Opinion ID: 2127293
Heading Depth: 1
Heading Rank: 5

Heading: Passive Investment Income

Text: This Court acknowledged in Medicine Shoppe International v. Director of Revenue, 75 S.W.3d 731 (Mo. banc 2002) ( Medicine Shoppe I ), that [t]he Union Electric cases retain vitality to the extent that they recognize that wholly passive investments outside the state of Missouri are not included in the taxation formula used to determine Missouri taxable income. Id. at 735. The issue in Medicine Shoppe I was whether Medicine Shoppe's income from loan origination fees and interest income on money loaned to non-Missouri franchisees was non-Missouri source income and, thus, not subject to apportionment. Medicine Shoppe I held that the brains of the operation were in Missouri but other portions of the income producing effort were performed in some other state; the sales or amount of business transacted were partly within and partly without Missouri for purposes of the apportionment fraction. Id. at 734 citing Bank Building and Equipment Corporation of America v. Director of Revenue, 687 S.W.2d 168, 171 (Mo. banc 1985). The facts in this case are different from Medicine Shoppe I, in part, because Medicine Shoppe became a subsidiary of Cardinal Health in 1995. The question in this case is whether the interest income at issue is like that in the Union Electric cases  wholly passive non-Missouri income  and not included in the calculation of Missouri income tax, or is like that in Medicine Shoppe I  generated by efforts within Missouri sufficiently active to be considered an efficient cause that contributes directly to the production of income, even though not entirely in Missouri. The record does not show how and where Cardinal Health invested the funds it received from Medicine Shoppe pursuant to the investment agreement. It is undisputed, however, that the funds from Missouri were controlled by the Ohio-based parent corporation and the only decision over which Medicine Shoppe has any control is whether to terminate the investment agreement. Appropriately applying these principles, the Administrative Hearing Commission determined that the investment income from Cardinal Health is not income from sales or business transacted for Missouri income tax purposes. Therefore, the commission concluded the income from Cardinal Health is not income from sales or business transacted for purposes of calculating the single-factor apportionment fraction. Based on this conclusion, the commission calculated Medicine Shoppe's tax liability for the three years at issue. The commission's decision was authorized by law and supported by competent and substantial evidence upon the entire record. Under this Court's standard of review, [9] the commission's decision is upheld.