BEFORE WALKER, C.J.; ROBERTSON AND ANDERSON, JJ.
ROBERTSON, JUSTICE, FOR THE COURT:
This is a corporate franchise tax case. For decision
today is whether not-yet-due payments emanating from an installment sale of assets, labeled "deferred gain," are includable in the corporation's statutorily defined capital employed in this state, such capital so defined forming the base upon which the franchise tax is computed. By reference to the statutory definition in effect for the years in issue, we answer the question in the negative.
For the reasons articulated below, we affirm the judgment of the Chancery Court which had in turn vacated and reversed the order of the State Tax Commission.
Dyer Investment Co., Inc. (hereinafter referred to as "Dyer"), formerly known as E. F. Dyer Manufacturing Co., Inc., is a Mississippi corporation having its principal place of business in Chickasaw County, Mississippi. Dyer is the Taxpayer and is the Appellee here. For the fiscal years ending June 30, 1980, June 30, 1981, and June 30, 1982, the Commissioner of Revenue *fn1 (hereinafter the "Commissioner") assessed Dyer with an additional franchise tax in the amount of $1,814.00 including interest.
For the tax years in question, Dyer carried an account on its balance sheet labeled "deferred gain." The deferred gain account arose from certain installment sales transactions between Dyer and another corporation, Dyer Woodturning, Inc. Both corporations appear to have been controlled by Dr. John D. Dyer and members of his family, although nothing turns on the point. The net effect of these sales was to transfer to Dyer Woodturning, Inc. the operations of taxpayer Dyer.
Prior to October 31, 1977, Dyer was involved in the business of manufacturing furniture and wood products. As of October 31, 1977, Dyer entered into certain agreements with Dyer Woodturning, Inc. for the sale to the latter of a portion of Dyer's accounts receivable, inventory and equipment. The accounts receivable and inventory were sold for $300,000.00 and the equipment was sold for $25,000.00.
In payment for these assets, Dyer Woodturning delivered to taxpayer Dyer two installment promissory notes dated October 31, 1977. The note representing the sale of the accounts receivable and inventory was in the original principal amount of $300,000,000. The note representing the sale of the equipment was in the original principal amount of $25,000.00. Dyer did not realize a gain as a result of the sale of the accounts receivable and inventory; however, Dyer realized a gain of $19,444.49 from the sale of equipment.
Because Dyer treated the sale as an installment sale under federal and state income tax law, the gain was reflected as a "deferred gain" when originally entered on Dyer's books.
The $25,000.00 note receivable provided that payments were not to begin until January 1, 1982. Because Dyer Woodturning made no payments under the terms of the note until January 1, 1982, there was no reduction in taxpayer Dyer's deferred gain account for the fiscal years ending June 30, 1980, and June 30, 1981. The deferred gain of $19,444.49 was carried over from Dyer's books to its financial statements into its federal and state income tax returns and, thus, to the state franchise tax returns. It is upon this deferred gain that the Commissioner sought the assessment of additional franchise tax for the fiscal years ending June 30, 1980, and June 30, 1981.
Also on October 31, 1977, Dyer entered into a lease agreement with Dyer Woodturning, Inc. for the building where the factory was located and the remaining equipment. Under the terms of this agreement, Dyer Woodturning, Inc. obtained an option to purchase the property leased on or before January 1, 1982, for the principal purchase price of $745,000.00. A specific condition of this option was that the lessee, Dyer Woodturning, Inc., had to pay in full the $300,000.00 promissory note given as part of the purchase price of the accounts receivables and inventory. Dyer Woodturning, Inc. exercised this option on January 1, 1982, by delivering to taxpayer Dyer an installment promissory note in the amount of $745,000.00. As a result of this sale, Dyer realized a gain of $653,068.64. This sale was also treated as an installment sale on Dyer's books, financial statements and federal and state tax returns.
Between January 1, 1982, and Dyer's fiscal year end on June 30, 1982, approximately $19,525.00 of the original deferred gain had been recognized as a result of payments made between January 1, 1982, and June 30, 1982. There was also a mathematical adjustment made to Dyer's books in the amount of $1,457.61, resulting in a deferred gain as of June 30, 1982, in the amount of $632,085.64. This is the amount which was carried over to Dyer's financial statements and tax returns for the fiscal year ending June 30, 1982. It is upon this deferred gain account in the amount of $632,085.64 that the Commissioner sought the assessment of additional franchise tax for the fiscal year ending June 30, 1982.
Even though taxpayer Dyer maintained its books on an accrual method, it did not recognize the gain realized from the sale of assets to Dyer Woodturning, Inc. in the year of
the sale. Instead, it set up this gain in a "deferred gain account" under the installment method of accounting. This method of accounting is one specifically allowed under the Internal Revenue Code and the State of Mississippi Income Tax Law for purposes of determining income tax. There is no specific statutory prescription ...