The California State Board of Equalization ruled that Richard and Mari Cower had to pay the tax on the options gain because the options compensated them for services they provided in theGolden State. The compensation for such services needs to be allocated on a “reasonable allocation method,” the board ruled.
The Cowers had excluded gain from the exercise of nonqualified stock options from theirCalifornia income. The Tax Board, however, assessed a deficiency. The couple challenged the assessment, arguing that the income was not California source income because the options were exercised after they left the state.
Upholding the assessment, the Board of Equalization said that because the options were compensation for services provided inCalifornia, a portion was California source income. Moreover, gains from stock options are compensation for services under Internal Revenue Code Section 83, the board said, and thus such services are appropriately allocated based on “a reasonable allocation method.”
The ruling is In re Cower (No. 294394).
The same issue has also come up in New York state (See Feature: Residence Evil? ).