IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
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No. 98-30507
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In The Matter of: LAURENCE LUCIUS LAMBERT,
Debtor
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LAURENCE LUCIUS LAMBERT,
Appellee-Cross-Appellant,
versus
MISSISSIPPI STATE TAX COMMISSION,
Appellant-Cross-Appellee.
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Appeals from the United States District Court for the
Eastern District of Louisiana, New Orleans
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June 22, 1999
Before KING, Chief Judge, and REYNALDO G. GARZA and JOLLY, Circuit
Judges.
E. GRADY JOLLY, Circuit Judge:
In this case, Lawrence Lucius Lambert, a nonresident of
Mississippi, sold Mississippi land he personally owned, along with
Mississippi land he owned through an S corporation. Because the
sale by the company was structured as an installment sale combined
with the dissolution of the company, the company did not recognize
any capital gain from the transaction under federal tax laws. In
a subsequent bankruptcy proceeding, the Mississippi Tax Commission
(“MSTC”) claimed taxes for the capital gains from the sale of all
the land and for the income from interest on promissory notes
involved in the sale. The bankruptcy court granted a judgment
against Lambert for the gains recognized on the Mississippi land he
personally owned but not for the interest income on the promissory
notes or the gains from the sale of the Mississippi land owned by
his S corporation. Both Lambert and the MSTC appealed the
bankruptcy court’s decision to the district court for the Eastern
District of Louisiana, which affirmed the bankruptcy court. Both
parties now appeal the district court decision. Finding no error
on the part of either the bankruptcy court or the district court,
we affirm.
I
This case begins with Lambert’s purchase of real estate
property (“personal property”) in Bay St. Louis, Mississippi. In
addition to that purchase, he set up an S corporation, Lambert Land
Company (“Lambert Co.”), to buy property (the marina property) that
bordered his personal property.
On January 27, 1992, Lambert Co. adopted a plan of liquidation
under §§ 331, 453B(h) of the Internal Revenue Code and § 79-4-14.03
of the Mississippi Code (articles of dissolution).1 By January 16,
1992, Lambert Co. had agreed to sell the marina property to Mardi
Gras Casino Corporation (“Mardi Gras”). Lambert also signed an
agreement to sell his personal property to Mardi Gras. In exchange
1
Under § 453B(h), when an S corporation adopts a plan of
liquidation, sells its assets for installment notes, and
distributes those notes to its shareholders in complete liquidation
within 12 months after adoption of the plan, the corporation
recognizes no gain from the sale of its assets and the shareholders
are treated as if they had sold their shares in the S corporation
for the value of the promissory notes.
2
for the combined properties, Mardi Gras paid two promissory notes,
one valued at $500,000--that was due by April 1992--and one valued
at $12 million--that was to be paid in installments. Both notes
were secured by the property. As we have noted, when Lambert Co.
was liquidated, Lambert became the owner of its notes--making
Lambert owner of both notes.
Lambert received the first installment on the $12 million
promissory note in October 1992. Lambert then received monthly
installments until the note was paid in full in 1993. Lambert Co.
never received any cash with respect to either of the two notes.
The total amount of interest accrued on the combined notes ($12
million and $500,000) net of payment of sales commissions, was
$349,814 in 1992 and $1,348,170 in 1993.
The contract made no allocation between Lambert’s share of the
purchase price and Lambert Co.’s share. However, Lambert's 1992
and 1993 federal individual income tax returns showed that the Bay
St. Louis property he owned individually was sold for $2.5 million,
and that he received $366,774 of that amount during 1992 and
$2,133,226 during 1993. These federal tax returns showed that the
corporation's property was sold for $10 million, $866,873 of which
was received during 1992 and $9,133,127 during 1993.2
2
Lambert now contends that this apportionment was an error and
that the value he received for the land he sold should be the fair
market value of the land at the time of sale, $422,800. According
to Lambert, he originally filed a Form 8594 in which he erroneously
valued Lambert Co. at $10 million. Lambert claims that, after
making this one error, his accountant carried this error through
his books, leading to multiple appearances of the error in his
3
To sum up then, Lambert entered into a transaction from which
he realized three different kinds of potentially taxable gain:
First, he realized a gain for the sale of his personal property--
the difference between his adjusted basis in the property and the
value of some percentage of the two promissory notes. Second,
Lambert Co. exchanged the marina property for the remaining
percentage of the promissory notes. Since that transaction
amounted to a liquidation, for which Lambert Co. realized no gain
on the property, Lambert personally recognized a gain from the
dissolution--the difference between his adjusted basis in the
shares of Lambert Co. and the value of the percentage of the
promissory notes he received for them. Finally, Lambert realized
interest on the two promissory notes.
During 1992 and 1993, the relevant time period of the
transaction, Lambert was not a resident of Mississippi. Lambert
also did not carry on business in Mississippi. Lambert did not
file a 1992 or 1993 individual Mississippi tax return. Lambert
Co.’s 1992 Mississippi tax return indicated that the company
suffered a loss. On October 3, 1995, the Mississippi State Tax
Commission (“MSTC”) assessed Lambert with additional state income
taxes for the years 1992 and 1993.
Lambert petitioned the MSTC’s Board of Review, under the
Mississippi statute, and the board reduced the assessment to
$1,012,768.75. Lambert filed for bankruptcy protection on
records.
4
August 19, 1996. On January 24, 1997, the bankruptcy court for the
Eastern District of Louisiana entered its Reasons for Order in
which it held:
1. Lambert did not owe income taxes for the gain he realized
from the sale of Lambert Co.’s assets and its subsequent
dissolution.
2. Lambert did not owe income taxes for interest he earned
on the two promissory notes as the situs of the notes was
not Mississippi.
3. Lambert owed Mississippi income taxes for his gain from
the sale of his personal property, for which he had
received $2.5 million.
4. Lambert was not subject to a penalty for fraudulently
underpaying Mississippi taxes pursuant to § 27-7-105(2)
of the Mississippi Code.
Both parties then appealed the bankruptcy order to district court.
The MSTC argued that the bankruptcy court erred in rulings 1, 2,
and 4; while Lambert argued that the bankruptcy court erred in
ruling 3. The district court affirmed the bankruptcy court. Both
parties timely appealed the district court’s decision.
III
Because this case originated from a bankruptcy court, we
review findings of fact made by the bankruptcy court for clear
error. With respect to questions of statutory interpretation, we
apply a de novo review. As a party challenges each of the four
holdings by the bankruptcy court, we address each in turn.
A
The bankruptcy court’s ruling with respect to dissolution of
Lambert Co. was based on its holding that Mississippi law applies
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the Internal Revenue Code provisions--§§ 453 and 453B--to
installment contracts, including those involving the dissolution of
S corporations. Under §§ 453 and 453B, neither Lambert nor Lambert
Co. recognized any gain from the sale of Lambert Co.’s assets.
Lambert’s gain came only from the event of exchanging his shares in
Lambert Co. for the promissory notes. Lambert could, therefore,
only be taxed for the profits he realized from “selling” his shares
in Lambert Co., a form of income that Mississippi could not reach
because Lambert was not a resident of Mississippi.
On appeal, the MSTC makes three arguments. First, the MSTC
argues that, in addressing tax questions, the court should look to
the substance of a transaction rather than the form. Second, the
MSTC disputes the bankruptcy court’s legal finding that Mississippi
law looks to IRC §§ 453 and 453B for rules governing the
dissolution of S corporations. Finally, the MSTC argues that,
because the situs of the promissory notes is Mississippi, Lambert
should somehow be subject to taxation for the gains Lambert Co.
would have realized from selling its land, if that sale were not a
dissolution governed by §§ 453 and 453B.
After a careful review of the district court and bankruptcy
court decisions, we find no error. There is no support for the
MSTC’s argument that Lambert structured the dissolution to comply
only with the form and not the substance of §§ 453 and 453B. The
provisions in the Mississippi Code with respect to installment
sales adopt all of the federal provisions, and because §§ 453 and
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453B apply, Lambert’s gain here comes from his exchange of the
shares of Lambert Co. for the promissory notes. As such, he can
only be taxed on that gain if Mississippi can reach the gain he
recognizes from the sale of his shares in Lambert Co. The MSTC has
not argued on appeal that it can tax that gain. We therefore
conclude that there was no error in holding that Lambert did not
owe Mississippi taxes for Lambert Co.’s sale of its assets and the
subsequent dissolution of Lambert Co.
B
The bankruptcy court held that the promissory notes did not
have a taxable situs in Mississippi. The relevant section of the
Mississippi Code is § 27-7-23(b)(1) which reads:
(b) Nonresident individuals, partnerships, trusts and
estates.
(1) The tax imposed by this article shall
apply to the entire net income of a taxable
nonresident derived from employment, trade,
business, professional, personal service or
other activity for financial gain or profit,
performed or carried on within Mississippi,
including the rental of real or personal
property located within this state or for use
herein and including the sale or exchange or
other disposition of tangible or intangible
property having a situs in Mississippi.
Under § 27-7-23(b)(1), the MSTC is entitled to tax for “the
disposition of . . . intangible property having a situs in
Mississippi.” Arguably, income earned from intangibles with a
situs in Mississippi could fit into this category. What
constitutes an intangible with a situs in Mississippi, however, is
not entirely clear.
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The MSTC argues that a promissory note that is secured by a
deed of trust filed in chancery court in Mississippi is an
intangible with a situs in Mississippi. Lambert disagrees, citing
to Gulley v. C.I.T. Corporation:
The general rule as to the situs of invisible and
intangible personal property--as notes, bonds, etc.--is
that it follows the domicile of the owner, and it is held
to be taxable at such domicile. But it is an exception
to the general rule that, where such credits acquire a
business situs different from that of the domicile of the
owner, then they may be taxed at such business situs.
150 So. 367, 369 (Miss. 1933).3
In response, the MSTC argues that Brady v. John Hancock Mut.
Life Ins. Co., 342 So.2d 295, 303 (Miss. 1977), requires us to hold
that a promissory note secured by property in Mississippi has its
situs in Mississippi. As both Lambert and the lower courts note,
however, Brady dealt with § 27-7-23(c)(2)(B)(ii), which applies to
foreign corporations doing business in Mississippi, not with
§ 27-7-23(b)(2), which deals with out-of-state individuals. Thus,
the lower courts did not find Brady applicable to this case.
In this case, the bankruptcy court held that Lambert did not
engage in business in the state of Mississippi. Because it would
therefore be impossible for a promissory note owned by Lambert to
have a business situs in Mississippi, we follow the general rule
3
The MSTC argued that Gulley is no longer applicable as
Mississippi has subsequently modified its code by adding
§ 27-7-23(c)(2)(B)(ii) to provide for taxation of intangibles. See
Brady v. John Hancock Mut. Life Ins. Co., 342 So.2d 295, 303 (Miss.
1977). The district court seemed to partially agree, noting that
the bankruptcy court’s cite to Gulley is questionable. Gulley,
however, is still good law with respect to § 27-7-23(b)(2).
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stated in Gulley that situs of intangible personal property is the
domicile of the owner. We therefore affirm the district court’s
ruling on this count as well.
C
Lambert argued below that his apportionment of the sale price
was in error. On cross-appeal, Lambert argues that, because there
is no specific figure for the price he received for the land he
personally owned, the bankruptcy court should have used an
appraisal of the land’s fair market value as an estimate of what he
received. Because the fair market value of the land at the time of
sale is arguably lower than Lambert’s adjusted basis in the land,
Lambert argues that he did not realize any gain on the sale of the
land.
We review the question of whether the bankruptcy court
properly apportioned the value of the land under a clearly
erroneous standard. In this case, Lambert has, at one point in
time, represented that he received $2,500,000 for the land he owned
personally. The bankruptcy court did not have to accept his self
serving testimony that the representation was an error. We
therefore find no clear error in the bankruptcy court valuing
Lambert’s personal property at that amount.
D
Because Lambert did not file tax returns with Mississippi for
1992 and 1993, the MSTC argues that the bankruptcy court erred when
it refused to find that Lambert acted fraudulently by understating
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the amount of income he realized for those years. Under
§ 27-7-105(2) of the Mississippi Code, a taxpayer may be assessed
a 75% penalty if an underpayment is attributable to fraud. The
bankruptcy court concluded that the MSTC failed to produce evidence
of fraud. The bankruptcy court also noted that the MSTC did not
urge such a penalty in the memo it filed with the bankruptcy court.
Whether we assess the bankruptcy’s determination that Lambert
did not commit fraud for plain error or for clear error, the result
is the same. Our review of the record reveals that the only
evidence that Lambert acted fraudulently is the opinion testimony
to that effect by a member of the board of review of the MSTC.
Consequently, we find no reversible error in the bankruptcy court’s
finding that this testimony, standing alone, is insufficient to
prove fraud.
III
In this case, Lambert and Lambert Co. entered into a series of
transactions from which Lambert emerged, having realized income
from the sale of Lambert Co.’s assets that was not subject to
Mississippi tax. The question on appeal is not whether these
transactions were structured in such a way that they avoided
Mississippi tax--they clearly were--but, instead, whether they
legally complied with Mississippi’s tax laws. We conclude that the
subject transactions do comply and therefore AFFIRM the district
court’s rulings with respect to these transactions. As for the
remaining two issues--whether the bankruptcy court erred in
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allocating the value of the property and in concluding that Lambert
did not act fraudulently in not filing a Mississippi tax return--we
also find no reversible error and therefore the district court is
in all respects
A F F I R M E D.
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