George R. Barton v. Joseph L. Blount
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IN THE COURT OF APPEALS OF THE STATE OF MISSISSIPPI
NO. 2006-CA-00698-COA
GEORGE R. BARTON AND BETTY S. BARTON
APPELLANTS
v.
JOSEPH L. BLOUNT, COMMISSIONER AND
MISSISSIPPI STATE TAX COMMISSION
DATE OF JUDGMENT:
TRIAL JUDGE:
COURT FROM WHICH APPEALED:
ATTORNEY FOR APPELLANTS:
ATTORNEYS FOR APPELLEES:
NATURE OF THE CASE:
TRIAL COURT DISPOSITION:
DISPOSITION:
APPELLEES
04/10/2006
HON. WILLIAM H. SINGLETARY
HINDS COUNTY CHANCERY COURT
HARRIS H. BARNES
GARY WOOD STRINGER
ASHLEY MAY
CIVIL - STATE BOARDS AND AGENCIES
THE DECISION OF THE STATE TAX
COMMISSION WAS AFFIRMED.
REVERSED AND REMANDED - 09/04/2007
MOTION FOR REHEARING FILED:
MANDATE ISSUED:
BEFORE MYERS, P.J., CHANDLER AND GRIFFIS, JJ.
CHANDLER, J., FOR THE COURT:
¶1.
George R. Barton and Betty S. Barton (the Bartons) appeal the decision of the Chancery
Court of Hinds County affirming an income tax assessment by the Mississippi State Tax
Commission (MSTC). The Bartons argue that the MSTC erred in its application of the tax
exemption in Mississippi Code Annotated section 27-7-9(f)(10)(B) (Rev. 1998), resulting in their
overpayment of taxes on depreciation recapture following a sale of corporate assets. They contend
that they are entitled to a refund of the overpaid amount.
¶2.
We find error in the MSTC's interpretation of the depreciation recapture provision in section
27-7-9(f)(10)(B)(iii). Therefore, we reverse and remand this case to the MSTC for a recalculation
of the tax assessment consistent with this opinion.
FACTS
¶3.
The Bartons, 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 MSTC conducted an audit that
resulted in an additional tax assessment for the tax year 2000.
¶4.
Pursuant to section 27-7-9 (f)(10)(B), the audit recaptured and taxed all the depreciation and
amortization which the Bartons had previously taken on the sold assets. 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.
¶5.
Then, 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 held a hearing and affirmed
2
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.
STANDARD OF REVIEW
¶6.
The issue of how depreciation recapture is to be determined under section 27-7-9(f)(10)(B)
presents a question of law. The chancellor found that the MSTC was entitled to a judgment as a
matter of law and granted the MSTC's motion for summary judgment. Our review of the grant or
denial of summary judgment is de novo. Laurel Yamaha, Inc. v. Freeman, 956 So. 2d 897, 902
(¶17) (Miss. 2007). Nonetheless, respecting the question of statutory interpretation presented, "we
are obligated to respect the agency's interpretation and give deference to it concerning administration
of laws under which the agency operates or those which it has responsibility to administer." State
v. Beebe, 687 So. 2d 702, 705 (Miss. 1996). While we do afford great deference to the agency's
interpretation of its own statutes and rules, if the agency's interpretation is contrary to the
unambiguous terms or best reading of a statute, no deference is due. Sierra Club v. Miss. Env.
Quality Permit Bd., 943 So. 2d 673, 679 (¶17) (Miss. 2006).
LAW AND ANALYSIS
I. DID THE CHANCERY COURT ERR IN AFFIRMING THE ORDER OF THE MSTC
REGARDING THE ASSESSMENT OF INCOME TAXES AGAINST THE BARTONS
PURSUANT TO MISSISSIPPI CODE ANNOTATED SECTION 27-7-9(f)(10)(B)?
¶7.
This appeal centers on the interpretation of a tax exemption found at Mississippi Code
Annotated section 27-7-9(f)(10)(B). Mississippi's tax code provides for the recognition, as ordinary
income, of gain on the sale of property unless an exception applies. Miss. Code Ann. § 27-7-9(b).
Section 27-7-9(f) enumerates exceptions to the recognition of gain. Effective January 1, 1994, the
legislature amended section 27-7-9(f) by adding subsection (10), which provided for the non-
3
recognition of gain from the sale of authorized shares in domestic corporations or partnership
interests in limited partnerships that had been held for over one year. 1994 Miss. Laws 483.
¶8.
In 1995, the legislature amended section 27-7-9(f)(10) to provide:
Sales of certain interests in financial institutions domiciled in Mississippi, domestic
corporations, domestic limited partnerships or domestic limited liability companies.
(A) No gain shall be recognized from the sale of authorized shares in
financial institutions domiciled in Mississippi and domestic corporations, or
partnership interests in domestic limited partnerships and domestic limited
liability companies, that have been held for more than one (1) year.
(B) No gain shall be recognized from the sale of all or substantially all of the
assets in domestic corporations provided:
(i) The assets of the corporation have been held for more than one
year;
(ii) The corporation is totally liquidated and dissolved within one (1)
calendar year from the date of the sale of all or substantially all of the
assets of the corporation; and
(iii) The depreciation that has been taken on the assets of the
corporation shall be recaptured and taxed as ordinary income in the
same manner as provided for in Section 1245 of the Internal Revenue
Code, as amended, and any corresponding regulations relating to
Section 1245 property.
1995 Miss. Laws 473.
¶9.
In 1997, the legislature again amended section 27-7-9(f)(10) to the version applicable to the
Barton's year 2000 tax return. Only subsection (f)(10)(B) is relevant to this appeal. The amended
subsection (f)(10)(B) provided:
No gain shall be recognized 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 provided:
(i) The assets of the corporation have been held for more than one (1) year;
4
(ii) The corporation is totally liquidated and dissolved within one (1) calendar
year from the date of the sale of all or at least ninety percent (90%) of the
assets of the corporation; and
(iii) The depreciation and/or amortization that has been taken on the assets
of the corporation shall be recaptured and taxed as ordinary income in the
same manner as provided for in Section 1245 of the Internal Revenue Code,
as amended, and any corresponding regulations relating to Section 1245
property. All depreciation and/or amortization shall be recaptured up to cost
prior to any nonrecognition of gains.
1997 Miss. Laws 381 (emphasis added).1
¶10.
The Bartons' year 2000 tax assessment taxed their income from the sale of two McDonald's
franchises in Vicksburg, one on Frontage Road and one on Clay Street. The parties agree that the
corporate assets had been held for over a year before the sale and that the corporation was totally
liquidated or dissolved within one year of the sale of all the assets, triggering the tax exemption at
section 27-7-9(f)(10)(B). In their brief, the Bartons included a breakdown of the accounting of the
sales showing that they realized $1,507,224 from the sale of the two stores, with $1,016,087 of that
amount constituting gain.2 We note that the Bartons' breakdown failed to carry over the amount
realized of $2,777 and adjusted basis of $2,777 on the leasehold improvements from the Frontage
Road store. After adjusting for this apparent mistake in the Bartons' calculations, the amount
realized on the sale of both stores should have been $1,510,001, with $1,016,087 in gain. The
1
Section 27-7-9(f)(10) was again amended in 2005 to delete subsection (B). 2005 Miss. Laws
497; see Miss. Code Ann. § 27-7-9(f)(10) (Rev. 2006).
2
No records of the MSTC were included in this appeal. Therefore, none of the actual
monetary amounts at issue have been properly placed before this Court. "Facts asserted to exist must
and ought to be definitely proved and placed before us by a record, certified by law; otherwise, we
cannot know them." Mason v. State, 440 So. 2d 318, 319 (Miss. 1983). It is for the limited purpose
of illustrating our explanation of the statutory interpretation issue that we refer to the monetary
amounts alleged in the Bartons’ brief. On remand, the MSTC is to recalculate the tax due with
reference to the actual figures before the agency.
5
adjusted basis on all of the assets was $421,153, reflecting accumulated depreciation of $941,495.
This amount of depreciation was adjusted to $936,332 after the subtraction of the net of certain items
that were classified as written off/junked. The Bartons allege that $936,332 was the amount which
the MSTC recaptured as ordinary income pursuant to section 27-7-9(f)(10)(B).
¶11.
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. See 26 U.S.C.A. §§197, 1245, 1250 (West 2006). 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.
¶12.
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.
§ 1245 property." This argument has two facets, which will be addressed in turn. Firstly, the
Bartons argue that section 27-7-9(f)(10)(B)(iii) only requires depreciation recapture with respect to
Section 1245 property, not Section 1250 or Section 197 property. Secondly, the Bartons argue that
under section 27-7-9(f)(10)(B)(iii) the amount of depreciation recapture must be calculated in the
6
same manner promulgated by Section 1245 and associated regulations. More about depreciation
recapture under Section 1245 will be explained later.
¶13.
The primary rule of statutory construction requires this Court to determine the intent of the
legislature "from the statute as a whole and from the language used therein." MIC Life Ins. Co. v.
Hicks, 825 So. 2d 616, 621 (¶12) (Miss. 2002) (quoting Clark v. State, 381 So. 2d 1046, 1048 (Miss.
1980)). Our chief objective is to interpret the statute consistent with the true intent of the legislature.
Anderson v. A.C. Lambert, 494 So. 2d 370, 374 (Miss. 1986). When a statute is plain and
unambiguous, we must afford the statute its plain meaning, refraining from principles of statutory
construction. OXY USA, Inc. v. Miss. State Tax Comm'n, 757 So. 2d 271, 274 (¶12) (Miss. 2000).
"[T]his Court cannot omit or add to the plain meaning of the statute or presume that the legislature
failed to state something other than what was plainly stated." City of Houston v. Tri-Lakes Ltd., 681
So. 2d 104, 106 (Miss. 1996). Moreover, we are not permitted to ignore statutory language. "A
construction which will render any part of a statute inoperative, superfluous, or meaningless is to be
avoided." State ex. rel. Pair v. Burroughs, 487 So. 2d 220, 226 (Miss. 1986). We must, if possible,
read the entire statute in a way that harmonizes all of its parts consistent with its scope and object.
McKnight v. Mound Bayou Pub. Sch. Dist., 879 So. 2d 493, 497-98 (¶15) (Miss. Ct. App. 2004)
(quoting Ellison v. Mobile & O.R. Co., 36 Miss. 572, 585 (1858)).
¶14.
The Bartons contend that the statute's statement that depreciation and/or amortization "shall
be recaptured and taxed as ordinary income in the same manner as provided for in Section 1245 of
the Internal Revenue Code . . . and any corresponding regulations relating to Section 1245 property"
means that only depreciation on Section 1245 property may be recaptured. A reading of the entire
statutory subsection thoroughly refutes this argument. The subsection provides for the non-
7
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. Miss. Code Ann. § 27-7-9(f)(10)(B). 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." Id.
¶15.
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. The language, "in the
same manner as provided for in Section 1245," simply means that the recapture of depreciation or
amortization taken on the corporate assets will be conducted as provided for in Section 1245.
¶16.
Having concluded that all the corporate assets were subject to recapture, we proceed to the
second facet of the Bartons' argument. In essence, the Bartons argue that the MSTC was required
to, but did not, calculate the recapture of depreciation and amortization "in the same manner as
provided for in Section 1245." The best way to approach this argument is with a brief explanation
of some simple aspects of Mississippi's income tax code. The code provides for the recognition as
ordinary income of gain on the sale of property unless an exception applies. Miss. Code Ann. § 27-
8
7-9(b). The amount of gain from the sale of property is calculated by subtracting the adjusted basis
in the property from the amount realized. Miss. Code Ann. § 27-7-9(a)(1) (Rev. 2006). The adjusted
basis is the original cost or, other basis of, the property minus the depreciation or amortization
deductions allowable on the property, whether or not those deductions were claimed or formerly
allowed. Miss. Code Ann. § 27-7-9(e)(1) (Rev. 2006). The amount realized is the amount the buyer
paid the seller for the item. Miss. Code Ann. § 27-7-9(a)(2) (Rev. 2006).
¶17.
As previously discussed, section 27-7-9(f)(10)(B) provides an exemption from the
recognition of gain from a sale of corporate assets meeting three conditions, one of which is that the
depreciation or amortization taken on the assets be recaptured and taxed as ordinary income. Prior
to its amendment in 1997, section 27-7-9(f)(10)(B)(iii) stated:
The depreciation and/or amortization that has been taken on the assets of the
corporation shall be recaptured and taxed as ordinary income in the same manner as
provided for in Section 1245 of the Internal Revenue Code, as amended, and any
corresponding regulations relating to Section 1245 property.
The plain meaning of this language is that any depreciation and amortization taken on the corporate
assets must be recaptured and added to ordinary income using the method prescribed by Section
1245 and the regulations relating to Section 1245 property. We now reach our discussion of that
method.
¶18.
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. 26 C.F.R. § 1.1245-1(a)(1)
(West 2007). Section 1245(a) states, in pertinent part:
(a) General rule.--
9
(1) Ordinary income.--Except as otherwise provided in this section, if section 1245
property is disposed of the amount by which the lower of-(A) the recomputed basis of the property, or
(B)(i) in the case of a sale, exchange, or involuntary conversion, the amount realized,
or
(ii) in the case of any other disposition, the fair market value of such property,
exceeds the adjusted basis of such property shall be treated as ordinary income. Such
gain shall be recognized notwithstanding any other provision of this subtitle.
(2) Recomputed basis.--For purposes of this section-(A) In general.--The term "recomputed basis" means, with respect to any property,
its adjusted basis recomputed by adding thereto all adjustments reflected in such
adjusted basis on account of deductions (whether in respect of the same or other
property) allowed or allowable to the taxpayer or to any other person for depreciation
or amortization.
26 U.S.C.A. § 1245 (West 2006). 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.3
¶19.
Treasury Regulations section 1.1245-1(a) states that, under Section 1245, "the amount of
such gain shall be determined separately for each item of section 1245 property." 26 C.F.R.
§ 1.1245-1(a) (West 2007). The same regulation provides a method for determining what constitutes
"an item" of Section 1245 property. Id. The regulation also states that, when a sale consists of
Section 1245 property and non-Section 1245 property, "the total amount realized upon the
disposition shall be allocated between the section 1245 property and the non-section 1245 property
in proportion to their respective fair market values." Id. When the buyer and seller have adverse
3
Under Section 1245(a)(2)(B), if the taxpayer establishes that the amount of depreciation or
amortization allowed was less than the amount allowable, the amount added to the adjusted basis
is the amount allowed.
10
interests in the allocation of the amount realized, they may enter into an arms-length agreement on
the price allocation. Id. 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.
¶20.
In 1997, subsection (iii) of 27-7-9(f)(10)(B) was amended to add, "[a]ll depreciation and/or
amortization shall be recaptured up to cost prior to any nonrecognition of gains." The MSTC
contends that the effect of this amendment was to deviate from the Section 1245 method of
calculating depreciation recapture in which the adjusted basis is subtracted from the lower of the
recomputed basis or the amount realized. The MSTC contends that, after the amendment, the only
permissible depreciation recapture calculation is to subtract the adjusted basis from the cost of the
item.
¶21.
According to the Bartons, they paid $976,380 for the Frontage Road store and $386,268 for
the Clay Street store, for a total cost of $1,362,648.
The Bartons took $617,502 in
depreciation/amortization deductions on the Frontage Road store assets, and $323,993 in
depreciation/amortization deductions on the Clay Street store assets, totaling $936,332 after
adjustment for property that was written off as junked. After depreciation/amortization, the adjusted
basis in the assets of the Frontage Road store was $358,878 and of the Clay Street store was $62,275,
totaling $421,153. The Bartons realized $1,510,001 on the sale of both stores and experienced gain
of $1,016,087.4 Under section 27-7-9(f)(10)(B), the MSTC assessed the Bartons $936,332 in
4
The Bartons' brief indicates that the total amount of gain reflects an adjustment to gain on
the goodwill from the Clay Street Store for installment sales income. Before the adjustment, this
gain totaled $594,455, which then was adjusted by applying a gross profit percentage of 97.62%
times $534,405 in payments received during the year, for a total of $521,694 attributed to
goodwill/franchise costs and fees. This total was eight dollars higher than the Court's calculation.
11
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.
¶22.
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. To illuminate this argument,
we provide a brief example. As stated, the MSTC argues that the only permissible depreciation
recapture calculation under the post-amendment section 27-7-9(f)(10)(B)(iii) is to subtract the
adjusted basis from the cost of the item. Assume a corporation had a single asset, a tractor, with a
cost of $10,000 and an adjusted basis of $3,000. To calculate the pre-amendment depreciation
recapture from the sale of the tractor for $4,000, under 27-7-9(f)(10)(B)(iii) and Section 1245, the
taxpayer would subtract the adjusted basis from the amount realized, arriving at depreciation
recapture of $1,000. But after the amendment, the taxpayer would subtract the adjusted basis from
the cost, and the depreciation recapture would be $7,000. Thus, the post-amendment calculation of
cost minus the adjusted basis would result in recapture of the entire amount realized of $4,000 plus
an additional $3,000 in depreciation earlier recovered by the taxpayer during the tractor's useful life
but not realized in the sale.
¶23.
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
However, minor inconsistencies in the Bartons' monetary calculations are largely irrelevant to this
appeal, which turns on the meaning of section 27-7-9(f)(10)(B)(iii).
12
sale of corporate assets to recapture depreciation over and above the amount realized, then the
section would operate as a tax penalty. Section 27-7-9(f)(10)(B) is contained within a list of
exceptions to the recognition of gain. Before the 1997 amendment, the section clearly operated as
a tax exemption, not a tax penalty. For these reasons, we conclude that the 1997 amendment to
section 27-7-9(f)(10)(B)(iii) cannot be construed as a tax penalty. Accordingly, 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. Miss. Code Ann. § 27-7-9(b).
¶24.
According to the MSTC's calculation of depreciation recapture, the MSTC did not recapture
depreciation above the amount realized on the sale. As stated, the Bartons realized $1,510,001 on
the sale of both stores. The MSTC recaptured $936,333, less than the gain on the sale of $1,016,087.
Under section 27-7-9(f)(10)(B), the difference between $1,016,087 and $936,333 was nonrecognized. The Bartons argue that the proper calculation under section 27-7-9(f)(10)(B)(iii)
required the use of the Bartons' agreed price allocation. The price allocation divided the total amount
realized on the sale among the various items. When the price allocation rather than the total amount
realized is used in the calculation of depreciation recapture, for many items, the MSTC's recapture
of all the depreciation taken on the item exceeds the amount realized for the item.
¶25.
For example, according to the price allocation, the Bartons realized $147,224 on the sale of
the furniture and fixtures from the Frontage Road store. The Bartons had taken depreciation
deductions on the furniture and fixtures of $238,160, leaving an adjusted basis in the furniture and
fixtures of $61,373. The MSTC's recapture of all the depreciation taken on the furniture and fixtures
meant that more depreciation was recaptured ($238,160) than the Bartons realized on the sale
13
($147,224). On the other hand, the Bartons allocated the bulk of the amount realized on both stores
to goodwill, an asset in which they had taken little amortization. On the Clay Street store, the
Bartons allocated $608,939 of the $758,932 sale price for the store to goodwill. The Bartons had
taken only $8,016 in amortization deductions on the goodwill. Therefore, the MSTC's recapture of
the entire $8,016 in amortization deductions did not exceed the amount realized. 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.
¶26.
Thus we reach the fundamental question in this appeal. Under section 27-7-9(f)(10)(B)(iii),
must the MSTC adhere to the taxpayer's agreed-upon price allocation, or can the MSTC simply
recapture and tax all of the prior deductions for depreciation/amortization as long as the recapture
is less than the total amount realized on the sale of corporate assets? We look to the language of
section 27-7-9(f)(10)(B)(iii), seeking to harmonize all of its parts in order to give effect to the
legislative intent. McKnight, 879 So. 2d at 497-98 (¶15). The section provides that the depreciation
taken on the assets is to be recaptured and taxed as ordinary income in the same manner provided
by Section 1245 and accompanying regulations. The 1997 amendment further provides that all
depreciation/amortization must be recaptured up to cost prior to the non-recognition of gain. We
have already settled that this language means that the recapture must be calculated by subtracting the
adjusted basis from the cost and that the amount of recapture cannot exceed the amount realized.
The MSTC's basic contention is that this language not only changed the Section 1245 recapture
calculation that used the lesser of the recomputed basis or the amount realized, but also obliterated
the Section 1245 requirement of calculating recapture on a per-item basis. See 26 C.F.R. 1.1245(a).
14
We cannot agree. In amending section 27-7-9(f)(10)(B) in 1997, the legislature declined to delete
the requirement that the depreciation/amortization be recaptured and taxed "in the same manner as
provided for in Section 1245 . . . and any corresponding regulations relating to Section 1245
property." We must harmonize this language with the language of the 1997 amendment. This is
readily done, as the 1997 amendment may be read as removing Section 1245's recapture calculation
and substituting the calculation mandated by the amendment, but not otherwise altering the Section
1245 procedure. Therefore, whatever procedure was used for determining the amount realized on
the sale of assets for recapture purposes prior to the 1997 amendment remains the method that must
be used after the 1997 amendment.
¶27.
Looking to Section 1245 and its corresponding regulations, Treasury Regulations
section 1.1245-1(a) provides that the amount of gain under Section 1245 "shall be determined
separately for each item of section 1245 property." When both Section 1245 property and property
other than Section 1245 property are sold together, then the amount realized is to be allocated
between the Section 1245 property and the non-Section 1245 property in proportion to their
respective fair market values. A buyer and seller having adverse interests in the allocation of the
amount realized between Section 1245 property and non-Section 1245 property may enter into an
arms-length agreement as to the price allocation. Thus, it appears that under the regulations
applicable to Section 1245 property, which apply to "the assets of the corporation" under section 277-9(f)(10)(B), the amount of gain must be separately determined for "each item." However, this
Court does not attempt to concretely determine the meaning of these regulations as that question is
not before the Court today, but is a proper subject for the expertise of the MSTC. Our adjudication
is limited to whether Section 1245 and its regulations apply to the determination of recapture after
15
the 1997 amendment. We have answered that question in the affirmative and hold that the 1997
amendment did nothing to alter the applicability of Section 1245 and its regulations to the recapture
of depreciation/amortization under section 27-7-9(f)(10)(B). 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, recognizing the limited change caused by the
substitution of up to cost recapture for the pre-amendment recapture calculation contained in Section
1245(a). We reverse and remand this case for the MSTC to recalculate and assess the taxes due for
depreciation/amortization recapture in a manner consistent with this opinion.
¶28. THE JUDGMENT OF THE CHANCERY COURT OF HINDS COUNTY IS
REVERSED AND REMANDED FOR FURTHER PROCEEDINGS CONSISTENT WITH
THIS OPINION. ALL COSTS OF THIS APPEAL ARE ASSESSED TO THE APPELLEES.
KING, C.J., LEE AND MYERS, P.JJ., GRIFFIS, BARNES, ISHEE, ROBERTS AND
CARLTON, JJ., CONCUR. IRVING, J., NOT PARTICIPATING.
16
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