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Allen v. Commissioner of Revenue Services

Supreme Court of Connecticut

December 28, 2016

JEFFERSON ALLEN ET AL.
v.
COMMISSIONER OF REVENUE SERVICES

          Argued October 13, 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 general, and, on the brief, George Jepsen, attorney general, for the appellee (defendant).

          Palmer, Zarella, Eveleigh, McDonald and Robinson, Js.

          OPINION

          EVELEIGH, J.

         The plaintiffs, Jefferson Allen and Evita Allen, appeal[1] from the trial court's award of summary 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 performing services within the state; and (3) it is constitutional to impose a tax on income derived from the exercise of nonqualified stock options[2] by a nonresident who was granted the options as compensation for performing 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 history are relevant to this appeal. From 1990 to 2001, Jefferson Allen[3] 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 applicable 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 determination 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 jurisdiction 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 defendant 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 conclusions are legally and logically correct and find support 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 recognized 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 represents 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 principle of sovereign immunity implicates the subject matter jurisdiction of the court. Id.; see also Giannoni v. Commissioner 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. Computers 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 sovereign immunity are well established. ‘‘[A] litigant that seeks to overcome the presumption of sovereign immunity [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 determination, [a court shall be guided by] the well established principle that statutes in derogation of sovereign immunity 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 narrowly 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 Statutes § 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 oneself of the limited statutory waiver of sovereign immunity 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 monetary obligation on the sovereign, and thus it is essential for its requirements to be satisfied.'' (Internal quotation marks omitted.) Housatonic Railroad Co. v. Commissioner of Revenue Services, supra, 301 Conn. 289, quoting 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 application . . . and without the ability to satisfy those prerequisites.'' 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 banks[11] had allegedly overpaid for the years in question . . . 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 permissible in the absence of such a statutory procedure. Norwich 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 sovereign immunity and exhaustion of administrative remedies 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 corporate 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 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. 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 Connecticut 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 federal 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 nonresidents 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 General 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 promulgated a regulation that addresses nonqualified stock options that provides in relevant part as follows: ‘‘Connecticut adjusted gross income derived from or connected with sources within this state includes . . . 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 ...


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