At issue in Matter of Dale A. Adams, DTA No. 850026 (N.Y.S. Div. of Tax App., Aug. 8, 2024) was whether a nonresident taxpayer used the proper methodology to source income from the vesting of restricted stock units, and whether the dividend income earned from restricted stock units that had vested should be sourced to New York State. The Administrative Law Judge (“ALJ”) ruled against the taxpayer on the first issue and for the taxpayer on the second issue.

The Facts: During the audit period of 2016 through 2018, Dale A. Adams was a nonresident of New York employed by a New York company, Omnicom Management, Inc. (“Omnicom”). During that time, Omnicom issued to Mr. Adams restricted stock units of its common stock. Each unit entitled Mr. Adams to one share of Omnicom common stock upon vesting but did not entitle him to any of the rights or privileges of a stockholder (including receiving dividends) until the units were fully vested. Pursuant to the terms of Omnicom’s Restricted Stock Unit Deferred Compensation Plan (“Deferred Comp Plan”), Mr. Adams elected to defer his receipt of restricted stock units, including vested units, and instead have them administered by the Deferred Comp Plan. The dividends Mr. Adams received in connection with his ownership of common stock were therefore paid out of this Deferred Comp Plan.

Mr. Adams filed New York State nonresident income tax returns reporting income from the vesting of restricted stock units and dividend income for each of the audit years. Mr. Adams allocated his income from the vesting of restricted stock units based upon the days worked in New York to total days worked in the year the restricted stock units vested. Mr. Adams did not treat any of his dividend income paid out of the Deferred Comp Plan as New York source income. Following an audit, the Division of Taxation (“Division”) issued a notice of deficiency asserting: (i) that Mr. Adams should have sourced his income from the vesting of restricted stock units using the vesting allocation methodology applicable to restricted stock set forth in the Division’s regulations; and (ii) that Mr. Adams should have allocated a portion of his dividend income from Omnicom common stock based on the days worked inside and outside of New York in the year the dividend was received.

The Decision: With respect to the restricted stock units, the ALJ noted that, pursuant to Tax Law § 631(g), a nonresident taxpayer that has been granted stock options or restricted stock “shall compute his or her New York source income as determined under rules and regulations prescribed by the commissioner.” He further noted that the regulations set forth a specific allocation methodology for “restricted stock,” which method was used by the Division. He found that, although “restricted stock units” were not specifically addressed by the regulations, there was “no clear distinction that justifies sourcing income from the vesting of restricted stock units differently than income from the vesting of restricted stock.”

With respect to the dividend income, the ALJ found that the evidence showed that the stock generating such dividends had vested at the time such dividends were issued. He also noted that the Division did not provide any evidence to support a conclusion that the dividend income was earned as a result of a business carried out in New York. As a result, the ALJ determined that the dividend income “is clearly not taxable to a nonresident taxpayer.”