Anderson v. Lambert

• Decision Date: 17 September 1986
• Docket Number: No. 55676,55676
• Citation: 494 So.2d 370
• Parties: Harry S. ANDERSON, et al. v. A.C. LAMBERT, Sr., Commissioner of Revenue, Mississippi State Tax Commission.
• Court: Mississippi Supreme Court

Page 370

494 So.2d 370

Harry S. ANDERSON, et al. v. A.C. LAMBERT, Sr., Commissioner of Revenue, Mississippi

State Tax Commission.

No. 55676.

Supreme Court of Mississippi.

Sept. 17, 1986.

Harris H. Barnes, III, Gulfport, for appellants.

James H. Haddock, Bobby R. Long, Gary W. Stringer, Jackson, for appellee.

Before HAWKINS, P.J., and DAN M. LEE and ANDERSON, JJ.

HAWKINS, Presiding Justice, for the Court:

This is an appeal from the 1st Judicial District of the Hinds County Chancery Court, wherein Harry S. Anderson and other nonresident taxpayers sought a redetermination of a State Tax Commission ruling that denied the taxpayers' request for a refund. The chancellor held that the corporate distributions going to the nonresident stockholders were subject to being taxed in Mississippi, since the distributions had a taxable situs in Mississippi. A cross bill against appellant Marne M. Anderson was likewise granted. Finding no error, we affirm.

FACTS

The subject litigation arises from the sale of corporate assets of King & Anderson, Inc., (K & A) and Planters Manufacturing Company (Planters). In 1980 and 1981, K & A and Planters sold corporate property pursuant to an Internal Revenue Code (IRC) Sec. 337 Liquidation Plan. The property, both real and personal, which was sold pursuant to the liquidations of the respective corporations is and always has been Mississippi corporate property. Prior to both sales, proper measures were taken by the shareholders to invoke the provisions of IRC Sec. 337 and Miss.Code Ann. Sec. 27-7-9(j)(3) (Supp.1980). The sales in question were completed within the statutory time and the statutory language under IRC Sec. 337 and Sec. 27-7-9(j)(3) was followed. Pursuant to the plan of liquidation, the proceeds derived from the sales of the Mississippi property were used to redeem the corporate stock of the shareholders of the two corporations. Those shareholders residing outside the State of Mississippi are the petitioners in this action.

The decision to sell the subject property was made by the shareholders outside the State of Mississippi. The principal discussion with lawyers for the purchaser took place in New Orleans, Louisiana, and the terms and conditions of the sale were agreed to in New Orleans, Louisiana. The sale was closed and the transactions were completed in the State of Mississippi.

The stock owned by the petitioners in K & A was the stock of a Delaware corporation which was doing business in the State of Mississippi. The stock was owned in the following percentages: Harry Anderson, Carolyn Anderson, Stiles Anderson and Elizabeth Anderson, 20 percent; Eugene N.S. Girard, Catherine A. Girard, Christopher A. Girard, Andrew S. Girard, William K.A. Girard and Eugene N.S. Girard, III, 20 percent; Marne M. Anderson, 20 percent. Planters is a Mississippi corporation, and the stock was owned by the petitioners as follows: Harry Anderson family, 1 percent; Girard family, 1 percent; Marne M. Anderson, 1 percent. It is undisputed that all petitioners are nonresidents of the State of Mississippi, and were and still are residents of the States of Louisiana, Florida and Tennessee respectively.

Therefore, nonresident shareholders owned 60 percent of K & A stock. The same nonresident shareholders owned three percent of Planters outstanding stock. This stock was always owned and kept by the nonresident shareholders at their respective residences and domiciles.

Pursuant to the liquidation proceedings and the provisions of Miss.Code Ann. Sec. 27-7-9(j)(3) (Supp.1980), the amount of three percent (3%) was withheld from each corporate distribution and was paid to the State Tax Commission. The nonresident shareholders assert that this withholding tax is a credit against the shareholders' estimated withholding tax accounts. Since the nonresidents have no taxes to apply this credit against, they therefore request a refund of this three percent withholding tax.

The Commission denied this refund, taking the position that the facts surrounding the corporate liquidation and the redemption of the corporate stock were so interrelated that a taxable situs in Mississippi was established. The nonresident shareholders sought a redetermination of this ruling in the chancery court of Hinds County. Basing his decision on the intent of the legislature, the chancellor held that the corporate distributions going to the nonresident stockholders had a taxable situs in Mississippi and were subject to being taxed in the State. In conjunction, the relief sought by the cross bill against Marne Anderson was granted.

The taxpayers appeal, assigning two errors:

I.

THE LOWER COURT ERRED WHEN IT FOUND THAT THE CORPORATE DISTRIBUTIONS GOING TO THE NONRESIDENT STOCKHOLDERS, THE APPELLANTS HEREIN, HAVE A TAXABLE SITUS IN MISSISSIPPI

AND ARE SUBJECT TO THE MISSISSIPPI INCOME TAX. IN THE SAME MANNER THE LOWER COURT ERRED IN GRANTING THE RELIEF PRAYED FOR IN THE CROSS BILL.

II.

THE LOWER COURT ERRED WHEN IT FOUND THAT THE STATE OF MISSISSIPPI HAD THE POWER AND AUTHORITY TO TAX A NONRESIDENT OF THE STATE OF MISSISSIPPI.

LAW

Today this Court is called upon to construe the Legislative intent of a tax statute. As a preface to this analysis, we recognize that our primary objective when construing statutes is to adopt that interpretation which will meet the true meaning of the Legislature. Baker v. State, 327 So.2d 288 (Miss.1976); Carter v. Harrison County Election Comm'n, 183 So.2d 630 (Miss.1966); Beard v. Stanley, 205 Miss. 723, 39 So.2d 317 (1949). An ancillary objective of this opinion is to make a tax case as simple and as easy to read as possible.

Let us begin with a simple example. A, B and C decide to purchase a tract of land for $10,000. They also decide to have it owned by a corporation with each of them holding equal shares. They form the ABC Corporation and pay into it $10,000 cash, for which they are issued corporate shares. ABC, Inc., then buys the land for $10,000, which is the sole corporate asset. Twenty years later the land is worth $100,000 and A, B and C wish to sell it and dissolve the corporation.

Prior to 1954, upon sale by ABC, Inc., the corporation would have realized a capital gain of $90,000 and would owe a federal capital gains tax. Let us assume the capital gains tax was $15,000. ABC, Inc., would then have remaining $75,000 to distribute to A, B and C in exchange for the shares for which they paid $10,000. Thus, the shareholders would have a capital gain of $65,000 and also be subject to a federal capital gains tax on this amount.

To eliminate this double taxation the United States Congress in 1954 enacted Section 337 of the Internal Revenue Code. This section provides that if a corporation, under a plan of complete liquidation, distributes all its assets in a 12-month period, no gain or loss would be recognized to the corporation.

Thus, in the above example, ABC, Inc., would pay no tax on its $90,000 profit, distribute it to A, B and C in exchange for their shares, and they individually would be taxed on the $90,000 capital gain.

Prior to 1980, under the above example, if the land was located in Mississippi, the corporation and the shareholders would each have a capital gain under our Mississippi state taxation statutes. See Miss.Code Ann. Secs. 27-7-1 and 27-7-9 (1972).

Let us add a factor to the example. Let us assume that of the three shareholders, only A was a citizen of Mississippi. This, of course, would be irrelevant to the United States Government, because the corporation and all shareholders are under the taxable jurisdiction of the federal government.

As to this State, however, would B and C have had to pay a capital gain tax to the State of Mississippi upon the retirement of their shares in final distribution of the corporate assets? We never addressed this particular question prior to 1980, and we need not address it in this decision. It is the question rather than the answer which is significant. B and C may have been required to pay a Mississippi capital gain tax, or they may not have.

What is certain, however, is that ABC, Inc., would have been subject to this State's capital gain tax, whether B and C would have or not. The entire corporate assets consisted of land located in Mississippi.

In 1980 this State enacted Chapter 461, Laws 1980, subparagraphs (j)(3) of which states:

Sec. 27-7-9. Gain or loss on disposition of property.

(j) Special rules.

(3) Gain or loss on sales or exchanges in connection with certain liquidations. Subject to the condition provided herein, no gain or loss shall be recognized to a corporation from the sale or exchange by it of property within the period of twelve (12) months beginning on the date of the adoption by said corporation of a plan of complete liquidation if such gain or loss would not be recognized to such corporation for federal income tax purposes under the provisions of Section 337 of the Federal Internal Revenue Code. As a condition to non-recognition of gain or loss, such corporation shall withhold from distributions to shareholders and pay over to the commissioner, on forms furnished, an amount equal to three percent (3%) of the total value of any money, property or instruments of indebtedness distributed to all stockholders as a liquidating distribution. Such amounts paid to the commissioner shall be deemed to be payments of estimated tax of the stockholders pursuant to the Mississippi Income Tax Withholding Act of 1968 and shall be allocated pro rata to the stockholders taxpayer account.

The headnote of this statute reads in pertinent part:

AN ACT to amend Section 27-7-9, Mississippi Code of 1972, to clarify the basis for determining gain or loss on the disposition of property; ... to establish special rules with Sections 332, 333, 334, 337 and 355 of the Federal Internal Revenue Code, with modifications....

The 1980 Act paragraphs (j)(3) thus provides that no taxable gain or loss from a sale or exchange of...