bblankenship0716[at]sbcglobal.net (BigBill0716) wrote:

- quote -

The date of vesting has no bearing on the source of the
income from an employee stock option. A nonqualified
option, or an ISO sold in a disqualifying disposition, is
property received in exchange for services and characterized
as wages to the extent of the difference between the
exercise price and the FMV of the stock at the date of
exercise. That amount should be reported as W-2 wages by
the employer.

The income has its source at the location where the services
were performed to entitle the holder to receive it. If your
client performed all of her services for this employer, from
the date of grant to the date of exercise, in California,
then all of the income is California source income taxable
in California. If she performed some of her services during
that time in California and some in Illinois, then you would
prorate the gain accordingly. The denominator is total work
days (for that employer) from the date of grant to the date
of exercise, and the numerator is work days in California.

If the stock purchased under the ISO was held for the period
specified in IRC Sec. 422, then all of the gain on sale of
the stock (proceeds minus exercise price) is gain from the
sale of an intangible and has its source at the residence of
the taxpayer at the time of sale.

See FTB Tax News, Vol. 00-4, July-August 2001,
http://www.ftb.ca.gov/professionals/...7801Cover.html.

If your client sold the stock in a disqualifying
disposition, the employer reported the transaction
correctly. The income is taxable by both states, but
Illinois should give your client credit for the tax paid to
California -- limited, of course, to the portion of her
Illinois tax liability that relates to that income. The
effect is that, net, she will pay state tax on that income
at the higher of the two states' rates (California's, in
this case).

If the disposition qualified under IRC Sec 422, then there
is no ordinary income, the gain is not subject to California
tax, and the employer's treatment was wrong.

Katie in San Diego

The foregoing is intended for educational purposes only and
does not constitute legal or professional advice.

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BigBill0716 wrote:

- quote -

When one exercises ISOs (incentive stock options) it is not
a taxable event other than for AMT. The taxable event occurs
when one sells the shares purchased with the ISO. There
would only be compensation income recorded on the sale.
There is favorable tax treatment unless the sale is a
disqualifying ISO disposition.

I will assume that you are discussing non-qualified stock
options (NQSO or NSO) granted to her while a resident and
employed in CA. Exercising an NQSO will create W-2 income.
The difference between the fair market value of the stock on
the date of exercise and the option price has a source in
California even though the underlying value of any stock may
increase after the taxpayer becomes a nonresident. That
difference is CA source income and taxable by CA. All this
assumes that she performed all of her services in CA. The
employer properly issued the CA W-2. She must declare that
income on her CA tax return (540-NR).

See the Illinois Dept. of Revenue Schedule CR tax form for
computing a credit for taxes paid to another state on the
same income being taxed by IL.

--
Alan
http://taxtopics.net

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I have a client who left California with her husband. She
was on maternity leave and decided not to return to work for
her employer in Illinois. She exercised her vested ISO's
while a resident of Illinois.

The employer issued her a California W-2. I contacted the
employer and never spoke to anyone beyond the screener. The
screener kept saying "well it would be taxable in California
if she moved here from Illinois."

After correcting the screener several times she said she
understood the problem. The company later contacted my
client and told them the ISO's were earned in California.

Could the company be right? I'm assuming the client never
notified payroll she was leaving with her husband.

Second question - I excluded the income on a part year
California return based on my belief the ISO vested while
she was an Illinois resident. Is this income then taxable
to both Illinois and California?

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