California’s Office of Tax Appeals issued a non-precedential decision on the state’s taxation of restricted stock units (RSUs), affirming the Franchise Tax Board’s “grant-to-vest” allocation method. In Appeal of Prince, the OTA approved the FTB’s long-standing position that nonresident income from RSUs should be allocated to California based on the employee’s working days in the state during the period from the date the RSUs were granted to the date the employee recognized income when the RSUs vested.
From 2007 to 2010, the taxpayer received six grants of RSUs as compensation from his California employer. The RSUs all vested in 2012, two years after the taxpayer became a California nonresident after moving abroad. Originally reporting the full value of the RSUs on his California nonresident return, the taxpayer subsequently filed an amended return and claimed a refund based on the stock price when he left California. On audit, the FTB applied the grant-to-vest allocation to determine California source income from the RSUs.
The taxpayer argued the FTB’s allocation method was not reasonable because the RSUs “sky-rocketed” in value after he left California, and his personal services directly contributed to the stock’s appreciation. But, the OTA rejected this “in-state appreciation” argument because the taxpayer did not provide enough evidence showing his services as a nonresident had a significant impact on the stock’s value increase after 2010. Rather, the evidence showed that the taxpayer’s income from the RSUs was equally attributable to the taxpayer’s services provided to his employer throughout the entire vesting period. The OTA noted that, while FTB’s working days formula is not mandatory in every case, it was appropriate here based on the facts.
Finding the taxpayer failed to meet his burden of showing that the FTB’s allocation method was not “inherently arbitrary” and did not “yield an unreasonable result,” the OTA explained that the RSUs should be taxed by California based on the grant-to-vest allocation method, describing the method as “reasonable” and “consistent with California law.”