Barton v. Blount
| Docket Number: | 2006-CA-00698-COA Linked Case(s): 2006-CA-00698-COA ; 2006-CT-00698-SCT |
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| Court of Appeals: |
Opinion Link Opinion Date: 09-04-2007 Opinion Author: CHANDLER, J. Holding: Reversed and Remanded |
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| Additional Case Information: |
Topic: Tax assessment - Section 1245 property - Sale of assets of domestic corporation - Section 27-7-9(f)(10)(B) Judge(s) Concurring: KING, C.J., LEE AND MYERS, P.JJ., GRIFFIS, BARNES, ISHEE, ROBERTS AND CARLTON, JJ. Non Participating Judge(s): IRVING, J. Procedural History: Admin or Agency Judgment Nature of the Case: CIVIL - STATE BOARDS AND AGENCIES |
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| Trial Court: |
Date of Trial Judgment: 04-10-2006 Appealed from: Hinds County Chancery Court Judge: William H. Singletary Disposition: THE DECISION OF THE STATE TAX COMMISSION WAS AFFIRMED Case Number: G-2004-857 S/2 |
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| Party Name: | Attorney Name: | |||
| Appellant: | GEORGE R. BARTON AND BETTY S. BARTON |
HARRIS H. BARNES
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| Appellee: | JOSEPH L. BLOUNT, COMMISSIONER AND MISSISSIPPI STATE TAX COMMISSION | GARY WOOD STRINGER ASHLEY MAY |
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Synopsis provided by:  If you are interested in subscribing to the weekly synopses of all Mississippi Supreme Court and Court of Appeals hand downs please contact Tammy Upton in the MLI Press office. |
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| Topic: | Tax assessment - Section 1245 property - Sale of assets of domestic corporation - Section 27-7-9(f)(10)(B) |
| Summary of the Facts: | George R. Barton and Betty S. Barton, incorporated as Barton, Inc., owned and operated McDonald's franchises in Mississippi. On October 27, 2000, the Bartons sold substantially all of their corporate assets respecting their McDonald's franchises to MNM Enterprises, LLC, a Delaware corporation. Within one year of the sale, the Bartons adopted a Plan of Liquidation and voluntarily filed Articles of Dissolution with the Mississippi Secretary of State. Later, the Mississippi State Tax Commission conducted an audit that resulted in an additional tax assessment for the tax year 2000. The MSTC issued a Notice of Assessment for the additional tax to the Bartons. The Bartons responded by filing an amended tax return for the year 2000 and remitted additional tax in the amount of $9,403, representing the recapture of depreciation taken only on those items subject to Internal Revenue Code Section 1245. The MSTC issued a Notice of Assessment of $1,034 in interest due on this amount as the result of filing the amended tax return; the Bartons paid the interest due. The Bartons appealed the assessment to the MSTC and contested the recapture of any depreciation and amortization unrelated to Section 1245 assets. After a hearing, the Board of Review affirmed the assessment in the amount of $57,667, including penalties and interest through June 30, 2002. The Bartons appealed to the Full Commission, which affirmed the assessment. The Bartons paid the assessment in full and then appealed to the chancery court, which entered a summary judgment in favor of the MSTC. The Bartons appeal. |
| Summary of Opinion Analysis: | According to the Bartons, their corporate assets consisted of furniture, fixtures, and signs classified under the Internal Revenue Code as Section 1245 property; leasehold improvements classified as Section 1250 property; and goodwill, an intangible asset classified as Section 197 property. The Bartons aver that they entered into an agreed price allocation with the buyer, MNM, in which the purchase price (amount realized) of the corporate assets was allocated between Section 1245 assets, Section 1250 assets, and Section 197 intangibles. The Bartons included a summary of this price allocation in their brief. Also, the Bartons included a breakdown of the depreciation or amortization taken on furniture and fixtures ($510,502), signs ($51,668), leasehold improvements ($56,257), and goodwill ($323,068). This amount totaled $941,495, which in the MSTC assessment was reduced to $936,332 and recaptured as ordinary income. The Bartons argue that they should only be required to recapture as ordinary income the amount of depreciation taken with respect to such equipment up to the amount of the gain realized which should be determined by reference to the purchase price allocation with respect to such I.R.C. ยง 1245 property. Section 27-7-9(f)(10)(B) provides for the non-recognition of gain from the sale of "all or at least ninety percent (90%) of the assets in domestic corporations except those assets that represent the ownership interest of another entity" if the sale meets three conditions. The first condition is that the assets of the corporation have been held for over a year, the second condition is that the corporation is totally liquidated and dissolved within one calendar year from the date of the sale of all or ninety percent of the assets of the corporation, and the third condition requires the recapture of the depreciation and/or amortization that has been taken on the assets of the corporation. Plainly, in the first and second conditions, the phrase, "the assets of the corporation," refers to all of the corporate assets, not merely the corporation's Section 1245 property. The third condition states that there must be recapture of the depreciation and amortization taken on "the assets of the corporation . . . In the same manner as provided for in Section 1245 . . . ." Clearly, in the third condition, just as in the first and second conditions, "the assets of the corporation" refers to all of the corporate assets. The plain language of the statute unambiguously indicates that it is "the assets of the corporation" that are subject to recapture, not merely Section 1245 assets. Under Internal Revenue Code Section 1245, a portion of the gain realized on depreciated property is recognized as ordinary income, or "recaptured." Without Section 1245, such gain would not be recognized as ordinary income under the Internal Revenue Code. Under Section 1245, in the case of a sale, the amount of depreciation recapture is calculated for each item of property by subtracting the adjusted basis from the lower of the amount realized or the recomputed basis. Under Section 1245(a)(2)(A), the recomputed basis is the adjusted basis with the allowable or allowed depreciation or amortization deductions added back in. When the buyer and seller have adverse interests in the allocation of the amount realized, they may enter into an arms-length agreement on the price allocation. The Bartons and MNM entered into such an agreement and allocated the purchase price of the stores between furniture and fixtures, signs, leasehold improvements, and goodwill. The Bartons realized $1,510,001 on the sale of both stores and experienced gain of $1,016,087. Under section 27-7-9(f)(10)(B), the MSTC assessed the Bartons $936,332 in depreciation/amortization recapture. Apparently, to reach this figure, the MSTC subtracted the adjusted basis of $421,153 from the total cost of $1,362,648 and then adjusted for the property written off as junked. The Bartons argue that the MSTC's method of recapturing depreciation "up to cost" was contrary to the reference to Section 1245 in section 27-7-9(f)(10)(B)(iii) and effectively penalized them by recapturing depreciation over what was realized in the sale. Under section 27-7-9(b), only gain is recognized as ordinary income. A taxpayer's gain is less than or equal to the amount realized because, in determining gain, the adjusted basis is subtracted from the amount realized. Therefore, if section 27-7-9(f)(10)(B) were intended upon the sale of corporate assets to recapture depreciation over and above the amount realized, then the section would operate as a tax penalty. While the proper recapture calculation under section 27-7-9(f)(10)(B) is indeed the cost minus the adjusted basis, the MSTC cannot recapture depreciation over and above the amount which the taxpayer gained on the sale. According to the MSTC's calculation of depreciation recapture, the MSTC did not recapture depreciation above the amount realized on the sale. Under section 27-7-9(f)(10)(B), the difference between $1,016,087 and $936,333 was nonrecognized. Because depreciation recapture under section 27-7-9(f)(10)(B)(iii) cannot exceed the amount realized, calculating depreciation recapture for each type of item by using the Bartons' price allocation results in less recapture than under the MSTC's calculation. Under the regulations applicable to Section 1245 property, which apply to "the assets of the corporation" under section 27-7-9(f)(10)(B), the amount of gain must be separately determined for "each item." On remand, the MSTC is to apply Section 1245 and its corresponding regulations in determining the amount realized in the same manner as it would have prior to the 1997 amendment of section 27-7-9(f)(10)(B), recognizing the limited change caused by the substitution of up to cost recapture for the pre-amendment recapture calculation contained in Section 1245(a). |
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