Tax Type
Individual Income Tax
Description
Stock options taxed in different years by IRS and California
Topic
Taxable Income
Date Issued
12-11-1985
December 11, 1985
Re: Virginia Code §58.1-1821 Application
Individual Income Tax: 1984
Dear *****
This will reply to your letter of October 1, 1985, in which you submit an application for correction of the individual income tax assessed to your clients, ***** for taxable year 1984.
FACTS
***** (Taxpayers) were residents of California until April 30, 1983 when they moved to Virginia. On December 1, 1982 Taxpayers exercised incentive stock options under an Employee Stock Purchase Plan. Under federal law, no income was recognized by the employee for the difference between the option price and the market value of the stock. California tax law treated the exercise in the same manner that federal tax law treats nonstatutory stock options. California considered the difference between the option price and the market price at the date the option was exercised to be taxable income and taxed this income. In 1984, while Virginia residents, Taxpayers sold the stock. The amount of gain that was reflected in Taxpayers' federal adjusted gross income was based on the difference in the selling price and the option price.
You contend that Taxpayers will be subject to state taxation twice on the same income, unless Virginia allows a credit for the California taxes paid on the gain.
DETERMINATION
Virginia Code Section 58.1-322 states that "the Virginia taxable income of a resident individual means his federal adjusted gross income for the taxable year" with certain modifications. Thus, Virginia has elected to conform its tax code to that of the federal government and to treat income derived from the exercise of incentive stock options under an Employee Stock Purchase Plan in substantially the sane manner as the federal government, i.e. basing the amount of gain on the difference between the selling price and the option price of the stock.
Of the subtractions, deductions, and modifications to federal adjusted gross income enumerated in Virginia Code Section 58.1-322 as noted above, none provides for the exclusion from Virginia taxable income of gains from exercising stock options that were previously taxed in another state.
We also find that the provisions of Virginia Code Section 58.1-332 are inapplicable. This section provides that:-
Whenever a resident of the Commonwealth has become liable for income tax to another state, on earned or business income, or any part thereof, for the taxable year, derived from sources without the Commonwealth and subject to taxation under this chapter, the amount of income tax payable by him shall, upon proof of such payment, be credited on his return with the income tax so paid by him to such other state. (Emphasis added.)
The phrase "for the taxable year" evinces an intent to limit this credit to circumstances in which income is earned and reported to two states during the same taxable year. Accordingly, this credit would not be applicable to your clients' situation inasmuch as the gain from exercising the stock options was taxed by California in 1983 and by the federal government and Virginia in 1984.
When Virginia elected to conform its individual income tax with that of the federal government, one of the primary motivations was to simply the tax for both tax administrators and taxpayers. However, some conflicts in tax law are inevitable when dealing with a jurisdiction which practices conformity with federal law (Virginia) and one which does not (California) in regard to stock options. While we appreciate the taxpayers' circumstance and empathize with their position, absent specific statutory authority to do so, the department cannot permit the subtraction claimed on the taxpayers' 1984 Virginia income tax return.
Therefore, based on the foregoing, the tax liability at question was properly assessed and is due and payable.
Sincerely,
W. H. Forst
Tax Commissioner-
Rulings of the Tax Commissioner