Allen v. Commissioner of Revenue Services , 324 Conn. 292 ( 2017 )

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JEFFERSON ALLEN ET AL. v. COMMISSIONER
OF REVENUE SERVICES
(SC 19567)
Palmer, Zarella, Eveleigh, McDonald and Robinson, Js.
Argued October 13—officially released December 28, 2016*
Daniel J. Krisch, with whom was Leslie E. Grodd,
for the appellants (plaintiffs).
Patrick T. Ring, assistant attorney general, with
whom were Matthew J. Budzik, assistant attorney gen-
eral, and, on the brief, George Jepsen, attorney general,
for the appellee (defendant).
Opinion
EVELEIGH, J. The plaintiffs, Jefferson Allen and
Evita Allen, appeal1 from the trial court’s award of sum-
mary judgment upholding the decision of the defendant,
the Commissioner of Revenue Services, denying their
request for a tax refund for the taxable years 2002, 2006,
and 2007. In this appeal, the plaintiffs claim that the trial
court improperly concluded that: (1) it lacked subject
matter jurisdiction with respect to the plaintiffs’ claim
for a refund for the taxable year 2002 on the basis of
the three year limitation period to file an income tax
refund pursuant to General Statutes § 12-732 (a); (2)
§ 12-711(b)-18 of the Regulations of Connecticut State
Agencies permitted the defendant to tax the plaintiffs’
income derived from the exercise of options because
the options were granted as compensation for per-
forming services within the state; and (3) it is constitu-
tional to impose a tax on income derived from the
exercise of nonqualified stock options2 by a nonresident
who was granted the options as compensation for per-
forming services within the state. We disagree with each
of the plaintiffs claims. Because the form of the trial
court’s judgment with respect to the plaintiffs’ claim
relating to the taxable year 2002 was improper, we
reverse the trial court’s award of summary judgment
with respect to that taxable year and remand the case
with direction to render judgment dismissing that claim.
We affirm the judgment of the trial court in all other
respects.
The following undisputed facts and procedural his-
tory are relevant to this appeal. From 1990 to 2001,
Jefferson Allen3 served as president and chief financial
officer of Tosco, Inc. (Tosco). During this period, Allen
was domiciled in and performed services solely within
Connecticut. As part of his compensation while
employed with Tosco, he was awarded nonqualified
stock options.4 In 2002, while the plaintiffs were residing
outside of Connecticut, Allen exercised the options he
was granted by Tosco, resulting in $7,633,027 of income.
The plaintiffs filed a Connecticut nonresident and part
year resident income tax return reporting income from
exercising these options in 2002 and paid the applica-
ble tax.
After a period of nonresidency from 2002 to 2004,
the plaintiffs returned to Connecticut in 2005. From
January 1, 2005 to August 31, 2005, Allen served as the
chief executive officer of Premcor, Inc. (Premcor), and
performed services solely within Connecticut. As part
of his compensation for performing services for
Premcor, Allen was awarded nonqualified stock
options.5 The plaintiffs again moved out of Connecticut
and resided outside the state in 2006 and 2007. In 2006,
Allen exercised certain stock options he had earned
performing services for Premcor, resulting in
$43,360,812 of income. In 2007, Allen again exercised
certain stock options that were earned as compensation
for performing services for Premcor, resulting in
$2,247,745 of income. The plaintiffs timely filed their
tax returns and paid the applicable tax for the taxable
years 2007 and 2008.
In October, 2009, the plaintiffs filed amended returns
for the taxable years 2002, 2006, and 2007, claiming
refunds for the income tax that the plaintiffs had paid
in each of those years. The plaintiffs’ claims for a refund
were denied. In 2013, the Appellate Division of the
Department of Revenue Services affirmed the denial.
The defendant thereafter issued a final determination
denying the plaintiffs’ claims for refunds.
Pursuant to General Statutes § 12-730,6 the plaintiffs
timely filed an appeal from the defendant’s determina-
tion in the Superior Court. The parties filed cross
motions for summary judgment on stipulated facts,
which the trial court granted in favor of the defendant.
This appeal followed. Additional facts and procedural
history will be set forth as necessary.
I
First we address the issue of whether the trial court
properly concluded that it lacked subject matter juris-
diction regarding the plaintiffs’ claim for a refund for
the taxable year 2002 because they filed their claim
after the lapse of the three year statute of limitations for
such a claim pursuant to § 12-732 (a) (1). The plaintiffs
concede that their request for a refund was filed after
the lapse of the three year period.7 Nevertheless, relying
principally upon Williams v. Commission on Human
Rights & Opportunities, 257 Conn. 258, 777 A.2d 645
(2001), the plaintiffs argue that the three year statute
of limitations is not jurisdictional and, therefore, should
be equitably tolled. In response, the defendant claims
that the statute of limitations, because it forms part of
a statutory scheme that waives sovereign immunity, is
jurisdictional and should not be tolled. We agree with
the defendant.
The following additional facts and procedural history
are relevant to the resolution of this issue. The defen-
dant commenced an audit of the plaintiffs’ taxable year
2005 income tax return in July 2006. In March 2007, the
defendant expanded the audit to include the taxable
years 2001 through 2004. Around this same time, the
plaintiffs filed a Connecticut nonresident and part year
resident return reporting income from 2002 and paid
the applicable tax. In October 2009, the plaintiffs filed
amended returns for the taxable year 2002, claiming a
refund for the income tax that the plaintiffs had paid.
In October, 2012, the plaintiffs claim for a refund for
the taxable year 2002 was disallowed. The defendant
denied the request for a refund on the grounds that,
pursuant to § 12-732 (a) (1),8 the claim for a refund was
untimely. The trial court affirmed the determination of
the defendant, concluding that it lacked subject matter
jurisdiction to consider the plaintiffs’ claim.
Our standard of review with respect to a trial court
determination regarding subject matter jurisdiction is
well settled. ‘‘A determination regarding a trial court’s
subject matter jurisdiction is a question of law. When
. . . the trial court draws conclusions of law, our
review is plenary and we must decide whether its con-
clusions are legally and logically correct and find sup-
port in the facts that appear in the record.’’ (Internal
quotation marks omitted.) Citibank, N.A. v. Lindland,
310 Conn. 147, 161, 75 A.3d 651 (2013).
‘‘The principle that the state cannot be sued without
its consent, or sovereign immunity, is well established
under our case law. . . . It has deep roots in this state
and our legal system in general, finding its origin in
ancient common law. . . . Not only have we recog-
nized the state’s immunity as an entity, but [w]e have
also recognized that because the state can act only
through its officers and agents, a suit against a state
officer concerning a matter in which the officer repre-
sents the state is, in effect, against the state.’’ (Internal
quotation marks omitted.) DaimlerChrysler Corp. v.
Law, 284 Conn. 701, 711, 937 A.2d 675 (2007). The princi-
ple of sovereign immunity implicates the subject matter
jurisdiction of the court. Id.; see also Giannoni v. Com-
missioner of Transportation, 322 Conn. 344, 349, 141
A.3d 784 (2016) (‘‘sovereign immunity implicates [a
court’s] subject matter jurisdiction’’ [internal quotation
marks omitted]); Chief Information Officer v. Comput-
ers Plus Center, Inc., 310 Conn. 60, 79, 74 A.3d 1242
(2013) (same); Nelson v. Dettmer, 305 Conn. 654, 660,
46 A.3d 916 (2012) (same); Miller v. Egan, 265 Conn.
301, 313, 828 A.2d 549 (2003) (same).9
The principles governing statutory waivers of sover-
eign immunity are well established. ‘‘[A] litigant that
seeks to overcome the presumption of sovereign immu-
nity [pursuant to a statutory waiver] must show that
. . . the legislature, either expressly or by force of a
necessary implication, statutorily waived the state’s
sovereign immunity . . . . In making this determina-
tion, [a court shall be guided by] the well established
principle that statutes in derogation of sovereign immu-
nity should be strictly construed. . . . [When] there is
any doubt about their meaning or intent they are given
the effect which makes the least rather than the most
change in sovereign immunity. . . . Furthermore,
because such statutes are in derogation of the common
law, [a]ny statutory waiver of immunity must be nar-
rowly construed . . . and its scope must be confined
strictly to the extent the statute provides.’’ (Citation
omitted; internal quotation marks omitted.) Housatonic
Railroad Co. v. Commissioner of Revenue Services,
301 Conn. 268, 288–89, 21 A.3d 759 (2011). ‘‘Whether the
legislature has waived the state’s sovereign immunity
raises a question of statutory interpretation.’’ Id. As
such, we are guided by the principles of General Stat-
utes § 1-2z.
A tax appeal is a two step process. With respect to
a claim for a refund for income taxes, the plaintiff must
first timely file a claim with the defendant. General
Statutes § 12-732 (a) (1); see Federal Deposit Ins. Corp.
v. Crystal, 251 Conn. 748, 759, 741 A.2d 956 (1999).
Section 12-732 (a) (1), in establishing an administrative
claim for a refund, is not itself an express or implicit
waiver of sovereign immunity. See DaimlerChrysler
Corp. v. Law, supra, 284 Conn. 715 (noting that sales
and use tax refund statute, General Statutes § 12-425
is not waiver of sovereign immunity). The applicable
appeal statute, § 12-730, does, however, statutorily
waive sovereign immunity. Id. Compliance with the
refund statute is a condition precedent to availing one-
self of the limited statutory waiver of sovereign immu-
nity provided by the appeal statute. See Federal Deposit
Ins. Corp. v. Crystal, supra, 760 (noting that corporate
tax refund statute ‘‘establishes an administrative
request for a refund as the prescribed avenue of relief
that the [plaintiff was] required to follow in order to take
advantage of the state’s limited waiver of its sovereign
immunity’’ [internal quotation marks omitted]).
Our firmly rooted principles of sovereign immunity
demand strict compliance with the procedures set forth
in the relevant statutes. In determining the scope of the
statutory waiver of sovereign immunity, we are mindful
that the underlying refund claim may impose ‘‘a mone-
tary obligation on the sovereign, and thus it is essential
for its requirements to be satisfied.’’ (Internal quotation
marks omitted.) Housatonic Railroad Co. v. Commis-
sioner of Revenue Services, supra, 301 Conn. 289, quot-
ing DaimlerChrysler Corp. v. Law, supra, 284 Conn.
716. In DaimlerChrysler Corp., we reasoned that the
plaintiff had failed to fall within the ambit of the relevant
appeal statute because, inter alia, the plaintiff invoked
the relevant sales and use refund statute, § 12-425,
‘‘independent of the statutory prerequisites for its appli-
cation . . . and without the ability to satisfy those pre-
requisites.’’ DaimlerChrysler Corp. v. Law, supra,
716–17.10 Accordingly, the plaintiff in that case did ‘‘not
fall within the class of persons entitled to a refund
pursuant to § 12-425 for whom the legislature waived
sovereign immunity.’’ Id., 717.
We have also addressed this issue in the context of
corporate taxes in Federal Deposit Ins. Corp. v. Crystal,
supra, 251 Conn. 759–60. In that case, we staed: ‘‘There
is no question . . . that if [the plaintiff] were seeking
. . . a refund of . . . corporation business taxes that
the banks11 had allegedly overpaid for the years in ques-
tion . . . failure to follow the procedures set forth in
[General Statutes] § 12-225 (b) (1)12 would deprive the
court of subject matter jurisdiction over such a claim.’’
(Footnotes added.) Id., 759. We noted that the statute
‘‘establishes an administrative request for a refund as
the prescribed avenue of relief that the [plaintiff was]
required to follow in order to take advantage of the
state’s limited waiver of its sovereign immunity.’’ Id.,
750. ‘‘We have frequently held that where a statute has
established a procedure to redress a particular wrong
a person must follow the specified remedy and may
not institute a proceeding that might have been permis-
sible in the absence of such a statutory procedure. Nor-
wich v. Lebanon, 200 Conn. 697, 708, 513 A.2d 77 (1986).
When an adequate administrative remedy exists at law,
a litigant must exhaust it before the Superior Court will
obtain jurisdiction over an independent action on the
matter. . . . Owner-Operators Independent Drivers
Assn. of America v. State, 209 Conn. 679, 686–87, 553
A.2d 1104 (1989). Thus, intertwined principles of sover-
eign immunity and exhaustion of administrative reme-
dies would require that any claim for a refund of taxes
allegedly overpaid . . . be preceded by a timely
amended return and claim for such a refund pursuant to
§ 12-225. Id., 686.’’ (Internal quotation marks omitted.)
Federal Deposit Ins. Corp. v. Crystal, supra, 760. While
the statute discussed in Federal Deposit Ins. Corp. v.
Crystal, supra, 760, § 12-225 (b) (1), implicated corpo-
rate taxes, both §§ 12-225 (b) (1) and 12-732 (a) (1)
permit claims for refunds within only a prescribed three
year period. In addition, both statutes provide that
‘‘[f]ailure to file a claim within the time prescribed in
this section constitutes a waiver of any demand against
the state on account of overpayment.’’ General Statutes
§§ 12-225 (b) (1) and 12-732 (a) (1).
In short, the refund statute and the appeal statute
set forth precise procedures a taxpayer must follow in
order to invoke the jurisdiction of the trial court to
review their claim.13 In the present case, the plaintiffs
failed to comply with the requirements of § 12-732 (a)
(1). Because the plaintiffs failed to comply with the
statutory prerequisites for their administrative refund
claim for the 2002 taxable year, the trial court was
without subject matter jurisdiction to consider that
claim.
II
We next address the plaintiffs’ claims with respect
to taxable years 2006 and 2007. The plaintiffs claim that
the income derived from the exercise of the Premcor
options by Allen in 2006 and 2007 is not properly taxable
under § 12-711(b)-18 (a) of the regulations. Specifically,
the plaintiffs claim that § 12-711(b)-18 (a) requires a
taxpayer to be performing services in Connecticut at
the time of exercising the options, as well as at the
time the options were awarded, in order for the income
derived therefrom to be subject to taxation. The defen-
dant contends that § 12-711(b)-18 (a) requires only that
the taxpayer have been performing services in Connect-
icut at the time the options were granted. The plaintiffs
further claim that taxation of the income derived from
the exercise of the Premcor options violates the due
process clause of the federal constitution. We disagree
with the plaintiffs.
The following additional facts and procedural history
are relevant to the resolution of these issues. In October
2009, the plaintiffs filed amended returns for the taxable
years 2006 and 2007, claiming refunds for the income
tax that the plaintiffs had paid for both of those years.
The defendant denied the plaintiffs’ claims for a refund
for taxable years 2006 and 2007 on the grounds that
the Premcor options were granted as compensation for
services Allen performed in Connecticut and, therefore,
the income was properly reported as income from Con-
necticut sources. In 2013, the Appellate Division of the
Department of Revenue Services affirmed the denial.
The defendant thereafter issued a final determination
denying the plaintiffs’ claims for refunds. The plaintiffs
timely appealed to the trial court, which affirmed the
decision of the defendant and rejected the plaintiffs’
constitutional claim.
A
Our resolution of this issue first requires a discussion
of the legal framework applicable to the state and fed-
eral taxation of nonqualified stock options. General
Statutes § 12-700 (b) authorizes the taxation of income
‘‘derived from or connected with sources within this
state of each nonresident . . . .’’ The tax upon nonresi-
dents is determined by the application of a formula that
includes the nonresident’s ‘‘Connecticut adjusted gross
income derived from or connected with sources within
this state . . . .’’ General Statutes § 12-700 (b). While
the terms ‘‘adjusted gross income’’ and ‘‘Connecticut
adjusted gross income’’ are defined by statute; see Gen-
eral Statutes § 12-701 (a) (19) and (20);14 the legislature
delegated to the defendant ability to define the term
‘‘ ‘derived from or connected with sources within this
state’ . . . .’’ General Statutes § 12-701 (c). Pursuant
to this statutory authority, the defendant has promul-
gated a regulation that addresses nonqualified stock
options that provides in relevant part as follows: ‘‘Con-
necticut adjusted gross income derived from or con-
nected with sources within this state includes . . .
income recognized under section 83 of the Internal Rev-
enue Code in connection with a nonqualified stock
option if, during the period beginning with the first day
of the taxable year of the optionee during which such
option was granted and ending with the last day of the
taxable year of the optionee during which such option
was exercised (or, if the option has a readily ascertain-
able fair market value, as defined in 26 C.F.R. § 1.83-
7[b], at the time of grant, the taxable year during which
such option was granted), the optionee was performing
services within Connecticut . . . .’’ Regs., Conn. State
Agencies § 12-711(b)-18 (a).
Because § 12-711(b)-18 of the regulations incorpo-
rates § 83 of the Internal Revenue Code, we look to
federal law for further guidance on the taxation of non-
qualified stock options.15 Under the federal law, the
transfer of property in exchange for the performance
of services is generally subject to taxation. See 26 U.S.C.
§ 83 (a). Not all transfers of property in exchange for
the performance of services are taxable events at the
time of transfer. One such transfer is the transfer of
stock options without a readily ascertainable fair mar-
ket value. 26 U.S.C. § 83 (e) (3); see Commissioner of
Internal Revenue v. LoBue, 351 U.S. 243, 249, 76 S. Ct.
800, 100 L. Ed. 1142 (1956). This, however, is by no
means a tax shelter. Taxation is merely deferred until
the taxpayer exercises the option. 26 C.F.R. § 1.83-7
(a).16 Indeed, ‘‘the uniform Treasury practice since 1923
has been to measure the compensation to employees
given stock options subject to contingencies of this sort
by the difference between the option price and the
market value of the shares at the time the option is
exercised.’’ Commissioner of Internal Revenue v.
LoBue, supra, 249. ‘‘[E]ver since LoBue it has been
unquestioned that, except for statutory alleviation,
when a compensatory option has no ascertainable mar-
ket value as of the time of grant, the receipt of fruits
of the option when exercised, fixes the time and mea-
sures the value of the economic benefit intended to
be, and now, conferred upon the employee.’’ Rank v.
United States, 345 F.2d 337, 343 (5th Cir. 1965); see
also Sutardja v. United States, 109 Fed. Cl. 358, 363
(2013) (‘‘[T]he Supreme Court established half a century
ago that, absent certain circumstances, the mere grant
of employee stock options is not a taxable event. . . .
A taxable event occurs only when the option is exer-
cised, resulting in a sale of shares to the employee, the
net value of which is immediately taxable.’’ [Citations
omitted.]).
B
With that background in mind, we now address the
proper construction of § 12-711(b)-18 (a) of the regula-
tions. The plaintiffs claim that § 12-711(b)-18 (a)
requires a taxpayer to be performing services in Con-
necticut at the time of exercising the options, as well
as at the time the options were awarded, in order for
the income derived therefrom to be subject to taxation.
The defendant contends that § 12-711(b)-18 (a) requires
only that the taxpayer have been performing services
in Connecticut at the time the options were granted.
We agree with the defendant.
‘‘Administrative regulations have the ‘full force and
effect’ of statutory law and are interpreted using the
same process as statutory construction . . . .’’ (Inter-
nal quotation marks omitted.) Sarrazin v. Coastal, Inc.,
311 Conn. 581, 603, 89 A.3d 841 (2014); see also Alexan-
dre v. Commissioner of Revenue Services, 300 Conn.
566, 578, 22 A.3d 518 (2011); Hasychak v. Zoning Board
of Appeals, 296 Conn. 434, 443, 994 A.2d 1270 (2010).
Accordingly, ‘‘[i]n conducting this analysis, we are
guided by the well established principle that [i]ssues
of statutory construction raise questions of law, over
which we exercise plenary review. . . . We are also
guided by the plain meaning rule for statutory construc-
tion. See General Statutes § 1-2z.’’ (Internal quotation
marks omitted.) LaFrance v. Lodmell, 322 Conn. 828,
833–34, 144 A.3d 373 (2016).
‘‘When construing a statute, [the court’s] fundamental
objective is to ascertain and give effect to the apparent
intent of the legislature. . . . In other words, [the
court] seek[s] to determine, in a reasoned manner, the
meaning of the statutory language as applied to the
facts of [the] case, including the question of whether
the language actually does apply. . . . In seeking to
determine that meaning . . . § 1-2z directs [the court]
first to consider the text of the statute itself and its
relationship to other statutes. If, after examining such
text and considering such relationship, the meaning of
such text is plain and unambiguous and does not yield
absurd or unworkable results, extratextual evidence of
the meaning of the statute shall not be considered. . . .
The test to determine ambiguity is whether the statute,
when read in context, is susceptible to more than one
reasonable interpretation.’’ (Citation omitted; internal
quotation marks omitted.) Price v. Independent Party
of CT—State Central, 323 Conn. 529, 539–40, 147 A.3d
529 (2016).
The starting point in the analysis is the language of
§ 12-711(b)-18 (a) of the regulations itself, which is set
forth in part II A of this opinion. The plaintiffs claim
that ambiguity lies in the meaning of the word ‘‘during,’’
as used in § 12-711(b)-18 (a) of the regulations. Because
that term is not defined by regulation or statute, we
look to the dictionary for guidance. General Statutes
§ 1-1 (a). ‘‘[D]uring’’ is defined as both ‘‘throughout the
continuance or course of’’ and ‘‘at some point in the
course of . . . .’’ Webster’s Third New International
Dictionary (1961). By applying the first definition, § 12-
711(b)-18 (a) of the regulations would subject option
income to taxation only if the taxpayer had been per-
forming services in the state throughout the period in
which the options were granted and subsequently exer-
cised. By applying the second definition, § 12-711(b)-18
(a) of the regulations would require that the nonresident
taxpayer only have been performing services in the
state at the time the options were awarded. The parties
disagree as to which definition of ‘‘during’’ is proper. As
we have repeatedly noted, however, statutory language
‘‘does not become ambiguous merely because the par-
ties contend for different meanings.’’ (Internal quota-
tion marks omitted.) Glastonbury Co. v. Gillies, 209
Conn. 175, 180, 550 A.2d 8 (1988); see also Luttrell v.
Luttrell, 184 Conn. 307, 310–11, 439 A.2d 981 (1981);
Caldor, Inc. v. Heffernan, 183 Conn. 566, 571, 440 A.2d
767 (1981). We conclude that § 12-711(b)-18 (a) of the
regulations is unambiguous because application of the
second definition of ‘‘during’’ leads to the only reason-
able construction. See Planning & Zoning Commis-
sion v. Freedom of Information Commission, 316
Conn. 1, 12–13, 110 A.3d 419 (2015) (‘‘it is a basic tenet
of statutory construction that [w]e construe a statute
as a whole and read its subsections concurrently in
order to reach a reasonable overall interpretation’’
[internal quotation marks omitted]).17
Reading the term ‘‘during’’ in § 12-711(b)-18 (a) of
the regulations to mean ‘‘throughout the continuance
or course of’’; Webster’s Third New International Dic-
tionary, supra; is unreasonable for two reasons. First,
this definition of ‘‘during’’ would create disharmony
within the regulation itself. It is axiomatic that the legis-
lature is presumed to have enacted a consistent and
harmonious body of law. See LaFrance v. Lodmell,
supra, 322 Conn. 837. It is a ‘‘cardinal’’ maxim of statu-
tory interpretation ‘‘that statutes shall not be construed
to render any sentence, clause, or phrase superfluous
or meaningless.’’ (Internal quotation marks omitted.)
Commissioner of Public Safety v. Freedom of Informa-
tion Commission, 312 Conn. 513, 543, 93 A.3d 1142
(2014); Connecticut Podiatric Medical Assn. v. Health
Net of Connecticut, Inc., 302 Conn. 464, 474, 28 A.3d
958 (2011) (‘‘[I]t is a basic tenet of statutory construc-
tion that the legislature [does] not intend to enact mean-
ingless provisions. . . . [I]n construing statutes, we
presume that there is a purpose behind every sentence,
clause, or phrase used in an act and that no part of a
statute is superfluous.’’ [Internal quotation marks
omitted.]).
Subsection (a) of § 12-711(b)-18 of the regulations
defines the income derived from stock options as
includable in Connecticut adjusted gross income, sub-
ject to certain conditions. This subsection contains pro-
viso language, ‘‘to the extent provided in this section,’’
which indicates that other parts of the regulation further
delineate how much of the income is includable in Con-
necticut adjusted gross income. Subsection (b) of § 12-
711(b)-18 requires the application of a formula to deter-
mine how much income is includable in Connecticut
gross income for nonresident taxpayers who perform
services wholly within Connecticut. Subsection (c) of
§ 12-711(b)-18 requires the application of a different
formula to determine how much income is includable
in Connecticut gross income for nonresident taxpayers
who perform services partly within and partly without
the state of Connecticut.18 If subsection (a) were con-
strued to require the taxpayer to be performing services
within Connecticut throughout the course of the rele-
vant time period, then the option income of a taxpayer
who performs services partially within and partially
without Connecticut would, by definition, not be includ-
able in Connecticut adjusted income. Consequently, the
formula set forth in subsection (c) to be applied to
such a taxpayer would be superfluous because such
taxpayer’s option income would not be includable in
gross income pursuant to subsection (a). Likewise,
under the plaintiffs’ construction, there would be no
need to distinguish between taxpayers performing ser-
vices wholly in Connecticut and taxpayers performing
services partially within and partially without Connecti-
cut because the option income of the latter would not
be includable in Connecticut adjusted gross income
pursuant to subsection (a).
Second, the plaintiffs’ proposed construction of the
relevant regulation would lead to bizarre results. It is
well established that ‘‘those who promulgate statutes
. . . do not intend . . . absurd consequences or
bizarre results.’’ (Internal quotation marks omitted.)
State v. Courchesne, 296 Conn. 622, 710, 998 A.2d 1
(2010). According to the plaintiffs’ proposed construc-
tion, option income is includable in Connecticut
adjusted gross income only if the optionee was per-
forming services within Connecticut throughout the
course of ‘‘the period beginning with the first day of
the taxable year of the optionee during which such
option was granted and ending with the last day of the
taxable year of the optionee during which such option
was exercised . . . .’’ Regs., Conn. State Agencies § 12-
711(b)-18 (a). The practical consequence of this con-
struction is that a taxpayer may commence performing
services after the first day of the taxable year in which
the options are granted or cease performing services
before the last day of the taxable year in which the
options are exercised in order to escape taxation of
the option income. By way of example, if a taxpayer
commences performing services in Connecticut on Feb-
ruary 1, is awarded options on June 30, exercises the
options on March 1 of the following year, and continues
employment thereafter, the income would not be
includable in Connecticut adjusted gross income
because the taxpayer was not performing services in
Connecticut during January, the first month of the tax-
able year in which the options were granted. Other
similar examples could be envisaged. In addition, this
construction is without a limiting principle. A taxpayer
who takes one month of leave could claim that he was
not performing services ‘‘throughout the continuance
or course of’’ the relevant period. Perhaps a similar
claim could be made for a week of leave, or even a
day. This construction of the regulation is unreasonable
and does not give effect to the intention of the defendant
in promulgating the regulation.
Application of the second definition of ‘‘during,’’ i.e.,
‘‘at some point in the course of,’’ furnishes a reasonable
construction of the regulatory language at issue. Under
this construction, if at any point during the taxable year
in which the options were granted and the taxable year
in which the options were exercised the taxpayer were
performing services in Connecticut, the income derived
from the exercise of the options would be includable in
Connecticut adjusted gross income. In turn, subsections
(b) and (c) of § 12-711(b)-18 of the regulations set forth
the extent to which the income is includable in Connect-
icut adjusted gross income on the basis of whether
the services were performed wholly or partially within
Connecticut. This construction imposes no irrational or
arbitrary conditions upon the taxation of option income
and comports comfortably with the due process princi-
ple that a state may tax the compensation of nonresi-
dents who perform services within the taxing state. See
part II C of this opinion.
The plaintiffs’ claim that the defendant’s construction
of the regulation would result in absurd results because
a nonresident would be taxed upon the exercise of
stock options but ‘‘income distributed from a pension
or retirement plan to nonresidents’’ would not be sub-
ject to taxation. Regs., Conn. State Agencies § 12-
711(b)-12. This is absurd, the plaintiffs claim, because
while both forms of income are earned while per-
forming services in the state, only the former is subject
to taxation. We disagree that this is an absurd result.
First, we note that federal law prohibits state taxation
of a nonresident’s retirement income. See 4 U.S.C. § 114
(a).19 Second, it is well established that ‘‘[a] [s]tate may
divide different kinds of property into classes and assign
to each class a different tax burden so long as those
divisions and burdens are reasonable.’’ Allegheny Pitts-
burgh Coal Co. v. County Commission, 488 U.S. 336,
344, 109 S. Ct. 633, 102 L. Ed. 2d 688 (1989); cf. Allied
Stores of Ohio, Inc. v. Bowers, 358 U.S. 522, 526–27, 79
S. Ct. 437, 3 L. Ed. 2d 480 (1959) (‘‘The [s]tate may
impose different specific taxes upon different trades
and professions and may vary the rate of excise upon
various products. It is not required to resort to close
distinctions or to maintain a precise, scientific unifor-
mity with reference to composition, use or value.’’). This
disparate treatment of two different forms of income
reflects the policy judgment that the defendant may
exercise pursuant to the authority vested in it by the leg-
islature.
Allen was performing services solely within Connecti-
cut when he earned the Premcor options in 2005.
Accordingly, we conclude that the income derived from
the exercise of the Premcor options by Allen in 2006
and 2007 is properly taxable under § 12-711(b)-18 (a)
of the regulations.
C
We next address whether the trial court properly
concluded that the taxation of the income derived from
Allen’s exercise of the Premcor options in 2006 and
2007 while a nonresident of Connecticut violated the
due process clause of the federal constitution. The
plaintiffs claim that taxation of income derived from
the exercise of stock options by a nonresident violates
the due process clause because the options had no
readily ascertainable value when they were granted and
there was an insufficient nexus between Connecticut
and the value attributable to the options at the time of
exercise. The defendant claims that the fact that Allen
was granted the stock options as compensation for
performing services in Connecticut serves as a suffi-
cient nexus to the state to satisfy the requirements of
the due process clause. We agree with the defendant.
In this appeal challenging the constitutionality of a
regulation, we apply the same standard of review for
challenges to the constitutionality of a statute.
‘‘Determining the constitutionality of a statute presents
a question of law over which our review is plenary.
. . . It [also] is well established that a validly enacted
statute carries with it a strong presumption of constitu-
tionality, [and that] those who challenge its constitu-
tionality must sustain the heavy burden of proving its
unconstitutionality beyond a reasonable doubt. . . .
The court will indulge in every presumption in favor of
the statute’s constitutionality . . . . Therefore, [w]hen
a question of constitutionality is raised, courts must
approach it with caution, examine it with care, and
sustain the legislation unless its invalidity is clear.’’
(Internal quotation marks omitted.) Doe v. Hartford
Roman Catholic Diocesan Corp., 317 Conn. 357, 405,
119 A.3d 462 (2015).
The power of Connecticut to impose a tax is a firmly
rooted inherent sovereign power. See Shaffer v. Carter,
252 U.S. 37, 51, 40 S. Ct. 221, 64 L. Ed. 445 (1920) (‘‘[t]he
rights of the several [s]tates to exercise the widest lib-
erty with respect to the imposition of internal taxes
always has been recognized in the decisions of [the
Supreme Court of the United States]’’); M’Culloch v.
Maryland, 17 U.S. (4 Wheat.) 316, 429, 4 L. Ed. 579
(1819) (‘‘It is obvious, that it is an incident of sover-
eignty, and is co-extensive with that to which it is an
incident. All subjects over which the sovereign power
of a [s]tate extends, are objects of taxation . . . .’’).
This sovereign power, however, is not unbounded. The
due process clause of the fourteenth amendment to the
United States constitution20 places a limit upon Con-
necticut’s power to impose a tax.21 ‘‘A state is free to
pursue its own fiscal policies, unembarrassed by the
[c]onstitution, if by the practical operation of a tax the
state has exerted its power in relation to opportunities
which it has given, to protection which it has afforded,
to benefits which it has conferred by the fact of being
an orderly, civilized society.’’ (Internal quotation marks
omitted.) Chase Manhattan Bank v. Gavin, 249 Conn.
172, 184, 733 A.2d 782, cert. denied, 528 U.S. 965, 120
S. Ct. 401, 145 L. Ed. 2d 312 (1999), quoting Wisconsin
v. J. C. Penney Co., 311 U.S. 435, 444, 61 S. Ct. 246, 85
L. Ed. 267 (1940).
‘‘[T]he due process clause denies to the state power
to tax or regulate the [entity’s] property and activities
elsewhere.’’ Connecticut General Life Ins. Co. v. John-
son, 303 U.S. 77, 80–81, 58 S. Ct. 436, 82 L. Ed. 673 (1938).
In order to determine whether a state tax comports with
the constraints of the due process clause, a reviewing
court shall examine ‘‘whether the taxing power exerted
by the state bears a fiscal relation to protection, oppor-
tunities and benefits given by the state. The simple
but controlling question is whether the state has given
anything for which it can ask return.’’ (Internal quota-
tion marks omitted.) Chase Manhattan Bank v. Gavin,
supra, 249 Conn. 184.
The standard has been refined to a two part test.
‘‘The [d]ue [p]rocess [c]lause demands that [1] there
exist some definite link, some minimum connection,
between a state and the person, property or transaction
it seeks to tax, as well as [2] a rational relationship
between the tax and the values connected with the
taxing [s]tate.’’ (Internal quotation marks omitted.)
MeadWestvaco Corp. v. Illinois Dept. of Revenue, 553
U.S. 16, 24, 128 S. Ct. 1498, 170 L. Ed. 2d 404 (2008);
see also Quill Corp. v. North Dakota, 504 U.S. 298, 306,
112 S. Ct. 1904, 119 L. Ed. 2d 91 (1992); Mobil Oil Corp.
v. Commissioner of Taxes, 445 U.S. 425, 436–37, 100
S. Ct. 1223, 63 L. Ed. 2d 510 (1980); Moorman Mfg. Co.
v. Bair, 437 U.S. 267, 272–73, 98 S. Ct. 2340, 57 L. Ed.
2d 197 (1978).
The first prong of the test, the minimum connection
requirement, may be satisfied in a number of circum-
stances. ‘‘It is well established that a state may tax all
of the income of one of its domiciliaries, irrespective of
the source of that income, geographical or otherwise.’’
Chase Manhattan Bank v. Gavin, supra, 249 Conn.
188, citing Oklahoma Tax Commission v. Chickasaw
Nation, 515 U.S. 450, 462–63, 115 S. Ct. 2214, 132 L. Ed.
2d 400 (1995). It is equally well established that a state
may tax the income of nonresidents earned within the
taxing state. See Shaffer v. Carter, supra, 252 U.S. 52
(‘‘just as a [s]tate may impose general income taxes
upon its own citizens and residents whose persons are
subject to its control, it may, as a necessary conse-
quence, levy a duty of like character, and not more
onerous in its effect, upon incomes accruing to [nonresi-
dents] from their property or business within the [s]tate,
or their occupations carried on therein; enforcing pay-
ment, so far as it can, by the exercise of a just control
over persons and property within its borders’’); see also
Zelinsky v. Tax Appeals Tribunal, 1 N.Y.3d 85, 97, 801
N.E.2d 840, 769 N.Y.S.2d 464 (2003) (concluding that
Connecticut resident ‘‘clearly has a ‘minimum connec-
tion’ to New York by virtue of his employment’’ at New
York law school). Additionally, as we have previously
noted, the United States Supreme Court has incorpo-
rated principles from its judicial jurisdiction line of
cases into the ‘‘minimum connection’’ analysis by
rejecting the formalistic test of taxpayer ‘‘ ‘presence’ ’’
in the jurisdiction and analyzing whether the taxpayer’s
contacts with the state make the exercise of jurisdiction
reasonable. See Chase Manhattan Bank v. Gavin,
supra, 186–87 (discussing Quill v. North Dakota, supra,
504 U.S. 306–308).22
With respect to the second prong of the test, a rational
relationship between the tax and the values connected
with the taxing state, ‘‘its principal application has been
in cases in which a state seeks to attribute to its tax base
some portion of the property or income of a multistate
business enterprise that does business in the state. In
such cases, the ‘values’ to which the test refers are
numerical, economic or fiscal values—property values
in a broad sense; not values in a social science sense—
and the cases require, in general terms, that only a
fair proportion of the property or income of the total
enterprise be attributed to the taxing state. See, e.g.,
Mobil Oil Corp. v. Commissioner of Taxes of Vermont,
supra, 445 U.S. 425; Moorman Mfg. Co. v. Bair, supra,
437 U.S. 267; Norfolk & Western [Railway] Co. v. Mis-
souri Tax Commission, [390 U.S. 317, 88 S. Ct. 995, 19 L.
Ed. 2d 1201 (1968)].’’ Chase Manhattan Bank v. Gavin,
supra, 249 Conn. 185 n.14.
We conclude that taxation of the income derived from
Allen’s exercise of the Premcor options comports with
the due process clause of the federal constitution. The
jurisdictional fact that Allen earned the stock options
while performing services in Connecticut serves, for
purposes of the due process clause, as a sufficient ‘‘min-
imum connection, between a state and the person, prop-
erty or transaction it seeks to tax . . . .’’ (Internal
quotation marks omitted.) MeadWestvaco Corp. v. Illi-
nois Dept. of Revenue, supra, 553 U.S. 24. It has been
well settled for nearly one century that, without
offending the due process clause, the state may tax
‘‘incomes accruing to nonresidents from . . . occupa-
tions carried on therein . . . .’’ Shaffer v. Carter, supra,
252 U.S. 52. When Allen earned the stock options as
compensation, he was performing services in the state
of Connecticut.23 During the course of his service within
the state, he enjoyed the benefits and protections atten-
dant to employment within this state. See id., 50 (‘‘[t]hat
the [s]tate, from whose laws property and business
and industry derive the protection and security without
which production and gainful occupation would be
impossible, is debarred from exacting a share of those
gains in the form of income taxes for the support of
the government, is a proposition so wholly inconsistent
with fundamental principles as to be refuted by its
mere statement’’).
It is without question that, in both substance and
form, stock options are compensation for services per-
formed for the employer. As one scholar who has exam-
ined the use of stock option grants as compensation
described them, ‘‘[o]ptions are the best compensation
mechanism we have for getting managers to act in ways
that ensure the long-term success of their companies
and the well-being of their workers and stockholders.’’
B. Hall, ‘‘What You Need to Know About Stock Options,’’
78 Harv. Bus. Rev. (March-April 2000), pp. 121–22.
Indeed, by the late 1990s, ‘‘the grant-date value of stock
options accounted for 40 percent of total pay for [chief
executive officers of companies listed on the Standard
and Poor’s 500 index] . . . .’’ B. Hall & K. Murphy,
‘‘Optimal Exercise Prices for Executive Stock Options,’’
90 Am. Econ. Rev. 209 (2000).24 Both federal and state
tax law acknowledge this practical reality regarding the
compensatory nature of stock options and the income
derived therefrom. The United States Supreme Court
noted in LoBue, ‘‘it seems impossible to say that [the
bargain transfer at the exercise of the stock option]
was not compensation.’’ Commissioner of Internal
Revenue v. LoBue, supra, 351 U.S. 247; see also Com-
missioner of Internal Revenue v. Smith, 324 U.S. 177,
181–82, 65 S. Ct. 591, 89 L. Ed. 830 (1945) (‘‘[h]ence
the compensation for respondent’s services, which the
parties contemplated, plainly was not confined to the
mere delivery to respondent of an option of no present
value, but included the compensation obtainable by the
exercise of the option given for that purpose’’); Rice v.
Montgomery, 104 Ohio App. 3d 776, 782–83, 663 N.E.2d
389 (1995) (‘‘[the] plaintiff’s exercise of the stock option
did not yield income from stock as [the] plaintiff main-
tains, but rather yielded him earned compensation
which took the form of stock attained at lower than
market price’’ [internal quotation marks omitted]); 26
C.F.R. § 1.83-7 (a) (‘‘[i]f the option is exercised . . .
the employee or independent contractor realizes com-
pensation upon such transfer’’ [emphasis added]).
Because Allen was awarded the stock options as com-
pensation for performing services in Connecticut, there
is a sufficient jurisdictional nexus for Connecticut to
impose a tax on the compensation.
The plaintiffs claim, however, that the fact that Allen
exercised the stock options after he had ceased per-
forming services in Connecticut and began residing out-
side of Connecticut severs the jurisdictional nexus. The
plaintiffs, in support of their argument, rely on Chase
Manhattan Bank v. Gavin, supra, 249 Conn. 202–203,
in which this court reasoned as follows: ‘‘We think that
it is implicit in the due process test that the benefits
afforded by the state to a domiciliary, or its functional
equivalent, justifying the taxation of its income, must
generally span the time period during which the income
was earned, and not solely antedate that time period
without any continuing effect.’’25 (Internal quotation
marks omitted.) This principle does not stretch so far
as to require that the benefits afforded by the state
‘‘must generally span . . . and not solely antedate’’
realization of the income as the plaintiffs suggest;
rather, it demands that enjoyment of the benefits pro-
vided by the state be contemporaneous with earning
the income. Thus, the intervening passage of time
between Allen’s cessation of employment in the state
and the exercise of the stock options he earned per-
forming services in the state does not deprive the state
of jurisdiction to tax the income derived from the exer-
cise of the stock options.
The plaintiffs further contend that the income real-
ized from the exercise of the stock options is not a
result of the performance of services in Connecticut;
but rather that the income is a result of the appreciation
in value of the underlying stock, which is not connected
to Allen’s performance of services within the state. We
disagree with this characterization of the income
derived from the exercise of stock options.26 The plain-
tiffs rightly point out that the stock options had no
reasonably ascertainable fair market value at the time
the options were awarded and, consequently, were not
subject to taxation at the time they were granted. See
26 U.S.C. § 83 (e) (3). Stock options do, however, have
value at the time of award. Nonqualified stock options
would not be contemplated as a form of compensation
if they did not constitute value to the parties of an
employment contract. The difficulty lies in quantifying
the value of the stock options.27 By implementing the
applicable regulations, both the United States Internal
Revenue Service and the defendant determined that,
rather than taxing the speculative value of the options
at the time of award, the better course of action is to
calculate the taxable income on the basis of the ‘‘bargain
element’’ at the time of exercise. See Rice v. Montgom-
ery, supra, 104 Ohio App. 3d 781 (‘‘[Federal law]
resolves the difficulty of valuing a nontransferable stock
option by waiting until the option is exercised, at which
time there is a recognition of income equal to the differ-
ence between the option price and the fair market value
of the stock at the time of the exercise. At the moment
that the income is recognized, a fair market value can
be assigned to the stock option.’’). For compensation
in the form of stock options, the intended compensation
for services performed within the state is measured and
taxed at the time the options are exercised. See Rank
v. United States, supra, 345 F.2d 343 (‘‘[a]nd whatever
the conceptual shortcomings might be to a theory which
attributes to a right then having no ascertainable value
the value of its fruits when and as they acquire demon-
strable worth, it makes tax sense if not common
sense’’). Due process does not demand that compensa-
tion be taxed by the application of a formula that utilizes
economic values that are ascertainable only contempo-
raneously with the performance of services in the taxing
state. Rather, it is sufficient to satisfy due process
requirements that, for a state to impose a tax on the
compensation of a nonresident, the taxpayer has per-
formed the services in the taxing state. Shaffer v. Carter,
supra, 252 U.S. 52.28
Finally, we briefly address the second prong of the
due process test, which requires ‘‘a rational relationship
between the tax and the values connected with the
taxing [s]tate.’’ (Internal quotation marks omitted.)
MeadWestvaco Corp. v. Illinois Dept. of Revenue, supra,
553 U.S. 24. As the plaintiffs concede, this prong’s ‘‘prin-
cipal application has been in cases in which a state
seeks to attribute to its tax base some portion of the
property or income of a multistate business enterprise
that does business in the state. . . . [T]he cases
require, in general terms, that only a fair proportion
of the property or income of the total enterprise be
attributed to the taxing state.’’ Chase Manhattan Bank
v. Gavin, supra, 249 Conn. 185 n.14. Because it is undis-
puted that Allen was awarded the stock options for
performing services only in Connecticut and this issue
does not implicate a multistate business enterprise, we
perceive this prong to be inapplicable to the constitu-
tional analysis.
Accordingly we conclude that § 12-711(b)-18 of the
regulations applies to the plaintiffs in this case and, as
applied, does not violate the due process clause of the
fourteenth amendment.
The form of the judgment with respect to the 2002
taxable year is improper, the judgment is reversed with
respect to that taxable year and the case is remanded
with direction to dismiss the plaintiffs’ corresponding
appeal for lack of subject matter jurisdiction; the judg-
ment is affirmed in all other respects.
In this opinion the other justices concurred.
* December 28, 2016, the date that this decision was released as a slip
opinion, is the operative date for all substantive and procedural purposes.
1
The plaintiffs appealed to the Appellate Court, and we transferred the
appeal to this court pursuant to General Statutes § 51-199 (c) and Practice
Book § 65-1.
2
‘‘Stock options [also known as call options] allow an employee to buy
the employer’s stock at a specified future date at a price [know as the strike
price or exercise price] fixed on the date that the stock is granted. Stock
options are granted with the expectation that the stock will increase in
price during the intervening period, thus allowing the grantee the right to
buy the stock significantly below its market price.’’ (Internal quotation marks
omitted.) Scully v. US WATS, Inc., 238 F.3d 497, 507 (3d Cir. 2001). ‘‘Statutory
stock options are compensatory options that meet certain criteria and are
treated differently under the Internal Revenue Code.’’ United States v. Tuff,
469 F.3d 1249, 1251 n.2 (9th Cir. 2006). Options that do not meet these
requirements are called ‘‘nonqualifed’’ or ‘‘nonstatutory’’ stock options. Id.
3
While both Jefferson Allen and Evita Allen are the plaintiffs in this appeal,
only income earned by Jefferson Allen is relevant to this appeal. For the
sake of simplicity, hereinafter we refer to Jefferson Allen, individually, by
his surname.
4
It is undisputed that all of the options pertinent to this appeal did not
have a readily ascertainable fair market value at the time they were awarded
to Allen.
5
In August, 2005, Premcor was acquired by Valero, Inc. (Valero). As a
consequence of the acquisition, Allen’s stock options were converted to
options for Valero stock. For the sake of consistency, we refer to the options
Allen earned in 2005 as Premcor options.
6
General Statutes § 12-730 provides relevant part: ‘‘[A]ny taxpayer
aggrieved because of any determination or disallowance by the commis-
sioner under section 12-729, 12-729a or 12-732 may, within one month after
notice of the commissioner’s determination or disallowance is mailed to
the taxpayer, take an appeal therefrom to the superior court for the judicial
district of New Britain . . . .’’
7
The parties agree that the due date for filing an income tax return for
the taxable year 2002 was April 15, 2003. See General Statutes § 12-719 (a)
(‘‘[t]he income tax return required under this chapter shall be filed on or
before the fifteenth day of the fourth month following the close of the
taxpayer’s taxable year’’). Consequently, the last day that the plaintiffs could
have filed a claim for a refund was April 15, 2006. The plaintiffs filed their
claim for a refund for income tax paid for taxable year 2002 on or about
October 13, 2009.
8
General Statutes § 12-732 (a) (1) provides in relevant part: ‘‘If any tax
has been overpaid, the taxpayer may file a claim for refund in writing with
the commissioner within three years from the due date for which such
overpayment was made, stating the specific grounds upon which the claim
is founded, provided if the commissioner has extended the time for the
filing of an income tax return by the taxpayer, the taxpayer may file a claim
for refund within three years after the date on which the income tax return
is filed by the taxpayer or within three years after the extended due date
of the income tax return, whichever is earlier. . . . Failure to file a claim
within the time prescribed in this section constitutes a waiver of any demand
against the state on account of overpayment. . . .’’
9
With respect to the plaintiffs’ claim that the prescribed three year limita-
tion period set forth in § 12-732 is not jurisdictional, we find their reliance
upon Williams v. Commission on Human Rights & Opportunities, supra,
257 Conn. 258, to be misplaced. The statute at issue in Williams did not
implicate sovereign immunity. Thus, that case furnishes no persuasive basis
to deviate from our firmly rooted principles of sovereign immunity. The
plaintiffs’ citation to Wiele v. Board of Assessment Appeals, 119 Conn. App.
544, 988 A.2d 889 (2010) is inapposite for much the same reason. That
case concerned a municipal tax appeal, and, accordingly, did not implicate
sovereign immunity. See Vejseli v. Pasha, 282 Conn. 561, 572, 923 A.2d 688
(2007) (‘‘[W]e expressly have recognized that, [u]nlike the state, municipali-
ties have no sovereign immunity from suit. . . . Rather, municipal govern-
ments have a limited immunity from liability.’’ [Internal quotation marks
omitted.]).
10
The plaintiff in DaimlerChrysler Corp. also did not qualify as a ‘‘ ‘tax-
payer’ ’’ as that term was contemplated by the Connecticut Sales and Use
Taxes Act, General Statutes § 12-406 et seq. DaimlerChrysler Corp. v. Law,
supra, 284 Conn. 716.
11
The plaintiff in Crystal, the Federal Deposit Insurance Corporation, was
appointed as receiver to two insolvent banks. Federal Deposit Ins. Corp.
v. Crystal, supra, 251 Conn. 750–51 n.2. As a result, the plaintiff succeeded
to the assets and liabilities of the insolvent banks, including the banks’
claims against the Commissioner of Revenue Services in that case. Id.
12
General Statutes § 12-225 (b) (1) provides in relevant part: ‘‘Any company
which fails to include in its return items of deductions or includes items of
nontaxable income or makes any other error in such return may, within
three years from the due date of the return, file with the commissioner an
amended return, together with a claim for refund of taxes overpaid as shown
by such amended return. Failure to file a claim within the time prescribed
in this section constitutes a waiver of any demand against the state on
account of overpayment. . . .’’
13
Consistent with our principles with respect to sovereign immunity and
subject matter jurisdiction, the three year period may not be equitably tolled.
See Williams v. Commission on Human Rights & Opportunities, supra,
257 Conn. 277 (noting that ‘‘the notion of equitable tolling . . . is inconsis-
tent with the concept of subject matter jurisdiction’’).
14
‘‘‘Adjusted gross income’ means the adjusted gross income of a natural
person with respect to any taxable year, as determined for federal income
tax purposes and as properly reported on such person’s federal income tax
return.’’ General Statutes § 12-701 (a) (19). ‘‘ ‘Connecticut adjusted gross
income’ ’’ means adjusted gross income subject to modifications not relevant
to this appeal. General Statutes § 12-701 (a) (20).
15
‘‘We long have held that when our tax statutes refer to the federal tax
code, federal tax concepts are incorporated into state law. . . . Although
this rule does not require the wholesale incorporation of the entire body
of federal tax principles into our state income tax scheme, where a reference
to the federal tax code expressly is made in the language of a statute, and
where incorporation of federal tax principles makes sense in light of the
statutory language at issue, our prior cases uniformly have held that incorpo-
ration should take place.’’ (Citations omitted; internal quotation marks omit-
ted.) Berkley v. Gavin, 253 Conn. 761, 773, 756 A.2d 248 (2000).
16
Title 26 of the Code of Federal Regulations, § 1.83-7 (a), provides in
relevant part: ‘‘If there is granted to an employee or independent contractor
(or beneficiary thereof) in connection with the performance of services, an
option to which section 421 (relating generally to certain qualified and other
options) does not apply, section 83(a) shall apply to such grant if the option
has a readily ascertainable fair market value (determined in accordance
with paragraph [b] of this section) at the time the option is granted. The
person who performed such services realizes compensation upon such grant
at the time and in the amount determined under section 83(a). If section
83(a) does not apply to the grant of such an option because the option does
not have a readily ascertainable fair market value at the time of grant,
sections 83(a) and 83(b) shall apply at the time the option is exercised or
otherwise disposed of, even though the fair market value of such option
may have become readily ascertainable before such time. If the option is
exercised, sections 83(a) and 83(b) apply to the transfer of property pursuant
to such exercise, and the employee or independent contractor realizes com-
pensation upon such transfer at the time and in the amount determined
under section 83(a) or 83(b). . . .’’
17
Because we conclude that § 12-711(b)-18 (a) of the regulations is unam-
biguous, the plaintiffs are not entitled to a construction in their favor. See
Sikorsky Aircraft Corp. v. Commissioner of Revenue Services, 297 Conn.
540, 561, 1 A.3d 1033 (2010).
18
We disagree with the plaintiffs’ contention that the contrast between
subsections (a) and (c), i.e., the fact that the latter contains a formula
while the former does not, highlights the ambiguity in § 12-711(b)-18 of the
regulations. Subsection (c) delineates the quantum of income that, pursuant
to subsection (a), is defined as includable in Connecticut adjusted gross
income; it is not itself a definition of income includable in Connecticut
adjusted gross income separate and apart from subsection (a).
19
Title 4 of the United States Code, § 114 (a), provides: ‘‘No State may
impose an income tax on any retirement income of an individual who is
not a resident or domiciliary of such State (as determined under the laws
of such State).’’
20
‘‘No State shall make or enforce any law which shall abridge the privi-
leges or immunities of citizens of the United States; nor shall any State
deprive any person of life, liberty, or property, without due process of law;
nor deny to any person within its jurisdiction the equal protection of the
laws.’’ U.S. Const., amend. XIV, § 1.
21
In addition to the due process clause, the commerce clause of the federal
constitution places an additional limit upon the state’s power to impose a
tax. MeadWestvaco Corp. v. Illinois Dept. of Revenue, 553 U.S. 16, 24, 128
S. Ct. 1498, 170 L. Ed. 2d 404 (2008) (‘‘[t]he [c]ommerce [c]lause forbids the
[s]tates to levy taxes that discriminate against interstate commerce or that
burden it by subjecting activities to multiple or unfairly apportioned
taxation’’).
22
In Quill, the United States Supreme Court concluded that the due pro-
cess requirements were satisfied by the fact that the taxpayer ‘‘engaged in
continuous and widespread solicitation of business within [the] [s]tate’’ such
that the taxpayer ‘‘clearly ha[d] fair warning that [its] activity may subject
[it] to the jurisdiction of a foreign sovereign.’’ (Internal quotation marks
omitted.) Quill v. North Dakota, supra, 504 U.S. 308.
23
We note also that the plaintiffs also enjoyed the benefits and protections
afforded domiciliaries while Allen was performing the services for which
he was granted the stock options.
24
While it is true that use of stock option awards as a form of executive
compensation has declined recently; S. Hannes & A. Tabbach, ‘‘Executive
Stock Options: The Effects of Manipulation on Risk Taking,’’ 38 J. Corp. L.
533, 539–40 (2013); this in no way alters the fact that such awards are
compensation for services performed.
25
The plaintiffs also rely on a recent Ohio Supreme Court case which
stated that, ‘‘[u]nder [Shaffer v. Carter, supra, 252 U.S. 37], the income of
a nonresident is the ‘res,’ or thing, that lies within the taxing jurisdiction
by virtue of the activity being performed within that jurisdiction. Thus, local
taxation of a nonresident’s compensation for services must be based on the
location of the taxpayer when the services were performed.’’ Hillenmeyer
v. Cleveland Board of Review, 144 Ohio St. 3d 165, 176, 41 N.E.3d 1164,
cert. denied, U.S. , 136 S. Ct. 491, 193 L. Ed. 2d 352 (2015).
26
The plaintiffs’ reliance upon the ‘‘secondary holding’’ in Molter v. Dept.
of Treasury, 443 Mich. 537, 551–52, 505 N.W.2d 244 (1993), is also misplaced.
In that case, the Michigan Supreme Court held that interest earned, and
subsequently disbursed to a nonresident, as part of a deferred compensation
plan was not attributable to services performed in the taxing state. Id. That
case, however, turned on the interpretation of a state statute that subjected
interest income to taxation, not on the due process clause. See id., 552 n.13
(distinguishing Michigan statute from related New Jersey statute).
27
There is a methodology for ascertaining the present value of stock
options. ‘‘The Black-Scholes option-pricing model is a standard model used
by analysts for pricing options. Fisher Black and Myron Scholes, the develop-
ers of the model, won Nobel Prizes in economics following the development
of the model. The existence of variables (the risk free rate, volatility of the
underlying stock, expiration date of the option, etc.) may cause the model
to have less reliability, however, in certain circumstances.’’ In re Coleman
Co. Inc. Shareholders, 750 A.2d 1202, 1208 n.13 (Del. Ch. 1999).
28
We are unmoved by the plaintiffs’ warning that ‘‘horribles would parade’’
as a result of our conclusion. Contrary to the plaintiffs’ claim, a state of
prior residence would not be able to impose a tax on a nonresident taxpayer
living and working in another state simply because the taxpayer enjoyed
benefits and protection during his time of residence in that state. Jurisdiction
is not predicated on whether a taxpayer has ever enjoyed the benefits or
protections of a state ‘‘that made the executive’s income possible’’; instead,
‘‘the benefits afforded by the state . . . must generally span the time period
during which the income was earned . . . .’’ (Emphasis added.) Chase Man-
hattan Bank v. Gavin, supra, 249 Conn. 202–203.