Donahue v. Chu

• Decision Date: 23 August 1984
• Citation: 104 A.D.2d 523,479 N.Y.S.2d 889
• Parties: In the Matter of Donald J. DONAHUE et al., Petitioners, v. Roderick G. W. CHU et al., Constituting the State Tax Commission of the State of New York, Respondents.
• Court: New York Supreme Court — Appellate Division

Page 889

479 N.Y.S.2d 889

104 A.D.2d 523

In the Matter of Donald J. DONAHUE et al., Petitioners, v. Roderick G. W. CHU et al., Constituting the State Tax Commission of the State of New York, Respondents.

Supreme Court, Appellate Division Third Department.

Aug. 23, 1984.

Debevoise & Plimpton, New York City (Jonathan H. Hines, New York City, of counsel) for petitioners.

Robert Abrams, Atty. Gen. (Francis V. Dow, Asst. Atty. Gen., of counsel), for respondent.

Before MAIN, J.P., and MIKOLL, YESAWICH, HARVEY and CASEY, JJ.

MEMORANDUM DECISION.

Proceeding pursuant to CPLR article 78 (transferred to this court by order of the Supreme Court at Special Term, entered in Albany County) to review a determination of the State Tax Commission which sustained a personal income tax assessment imposed pursuant to article 22 of the Tax Law.

For approximately 26 years, petitioner ¹ served as an executive of AMAX, Inc., a New York corporation, and its predecessor corporation. For a substantial period of time, he was its president. Prior to March, 1975, the executive offices of the corporation were located in New York City. At that time, they were moved to Connecticut and, on June 30, 1975, petitioner changed his residence from New York to Connecticut. On September 4, 1975, petitioner and the directors of the corporation entered into a written agreement to terminate petitioner's employment contract. Pursuant to the agreement, the corporation paid petitioner certain amounts of money which he reported on his Federal income tax return but not on his New York State return. His reasoning was that the unreported income was that of a nonresident of New York and not connected with any New York source.

Upon audit, the Department of Taxation and Finance determined that petitioner's New York taxable income included $944,611.40 petitioner received for the cancellation of stock options granted him by his employer while he was employed in New York, $107,361 in settlement of the corporation's obligation to pay petitioner for future consultation services, and $40,000 salary payments from June 30, 1975 to October 1, 1975. Petitioner sought review before respondent. Upon review, respondent refused to grant petitioner his demanded relief ² and this CPLR article 78 proceeding was commenced and transferred by Special Term to this court.

There is no dispute as to respondent's findings of fact. It is our responsibility to decide whether there was a rational basis for respondent's determination and substantial evidence in support thereof (Matter of Levin v. Gallman, 42 N.Y.2d 32, 34, 396 N.Y.S.2d 623, 364 N.E.2d 1316; Matter of Golden v. State Tax Comm., 90 A.D.2d 941, 457 N.Y.S.2d 905). All of the income in dispute was paid to petitioner after he and his company moved to Connecticut. Therefore, it is incumbent upon respondent to produce substantial evidence that the money paid was for services performed in New York (see Matter of Gleason v. State Tax Comm., 76 A.D.2d 1035, 429 N.Y.S.2d 314). Section 632 of the Tax Law makes taxable that portion of a nonresident's income derived from an occupation carried on in this State.

During the years 1968, 1970, 1971 and 1974, while petitioner was both residing and working in New York, the employer granted petitioner stock options for the purchase of 45,500 shares of its common stock. The aggregate exercise price was $1,454,376.10. Those options were never exercised. By a provision of the severance agreement of September, 1975, petitioner was given the opportunity to offer his options for cancellation in exchange for the payment to him of $944,611.40. The amount was determined by subtracting the aggregate exercise price from the aggregate fair market value at the time of cancellation. The mere fact that the transaction took place in Connecticut after petitioner severed his ties with New York is not controlling. Petitioner contends that the options were granted as an incentive for him to continue in the service of his company. A similar position was taken by respondent inMatter of Michaelsen (CCH Tax Rep. par 99-996j ). We, however, conclude otherwise. Stock options are compensation and are taxable as such (Commissioner v. LoBue, 351 U.S. 243, 76 S.Ct. 800, 100 L.Ed. 1142). To the extent that they were compensation in connection with his employment in New York, their value is taxable in this State (see, e.g., Matter of Speno v. Gallman, 35 N.Y.2d 256, 360 N.Y.S.2d 855, 319 N.E.2d 180; Matter of Hayes v. State Tax Comm., 61 A.D.2d 62, 401 N.Y.S.2d 876). We conclude that substantial evidence supports the taxability of the value of the stock options at the time the options became exercisable, which in this case appears to be at the time they were granted.

We find, however, that respondent erred in computing the tax base. Although section 83 of the Internal Revenue Code establishes the event of sale as the date of determination of value, that rule does not apply to the allocation of income attributable to New York sources. The proper method would have been to subtract the aggregate exercise price of each issue of options from the aggregate fair market value of the shares of stock on the date that the options became exercisable. There was no evidence connecting the granting of the options with the appreciation of the market value of the common stock of the corporation...