Mississippi Chancery Court Again Holds Dividends Received

The Chancery Court of Hinds County, Mississippi, recently has held that the state's corporate income tax dividends received exclusion statute violates the Commerce Clause of the U.S. Constitution because the exclusion is limited to dividends received from affiliates that are doing business in Mississippi and file income tax returns in the state.1 The Court held that the statute does not allow the exclusion of dividends received from an affiliate that does not do business in Mississippi. As a result, the Court determined that the dividend exclusion statute is discriminatory because it clearly favors domestic corporations over foreign competitors. The Court held that the statute is unconstitutional and granted the taxpayer's motion for summary judgment. The decision is substantially similar to a 2006 decision that the Court issued to the same taxpayer which ultimately was overturned by the Mississippi Supreme Court on procedural grounds.

Background

The taxpayer, AT&T, and some of its affiliates filed group Mississippi income tax returns for the 1997 through 1999 tax years. Following an audit for these years, the Mississippi Department of Revenue made adjustments to change: (i) the computation method used by the taxpayer to a "combined" method;2 (ii) the computation of interest expense attributable to non-business assets that was added back to business income; and (iii) the inclusion of business income dividends received by the taxpayer from its subsidiaries which the auditors determined were not taxable in Mississippi in the year in which the dividend was included in the taxpayer's business income. In 2003, the Department issued an assessment of income taxes against the taxpayer and its subsidiaries for the relevant tax years of nearly $12 million, inclusive of interest and penalties. After the Department and the taxpayer reached a resolution concerning some of the adjustments, the only issue remaining for consideration was the taxation of intercompany dividends.

As a result of the contested treatment of the dividends, the taxpayer appealed the additional income tax assessment to the Mississippi Tax Commission Board of Review. After the Board upheld the assessment, the taxpayer promptly appealed the order to the full Tax Commission. The Commission affirmed the assessment but reduced the amount by approximately $1 million. The taxpayer subsequently appealed this order to the Chancery Court of Hinds County by filing a Petition for Appeal of Additional Income Tax Assessment Ordered by State Tax Commission, for Declaratory and Injunctive Relief, and for Refund of Overpayment of Tax. As required by statute, the taxpayer also filed an appeal bond equal...