Appeal of J. Otting and Y. Otting, OTA Case No. 230914221 (Cal. Off. Tax App. 2026)

For tax practitioners representing executive clients who relocate from California, the tax sourcing of post-termination payments is a frequent and high-stakes battleground. On February 11, 2026, the California Office of Tax Appeals (OTA) held an oral hearing and subsequently issued its opinion in the Appeal of J. Otting and Y. Otting (OTA Case No. 230914221). The OTA’s decision provides a highly sophisticated, bifurcated sourcing framework for termination payments. By distinguishing between severance payments, medical premium reimbursements, and restricted stock units (RSUs), the OTA clarified the boundaries between service-based wage sourcing under California Revenue and Taxation Code (R&TC) Section 17951 and intangible-based contract-right sourcing under R&TC Section 17952. This article analyzes the facts, legal arguments, and the court’s detailed statutory application, providing critical takeaways for CPAs and EAs handling multi-state executive compensation.

Factual Background and Chronology of the Dispute

The taxpayer, J. Otting (appellant-husband), is a lifelong banker who served as the President and Chief Executive Officer of OneWest Bank, a regional banking institution based in California, from October 2010 until August 2015. In July 2014, CIT Group Inc. (CIT), a large national business in the same field, entered into a merger agreement with OneWest Bank. In connection with this impending transaction, CIT sent J. Otting an offer letter (Offer Letter) for a three-year term of employment as President and CEO of the post-merger entity, CIT Bank, N.A. (CIT Bank), which was subsequently agreed to and accepted by both parties.

The Offer Letter laid out J. Otting’s prospective salary, deferred compensation, and a comprehensive severance agreement. Upon the merger’s closing in August 2015, J. Otting assumed his role and received a base annual salary of $1,000,000. Concurrently, CIT issued restricted stock unit (RSU) agreements under a long-term incentive plan. These RSU agreements provided that while the grants would vest in the future contingent on J. Otting’s continued employment, they would continue to vest on their original schedule if he were terminated without “cause” pursuant to the severance agreement.

On December 8, 2015, CIT filed a Form 8-K with the Securities and Exchange Commission, announcing J. Otting’s termination as CEO and President of CIT Bank, effective December 31, 2015. J. Otting performed no services as an employee of CIT Bank after December 8, 2015. The very next day, on December 9, 2015, J. Otting and his spouse (appellant-wife) relocated from California to Nevada, successfully establishing a new domicile and residency outside of California.

On December 14, 2015, CIT sent a termination letter confirming that his employment would end on December 31, 2015, which coincided with the scheduled vesting date for the first portion (one-third) of his RSUs. This letter also informed him of the requirement to sign and return a Confidential Separation Agreement and General Release (the Release) to receive his severance payments and to permit the termination-based vesting of his RSUs. J. Otting engaged specialized compensation counsel to negotiate the specific terms of the Release, which he testified was “highly customized and very specific to him” rather than a boilerplate CIT form. He executed the Release on or about January 30, 2016.

In 2016, as a Nevada resident, J. Otting received three distinct termination payments:

A lump-sum severance payment calculated based on a monthly rate multiplied by the 32 months remaining on his original three-year employment contract;
Payment for medical premiums; and
A payment corresponding to the portion of the RSUs that vested as of December 31, 2015, which CIT Bank paid on the originally planned schedule.

CIT reported all three payments as wages on J. Otting’s 2016 Form W-2.

Taxpayer’s Request for Relief and Auditing History

On their 2016 California nonresident personal income tax return, the taxpayers included the termination payments in their federal adjusted gross income (AGI) but excluded them from their California-source income, reflecting their nonresident status during 2016.

The Franchise Tax Board (FTB) audited the taxpayers’ return, determined that the entirety of the termination payments constituted California-source income, and issued a Notice of Proposed Assessment (NPA) on January 13, 2022, proposing additional tax of $1,800,858 plus applicable interest. Following an unsuccessful protest by the taxpayers, the FTB issued a Notice of Action sustaining the NPA. The taxpayers timely appealed the FTB’s action to the Office of Tax Appeals.

Sourcing Framework for Nonresidents: Wages vs. Intangibles

The primary legal issue on appeal was whether the severance, medical premiums, and RSU payments received by J. Otting in 2016 (while a Nevada resident) constituted California-source income. To resolve this, the OTA had to analyze the intersection of two distinct statutory sourcing schemes:

Compensation for Personal Services (Wages): Under R&TC Section 17951 and California Code of Regulations, Title 18, (Regulation) Section 17951-5(a)(4), compensation paid to nonresident corporate officers for a continuous period of employment in California is California-source income.
Income from Intangible Personal Property (Contract Rights): Under R&TC Section 17952 and Regulation Section 17952(b), income of nonresidents from intangible personal property is generally sourced to the state of the taxpayer’s domicile under the common-law doctrine of mobilia sequuntur personam. Such income is only taxable in California if the underlying intangible property has acquired a “business situs” in California.

The taxpayers contended that the payments were received in exchange for releasing intangible contract rights (the right to sue and other covenant agreements) and were thus sourced to Nevada. The FTB argued that the payments were compensation for personal services previously performed in California and should be sourced as wages.

Legal Precedent and the Control of Appeal of McAneeley

In evaluating early employment contract terminations, the OTA relied heavily on Appeal of McAneeley (80-SBE-131) 1980 WL 5045. In McAneeley, the State Board of Equalization (BOE) held that a payment received by a nonresident professional athlete in recognition of the early termination of his employment contract was a payment for a contract right, which constitutes intangible personal property. Sourcing was therefore governed by the domicile of the recipient unless the contract right acquired a business situs in California.

The OTA emphasized that McAneeley is precedential authority over OTA matters under Regulation Section 30504. It noted that:

“Nonetheless, it is clear that McAneeley, which is precedential authority over OTA matters, states that a payment to a former employee as compensation for the early termination of an employment contract is treated as income from intangible personal property.”

This position was further reinforced by the FTB’s own historical administrative guidance. FTB Chief Counsel Ruling 01-201181 (and the FTB’s Residency and Sourcing Technical Manual in effect until November 2022) explicitly stated:

“[i]ncome from a termination of employment contract does not constitute compensation for services rendered, but income from an intangible.”

Thus, the manual directed that the source of such income “is not where the services were provided or would have been provided had the employment relationship not been terminated, but generally at the residence of the former employee at the time the income is recognized,” pursuant to R&TC Section 17952.

Distinguishing and Preserving the Precedential Status of McAneeley

The FTB raised several arguments attempting to distinguish or overturn McAneeley.

First, the FTB asserted that J. Otting was an “at-will” employee and therefore had no right to continued employment, unlike the professional hockey player in McAneeley who had a fixed-term contract. The OTA rejected this distinction, holding that the Offer Letter was a contract that:

“...contained agreed upon specific terms for compensation to be paid to appellant-husband by CIT should his employment be terminated without cause prior to the full three-year term completing.”

The OTA concluded:

“Accordingly, while appellant-husband may have been an at-will employee, he had legal rights, in the terms of the contract, for compensation in the event of early termination. As such, appellant-husband’s severance and RSU payments in 2016 are payments as a result of his termination, and therefore the principle found in McAneeley that termination payments constitute income from intangible personal property applies.”

Second, the FTB cited United States v. Quality Stores, Inc., 572 U.S. 141 (2014) to argue that severance payments are legally characterized as “wages”. The OTA distinguished Quality Stores, noting it was limited strictly to the broad definition of “wages” for Federal Insurance Contributions Act (FICA) withholding purposes. It did “not disturb the precedential status of McAneeley where it pertains specifically to the sourcing of severance payments for income tax purposes.”

Third, the FTB pointed to California Employment Development Department (EDD) Regulation Section 4309-1(b)(4), which characterizes dismissal or severance payments as wages. The OTA dismissed this attempt to “pull in Social Security law and have its definitions control over on-point income tax precedent”.

Application of Law to Facts: The Business Situs Inquiry

Having concluded that the termination payments constituted income from intangible personal property governed by McAneeley, the OTA turned to the critical secondary question: Did these intangible contract rights acquire a “business situs” in California under Regulation Section 17952(c)?

Under Regulation Section 17952(c), an intangible personal property has a business situs in California:

“...if it is employed as capital in [California] or the possession and control of the property has been localized in connection with a business, trade or profession in [California] so that its substantial use and value attach to and become an asset of the business, trade or profession in [California].”

The OTA applied the doctrine of Raytheon Production Corporation v. Commissioner, 144 F.2d 110 (1st Cir. 1944), which establishes that “the characterization of a settled claim is derived from the characterization of the underlying claim itself.” Accordingly, the OTA performed a component-by-component analysis of the rights J. Otting released in the Separation Agreement.

Sourcing of the Severance Payment

The severance payment represented compensation for the waiver of several distinct legal claims and obligations under the Release, including: (1) waiver of claims to future wages; (2) immediate resignation; (3) non-disclosure/non-disparagement; and (4) non-competition/non-solicitation.

For the waiver of future wages, the OTA analyzed FTB Legal Ruling 1958-133, which states that payments in lieu of future wages can acquire a business situs if the personal services were contractually required to be performed in California. The OTA found that J. Otting’s employer (CIT) was headquartered in New York, and while his bank operations were in California, “there is no explicit clause or other facts showing that his employment was specifically restricted to California as a predicator for receipt of those future wages.” Thus, the right to future wages did not acquire a California business situs.

The administrative and post-termination provisions—including immediate resignation, cessation of business expenses, return of property, non-disclosure, non-disparagement, and cooperation—were “specifically not limited solely to California” and thus “acquired no business situs in California.”

Regarding the non-competition and non-solicitation covenants, J. Otting agreed not to compete in the banking industry generally. This geographic restriction “specifically encompassed the area of [the nation/entirety of CIT’s market] and was in no way limited or specific to California.” Consequently, the OTA held that:

“...there is no business situs in California here. Accordingly, there is no evidence showing that any portion of the severance payment arose from the sale of intangible personal property that had acquired a business situs in California.”

The severance payment was therefore sourced entirely to his state of domicile, Nevada, and was not taxable in California.

Sourcing of the Medical Premiums

Following the same logic as the severance payment, the OTA found that “there is no indication that the right to compensation for lost future medical premiums had acquired a California situs” since they were not restrictively tied to goods or services located solely in California. The medical premiums were therefore sourced to J. Otting’s domicile in Nevada and were not taxable in California.

Sourcing of the RSU Payments

The final piece of the termination payments was the payment for J. Otting’s RSUs that vested on December 31, 2015, which was his last day of employment. The right to these payments was set forth in the Offer Letter and the RSU Agreements.

Unlike the future-looking analysis applied to the severance payment, the OTA noted that the RSU payment was backward-looking. J. Otting was employed as a California resident corporate officer operating out of a main office in Pasadena for the entire duration from the grant date to the vesting date of this portion of the RSUs.

The OTA rejected the taxpayers’ argument that the RSU payments were inseparable from the Release. The OTA observed:

“...they are undeniably representative of appellant-husband’s claim to RSU payments for personal services rendered during his employment in California in 2015.”

The OTA integrated the principles of R&TC Section 17951-5(b) (governing the apportionment of deferred compensation) with Regulation Section 17952 (governing intangibles). The OTA held:

“...so too should it be found under Regulation section 17952 that compensation wholly attributable to a corporate officer’s employment in California has a business situs in California, even if that compensation is deferred to a later date or realized as part of a termination payment. As such, the RSU payments received in 2016 must be found to have a business situs in California.”

As a result, the RSU payments did acquire a California business situs, and were taxable as California-source income.

Conclusions and Administrative Takeaways

The Office of Tax Appeals ultimately sustained the FTB’s assessment only to the extent of the RSU payments and reversed the assessment regarding the severance payments and medical premiums.

For tax professionals, the Otting decision establishes several critical principles:

The Viability of McAneeley: McAneeley remains robust precedential authority. Early termination payments are characterized as income from intangible personal property (contract rights) and are sourced to the taxpayer’s domicile at the time of recognition, unless a business situs is established.
At-Will Executive Sourcing: At-will employment does not preclude the application of McAneeley as long as the underlying employment agreement contains specific, enforceable rights to compensation in the event of termination.
The Raytheon Origin-of-the-Claim Doctrine: Settlements and separation releases must be parsed based on the origin of the claims released. Nationwide non-compete agreements and general release clauses lack a localized connection to California, preventing the establishment of a California business situs.
Situs of Deferred Compensation: RSUs and other deferred compensation tied to services rendered while a California resident corporate officer will be deemed to have a California business situs, even if realized through a post-termination settlement or separation agreement after the taxpayer has established residency in another state.

When planning executive exit packages, tax advisors should carefully separate the calculation and documentation of true severance (associated with releasing general contract claims and nationwide covenants) from deferred compensation vesting, ensuring clear, separate contracts to preserve the domicile-based sourcing of the severance payments.

Prepared with assistance from Google Notebook.