“ We ’ ve seen instances where states take some unusual positions on taxing nonresident taxpayers , with Massachusetts being a good example ,” says Kateryna Melnikova , a senior manager at CBIZ MHM ’ s national tax practice in Boston . “ California and New York [ also ] have a reputation for being aggressive when taxing nonresident taxpayers .”

In a recent New York case , she says , a nonresident was liable for state tax on stock sale proceeds because the income was “ compensatory ” ( the taxpayer acquired the stock at a value below market price in exchange for services ). Similarly , California

has recently successfully argued that state taxes can apply to nonresident business owners if their companies have established a business “ situs ” in the state . Situs is the location in which a taxing event occurs .

“ Some types of income will still attract tax from a former resident state if that income was earned during the period the person lived there ,” says Marci Spivey , a CPA , tax partner and private client services leader at Cherry Bekaert Advisory in Atlanta . Examples of such income , she says , include deferred compensation and gains from the sale of stock options , as well as income from the sale of real estate and multistate business passthrough income to shareholders and owners . In November , the Massachusetts Appellate Tax Board held in the case Welch v .

Clients should “ understand the state income tax rules for both [ their ] former and current state ... and whether any credits for taxes paid to another state may apply .”

— Kris Yamano , Crewe Advisors

Commissioner of Revenue that a nonresident could be taxed on the gain from the sale of stock after moving — a decision that John Pantekidis , managing partner and general counsel at wealth advisory TwinFocus in Boston , calls an “ extremely unusual and potentially overreaching decision .”

“ Taxing authorities stated that these gains from the sale of the business were sourced within Massachusetts ‘ if the gain is otherwise connected with the taxpayer ’ s conduct of a trade or business , including employment ,’” Pantekidis says .

He adds that New York tax authorities came to a similar conclusion in another case , “ noting that despite the capital gain from an intangible resulting in capital gains , the income from the shares was nonetheless compensatory in nature and hence not from intangibles but ordinary income .”

Clients need to do their tax homework before moving and realize that the states are getting wiser . In the Welch case , for instance , the appellate board highlighted “ that the taxpayer didn ’ t file in any other states while residing in Massachusetts . This aspect is being utilized by the state to assess whether all or part of [ a ] gain should be taxable ,” Melnikova says .

And clients should “ understand the state income tax rules for both [ their ] former and current state , including how to establish domicile in the new state ,” says Kris Yamano , a partner at Crewe Advisors in Salt Lake City . “ Understand which items , including sale proceeds from a company , each state will consider taxable ... and whether any credits for taxes paid to another state may apply .”

For instance , under Section 1202 of the Internal Revenue Code , capital gains from the sale of small business startups could possibly be excluded from federal taxation ,

Continued on page 14

10 | FINANCIAL ADVISOR MAGAZINE | JULY / AUGUST 2024 WWW . FA-MAG . COM