On May 18, the California Office of Tax Appeals (“OTA”) issued a pending precedential decision holding that community income derived from nonqualified stock options (“NQSOs”) and restricted stock units (“RSUs”) granted to a resident in exchange for services performed exclusively in California and vested while a California resident is taxable California source income to a non-resident spouse living in France.
The OTA employed a two-step analysis to determine whether or not the income was subject to tax. First, the OTA considered the nonearning spouse’s marital property interest in the earning spouse’s income. Because the earning spouse was domiciled in California – a community property state – when the income from the NQSOs and RSUs was earned, the OTA concluded that the income was community property.
Second, the OTA analyzed whether the nonresident, nonearning spouse’s interest in the community income was taxable in California. Here, the NQSOs and RSUs were compensation for personal services performed by the resident spouse entirely in California. The OTA rejected the nonresident spouse’s argument that her services to the marriage (i.e., the community) were performed entirely in France such that her share of the community income did not have a California source. The OTA instead treated the nonresident, nonearning spouse as if she had derived the income directly from the source from which her resident husband derived it. Accordingly, the OTA found the income had a California source and was thus taxable.
Appeals of O. Cremel and E. Koeppel, 2021-OTA-222P (May 18, 2021).