United States: Mississippi Supreme Court Finally Disconnects The Line On Dividend Exclusion Statute In The AT&T Case

In a previous article, we summarized AT&T's 16-year effort, in two separate lawsuits, to have declared unconstitutional two Mississippi income tax statutes on the alleged basis that they placed a greater tax burden on AT&T and similarly situated taxpayers merely because these taxpayers engaged in interstate commerce.  The dormant Commerce Clause of the U.S. Constitution forbids such discrimination.

The first case ("AT&T I"), related to tax years 1993-96 and was filed in state court in 2000, claiming that both Mississippi's consolidated return and its dividend exclusion statutes were unconstitutional.  The trial court agreed and the Mississippi Department of Revenue ("MDOR") appealed.  (For tax years beginning on or after January 1, 2004, Mississippi law was changed to eliminate use of the consolidated return method.)

AT&T I ended in 2012 with the Mississippi Supreme Court dismissing AT&T's case on procedural grounds, finding that the trial court lacked subject matter jurisdiction to hear the case because AT&T failed to post the statutory supersedeas bond.  (Instead of posting a bond, AT&T paid the tax under protest, but the Court held that this did not satisfy the bond requirement).

Then, in 2004, AT&T filed a second lawsuit ("AT&T II"), challenging assessments made by MDOR for the 1997-99 tax years.  The only issue before the court was the constitutionality of the dividend exclusion statute (the "DES") as applied by MDOR (the parties had settled the consolidated return dispute).  In March 2015, the same trial judge who presided in AT&T I again ruled in favor of AT&T, citing the same constitutional grounds on which he based his decision in AT&T I.

In summary, the trial court found that the DES exempted from the taxpayer's gross income only dividends the taxpayer received from domestic subsidiaries, but not those dividends the taxpayer received from out-of-state subs.  As such, the court found that the DES denied taxpayers the benefit of deducting dividends from gross income based solely upon the choice of the taxpayer and its subsidiaries not to locate any operations in Mississippi or to file a Mississippi income tax return.  Of course, MDOR appealed this decision.

On October 27, 2016, litigation in AT&T II and on the constitutionality of Mississippi's DES finally came to an end with the Mississippi Supreme Court affirming the trial court's decision and thus ruling in favor of AT&T.  The Court applied the well-known four-part test of Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), to determine whether the DES violated the dormant aspect of the Commerce Clause.  The Court only found it necessary to address in detail the second factor, which it found dispositive—namely, the so-called internal and external consistency tests.  After considering and rejecting several MDOR arguments, some of which were quite novel, the Court ultimately concluded that as a matter of law, the DES was internally inconsistent, its application resulted in improper apportionment, and therefore its geographical limitation was an unconstitutional violation of the Commerce Clause.


  The Court first cited and gave credence to Mississippi's severability statute which essentially provides that absent contrary intent, when a portion of a statute is declared unconstitutional, the remaining sections continue in effect.  Once the DES was found to be constitutionally defective, the MDOR wanted the Court to strike the entire statute, which would have eliminated the availability of the DES to any taxpayer.  However, the Court instead chose to strike the following phrase from the statute, which it determined to be unconstitutionally offensive to the Commerce Clause: "under the provisions of this article."  The stricken phrase refers to taxation in Mississippi.  The Court further justified this remedy by stating that it preserved legislative intent by including dividend income in the definition of gross income, while at the same time allowing an exemption (or exclusion) to those taxpayers who have already borne a tax in Mississippi or another state.  Here is the change to the DES as a result of this case:

Miss. Code Ann. of 1972, § 27-7-15(4)(i), provides that gross income does not include:

Before AT&T II

Income from dividends that has already borne a tax as dividend income under the provisions of this article, when such dividends may be specifically identified in the possession of the recipient.

After AT&T II

Income from dividends that has already borne a tax as dividend income ******, when such dividends may be specifically identified in the possession of the recipient.


Based on well-established U.S. Supreme Court precedence in tax-related Commerce Clause cases, the Mississippi Supreme Court made the right decision in AT&T II.  There are a number of cases in the administrative appeals pipeline which present the same DES constitutional issue as AT&T II.  These appeals stem from consistent MDOR audit positions over the years and have been held in abeyance pending a decision in this case.  The Court said that the constitutionally-required severance noted above "shall be applied to AT&T for the tax years in issue."  This language is not altogether clear as to what it means for the cases in the administrative appeals pipeline.  However, we believe that the correct interpretation is that the reformed dividend exclusion statutory language should apply to any taxpayer similarly affected as AT&T for tax years after beginning after 1996.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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