beneficial interest in the stock are substantially vested
If the IRC Sec. 83(b) election is made:
The amount of Compensation is the amount recognized for federal purposes
The allocation period is the same that applies to wages
If no 83(b) election is made:
The amount of compensation is the FMV of the stock at the time it vests and is recognized for federal purposes
The allocation period is the period of time beginning with the date the stock was received and ending with the earliest of: (1) the date the stock was substantially vested (transferable or not subject to substantial risk of forfeiture); (2) the date the individual's services terminated; or (3) the date the stock was sold
Similar to statutory stock options the allocation period may span multiple years

21. Regular Season Issues Non-Resident Taxation Deferred Income
Generally under a deferred compensation plan such as a supplemental executive retirement plan– payments are made in a lump-sum upon retirement or are paid as an annuity
NY state has ruled that non-residents are not subject to tax on payments from such a plan– TSB-A-00(6)I (9/6/2000)

22. Issues for the Manager Big Picture Strategy
Risks to Companies—Sarbanes-Oxley 404
Certification that procedures in place to comply with applicable laws and regulations, including state tax rules.
Risks to Companies—Withholding Audits
Risks to Companies—Employee Satisfaction
Pro-Active Solutions
Approach bigger states—NY, IL, CA

23. Issues for the Manager Who’s in the Lineup?
Employer Withholding Requirements on Non-Resident Taxation
Some States Employ First Dollar Approach
Some States Require Withholding After Certain Days Threshold Az. (60), Ha. (60), Me. (10), NM. (15)
Earnings Threshold—Offers very little relief (often $5000 or less)
Generally, employee and employer obligations same
But NY, employer withholding only triggered after 14 days in-state even though employee is obligated immediately for NY tax

24. Issues for the Manager The Nonresident Income Tax Audit
Audit will focus on three key items
Income
Allocation of income to nonresident state
Withholding
Individual must document allocation
Travel log
Credit card receipts
Calendar

25. Issues for the Manager The Nonresident Income Tax Audit
Company Issues
Did the company properly withhold?
Company may rely on withholding information provided by employee
Proactive Withholding Tax Policy
Avoid penalties
Develop company-wide withholding policy
Enter into voluntary withholding agreements with states
Threshold to initiate withholding based on days worked in the state or based upon dollar amount

26. Appeals to the Umpires Ball Four--Take Your Base!
Some states have established cooperative agreements to simplify non-resident taxation and withholding
Frequently, employee must file certificate declaring non-resident status in reciprocal state.

27. Appeals to the Umpires Strike Three!!!
Major states with no reciprocal agreements despite personal income tax
California
New York
Connecticut
Missouri
Massachusetts
Oregon

28. Appeals to the Commissioner
Patchwork of state laws and practices, increased liabilities and enforcement, and administrative headaches regularly leads to calls for Congress to use its commerce-regulating power to create more uniform rules

29. Appeals to the Commissioner Congressional Intervention
Relief for Certain Employees
Members of Congress—Taxed only in state of residence. Surprising???
Interstate Transportation Employees—Railroad employees (49 U.S.C. § 11502), motor carrier employees (49 U.S.C. § 14503), and merchant mariner employees (46 U.S.C. § (b)) can generally only be taxed in their states of residence

30. Appeals to the Commissioner Congressional Intervention
Relief on Forms of Income
Retirement Income--No state taxation of retirement income of an individual who is not a resident or domiciliary of the state. 4 U.S.C. § 114. (P.L )
Retirement Income--Includes a prohibition on taxing retirement income paid by a partnership to a nonresident retired partner under any written plan, program, or arrangement in effect immediately before retirement begins. 4 U.S.C. § 114 (P.L )
Clarifies employee versus partner position advanced by NY.
Sullivan colleague Stan Arnold (former NH DRA Commissioner and FTA President testifies in favor of this legislation)

31. Appeals to the Commissioner A Whole New Game?
H.R. 3359—The Mobile Workforce State Income Tax Fairness and Simplification Act of 2007
Purpose—To limit the authority of States and localities to tax certain income of employees for employment duties performed in other States and localities
Introduced in August of 2007
House Hearing held in November 2007
COST—Supports as Introduced
American Payroll Association—Supports as Introduced
FTA—Opposed as Introduced
Prospects for Passage in 2008??

32. Appeals to the Commissioner A Whole New Game?
H.R creates rule to limit taxation of wages or other remuneration to state or locality of the employee’s residence unless the employee is physically present performing duties in another state for more than 60 days during the calendar year in which income is taxed
Day is defined as more than 50 percent of the employee’s duties for such day
Wages or other remuneration defined by state law
Professional Athletes, Professional Entertainers, and Certain Public Figures not protected
Buchman helped but Jeter is not