Section 19 Allocation of Income

• Library: Tax Law 2009

The principle of specific allocation under § 143.451.2, RSMo 2000, and its predecessor provisions, was established early in the history of the single-factor formula and was an outgrowth of the “source of income” analysis of ArtophoneCorp. v. Coale, 133 S.W.2d 343 (Mo. 1939), and In reKansas City StarCo., 142 S.W.2d 1029 (Mo. banc 1940). See §8.8, supra; see also:

• Union Elec. Co. v. Coale, 146 S.W.2d 631 (Mo. 1940) (source of dividend income)

• Petition of Union Elec. Co. of Mo., 161 S.W.2d 968 (Mo. banc 1942) (source of dividend income and interest on corporate bonds)

• A.P. Green Fire Brick Co. v. Mo. State Tax Comm’n, 277 S.W.2d 544 (Mo. 1955) (source of royalty income)

The question presented in Coale, 146 S.W.2d 631, was the geographical source of dividends paid to the taxpayer with respect to stock it owned in various foreign corporations that neither employed any capital nor engaged in any business activity in Missouri during or before the taxable year in question. The taxpayer had excluded the dividends from taxable income. The state auditor argued that the exclusion was improper; the source of the dividends was the shares of stock held by the taxpayer, evidenced by stock certificates, that had a business situs in Missouri, the legal and commercial domicile of the taxpayer. The parties stipulated that the dividends were paid from funds derived from capital employed and business operations carried on in states other than Missouri, and the Court apparently viewed that fact as determinative of the source of the dividend income. Id. at 635. Because Missouri was not the geographical source of the dividends, the dividends were not includable in Missouri taxable income. Artophone, 133 S.W.2d 343, and F. Burkhart Manufacturing. Co. v. Coale, 139 S.W.2d 502 (Mo. 1940), the Court observed, related to “the allocation of total net income derived from transactions in this state and other states, and do not answer the question here.” Coale, 146 S.W.2d at 635. The source of income, under Kansas City Star, 142 S.W.2d 1029, is the place where it is produced, and the Court believed it illogical to view the dividends in question as “produced” in Missouri. Id.

Shortly thereafter, in Petition of Union Electric Co. of Missouri, 161 S.W.2d 968, the Court reexamined and reaffirmed its position. The state auditor disputed the taxpayer’s exclusion from its Missouri taxable income of:

• dividends from foreign corporations, one of which was licensed to do business in Missouri and apparently conducted some limited operations in Missouri; and

• interest on bonds of an Illinois corporation doing business exclusively in Illinois, not secured by a lien on property in Missouri

The Court again rejected the view that the source of the dividends is the shareholder’s state of domicile. Instead, it reiterated the Kansas City Star rule that in the case of income derived from labor, the source is the place where the labor is performed; in the case of income derived from capital, the source is the place where the capital is employed...