35 Miss. Admin. Code Pt. III, Subpt. 8, Ch. 01 — Liquidations and Distributions

100 Effects on Corporation:

# 1.

Distributions of the property of a corporation, including partial and complete
liquidations, shall be recognized by the distributing corporation and the gain or loss
shall be computed on the difference of the fair market value of the assets distributed
and their basis. The above would be applicable to a subsidiary liquidating into a
parent unless the parent assumes the same basis that was on the books of the
subsidiary. If the parent assumes a basis different from that on its subsidiary's
books, then the gain would be recognized on the excess amount placed on the
parent's books over the amount recorded on the subsidiary's books. A corporation
shall also recognize any gain on the sale of its assets in a partial or complete
liquidation, the gain recognized being the difference in the cash and fair market
value of property received less the basis of the property given up.

# 2.

A gain or loss will be recognized in the year of the sale of the assets, or if a
distribution of assets, in the year of the distribution. A corporation that distributes
property over two taxable years must report the gain or loss in each year the
distribution is made. The distributing corporation may not elect an installment basis
for reporting the sale of its assets.

# 3.

A tax credit is allowed to the shareholders for the tax paid by the corporation on the
distribution. This credit to each shareholder is determined by the ratio of the
percentage of shares owned by the shareholder to the total number of shares
relinquished for the property, applied against the tax paid on the distribution gain by
the distributing corporation.

# 4.

The corporation shall provide the State Tax Commission a list of all shareholders
with their percentage of ownership, distribution, tax credit allowed, and
identification number on Form 62 -465. The corporation shall also provide to the
shareholder their percentage of ownership, distribution, tax credit allowed, and
identification number.
101 Effect on Shareholders:
1. Shareholders shall report any distribution by the corporation to them at its fair
market value. The basis of any stock surrendered shall be applied against and
reduce any gain on the property received. Gain shall be reported by the shareholder
on the difference between the basis of the shareholder and the fair market value of
the property received.
2. A credit for the tax paid by the distributing or liquidating corporation from the gain
of the sale or gain on the distribution of property will be apportioned to each
shareholder. The shareholder should attach Form 62 -465, that has been furnished
by the corporation, to his income tax return to be allowed credit for the tax paid by
the corporation. A shareholder who receives an installment note in return for the
surrender of a portion or all of his stock may report his gain on the installment
method; however, the credit for tax paid by the distributing corporation is only
allowed in the year the property is distributed to the shareholder. The credit is
applied against, but limited to, the tax liability from this gain reported by the
shareholder and none of the credit may be refunded. A loss must be reported in the
year of distribution to the shareholder.
3. Distributions received by one corporation in complete liquidation of another
corporation are treated as full payment in exchange for stock in the other
corporation. Gain realized to the shareholder corporation from the distribution is
recognized and shall be treated as ordinary income. A loss sustained is deductible in
full in the tax year of the distribution.
102 State 338 Election:
1. Seller elects 338 [338h(10)].
a. Corporations that elect a Section 338 sale of assets for Federal tax purposes
must also make a similar election for Mississippi tax purposes. The
treatment of the election will be different for Mississippi in that the
subsidiary corporation must report any gain as if it distributed assets in
liquidation to the parent and the parent will report gain on the disposition of
its stock as if the subsidiary is liquidated. The subsidiary will increase the
bases of its assets by gain reported.
b. Tax paid by the subsidiary on the gain from the increase in basis can be
used by the parent as a tax credit to offset tax due on gain from the disposal
of the subsidiary's stock. The parent cannot use the tax credit for tax paid on
the increase in basis by the subsidiary to offset tax due from any other
activity. Additionally, the tax credit cannot be carried forward or refunded.
2. Purchaser elects 338.
A Corporation that elects a Section 338 Purchase of assets for Federal Tax purposes
in which the corporation purchases at least 80% of the stock of another corporation
and treats this purchase as a purchase of assets must make a similar election for
Mississippi tax purposes. The subsidiary which has been purchased shall report any
gain on the increase in the basis of its assets.
103 Stock Sale Treated as Asset Sale:
Section 27 -7-9(j)4 requires a corporation or other entity involved in restructuring,
reorganizing, distributing assets or profits or changing ownership that results in
adjustments to its asset basis to report any gain in that year on any such transaction when
the transaction involves assets owned or used in this state. A corporation that transfers
Mississippi assets to a subsidiary corporation in exchange for stock of such subsidiary and
within two years of such transfer sells stock shall recognize such sale of stock of such
subsidiary as a sale of Mississippi assets. If the sale of such stock occurs after such two
year period but results in avoidance of Mississippi tax then the sale will be treated as a sale
of Mississippi assets. Otherwise, a sale of stock will be subject to other provisions of the
Mississippi law.
104 Liquidation of a Subsidiary Into a Parent:
1. Section 27 -7-9(j)1 provides that no gain shall be recognized if a subsidiary
liquidates into a parent and the parent carries the assets at the same bases as were
carried on the books of the subsidiary. The non -recognition of gain in this section
refers to any gain on distribution by the subsidiary. Therefore, there would be no
gain by the subsidiary.
2. Section 27 -7-9(l) requires shareholders to recognize gain on the redemption of
stock including partial and complete liquidations, subject to subsection j(1). The
parent is required to record the assets of a subsection j(1) liquidation at the same
basis that the subsidiary had prior to liquidation. Subsection j(1) would defer any
gain on the difference between the fair market value of the assets and the basis
which the parent used to record the assets on its books (carryover basis). Any gain
on the difference between the basis of the stock of the subsidiary and the basis of
the assets from the subsidiary would be recognized and reported by the parent.
3. If the basis in the stock exceeds the basis in assets, a loss may not be recognized,
but the basis in the assets may be increased to equal the basis in the stock.
4. Under no circumstances is a gain on a liquidation, transfer of assets, distribution of
assets or a reorganization forgiven.
105 Spin-Offs:
1. A Section 355 Distribution is a distribution of voting stock (at least 80% of voting
stock) to the shareholder corporation of the distributing parent corporation (i.e. a
spin-off). To qualify under Section 355, the corporation must have been engaged in
active business for five years preceding the spin-off and there must be a continuing
active business after spin-off. The transaction cannot be used principally as a device
for the distribution of earnings and profits. There must be a germane business
reason beyond the avoidance of tax for the distribution.
2. Section 27-7-9(j)3 provides that no gain shall be recognized on a distribution to a
stockholder of a corporation if such gain would not be recognized to such
stockholder for Federal income tax purposes under the provisions of Section 355 of
the Federal Internal Revenue Code. The shareholder would take the same basis as
the basis of the distributing corporation prior to distribution, plus any gain
recognized and reported by the distributing corporation.
3. The distributing corporation in a 355 Distribution must report the gain on the
distribution. The gain would be the difference between the fair market value of the
stock and the basis of the stock immediately prior to any adjustment in
contemplation of distribution of the stock. Corporations with one hundred percent
(100%) of their income reportable to Mississippi should report the gain in full to
Mississippi. Multistate corporations would determine their gain according to the
method of reporting the dividend income from such subsidiary to Mississippi. For
example: A multistate corporation which has a unitary subsidiary that would
apportion dividends from this subsidiary to Mississippi would also apportion the
gain on the distribution to Mississippi. Allocated dividends would require allocation
of gain from the stock of the subsidiary.
4. A corporation which makes a 355 Distribution and is included in a combined return
for Mississippi, as provided by Section 27-7-37 of the Mississippi Code, would also
be required to report the gain on distribution whether or not the parent's shareholder
is a part of the combined group before or after the distribution.

# 5.

No credit is allowed to the shareholder corporation receiving the distribution unless
the shareholder must report the gain for Federal purposes. If the shareholder is
required to report the gain for Federal purposes, the same requirement would exist
for Mississippi purposes.
106 Collapsible Corporations:
The entire gain from: (1) the actual sale or exchange of stock of a collapsible corporation,
(2) amounts distributed in complete or partial liquidation of a collapsible corporation which
are treated as payment in exchange for stock, and (3) a distribution made by a collapsible
corporation, which is treated in the same manner as a gain from the sale or exchange of
property, shall be considered as gain from the sale or exchange of property and such gain
shall be treated as ordinary income.
107 Partial liquidation defined:
A distribution is treated as in partial liquidation of a corporation if:
1. The distribution is one of a series of distributions in redemption of all the stock of
the corporation pursuant to a plan of complete liquidation, or
2. The distribution is:
a. not essentially equivalent to a dividend,
b. in redemption of a part of the stock of the corporation pursuant to a plan,
and
c. occurs within the taxable year in which the plan is adopted or within the
succeeding taxable income.
108 (Reserved)
109 (Reserved)