In a summary judgment action, a Suffolk County Supreme Court judge has rejected a Connecticut couple’s constitutional challenge to the taxation of their stock option income as a New York statutory resident. Noto v. N.Y.S. Dep’t of Taxation & Fin., 2014 NY Slip Op. 30578 (NY Sup. Ct., Suffolk Cnty. Mar. 3, 2014).

The Notos are domiciled in Greenwich, Connecticut, and also own a vacation home in East Hampton, Long Island.  They spent more than 183 days in New York State in 2005 and 2006, and filed New York State income tax returns as statutory residents.  Prior to his retirement from ExxonMobil in 2001, Mr. Noto received stock options from his employer. In 2005 and 2006, Mr. Noto exercised those options, deriving $24 million in 2005, and $17 million in 2006.  He also received deferred compensation from ExxonMobil.  The Notos paid tax to Connecticut, their state of domicile, on their stock option income.  It does not appear that Mr. Noto ever worked for ExxonMobil in New York State.  On their New York resident tax returns, the Notos claimed a tax credit for taxes paid to Connecticut relating to the stock options, which the Department disallowed.

The Notos brought declaratory judgment motions in Suffolk County Supreme Court on the grounds that the income tax law was unconstitutional “as applied.”  They argued that their stock option income — which was not derived from services performed in New York State — was being taxed by both Connecticut and New York in violation of the Commerce Clause of the U.S. Constitution.  Among other things, they claimed that by taxing the income because they were statutory residents, the Department was impermissibly burdening interstate commerce by favoring individuals who live and work exclusively in New York over statutory residents who (like the Notos) earn income outside the State.  This resulted in double tax, with the income being taxed both by the taxpayers’ state of domicile (Connecticut) and by their state of statutory residence (New York).

The Supreme Court judge held that the Court of Appeals decision in Tamagni v. Tax Appeals Tribunal, 91 N.Y.2d 530 (1998), cert. denied, 525 U.S. 931 (1998) was dispositive of the constitutional challenge regarding double taxation and the Commerce Clause.  There, the Court of Appeals rejected a similar Commerce Clause challenge to the New York tax as applied to a statutory resident.  As in this case, the taxpayer in Tamagni was denied a credit for taxes paid to his state of domicile (New Jersey) on his investment income, which potentially subjected it to double taxation.  The judge noted that the Tamagni decision rejected a Commerce Clause challenge based on potential double taxation, on the grounds that the New York personal income tax does not substantially affect interstate commerce.

The judge also ruled against the Notos’ Due Process Clause challenge, concluding that by owning a vacation home and being present in the State for more than 183 days, the Notos had established the “minimal connection” necessary for Due Process Clause purposes. The judge therefore granted summary judgment in favor of the State.

Additional Insights

Separate and apart from the Department’s sometimes expansive interpretation regarding who is a statutory resident (which recently, in Matter of John Gaied, was scaled back somewhat by the Court of Appeals on what constitutes a “permanent  place of abode”), the Tamagni decision remains a controversial limitation on constitutional challenges to the double taxation of New York statutory residents. Presumably, if the Notos’ stock option income had been taxed in the states where Mr. Noto had worked, the Department would have allowed a tax credit for taxes paid to those states on the grounds that the income was derived from sources in those states.