Costas v. Comm'r of Revenue Servs.

213 Conn.App. 719

280 A.3d 108

John P. COSTAS et al.

v.COMMISSIONER OF REVENUE SERVICES

AC 44075

Appellate Court of Connecticut.

Argued October 5, 2021

Officially released July 19, 2022

Timothy P. Noonan, for the appellants (plaintiffs).

Patrick T. Ring, assistant attorney general, with whom were Joseph J. Chambers, deputy assistant attorney general, and, on the brief, William Tong, attorney general, and Clare Kindall, solicitor general, for the appellee (defendant).

Alvord, Cradle and Palmer, Js.

PALMER, J.

The plaintiffs, John P. Costas and Barbara S. Costas, appeal from the summary judgment rendered by the trial court in favor of the defendant, the Commissioner of Revenue Services (commissioner), sustaining the commissioner's assessment of taxes against the plaintiffs with respect to certain stock options and restricted stock units granted to John P. Costas by his employer as compensation for services he performed both in this state and in New York.¹ On appeal, the plaintiffs claim that the court incorrectly concluded that the commissioner was entitled to summary judgment because the court (1) misinterpreted and misapplied the regulations at issue, namely, §§ 12-711(b)-17 ² and 12-711(b)-18 ³ of the Regulations of Connecticut State Agencies, which govern the credit to which a Connecticut taxpayer is entitled for taxes paid to another state on compensation derived from the vesting of restricted stock and the exercise of nonqualified stock options (stock options), respectively, for services performed in both Connecticut and that other state, and (2) refused to require that the commissioner approve an alternate apportionment methodology with regard to the income attributable to Connecticut and New York for purposes of determining the amount of those tax credits pursuant to § 12-711(b)-15 ⁴ of the Regulations of Connecticut State Agencies.⁵ We reject the plaintiffs’ claims and, accordingly, affirm the judgment of the court.

The following uncontested facts, as set forth by the court, and procedural history are relevant to our resolution of this appeal. "Costas joined UBS [Investment Bank (UBS), formerly known as UBS Warburg] in 1996 as the Head of Fixed Income. In 2001, [he] assumed the role of [chief executive officer (CEO)] of ... UBS ... before being promoted to Deputy CEO of UBS in 2004. In 2005, [Costas] became CEO of UBS's Dillon Reed Capital Management, and he remained in that role until he left UBS in 2007. When [Costas] joined UBS in 1996, he was a resident of New Jersey and he performed services for UBS in New York. However, in 1998, [he] moved to Connecticut and, in doing so, moved his office from New York City to ... Stamford.... [Following this move, Costas initially] did not spend any significant amount of time performing services in New York. Gradually, however, his time spent [performing services] in New York increased as follows: [between 1 and 2 percent in 2003, 10.22 percent in 2004, 29.11 percent in 2005, 66.29 percent in 2006, 60.22 percent in 2007, and 0 percent in 2008].

"As an executive of UBS, from 1998 through 2007, [Costas’] compensation package was comprised [primarily] of [deferred stock based compensation] ... which had no readily ascertainable value at the time of grant.⁶ Specifically, UBS granted [Costas] stock options (the ability to purchase UBS stock at a fixed price after a period of vestment) and restricted stock (a grant of stock subject to a vesting schedule deemed received on the date of vestment)." (Footnote added; internal quotation marks omitted.) "[In] recognition that stock options and restricted stock [generally] have no reasonably ascertainable fair market value at the time awarded and, consequently, are not subject to taxation at the time they are granted [stock options are treated as taxable income when they are exercised and restricted stock is treated as taxable income upon vesting]."

"The plaintiffs ... filed Connecticut resident income tax returns for each of the taxable years of 2005, 2007 and 2008, and, on each of these returns, the plaintiffs included compensation that [Costas] had received from his exercise of stock options and [the vesting of] restricted stock previously given to him [by UBS]. In filing their tax returns, the plaintiffs claim a credit for taxes paid to New York for services [Costas] performed for UBS ... that occurred both in Connecticut and in New York." This credit was awarded pursuant to General Statutes § 12-704,⁷ which permits a Connecticut resident to offset a credit for income taxes paid to other states "[i]n order for [the] taxpayer to avoid having to pay a double tax on the same services provided to his or her employer."

"Subsequently, the New York State Department of Taxation and Finance conducted an audit of the plaintiffs’ tax returns and entered into an agreement with the plaintiffs whereby the plaintiffs agreed that they owed the state of New York additional tax on the compensation that [Costas] had received from UBS for the taxable years of 2005, 2007 and 2008. Following the payment of the additional taxes to New York, the plaintiffs filed amended Connecticut income tax returns for the taxable years of 2005, 2007 and 2008 in which they sought additional credits for these additional taxes paid to New York.... The [commissioner] disallowed part of the plaintiffs’ claims for a refund of taxes paid to New York for the taxable years of 2005, 2007 and 2008 [on the ground] that the plaintiffs were required to allocate income from the exercise of stock options and vesting of restricted stock between Connecticut and New York in accordance with [ §§ 12-711(b)-17 (c) and 12-711(b)-18 (c) of the Regulations of Connecticut State Agencies]."⁸ (Footnote omitted.)

The parties acknowledge that, in calculating the amount of the credit to which the plaintiffs were entitled for each of the taxable years at issue, the commissioner was required to apply the methodology set forth in §§ 12-711(b)-17 (c) and 12-711(b)-18 (c) of the Regulations of Connecticut State Agencies for determining how much income from stock options and grants of restricted stock is allocated to this state when, as here, the employee performs services both within and outside this state during the "grant-to-exercise period" (in the case of stock options) and "grant-to-vest period" (in the case of restricted stock).⁹ As the parties also agree, the proper apportionment of income for tax credit purposes is a function of the ratio between the total compensation received during the grant-to-exercise period or grant-to-vest period for services performed in New York (the ratio's numerator) and the total compensation received during those periods for services performed in this state, New York and anywhere else (the ratio's denominator). In determining that apportionment, however, the commissioner construed §§ 12-711(b)-17 (c) and 12-711(b)-18 (c) as requiring a computation of the total compensation received by Costas during the grant-to-exercise and grant-to-vest periods, including deferred compensation that was received in those periods for services rendered prior thereto. This construction of the applicable regulations differed from the interpretation advocated by the plaintiffs, who contended that the apportionment computation should include only compensation received for services actually performed during such periods and not deferred compensation earned earlier but received in those periods.¹⁰

In accordance with General Statutes § 12-730,¹¹ the plaintiffs appealed to the trial court from the determination of the commissioner partially disallowing their claims for refunds. On appeal to the trial court, the plaintiffs claimed that the commissioner (1) misinterpreted §§ 12-711(b)-17 and 12-711(b)-18 of the Regulations of Connecticut State Agencies, thereby miscalculating to their detriment the amount of the credit available to them, and (2) abused his discretion in failing to utilize the alternate method of apportionment authorized under § 12-711(b)-15 of the regulations in determining the amount of credit to which they were entitled. After jointly stipulating to uncontested facts, the plaintiffs and the commissioner both filed motions for summary judgment.¹²

The court subsequently issued a memorandum of decision granting the commissioner's motion for summary judgment and denying the plaintiffs’ motion. In its decision, the court agreed with the commissioner's construction of §§ 12-711(b)-17 and 12-711(b)-18 of the Regulations of Connecticut State Agencies as providing that the compensation to be considered for purposes of income allocation was all of the compensation Costas received during the grant-to-exercise and grant-to-vest periods, including deferred compensation that Costas received in those periods but had earned prior to those periods. The court held that this calculation was dictated by the language of the regulations, noting, further, that the required methodology was consistent with federal and state income tax principles, which, as the court explained, "focus on taxable events, not when the services occurred," such that "compensation is includable in gross income in the year received, and not in the year earned." (Internal quotation marks omitted.) The court also rejected the plaintiffs’ contention that the commissioner should have exercised his discretion to award them the credit they sought under the alternate apportionment methodology authorized by § 12-711(b)-15 of the regulations because the methodology applied by the commissioner resulted in an unfair and inequitable allocation. The plaintiffs thereafter appealed to this court, renewing the same claims that they had raised in the trial court.

Before addressing those claims, we set forth the legal principles that guide our analysis. Our review of the trial court's decision granting the commissioner's motion for summary judgment is well settled. "Summary judgment shall be rendered forthwith if the pleadings,...