## Facts

- Sperry & Hutchinson Company (S&H) operated a multistate trading-stamp promotional business; in Oregon its business activity was selling the stamp service to retailers.
- During the relevant years (1961, 1963, 1964, 1965), S&H invested substantial revenues in fixed-income securities managed outside Oregon.
- S&H classified its securities into: (1) short-term securities held pending use in the stamp business (working capital), (2) short-term securities held for investment purposes (e.g., pending acquisitions or favorable long-term market conditions), and (3) long-term securities held as investments.
- S&H reported all interest income as allocable to its commercial domicile (New York), not apportionable to Oregon.
- The Oregon Department of Revenue assessed additional corporate excise tax, treating all interest as apportionable business income.
- The Oregon Tax Court held: interest on long-term securities and investment-oriented short-term securities was not apportionable; interest on short-term securities held pending use in the stamp business was apportionable.
- The Department appealed the non-apportionability rulings; S&H cross-appealed the apportionability ruling.

## Issues

1. Whether interest income from securities held by a multistate corporation is apportionable business income for Oregon corporate excise tax purposes when the securities are held either as working capital for the Oregon business or solely for investment purposes.
2. Whether the possibility that long-term investments could be used to satisfy business obligations upon liquidation makes their interest income apportionable to Oregon.

## Decision

- The Oregon Supreme Court affirmed the Oregon Tax Court on both the appeal and cross-appeal.
- Interest on long-term investment securities and on short-term securities held for investment purposes was not apportionable to Oregon and was allocable to S&H’s commercial domicile.
- Interest on short-term securities held pending use in the trading-stamp business was apportionable to Oregon as business income.
- The court rejected the Department’s argument that potential liquidation needs converted long-term investment assets into operational capital for apportionment purposes.

## Legal Principles

- Interest income is apportionable to Oregon when the capital producing the income is functionally connected to, and serves as working capital for, the taxpayer’s Oregon business operations.
- Interest income from capital set aside for investment purposes, not functionally part of the Oregon business, is not apportionable and is instead allocable to the taxpayer’s commercial domicile.
- A hypothetical ability to use investment assets to satisfy business liabilities upon liquidation does not, by itself, establish a present functional relationship sufficient to treat investment income as apportionable business income.

## Conclusion

Oregon could apportion interest only from short-term securities that functioned as working capital in the trading-stamp operation; interest from long-term and investment-oriented holdings remained non-apportionable and allocable to the company’s domicile.


Sperry & Hutchinson Co. v. Dep’t of Revenue, 270 Or. 329, 527 P.2d 729 (1974)