In Allen v. Commissioner, 324 Conn. 292 (2016), the Connecticut Supreme Court did not permit a Connecticut taxpayer to seek a refund in connection with a late-filed tax return because the return was filed more than three years after its original due date—even though the tax year was still open for examination by the Department of Revenue Services. 

The Supreme Court further determined in Allen that income from the exercise of nonqualified stock options should be considered Connecticut source income if the options were granted while the taxpayer was a resident of Connecticut—even though the options were exercised and the resulting income arose for tax purposes after the taxpayer ceased to be a resident of Connecticut.

In Allen, the Supreme Court exercised its ability to directly decide on Appellate Court matters and upheld the Superior Court’s overall findings in Allen v. Sullivan, No. CV 11 6010197, 2015 WL 2458050 (Apr. 29, 2015), but the Supreme Court remanded to the trial court the part of the case dealing with the 2002 refund, without changing the Superior Court result. At the Superior Court, the plaintiff-taxpayers had sought a refund of income taxes for the taxable years of 2002, 2006 and 2007, in each case based upon the assertion that income from certain nonqualified stock options was improperly treated as Connecticut source income.

The Tax Session of the Superior Court held that the refund claim for the 2002 tax year was barred by the statute of limitations because it had been filed after April 15, 2006 (the three-year anniversary of the due date for the 2002 tax year). The Superior Court determined that it lacked subject matter jurisdiction over the matter and granted summary judgment to the defendant, the Commissioner of Revenue Services. The Supreme Court remanded to the Superior Court clarifying and expanding upon the lack of jurisdiction and the tolling of the statute of limitation.

The plaintiff-taxpayers filed their 2002 tax return more than three years after its original due date and then sought a refund for taxes paid on that return. Based on the actions of the Supreme Court in this case, it is apparent that by filing a return more than three years after its original due date, the plaintiffs lost the opportunity to seek a refund in connection with that late-filed return, despite the tax year still being open to examination by the Department of Revenue Services.

The Superior Court also rejected the plaintiffs’ argument that the income from the exercise of the nonqualified stock options in 2006 and 2007 should not be considered Connecticut source income because the plaintiffs were not residents of Connecticut at the time of the exercise of the options.  The Superior Court found that the options had been granted as compensation to the plaintiff when the plaintiff was employed in, and a resident of, Connecticut, and held that any compensation earned thereby is Connecticut source income, even if recognized for income tax purposes later upon exercise when the plaintiff is no longer a Connecticut resident.

On appeal, the plaintiff argued that (i) the income in question for 2006 and 2007 was not subject to taxation in Connecticut based on Conn. Admin. Regs. § 12-711(b)-18(a) (which specifies the sourcing of nonqualified stock options) and further (ii) that taxation of such income violates the due process clause of the federal constitution. The Supreme Court dismissed both these arguments and upheld the Superior Court decision.

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Photo of Robert L. Day, III Robert L. Day, III

Robert is a member of the Tax and Employee Benefits Practice Group and practices primarily in the areas of federal, state and local taxation.  Robert regularly counsels a wide variety of taxpayers including individuals, manufacturers, insurers, media companies, financial institutions, hedge funds, and…

Robert is a member of the Tax and Employee Benefits Practice Group and practices primarily in the areas of federal, state and local taxation.  Robert regularly counsels a wide variety of taxpayers including individuals, manufacturers, insurers, media companies, financial institutions, hedge funds, and asset management funds.  He also has experience representing these clients in tax controversies before the Connecticut Department of Revenue Services and other taxing authorities.

Photo of Alan E. Lieberman Alan E. Lieberman

Alan Lieberman’s practice involves counseling clients on matters involving international, federal, state and local taxation, and representing them in tax-related disputes in administrative and court proceedings. In addition, Alan represents clients in the formation, reorganization, and liquidation of business entities and tax-exempt organizations.

Photo of Louis B. Schatz Louis B. Schatz

Louis Schatz is a partner in Shipman’s Tax and Employee Benefits Practice Group, a group which he chaired for many years. From 2007 to 2017, Lou served on the firm’s seven-person Management Committee. He is the past Chair of the Tax Section of…

Louis Schatz is a partner in Shipman’s Tax and Employee Benefits Practice Group, a group which he chaired for many years. From 2007 to 2017, Lou served on the firm’s seven-person Management Committee. He is the past Chair of the Tax Section of the Connecticut Bar Association.

Lou practices in the areas of federal and State of Connecticut tax with attention to the representation of closely held businesses organized as limited liability companies, partnerships and S corporations; real estate joint ventures; and the representation of taxpayers involved in federal and Connecticut tax controversies (at the audit, appellate and court levels). He is a frequent lecturer on federal and State of Connecticut tax, partnership and limited liability company issues.