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The Show Me (the Allocation) State: Passive, Non-Missouri Source Income Allocable as Nonbusiness Income

By Shane Lord and Prentiss Willson

The Missouri Administrative Hearing Commission held that a telephone company’s interest income receiv

August 18, 2013

By Shane Lord and Prentiss Willson

The Missouri Administrative Hearing Commission held that a telephone company’s interest income received from its parent company was passive, non-Missouri source income and thus excludible from apportionable income as nonbusiness income. The interest income at issue was related to a note between the taxpayer and its parent company pursuant to which the taxpayer loaned its parent company excess cash after payment of the taxpayer’s expenses. The Missouri Director of Revenue conceded that the interest income was passive but took the position that such income was Missouri source income. The Director argued that even passive, non-Missouri source income was apportionable income for the taxpayer because the apportionment statute for telephone companies does not include a specific provision allowing for the allocation of passive, non-Missouri source income. The Commission disagreed on both points. First, the Commission held the passive interest income was non-Missouri source income because decisions regarding the use of the loaned funds were made outside Missouri, and the loaned funds were held, used and controlled outside Missouri. The Commission then stated that under the general apportionment statute and Missouri Supreme Court precedent reviewing the statute, income is allocable as nonbusiness income if it is both passive and non-Missouri source income, even though the general statute does not include a specific allocation provision for such income. Consequently, the Commission held that a specific allocation provision is also not necessary to allocate income under the apportionment statute for telephone companies, and thus the taxpayer properly allocated its passive, non-Missouri source income as nonbusiness income. AT&T Communications of the Southwest Inc. v. Director of Revenue, No. 11-1375 RI (Mo. Admin. Hearing Comm’n).

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