New York State Tax Owned on Option Exercise in WA

July 30, 2004 ( - A former New York resident, granted stock options during his residency, is subject to state income tax once those options are exercised.

>The State of New York’s Division of Tax Appeals based its determination on optionee’s residency status at the time of the option grant.   In this case, Randall Stuckless received option grants from his employer, Microsoft, in 1991 when he was living in New York.

>Stuckless then exercised his options in 1997 when he was a resident of Washington.   In 2002, the New York Division of Taxation issued Stuckless a “Notice of Deficiency” for alleged unpaid state income taxes on his option exercises.   Stuckless appealed to the state since he was not a resident at the time of the option exercise.  

>The appellate board rejected Stuckless’ appeal, basing its ruling on Tax Law Section 601(e), which imposes a imposes a personal income tax for each taxable year on a nonresident individual’s taxable income which is derived from sources within New York State.   For Stuckless to prevail in this case, the appeals board said he would have to show that the income he received from the option exercises was not secured or earned “pursuant to activities connected with or derived from New York sources.”  

>Stuckless argued that even though the options were granted to him while he was a New York resident, they did not vest until he exercised his options while a Washington state resident.   Further, Stuckless argued his move to Washington effectively terminated his New York-based Microsoft employment.  

>The taxation appeals board, though, found regardless of where Stuckless resided, he continued to benefit from the appreciation in value of stock options granted while he was a New York resident and thus, owed state income taxes on the proceeds from the option exercise.

“The stock options awarded to petitioner on November 4, 1991 and July 7, 1992 under the Stock Option Plan were secured or earned through petitioner s Microsoft employment and were therefore properly considered New York source income for the years at issue,” the board ruled.

A copy of the decision can be found at