NOTICE: IC § 4-22-7-7 permits the publication of this document in the Indiana Register. The publication of this document provides the general public with information about the Indiana Department of Revenue's official position concerning a specific set of facts and issues. The "Holding" section of this document is provided for the convenience of the reader and is not part of the analysis contained in this written ruling.

Individual provided additional supporting documents establishing that she was entitled to additional refund of income tax because she documented that she moved from Indiana to Florida and changed her domicile to Florida; as such, her retirement income with respect to the 1099-R distribution was not subject to Indiana income tax because Individual was a Florida resident. Individual was also entitled to a refund of tax withheld on income from exercising her Stock Appreciation Rights, which was previously awarded by her former employer, because she documented that the income from exercising those Rights was not income derived from sources within Indiana subject to Indiana income tax. Individual, however, was not entitled to additional refund on her remaining W-2 income because her supporting documents could not be verified.

I. Individual Income Tax - Refund - Residency and Indiana Source Income.

Authority: 4 U.S.C. § 114; I.R.C. § 61; I.R.C. § 83; IC § 6-3-1-3.5; IC § 6-3-1-12; IC § 6-3-1-13; IC § 6-3-2-1; IC § 6-3-2-2; Treas. Reg. § 1.61-2; Treas. Reg. § 1.83-6; Treas. Reg. § 1.83-7; Miller Brewing Co. v. Indiana Dep't of State Revenue, 903 N.E.2d 64 (Ind. 2009); Scopelite v. Indiana Dep't of Local Gov't Fin., 939 N.E.2d 1138 (Ind. Tax Ct. 2010); 45 IAC 3.1-1-21; 45 IAC 3.1-1-22; 45 IAC 3.1-1-22.5; 45 IAC 3.1-1-23; Internal Revenue Service, Publication 525, Taxable and Nontaxable Income (2016); Internal Revenue Service, Equity (Stock) - Based Compensation Audit Techniques Guide (August 2015); U.S. MASTER TAX GUIDE § 1923 (CCH eds. 99th ed., 2016); Final Order Denying Refund 01-20181357 (August 10, 2018).

Taxpayer protests the denial of a refund claim.

Taxpayer is an individual with a current Florida mailing address. In April 2017, Taxpayer filed an Indiana Part-Year or Full-Year Nonresident Individual Income Tax Return (Form IT-40PNR) for the tax year 2016. In that filing, Taxpayer claimed that she had no or zero (0) income subject to Indiana income tax and requested a full refund of $35,465 withheld on her behalf. Upon review, the Indiana Department of Revenue ("Department") made adjustments to Taxpayer's filing and, by means of direct deposit, refunded Taxpayer $23 on April 26, 2017.

In March 2018, Taxpayer filed a Form GA-110L, Claim for Refund (Claim Number 1839476), requesting that the Department refund her additional income tax, in the amount of approximately $35,000. Taxpayer's refund claim was pertaining to "taxes paid in by her former employer." The Department, upon initial review, denied Taxpayer's claim in a letter dated April 27, 2018.

Taxpayer timely protested the refund denial, requesting that the Department make a "[f]inal determination without a hearing." The Final Order Denying Refund 01-20181357 (August 10, 2018), 20181031 Ind. Reg. 045180424NRA ("ODR"), was issued, denying Taxpayer's protest specifically based on the reason that, for 2016, Taxpayer was a full-year Indiana resident because Taxpayer failed to document that she effectively changed her domicile to Florida. As such, the ODR concluded that Taxpayer was domiciled in Indiana and was not entitled to the additional refund.

Taxpayer disagreed and submitted additional documents to support her rehearing request. The rehearing was conducted based on the additional documents submitted by Taxpayer. This Supplemental Memorandum of Decision ensues. Additional facts will be provided as necessary.

I. Individual Income Tax - Refund - Residency and Indiana Source Income.

In her Claim for Refund, Form GA-110L, Taxpayer stated that she "changed [her] residency to [Florida] in 2015 but [the Department] held her 2016 refund for taxes paid in by her former employer." The Department, based on documents provided, found that Taxpayer was a longtime Indiana resident and did not abandon her Indiana domicile. The Department thus concluded that, for 2016, Taxpayer was not entitled to the additional refund because Taxpayer was an Indiana domiciliary and was required to file an Indiana Full-Year Resident Individual Income Tax Return (Form IT-40), reporting and remitting her Indiana income tax on her income regardless of whatever source derived.

Taxpayer disagreed, requesting a rehearing. Throughout the rehearing process, Taxpayer offered additional documentation to support her position. Taxpayer asserted that she was entitled to the refund because (1) she changed her domicile and became a Florida resident; and (2) the income at issue was "stock options that were exercised after retirement" and therefore was not income derived from sources within Indiana subject to Indiana income tax.

Accordingly, the issue here is whether Taxpayer demonstrated that she was entitled to the refund of tax which Taxpayer's former employer withheld on her behalf because (1) prior to 2016, Taxpayer abandoned her Indiana domicile and became a Florida resident, and (2) the income she received was not income derived from sources within Indiana.

As explained previously in the ODR, Taxpayer is required to demonstrate that she was entitled to the claimed refund. Poorly developed and non-cogent arguments are subject to waiver. Scopelite v. Indiana Dep't of Local Gov't Fin., 939 N.E.2d 1138, 1145 (Ind. Tax Ct. 2010).

Indiana imposes a tax "on the adjusted gross income of every resident person, and on that part of the adjusted gross income derived from sources within Indiana of every nonresident person." IC § 6-3-2-1(a). IC § 6-3-2-2(a) specifically outlines what is income derived from Indiana sources and subject to Indiana income tax. For Indiana income tax purposes, the presumption is that taxpayers file their federal income tax returns as required pursuant to the Internal Revenue Code. Thus, to efficiently and effectively compute what is considered the taxpayers' Indiana income tax, the Indiana statute refers to the Internal Revenue Code. IC § 6-3-1-3.5(a) provides the starting point to determine the taxpayers' taxable income and to calculate what would be their Indiana income tax after applying certain additions and subtractions to that starting point. In relevant part, the provision states "[i]n the case of all individuals, 'adjusted gross income' (as defined in Section 62 of the Internal Revenue Code), modified as follows . . . ." Id. Gross income includes all income whatever source derived. I.R.C. § 61(a).

A corporate employer may offer a stock option plan - qualified or otherwise (nonqualified or nonstatutory stock options) - to compensate its employees for services rendered. When such stock option is offered, it is compensation to employees and generally subject to income tax pursuant to Treas. Reg. § 1.61-2. Similarly, Indiana follows the federal tax law in taxing income from stock options. I.R.C. § 83(a) states in relevant part that if property is granted "in connection with the performance of services . . . the excess of the fair market value of such property . . . over the amount . . . paid for such property, shall be included in the gross income of the person who performed such services . . . ." When the corporate employer offers a nonqualified stock option to its employee, it may deduct the value of stock option for the tax year in which the option is included in the gross income of the employee. I.R.C. § 83(h); Treas. Reg. § 1.83-6(a). When the "employee exercises [the] nonqualified stock option, the employer is required to report the excess of the fair market value of the stock received over the amount that the employee paid for that stock on the employee's Form W2." U.S. Master Tax Guide § 1923 (CCH eds. 99th ed., 2016). Treas. Reg. §1.83-7(a) further establishes requirements to determine the amount of the income to be included, which in relevant part, states "if the option has a readily ascertainable fair market value . . . [t]he person who performed such services realizes compensation upon such grant." Id. If the option does not have a readily ascertainable fair market value, income is realized when the option is exercised. Id. Regardless, the income from exercising stock options is subject to income tax.

Taxpayer in this instance argued that her W-2 income was not subject to Indiana income tax because (1) prior to 2016, Taxpayer abandoned her Indiana domicile and became a Florida resident, and (2) the income she received was not income derived from sources within Indiana. This Decision addresses Taxpayer's arguments, as follows:

As explained in the ODR, for Indiana income tax purposes, resident "includes (a) any individual who was domiciled in this state during the taxable year, or (b) any individual who maintains a permanent place of residence in this state and spends more than one hundred eighty-three (183) days of the taxable year within this state . . . ." IC § 6-3-1-12; see also 45 IAC 3.1-1-21. Nonresident is "any person who is not a resident of Indiana." IC § 6-3-1-13.

In 2017, the Department revised the Adjusted Gross Income Tax regulations. Some revisions intended to clarify the definition of a person's domicile for Indiana income tax purposes and afford more considerations in determining a person's domicile. Thus, a taxpayer may benefit from the application of the new regulations when the taxpayer's domicile is in dispute. Thus, while this Decision applies the new regulations accordingly, this Decision also references and incorporates all relevant statutes, regulations, facts, and the Department findings discussed in the ODR and addresses Taxpayer's protest, in turn, as follows:

Throughout the rehearing process, Taxpayer submitted additional documents to support her protest. Specifically, Taxpayer's supporting documentation demonstrated, among other things, that in late 2015 she moved to Florida, that she claimed the homestead exemption on her Florida home, that she registered to vote in Florida, and that she obtained a Florida driver's license. Taxpayer also took steps to relinquish the homestead exemption claimed on her Indiana home in 2016. Given the totality of the circumstances, the Department is prepared to agree that, for 2016, Taxpayer was not domiciled in Indiana because her supporting documentation overcomes the rebuttable presumption established under 45 IAC 3.1-1-22.5(c).

As mentioned earlier, Taxpayer may also qualify as an Indiana resident if she spent more than 183 days during 2016 in Indiana when Taxpayer maintained a permanent place of residence in Indiana. IC § 6-3-1-12(b); 45 IAC 3.1-1-21. The ODR concluded that during 2016, Taxpayer did not spend more than 183 days in Indiana and thus was not a full-year Indiana resident under IC § 6-3-1-12(b). Nevertheless, it should be noted that, in this case, Taxpayer, who continues to maintain a permanent place of residence in Indiana, is on notice that for the purposes of determining Indiana residency, each year stands alone. Miller Brewing Co. v. Indiana Dep't of State Revenue, 903 N.E.2d 64, 69 (Ind. 2009). Going forward, if similar circumstances arise again for different tax years, Taxpayer will be required to document her potential residency issues accordingly.

In short, the Department is prepared to agree that Taxpayer demonstrated that, for 2016, she was not a full-year Indiana resident under IC § 6-3-1-12.

As mentioned above, Indiana imposes a tax "on that part of the adjusted gross income derived from sources within Indiana of every nonresident person." IC § 6-3-2-1(a). IC § 6-3-2-2(a) specifically outlines what is income derived from Indiana sources and subject to Indiana income tax. In particular, with regards to nonresident persons, "'adjusted gross income derived from sources within Indiana' . . . include . . . compensation for labor or services rendered within this state . . . ." IC § 6-3-2-2(a)(4). When an individual only has retirement income, under 4 U.S.C. § 114(a), Indiana may only impose state income tax "on any retirement income of an individual who is [] a resident or domiciliary of [Indiana] (as determined under the laws of [Indiana])." 4 U.S.C. § 114(b)(1) further provides what is considered as retirement income.

Taxpayer's W-2 and 1099 statements in this instance demonstrated that Taxpayer listed her Indiana address as the address of the "Employee" or "Recipient" for the 2016 year. By doing so, Taxpayer expressively informed her employer that she resided in Indiana, to which the financial and tax documents were to be sent. Therefore, there is a rebuttable presumption that Taxpayer had income derived from sources within Indiana and that her income, W-2 or otherwise, was subject to Indiana income tax.

Throughout the protest process, Taxpayer's representative referenced Taxpayer's W-2 and 1099 statements, asserting that Taxpayer's "income [was] treated as Indiana source income when in fact it was Florida source income." Specifically, the representative stated that Taxpayer's "W-2 income was solely from stock options; she did not work in Indiana at all during tax year 2016." Presumably, Taxpayer argued that because she was not an Indiana resident (domiciliary) and did not work in Indiana, she was entitled to the refund of the tax withheld by her former employer concerning the W-2 income from exercising her stock options, an equity-based compensation, previously granted by her former employer.

Upon review, Taxpayer's supporting documentation demonstrated that she received two (2) separate W-2 statements from two different companies - Company C and Company P - which withheld Indiana tax, in the amount of $28,282 and $1,182.60, respectively. But Taxpayer only offered additional verifiable information on the former without doing the same for the latter. In particular, the former W-2 statement was pertaining to the stock appreciation rights ("SARs") previously awarded to Taxpayer, in 2008 and 2009, by her former employer through a "Long Term Incentive Plan" (the "Plan"). The Plan's Schedule of Terms explained that the SARs provide Taxpayer "with the right to the appreciation in the common stock" of her former employer "measured from the date of grant to the date of exercise." When the Plan's specified terms and conditions were satisfied, such as the vesting rule, Taxpayer - employed or otherwise - was allowed to exercise her vested SARs before her vested SARs expired. Thus, Taxpayer received compensation in connection with the performance of services and the income from exercising her vested SARs was subject to income tax. Taxpayer exercised her vested SARs in 2016, several years after she retired from working for her former employer.

The Internal Revenue Service ("IRS") in its Publication 525, Taxable and Nontaxable Income, provides, in relevant part:

Internal Revenue Service, Publication 525, Taxable and Nontaxable Income 4 (2016), available at https://www.irs.gov/pub/irs-prior/p525--2016.pdf (last visited December 26, 2018). IRS in its 2015 Audit Techniques Guide further explains, as follows:

Internal Revenue Service, Equity (Stock) - Based Compensation Audit Techniques Guide (August 2015), available at https://www.irs.gov/businesses/corporations/equity-stock-based-compensation-audit-techniques-guide (last visited December 26, 2018).

Therefore, when Taxpayer exercised her vested SARs in 2016, even though Taxpayer was retired from her employment, Taxpayer's former employer properly withheld tax on the payment pertaining to Taxpayer's vested SARs and issued a W-2 statement accordingly pursuant to the IRS guidance above. When Taxpayer exercised her vested SARs in 2016, she had already moved from Indiana to Florida and established her domicile in Florida. Thus, when Taxpayer exercised her SARs - the taxable event - in 2016, Taxpayer was not an Indiana resident (domiciliary) and did not work in Indiana. As such, Taxpayer's income from exercising her vested SARs was not derived from sources within Indiana subject to Indiana income tax pursuant to IC § 6-3-2-2(a)(4).

Taxpayer's documentation, however, failed to substantiate that the other W-2 statement issued by Company P was not income derived from sources within Indiana because her supporting documentation could not be verified. Thus, given the totality of the circumstances, in the absence of other verifiable supporting documents, the Department is not able to agree that Taxpayer was entitled to the refund of that $1,182.60.

Finally, it should also be noted that since the Department concluded in Part A that, for 2016, Taxpayer was not an Indiana resident under IC § 6-3-1-12, Taxpayer's retirement income was therefore not subject to Indiana income tax pursuant to 4 U.S.C. § 114. In this instance, Taxpayer received a 1099-R (Code 7 in box 7) distribution and a tax of $6,000 was withheld on that income. Taxpayer thus was entitled to a refund of the tax on that 1099-R distribution.

In short, Taxpayer's supporting documentation demonstrated that, for 2016, she was not an Indiana resident (domiciliary) under IC § 6-3-1-12. Thus, Taxpayer's retirement income, such as the 1099-R distribution, was not subject to Indiana income tax pursuant to 4 U.S.C. § 114(a). Additionally, Taxpayer's documents demonstrated that after she retired and became a Florida resident in 2016, she exercised her vested SARs, the taxable event. As a nonresident for Indiana income tax purposes, her W-2 income from exercising her vested SARs, which was previously granted to her, was not income derived from sources within Indiana under IC § 6-3-2-2(a)(4). However, as to the tax withheld on the remaining W-2 income she received from Company P, Taxpayer was not entitled to the refund because Taxpayer's documents cannot be verified. Thus, Taxpayer was required to report that income from Company P and remit the Indiana income tax accordingly.

Taxpayer's protest is sustained in part and denied in part.

December 28, 2018