Transcript RYP LOGO CONF LOGO - Rath, Young and Pignatelli, PC

State Taxation
of Executive Compensation
“Touching All the Bases”
Presented by:
Christopher J. Sullivan
Rath, Young and Pignatelli, P.C.
One Capital Plaza
Concord, N.H. 03302
Paul Buchman
Tyco International (U.S.), Inc.
301 Yamato Road
Boca Raton, Fl. 33431
(603) 410-4324
[email protected]
(561) 322-7840
[email protected]
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
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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
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America’s Game is
Growing
• Increased State Revenue Needs
• Increased Political Attractiveness of Exporting Tax to NonResidents
• 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)
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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
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Spring Training
The First Ground Ball
Like Paul Buchman, is Derek Jeter a Florida
Resident?
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Spring Training Grounders
• Specifics of Derek Jeter Case in New York
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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.
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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
2001. Burden on party asserting change.
– NY claims Jeter is a NY Resident for Tax Years
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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).
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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).
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Spring Training Grounders
Common Domicile Factors
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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
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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
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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 17016.
• 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).
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Regular Season Issues
Non-Resident Taxation
• States may generally tax the income of nonresidents when income is earned in that state
• California—Tax on income of individual nonresidents “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
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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
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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
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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
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Regular Season Issues
Non-Resident Taxation
• Typical Executive Income
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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?
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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
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Regular Season Issues
Non-Resident Taxation
Stock Options
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Consistent issues among states
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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
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Michealson, 67 NY 2d 579 (1986) – Established the rule for determining the portion of the
option income that is NY based compensation.
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TSB-M-95(3)I (1995) – Explains allocation method for NY option compensation
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Stuckless, 819319, NY Tax Appeals Tribunal, (8/17/2006) – Allows alternative allocation
method
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TSB-M-06(7)I (2006) – Applies to tax year 2005 and prior
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NYS Regulation: NYCRR 132.24 (Revised 12-27-06)
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TSB-M-07(7)I (2007) – Interprets NYCRR 132.4
Significant Option Events:
Grant → Vest /Exercise → Sale
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Regular Season Issues
Non-Resident Taxation
Nonstatutory Stock Options
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Example: Nonresident employee lives in CT and works in NY - also performs services
outside NY for employer
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NY Compensation from the nonstatutory stock option:
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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%.
$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
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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
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Regular Season Issues
Non-Resident Taxation
Restricted Stock
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Restricted Stock: A grant of company stock in which the recipient's rights in the stock
are restricted until the shares vest
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If the IRC Sec. 83(b) election is made:
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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
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:
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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
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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)
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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
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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
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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
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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
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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 nonresident status in reciprocal state.
State
Illinois
Indiana
Iowa
Kentucky
Maryland
Michigan
Minnesota
Montana
New Jersey
North Dakota
Ohio
Pennsylvania
Virginia
West Virginia
Wisconsin
Some Form of Reciprocal Agreement With
IA, KY, MI, WI
KY, MI, OH, PA, WI
IL
IL, IN, MI, OH VA, WV, WI
DC, PA, VA, WV
IL, IN, KY, MN, OH, WI
MI, ND, WI
ND
PA
MN, MT
IN, KY, MI, PA, WV
IN, MD, NH, OH, VA, WV
DC, KY, MD, PA, WV
KY, MD, OH, PA, VA
IL, IN, KY, MI, MN
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Appeals to the Umpires
Strike Three!!!
• Major states with no reciprocal agreements despite
personal income tax
– California
– New York
– Connecticut
– Missouri
– Massachusetts
– Oregon
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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 commerceregulating power to create more uniform
rules
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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. § 11108 (b)) can
generally only be taxed in their states of
residence
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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. 104-95)
– 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. 109-264)
• 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)
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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??
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Appeals to the Commissioner
A Whole New Game?
• H.R. 3359 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
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