Costas v. Commissioner of Revenue Services

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JOHN P. COSTAS ET AL. v. COMMISSIONER
OF REVENUE SERVICES
(AC 44075)
Alvord, Cradle and Palmer, Js.
Syllabus
The plaintiff taxpayers, J and B, appealed to the trial court from the decision
of the defendant Commissioner of Revenue Services disallowing in part
their claims for certain income tax refunds. The plaintiffs resided in
Connecticut, but J performed services for his employer, U Co., in both
Connecticut and New York. As part of his compensation for those ser-
vices, J received stock options and restricted stock from U Co. For the
2005, 2007 and 2008 taxable years, the plaintiffs filed Connecticut resi-
dent income tax returns on which they reported compensation that J
had received from his exercise of stock options and the vesting of
restricted stock that U Co. previously had granted to him. They also
sought a credit for taxes paid to New York during those years for services
J performed for U Co. that occurred both in Connecticut and New York.
The commissioner allowed the credit pursuant to the applicable statute
(§ 12-704 (a)). Following an audit conducted in New York, the plaintiffs
paid additional taxes to New York for compensation that J had received
from U Co. for the 2005, 2007 and 2008 taxable years. The plaintiffs
filed amended Connecticut resident income tax returns for those years
and sought a credit for the additional taxes they paid to New York. The
commissioner disallowed in part the requested credit and the plaintiffs’
claims for refunds of the taxes paid to New York for the subject taxable
years on the ground that the plaintiffs were required to allocate income
from the exercise of stock options and the vesting of restricted stock
between Connecticut and New York in accordance with the relevant
state regulations (§§ 12-711(b)-17 (c) and 12-711(b)-18 (c)). In determin-
ing the apportionment and the credit to which the plaintiffs were entitled,
the commissioner applied the methodology set forth in those regulations,
which he construed as requiring a computation of the total compensation
received by J during the relevant periods, including deferred compensa-
tion that J received in those periods for services rendered prior thereto.
The plaintiffs had proposed an alternate methodology pursuant to the
relevant state regulation (§ 12-711(b)-15 (a)) that did not include
deferred compensation. The plaintiffs appealed to the trial court from
the commissioner’s decision, claiming that the commissioner had misin-
terpreted §§ 12-711(b)-17 (c) and 12-711(b)-18 (c), and abused his discre-
tion in failing to utilize their alternate apportionment methodology
because the methodology that he applied resulted in an unfair and
inequitable allocation. The trial court rendered summary judgment in
favor of the commissioner, and the plaintiffs appealed to this court. Held:
1. The trial court and the commissioner correctly interpreted §§ 12-711(b)-
17 (c) and 12-711(b)-18 (c) of the regulations, as their construction was
mandated by the plain language of those regulations and did not yield
absurd or unworkable results: it was undisputed that the deferred com-
pensation at issue was received during the relevant periods, and, there-
fore, it fell squarely within the straightforward regulatory language
directing that the computation of credit shall include all of the compensa-
tion received during the relevant periods for the particular services
identified therein; moreover, although the plaintiffs claimed that the
regulations must be understood in the context of the broader regulatory
scheme and its overriding purpose and that their construction of the
regulations best achieved that goal, they failed to identify any language
in the regulations to substantiate their construction of those provisions,
and their belief as to how the regulatory purpose is best served did not
trump the plain and unambiguous language of the regulations, which
was determinative of their meaning.
2. The plaintiffs’ alternative claim that the trial court incorrectly refused to
require the commissioner to exercise his discretionary authority under
§ 12-711(b)-15 (a) of the regulations to approve their proposed alternate
apportionment methodology was without merit; because the commis-
sioner correctly construed and applied §§ 12-711(b)-17 (c) and 12-711(b)-
18 (c) of the regulations, the resulting apportionment was presumptively
fair and equitable under § 12-711(b)-15 (b), and the plaintiffs failed to
overcome that presumption by establishing that the methodology set
forth in §§ 12-711(b)-17 (c) and 12-711(b)-18 (c) was so unfair and inequi-
table as applied to J that the commissioner was required to use their
alternate apportionment methodology in determining the amount of
their tax credit.
Argued October 5, 2021—officially released July 19, 2022
Procedural History
Appeal from the decision of the defendant disal-
lowing in part the plaintiffs’ claims for certain income
tax refunds, brought to the Superior Court in the judicial
district of New Britain, Tax Session, where the parties
filed a joint stipulation of facts; thereafter, the court,
Hon. Arnold W. Aronson, judge trial referee, granted
the defendant’s motion for summary judgment, denied
the plaintiffs’ motion for summary judgment and ren-
dered judgment thereon, from which the plaintiffs
appealed to this court. Affirmed.
Timothy P. Noonan, for the appellants (plaintiffs).
Patrick T. Ring, assistant attorney general, with
whom were Joseph J. Chambers, deputy assistant attor-
ney general, and, on the brief, William Tong, attorney
general, and Clare Kindall, solicitor general, for the
appellee (defendant).
Opinion
PALMER, J. The plaintiffs, John P. Costas and Bar-
bara S. Costas, appeal from the summary judgment
rendered by the trial court in favor of the defendant,
the Commissioner of Revenue Services (commis-
sioner), sustaining the commissioner’s assessment of
taxes against the plaintiffs with respect to certain stock
options and restricted stock units granted to John P.
Costas by his employer as compensation for services
he performed both in this state and in New York.1 On
appeal, the plaintiffs claim that the court incorrectly
concluded that the commissioner was entitled to sum-
mary judgment because the court (1) misinterpreted
and misapplied the regulations at issue, namely, §§ 12-
711(b)-172 and 12-711(b)-183 of the Regulations of Con-
necticut State Agencies, which govern the credit to
which a Connecticut taxpayer is entitled for taxes paid
to another state on compensation derived from the vest-
ing of restricted stock and the exercise of nonqualified
stock options (stock options), respectively, for services
performed in both Connecticut and that other state, and
(2) refused to require that the commissioner approve
an alternate apportionment methodology with regard
to the income attributable to Connecticut and New York
for purposes of determining the amount of those tax
credits pursuant to § 12-711(b)-154 of the Regulations
of Connecticut State Agencies.5 We reject the plaintiffs’
claims and, accordingly, affirm the judgment of the
court.
The following uncontested facts, as set forth by the
court, and procedural history are relevant to our resolu-
tion of this appeal. ‘‘Costas joined UBS [Investment
Bank (UBS), formerly known as UBS Warburg] in 1996
as the Head of Fixed Income. In 2001, [he] assumed
the role of [chief executive officer (CEO)] of . . . UBS
. . . before being promoted to Deputy CEO of UBS in
2004. In 2005, [Costas] became CEO of UBS’s Dillon
Reed Capital Management, and he remained in that role
until he left UBS in 2007. When [Costas] joined UBS in
1996, he was a resident of New Jersey and he performed
services for UBS in New York. However, in 1998, [he]
moved to Connecticut and, in doing so, moved his office
from New York City to . . . Stamford . . . . [Follow-
ing this move, Costas initially] did not spend any signifi-
cant amount of time performing services in New York.
Gradually, however, his time spent [performing ser-
vices] in New York increased as follows: [between 1 and
2 percent in 2003, 10.22 percent in 2004, 29.11 percent
in 2005, 66.29 percent in 2006, 60.22 percent in 2007,
and 0 percent in 2008].
‘‘As an executive of UBS, from 1998 through 2007,
[Costas’] compensation package was comprised [pri-
marily] of [deferred stock based compensation] . . .
which had no readily ascertainable value at the time of
grant.6 Specifically, UBS granted [Costas] stock options
(the ability to purchase UBS stock at a fixed price after
a period of vestment) and restricted stock (a grant of
stock subject to a vesting schedule deemed received
on the date of vestment).’’ (Footnote added; internal
quotation marks omitted.) ‘‘[In] recognition that stock
options and restricted stock [generally] have no reason-
ably ascertainable fair market value at the time awarded
and, consequently, are not subject to taxation at the
time they are granted [stock options are treated as
taxable income when they are exercised and restricted
stock is treated as taxable income upon vesting].’’
‘‘The plaintiffs . . . filed Connecticut resident
income tax returns for each of the taxable years of
2005, 2007 and 2008, and, on each of these returns,
the plaintiffs included compensation that [Costas] had
received from his exercise of stock options and [the
vesting of] restricted stock previously given to him [by
UBS]. In filing their tax returns, the plaintiffs claim a
credit for taxes paid to New York for services [Costas]
performed for UBS . . . that occurred both in Con-
necticut and in New York.’’ This credit was awarded
pursuant to General Statutes § 12-704,7 which permits
a Connecticut resident to offset a credit for income
taxes paid to other states ‘‘[i]n order for [the] taxpayer
to avoid having to pay a double tax on the same services
provided to his or her employer.’’
‘‘Subsequently, the New York State Department of
Taxation and Finance conducted an audit of the plain-
tiffs’ tax returns and entered into an agreement with
the plaintiffs whereby the plaintiffs agreed that they
owed the state of New York additional tax on the com-
pensation that [Costas] had received from UBS for the
taxable years of 2005, 2007 and 2008. Following the
payment of the additional taxes to New York, the plain-
tiffs filed amended Connecticut income tax returns for
the taxable years of 2005, 2007 and 2008 in which they
sought additional credits for these additional taxes paid
to New York. . . . The [commissioner] disallowed part
of the plaintiffs’ claims for a refund of taxes paid to
New York for the taxable years of 2005, 2007 and 2008
[on the ground] that the plaintiffs were required to
allocate income from the exercise of stock options and
vesting of restricted stock between Connecticut and
New York in accordance with [§§ 12-711(b)-17 (c) and
12-711(b)-18 (c) of the Regulations of Connecticut State
Agencies].’’8 (Footnote omitted.)
The parties acknowledge that, in calculating the
amount of the credit to which the plaintiffs were entitled
for each of the taxable years at issue, the commissioner
was required to apply the methodology set forth in
§§ 12-711(b)-17 (c) and 12-711(b)-18 (c) of the Regula-
tions of Connecticut State Agencies for determining
how much income from stock options and grants of
restricted stock is allocated to this state when, as here,
the employee performs services both within and outside
this state during the ‘‘grant-to-exercise period’’ (in the
case of stock options) and ‘‘grant-to-vest period’’ (in
the case of restricted stock).9 As the parties also agree,
the proper apportionment of income for tax credit pur-
poses is a function of the ratio between the total com-
pensation received during the grant-to-exercise period
or grant-to-vest period for services performed in New
York (the ratio’s numerator) and the total compensation
received during those periods for services performed
in this state, New York and anywhere else (the ratio’s
denominator). In determining that apportionment, how-
ever, the commissioner construed §§ 12-711(b)-17 (c)
and 12-711(b)-18 (c) as requiring a computation of the
total compensation received by Costas during the grant-
to-exercise and grant-to-vest periods, including
deferred compensation that was received in those peri-
ods for services rendered prior thereto. This construc-
tion of the applicable regulations differed from the inter-
pretation advocated by the plaintiffs, who contended
that the apportionment computation should include
only compensation received for services actually per-
formed during such periods and not deferred compensa-
tion earned earlier but received in those periods.10
In accordance with General Statutes § 12-730,11 the
plaintiffs appealed to the trial court from the determina-
tion of the commissioner partially disallowing their
claims for refunds. On appeal to the trial court, the
plaintiffs claimed that the commissioner (1) misinter-
preted §§ 12-711(b)-17 and 12-711(b)-18 of the Regula-
tions of Connecticut State Agencies, thereby miscalcu-
lating to their detriment the amount of the credit
available to them, and (2) abused his discretion in failing
to utilize the alternate method of apportionment author-
ized under § 12-711(b)-15 of the regulations in determin-
ing the amount of credit to which they were entitled.
After jointly stipulating to uncontested facts, the plain-
tiffs and the commissioner both filed motions for sum-
mary judgment.12
The court subsequently issued a memorandum of
decision granting the commissioner’s motion for sum-
mary judgment and denying the plaintiffs’ motion. In
its decision, the court agreed with the commissioner’s
construction of §§ 12-711(b)-17 and 12-711(b)-18 of the
Regulations of Connecticut State Agencies as providing
that the compensation to be considered for purposes
of income allocation was all of the compensation Costas
received during the grant-to-exercise and grant-to-vest
periods, including deferred compensation that Costas
received in those periods but had earned prior to those
periods. The court held that this calculation was dic-
tated by the language of the regulations, noting, further,
that the required methodology was consistent with fed-
eral and state income tax principles, which, as the court
explained, ‘‘focus on taxable events, not when the ser-
vices occurred,’’ such that ‘‘compensation is includable
in gross income in the year received, and not in the
year earned.’’ (Internal quotation marks omitted.) The
court also rejected the plaintiffs’ contention that the
commissioner should have exercised his discretion to
award them the credit they sought under the alternate
apportionment methodology authorized by § 12-711(b)-
15 of the regulations because the methodology applied
by the commissioner resulted in an unfair and inequita-
ble allocation. The plaintiffs thereafter appealed to this
court, renewing the same claims that they had raised
in the trial court.
Before addressing those claims, we set forth the legal
principles that guide our analysis. Our review of the trial
court’s decision granting the commissioner’s motion for
summary judgment is well settled. ‘‘Summary judgment
shall be rendered forthwith if the pleadings, affidavits
and any other proof submitted show that there is no
genuine issue as to any material fact and that the moving
party is entitled to judgment as a matter of law. . . .
Our review of the trial court’s decision to grant [a]
motion for summary judgment is plenary.’’ (Citation
omitted; internal quotation marks omitted.) Elder v.
21st Century Media Newspaper, LLC, 204 Conn. App.
414, 420, 254 A.3d 344 (2021).
‘‘Administrative regulations have the full force and
effect of statutory law and are interpreted using the
same process as statutory construction . . . . Accord-
ingly, in conducting this analysis, we are guided by
the well established principle that [i]ssues of statutory
construction raise questions of law, over which we
[also] exercise plenary review. . . .
‘‘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 . . . [General Statutes] § 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, extratex-
tual 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.’’ (Citations
omitted; internal quotation marks omitted.) Allen v.
Commissioner of Revenue Services, 324 Conn. 292,
307–308, 152 A.3d 488 (2016), cert. denied, U.S. ,
137 S. Ct. 2217, 198 L. Ed. 2d 659 (2017).
‘‘Ordinarily, the construction and interpretation of a
[regulation] is a question of law for the courts where
the administrative decision is not entitled to special
deference, particularly where . . . the [regulation] has
not previously been subjected to judicial scrutiny or
time-tested agency interpretations.’’ (Internal quotation
marks omitted.) State Medical Society v. Board of
Examiners in Podiatry, 208 Conn. 709, 718, 546 A.2d
830 (1988). Because the regulations at issue in the pres-
ent case have not previously been subjected to judicial
scrutiny, and because neither party claims that the com-
missioner’s interpretation is time-tested, the commis-
sioner’s interpretation of the applicable regulations is
not entitled to deference.
Furthermore, ‘‘[t]he United States Supreme Court has
recognized that the taxing authority of a state govern-
ment is a key component of a state’s sovereignty.’’ Hou-
satonic Railroad Co. v. Commissioner of Revenue Ser-
vices, 301 Conn. 268, 281, 21 A.3d 759 (2011). As the
United States Supreme Court also has explained, ‘‘[t]he
[s]tates have a very wide discretion in the laying of
their taxes. When dealing with their proper domestic
concerns, and not trenching upon the prerogatives of
the [n]ational [g]overnment or violating the guaranties
of the [f]ederal [c]onstitution, the [s]tates have the attri-
bute of sovereign powers in devising their fiscal systems
to ensure revenue and foster their local interests.’’
Allied Stores of Ohio, Inc. v. Bowers, 358 U.S. 522, 526,
79 S. Ct. 437, 3 L. Ed. 2d 480 (1959). ‘‘The [state’s] taxing
power is an inherent attribute of sovereignty and as
such unlimited in character and scope, [except insofar]
as limitations may be self-imposed. Under our form
of government its exercise is vested in the legislative
department which may exercise it for lawful purposes
in its discretion both as regards the choice of subject-
matter of taxation and the extent and manner of the
tax, save as constitutional limitations may intervene
. . . .’’ (Internal quotation marks omitted.) Lublin v.
Brown, 168 Conn. 212, 221, 362 A.2d 769 (1975). Thus,
the authority of the legislature to levy taxes and to grant
exemptions is extremely broad. See Allied Stores of
Ohio, Inc. v. Bowers, supra, 526; Lublin v. Brown,
supra, 220–23. Consequently, ‘‘[i]t 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.’’ (Internal quotation marks
omitted.) Allen v. Commissioner of Revenue Services,
supra, 324 Conn. 316.
Nevertheless, Connecticut allows a credit to resi-
dents of this state for taxes paid by such residents to
another jurisdiction with respect to any income that
is derived from sources within that other jurisdiction,
including compensation for services performed therein.
See General Statutes § 12-704. Under our statutory
scheme, a taxpayer is entitled to such credit only if
two conditions are met: (1) the tax paid to the other
jurisdiction is for income derived from sources within
that jurisdiction and (2) the income for which the credit
is being sought is taxable as income in this state. See
General Statutes § 12-704 (a). As previously indicated,
§§ 12-711(b)-17 (pertaining to restricted stock) and 12-
711(b)-18 (pertaining to stock options) of the Regula-
tions of Connecticut State Agencies govern the credit
against this state’s income tax to which a Connecticut
taxpayer is entitled for taxes paid to another state on
compensation derived from those sources for services
performed in both Connecticut and that other state.13
Mindful of these principles, we turn to the merits of
the plaintiffs’ claims.
I
We first address the plaintiffs’ claim that the court’s
interpretation of §§ 12-711(b)-17 and 12-711(b)-18 of the
Regulations of Connecticut State Agencies, like that of
the commissioner, was flawed, thereby resulting in the
wrongful disallowance of certain credits for taxes the
plaintiffs had paid to New York. Specifically, the plain-
tiffs claim that the court misconstrued the regulations
by calculating the tax credit on the basis of a computa-
tion of the total compensation for the relevant period as
including deferred compensation, that is, compensation
that Costas received during the grant-to-exercise and
grant-to-vest periods but earned prior to those periods.
In other words, according to the plaintiffs, the court
should have calculated the credit to which they were
entitled solely on the basis of the compensation that
Costas received during the grant-to-exercise and grant-
to-vest periods for services performed during those
periods and those periods only. The commissioner
takes a contrary view, arguing that the court correctly
determined the credit to which the plaintiffs were enti-
tled because ‘‘[t]he regulations are not concerned with
when . . . compensation is ‘earned,’ but rather when
it is received,’’ and the total compensation received by
the plaintiffs during the periods in question included
compensation for services performed both during and
prior to those periods.
We agree with the commissioner and the court
because we conclude that their construction of §§ 12-
711(b)-17 (c) and 12-711(b)-18 (c) of the Regulations
of Connecticut State Agencies is mandated by the plain
language of those two provisions. Under both provi-
sions, the amount of credit to be awarded for taxes
paid to another state is determined on the basis of the
‘‘same ratio that the total compensation received . . .
during [the relevant] period for services performed in
this state bears to the total compensation received . . .
during [the relevant] period for services performed
within and without this state.’’ (Emphasis added.) Regs.,
Conn. State Agencies § 12-117(b)-17 (c); accord Regs.,
Conn. State Agencies § 12-117(b)-18 (c). In the present
case, there is no dispute that the deferred compensation
at issue, that is, compensation that was paid to Costas
during the grant-to-exercise and grant-to-vest periods—
and which therefore was taxable at that time—was
received during those periods. Consequently, that
deferred compensation falls squarely within the
straightforward regulatory language directing that the
computation of credit shall include all of the compensa-
tion received during the relevant periods for the particu-
lar services identified therein.
The plaintiffs nevertheless contend that the regula-
tions contemplate a limitation on the compensation to
be included in the apportionment calculation, such that,
to be part of the computation, the compensation must
also be for services performed during the grant-to-exer-
cise and grant-to-vest periods. That is, the plaintiffs
maintain that the provisions should be construed so
that the computation excludes compensation, even if
it was received during the relevant periods, unless it
also was earned during those periods. In support of
this reading of the regulatory language, the plaintiffs
argue that it is more consistent with the statutory and
regulatory purpose of offsetting taxes that they were
required to pay to New York under that state’s allocation
methodology because it more faithfully accounts for
the amount of time Costas worked in Connecticut dur-
ing the grant-to-exercise and grant-to-vest periods rela-
tive to the amount of time he worked in New York
during those same periods.
The plaintiffs’ belief as to how the statutory and regu-
latory purpose is best served, however, cannot trump
the plain and unambiguous language of §§ 12-711(b)-17
(c) and 12-711(b)-18 (c) of the Regulations of Connecti-
cut State Agencies, which is necessarily determinative
of the provisions’ meaning. Our Supreme Court’s obser-
vations in this regard with respect to the construction
of statutes is equally applicable to the construction of
regulations. ‘‘It is well established that a court must
construe a statute as written. . . . Courts may not by
construction supply omissions . . . or add exceptions
merely because it appears that good reasons exist for
adding them. . . . The intent of the legislature, as [our
Supreme Court] has repeatedly observed, is to be found
not in what the legislature meant to say, but in the
meaning of what it did say. . . . It is axiomatic that
the court itself cannot rewrite a statute to accomplish a
particular result. That is the function of the legislature.’’
(Internal quotation marks omitted.) Cady v. Zoning
Board of Appeals, 330 Conn. 502, 516, 196 A.3d 315(2018). Simply put, if the regulatory provisions had been
promulgated with the intent that only compensation
received for services performed during the grant-to-
exercise and grant-to-vest periods were to be included
in the allocation computation, those provisions
undoubtedly would contain language to that effect, and
they do not. See, e.g., Dept. of Public Safety v. Freedom
of Information Commission, 298 Conn. 703, 729, 6 A.3d
763 (2010) (if legislature intended to limit scope of
statutory definition at issue, it ‘‘easily could have
expressed such an intent’’); Windels v. Environmental
Protection Commission, 284 Conn. 268, 299, 933 A.2d
256 (2007) (legislature knows how to convey its intent
expressly).
Indeed, the plaintiffs have identified no language in
§§ 12-711(b)-17 and 12-711(b)-18 of the Regulations of
Connecticut State Agencies to substantiate their read-
ing of those provisions.14 They argue, however, that
those provisions must be understood in the context
of the broader regulatory scheme and its overriding
purpose, and that their construction of the provisions
best achieves that goal. We disagree.
As the commissioner explained in his appellate brief,
‘‘Connecticut [need not] provide a one to one tax credit
based on the number of days a taxpayer has worked
in another jurisdiction. . . . Connecticut’s allocation
ratio does not measure days worked in New York (or
any other jurisdiction), but rather compensation
received during the grant-to-exercise [or grant-to-vest]
period attributable to New York (or any other jurisdic-
tion). That is, if during the period the benefits the plain-
tiffs received for services performed in Connecticut
were more valuable than the benefits the plaintiffs
received for services performed in New York, then the
allocation ratio would favor Connecticut over New
York, regardless of the number of days that Costas
might have worked in New York during that period.
And because the number of days worked in a place
does not necessarily reflect the value of the benefits
received from that place, there is a good reason for
Connecticut to use this kind of allocation ratio. . . .
‘‘[In sum] Connecticut has decided to allow a tax
credit based on the value of the benefits received from
another jurisdiction, not the number of days worked in
that jurisdiction. Absent some constitutional infirmity,
Connecticut is free to calculate its tax credit in this
way.’’ (Citation omitted; emphasis in original.)
The commissioner is correct. The plaintiffs have
made no claim challenging the constitutionality of the
commissioner’s construction of §§ 12-711(b)-17 and 12-
711(b)-18 of the Regulations of Connecticut State Agen-
cies. Furthermore, those provisions, construed in accor-
dance with their plain language, do not yield absurd or
unworkable results.15 We therefore reject the plaintiffs’
claim that the court erred in concluding that the com-
missioner incorrectly applied the provisions in
determining the tax credit to which the plaintiffs are
entitled.
II
The plaintiffs also claim, in the alternative, that the
court incorrectly refused to require the commissioner
to exercise his discretionary authority under § 12-
711(b)-15 of the Regulations of Connecticut State Agen-
cies to approve the apportionment methodology they
have advanced. In the plaintiffs’ view, applying that
methodology—irrespective of the requirements of
§§ 12-711(b)-17 and 12-711(b)-18 of the regulations—is,
at least in this case, the only approach that fairly and
appropriately allocates income for tax credit purposes.
The plaintiffs’ claim is without merit.
Subsection (a) of § 12-711(b)-15 of the Regulations
of Connecticut State Agencies provides in relevant part:
‘‘[A] nonresident individual may submit an alternate
method of apportionment with respect to items of
income, gain, loss and deduction attributable to a busi-
ness, trade, profession or occupation carried on partly
within and partly without Connecticut. The proposed
method shall be fully explained in the Connecticut non-
resident income tax return. If the method proposed by
such individual is approved by the [c]ommissioner, it
may be used in lieu of the applicable method described
in this Part.’’16 Relatedly, subsection (b) of § 12-711(b)-
15 provides in relevant part: ‘‘The methods provided in
this Part are presumed to result in fair and equitable
apportionment, and any person . . . proposing an alter-
nate method of apportionment shall bear the burden
of establishing that the methods provided in this Part
unfairly and inequitably attributed items of income,
gain, loss or deduction to Connecticut.’’ (Emphasis
added.) Accordingly, under § 12-711(b)-15 (b), the plain-
tiffs in the present case bear the burden of establishing
that the methods provided in §§ 12-711 (b)-17 and 12-
711(b)-18 of the regulations, as construed by the com-
missioner, are so unfair and inequitable as applied to
Costas that the commissioner was required to use the
alternate method of apportionment proposed by the
plaintiffs in determining their tax credit.
In support of their claim under § 12-711(b)-15 (a)
of the Regulations of Connecticut State Agencies, the
plaintiffs merely repeat their argument that the commis-
sioner’s interpretation of §§ 12-711(b)-17 and 12-711(b)-
18 of the regulations results in ‘‘an unfair and unreason-
able allocation of income.’’ We already have explained,
however, that the commissioner correctly construed
and applied §§ 12-711(b)-17 and 12-711(b)-18 and, con-
sequently, under § 12-711(b)-15 (b), the resulting appor-
tionment thereunder is presumptively fair and equita-
ble. Moreover, the commissioner necessarily must be
afforded wide latitude to accept or reject a proposed
alternate methodology pursuant to § 12-711(b)-15 (a).
Although the plaintiffs are dissatisfied with the appor-
tionment mandated by the regulatory scheme—prefer-
ring the apportionment that would result from applica-
tion of their methodology—that is hardly reason for us
to declare that the income allocation derived from the
regulations themselves is unfair or unreasonable.
Because the plaintiffs have failed to overcome the pre-
sumption created by § 12-711(b)-15 (b), we reject their
claim under § 12-711(b)-15 (a).
The judgment is affirmed.
In this opinion the other judges concurred.
1
Although both John P. Costas and Barbara S. Costas are the plaintiffs
in this appeal, only compensation received by John P. Costas is relevant to
the issues presented by the appeal. For the sake of simplicity and when
necessary, hereinafter we refer to John P. Costas, individually, by his sur-
name.
2
Section 12-711(b)-17 of the Regulations of Connecticut State Agencies
provides in relevant part: ‘‘(a) Connecticut adjusted gross income derived
from or connected with sources within this state includes, to the extent
provided in this section, income recognized under section 83 of the Internal
Revenue Code on the transfer of property in connection with the perfor-
mance of services, if, during the period beginning with the first day of the
taxable year of the transferee during which such property was transferred
thereto and ending with the last day of the taxable year of the transferee
during which the rights of the person having the beneficial interest in such
property first were transferable or first were not subject to a substantial
risk of forfeiture, whichever occurs earlier (or, if an election is made under
section 83(b)(1) of the Internal Revenue Code, the taxable year that such
election is made), the transferee was performing such services within Con-
necticut. In determining whether the person was performing such services
within Connecticut, the regulations of this Part shall apply. . . .
‘‘(c) If, during the period described in subsection (a) of this section,
the transferee’s services were performed partly within and partly without
Connecticut, the portion of the amount by which the fair market value of
the property, as determined under section 83(a) of the Internal Revenue
Code, at the first time the rights of the person having the beneficial interest
in such property are transferable or are not subject to a substantial risk of
forfeiture, whichever occurs earlier, exceeds the amount, if any, paid for
such property, that is derived from or connected with sources within this
state is in the same ratio that the total compensation received from the
transferor during such period for services performed in this state bears to
the total compensation received from the transferor during such period for
services performed both within and without this state. . . .’’
3
Section 12-711(b)-18 of the Connecticut State Regulations provides in
relevant part: ‘‘(a) Connecticut adjusted gross income derived from or con-
nected with sources within this state includes, to the extent provided in
this section, income recognized under section 83 of the Internal Revenue
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 ascertainable 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. In
determining whether the optionee was performing services within Connecti-
cut, the regulations of this Part shall apply. . . .
‘‘(c) If, during the period described in subsection (a) of this section,
the optionee’s services were performed partly within and partly without
Connecticut, the portion of the amount by which the fair market value of
the stock, at the time such option was exercised, exceeds the option price,
that is derived from or connected with sources within this state is in the
same ratio that the total compensation received from the grantor during such
period for services performed in this state bears to the total compensation
received from the grantor during such period for services performed both
within and without this state. . . .’’
4
Section 12-711(b)-15 of the Regulations of Connecticut States Agencies
provides in relevant part: ‘‘(a) Where the methods provided in this Part do
not apportion items of income, gain, loss and deduction in a fair and equitable
manner, the Commissioner may require a nonresident individual to apportion
those items under such method as the Commissioner prescribes, as long as
the prescribed method results in a fair and equitable apportionment. In
addition, a nonresident individual may submit an alternate method of appor-
tionment with respect to items of income, gain, loss and deduction attribut-
able to a business, trade, profession or occupation carried on partly within
and partly without Connecticut. The proposed method shall be fully
explained in the Connecticut nonresident income tax return. If the method
proposed by such individual is approved by the Commissioner, it may be
used in lieu of the applicable method described in this Part.
‘‘(b) The methods provided in this Part are presumed to result in fair and
equitable apportionment, and any person, whether it be the Commissioner
or a nonresident individual, proposing an alternate method of apportionment
shall bear the burden of establishing that the methods provided in this Part
unfairly and inequitably attribute items of income, gain, loss or deduction
to Connecticut. . . .’’
5
We note that, although §§ 12-711(b)-15, 12-711(b)-17 and 12-711(b)-18 of
the Regulations of Connecticut State Agencies refer to nonresident taxpay-
ers, they are equally applicable to resident taxpayers. See Regs., Conn. State
Agencies § 12-704(a)-4 (a) (3).
6
Although Costas also received some compensation in the form of wages
and bonuses, those wages and bonuses are not the subject of this appeal.
7
General Statutes § 12-704 (a) (1) provides: ‘‘Any resident or part-year
resident of this state shall be allowed a credit against the tax otherwise due
under this chapter in the amount of any income tax imposed on such resident
or part-year resident for the taxable year by another state of the United
States or political subdivision thereof or the District of Columbia on income
derived from sources therein and which is also subject to tax under this chap-
ter.’’
8
In their amended returns for taxable years 2005, 2007 and 2008, the
plaintiffs increased the amount of their claim for credit for income tax
paid to New York to $259,446, $2,878,718, and $280,668, respectively. The
commissioner ultimately determined that the plaintiffs were entitled to credit
for income tax paid to New York in the amount of $182,536, $1,568,022 and
$70,899, for the taxable years 2005, 2007 and 2008, respectively.
9
The parties use the term ‘‘grant-to-exercise period’’ to refer to the period
from the date a stock option is awarded to the date the option is exercised,
and the term ‘‘grant-to-vest period’’ to refer to the period from the date
restricted stock is awarded to the date of its vesting. For ease of reference,
we hereinafter use the same terminology.
10
By way of illustration of these differing interpretations, the parties
provided the following example, as set forth in the plaintiffs’ brief to this
court: ‘‘On June 30, 2007, [Costas] received $13,997,956 in compensation
from the vesting of restricted stock that he was granted on March 1, 2006,
from [UBS]. . . . During this period of time, [Costas] worked about 65
percent of his time in New York. [The commissioner], taking into account
all compensation received by [Costas] from January 1, 2006, through June
30, 2007—including compensation received by him in 2006 and 2007 for
services rendered prior to 2006, when he worked much less in New York—
calculated the ‘New York [c]ompensation ratio’ to be only 23.76 percent,
and thus significantly reducing the credit [Costas] claimed for tax paid to
New York.
‘‘[The] [p]laintiffs, taking into account all compensation received by [Cos-
tas] from January 1, 2006, [through] June 30, [2007], for services performed
during such period, calculated the ‘New York [c]ompensation ratio’ to be
65.56 percent. Thus, under [the commissioner’s] method, a much lower
percentage of this income was deemed to be derived from New York sources,
and, therefore, [Costas] was entitled to a much lower credit for the New
York tax paid.’’ (Emphasis in original.)
11
General Statutes § 12-730 provides in 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, not later than thirty
days 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 . . . .’’
12
Neither the plaintiffs nor the commissioner claimed that there were any
material facts in dispute.
13
It also bears emphasis that, as the trial court explained, compensation
from restricted stock is treated as income at the time the stock vests, and
compensation derived from stock options generally is treated as income at
the time the options are exercised. The parties do not dispute that restricted
stock and stock options are treated in this manner for tax purposes under
both federal law and Connecticut law. See, e.g., Allen v. Commissioner of
Revenue Services, supra, 324 Conn. 321–22 (explaining that, because stock
option generally has no reasonably ascertainable fair market value at time
of award and does have value at time it is exercised, taxable income attribut-
able to stock option is calculated at time of exercise). In the case of stock
options, the taxable income is measured by the difference between the
option price and the fair market value of the stock when the option is
exercised, and, in the case of restricted stock, the taxable income is mea-
sured by the difference between the price of the stock when it was granted
and its fair market value upon vesting.
14
The plaintiffs do assert that, because subsection (c) of both provisions
begins with the qualifier ‘‘[i]f, during the period described in subsection
(a) of this section,’’ that is, the grant-to-exercise period and the grant-
to-vest period, and thereafter describes the relevant ‘‘compensation’’ as
compensation received ‘‘during such period for services performed in this
state,’’ the apparent intent of the provisions is to limit the compensation to
be included in the calculation of the credit only to the compensation that
was received during that period. (Emphasis in original; internal quotation
marks omitted.) The plaintiffs’ argument is unavailing because the first
reference in subsection (c) to the ‘‘period described in subsection (a) of
this section’’ merely delineates the time frame within which services must
have been performed partly within and partly without this state so as to
implicate the provisions of subsection (c), and the second reference in
subsection (c) to that period relates to the ‘‘total compensation received’’
during that period for services performed in this state and contains no
limitation as to when the compensation to be included in the computation
of credit was earned. Regs., Conn. State Agencies § 12-117(b)-17 (c); accord
Regs., Conn. State Agencies § 12-117(b)-18 (c).
15
We note that the plaintiffs also contend that Allen v. Commissioner of
Revenue Services, supra, 324 Conn. 292, supports their interpretation of
§§ 12-711(b)-17 and 12-711(b)-18 of the Regulations of Connecticut State
Agencies. We are not persuaded. In Allen, our Supreme Court was required
to determine whether, under subsection (a) of § 12-711(b)-18, the exercise
of stock options is taxable if the taxpayer, although performing services in
Connecticut at the time the options were awarded, was not performing
services in Connecticut at the time the options were exercised. Id., 303. In
agreeing with the commissioner that ‘‘§ 12-711(b)-18 (a) requires only that
the taxpayer [was] performing services in Connecticut at the time the options
were granted’’; id., 307; our Supreme Court concluded that § 12-711(b)-18
(a) was plain and unambiguous as applied to the taxpayers’ claim because
that provision was susceptible of only one reasonable interpretation when
considered in the context of the regulation as a whole. Id., 308–13. More
specifically, the court explained that the interpretation advocated by the
taxpayers in that case ‘‘would create disharmony within the regulation itself’’;
id., 309; and ‘‘lead to bizarre results.’’ Id., 311. Allen does not aid the plaintiffs
because it involved an issue entirely different from the one in the present
case. Moreover, applying the plain and unambiguous language of §§ 12-
711(b)-17 (c) and 12-711(b)-18 (c) to the plaintiffs’ claim neither creates
disharmony within the regulatory scheme nor leads to a bizarre or untena-
ble result.
16
It is undisputed that the plaintiffs did not submit or propose an alternate
method of apportionment under § 12-711(b)-15 of the Regulations of Con-
necticut State Agencies in connection with their resident tax returns for
taxable years 2005, 2007 and 2008 but did so in connection with the amended
tax returns they filed in 2010 for those years. For present purposes, we treat
the plaintiffs’ proposal for an alternate method of apportionment pursuant
to § 12-711(b)-15 on their amended tax returns as sufficient to preserve their
claim on appeal under that provision.