US Stock Options Tax

In Jan 2010 (2009/10 tax year) I was granted a US performance-related stock option with McGraw-Hill. I was employed by McGraw-Hill in the UK. The option measured the stock performance in year 1, and then vested over years 2 & 3. It is being paid out now.

I left McGraw-Hill in Feb 2012 (2011/12 tax year).

The award converts units into shares. However, McGraw Hill in UK has advised HQ in NY that 50% "Foreign Tax" should be applied and the value of the option has been reduced by 50% through subtracting half the shares from the award.

McGraw-Hill says this is correct as I was employed by them at the time the option was awarded (at that time I was in the UK 40% tax band). I am challenging this, as I have had no gain from the award so question how I can be "taxed" in the US. I am also W8-BEN registered in US.

So my questions:

* As I am not an employee of McGraw-Hill, (and haven't been for nearly a year) how can they instruct the US to withhold 50% of my award for tax purposes?

* where will this tax be paid

* What about capital gains tax, which was what I was expecting to pay

 

And the most important question, how can I get this reinstated?

 

Thanks for any help.