MISSISSIPPI LEGISLATURE

1998 Regular Session

To: Ways and Means

By: Representatives Franks, Holland, Scott (17th), Bowles, Miles

House Bill 1805

AN ACT TO AMEND SECTION 27-7-9, MISSISSIPPI CODE OF 1972, TO DELETE THE REQUIREMENT THAT CERTAIN TRANSACTIONS ENTERED INTO BY CORPORATIONS BE ADJUSTED OR ELIMINATED FOR INCOME TAX PURPOSES; TO AMEND SECTION 27-7-17, MISSISSIPPI CODE OF 1972, TO REVISE CERTAIN PROVISIONS REGARDING THE TREATMENT OF CERTAIN INTEREST EXPENSE AS A BUSINESS DEDUCTION; AND FOR RELATED PURPOSES. 

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MISSISSIPPI:

SECTION 1. Section 27-7-9, Mississippi Code of 1972, is amended as follows:

27-7-9. (a) Except as provided in Sections 27-7-95 through 27-7-103, determination of amount of gain or loss.

(1) Computation of gain or loss. The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in subsection (c) for determining gain, and the loss shall be the excess of the adjusted basis provided in subsection (c) for determining loss over the amount realized.

(2) Amount realized. The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received.

(3) Installment sales. Nothing in this section shall be construed to prevent (in the case of property sold under contract providing for payment in installments) the taxation of that portion of any installment payment representing gain or profit in the year in which such payment is received.

(b) Recognition of gain or loss. Except as otherwise provided in this section, on the sale or exchange of property the entire amount of the gain or loss, determined under subsection (a), shall be recognized.

(c) Adjusted basis for determining gain or loss.

(1) In general. The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis determined under subsection (d) adjusted as provided in subsection (e).

(2) Bargain sale to a charitable organization. If a deduction is allowed under Section 27-7-17 (relating to charitable contributions) by reason of a sale, then the adjusted basis for determining the gain from such sale shall be that portion of the adjusted basis which bears the same ratio to the adjusted basis as the amount realized bears to the fair market value of the property.

(d) Basis of property.

(1) Property acquired after March 16, 1912. The basis for ascertaining the gain derived or the loss sustained from the sale or other disposition of property, real, personal or mixed, shall be, in the case of property acquired after March 16, 1912, the cost of such property, except as otherwise provided in this subsection.

(2) Inventory property. If the property should have been included in the last inventory, the basis shall be the last inventory value thereof.

(3) Property acquired by gift. In the case of property acquired by gift after January 1, 1936, the basis shall be the same as that which it would have in the hands of the donor or the last preceding owner by whom it was not acquired by gift. If the facts necessary to determine such basis are unknown to the donee, the commissioner shall, if possible, obtain such facts from such donor, or last preceding owner, or any other person cognizant thereof. If the commissioner finds it impossible to obtain such facts, the commissioner shall establish a basis for the property from the best information available. In the case of property acquired by gift on or before January 1, 1936, the basis for ascertaining gain or loss from the sale or other disposition thereof shall be the fair market price or value of such property at the time of acquisition.

(4) Property acquired by bequests, devises and inheritance. If personal property was acquired by specific bequest, or if real property was acquired by general or specific devise or by intestacy, the basis shall be the fair market value of the property at the time of the death of the decedent. If the property was acquired by the decedent's estate from the decedent, the basis in the hands of the estate shall be the fair market value of the property at the time of the death of the decedent. In all other cases, if the property was acquired either by will or by intestacy, the basis shall be the fair market value of the property at the time of the distribution to the taxpayer. In the case of property transferred in trust to pay the income for life to or upon the order or direction of the grantor, with the right reserved to the grantor at all times prior to his death to revoke the trust, the basis of such property in the hands of the persons entitled under the terms of the trust instrument to the property after the grantor's death shall, after such death, be the same as if the trust instrument had been a will executed on the day of the grantor's death.

(5) Property acquired by a transfer in trust. If the property was acquired by a transfer in trust (other than by a transfer in trust by a bequest or devise), the basis shall be the same as it would be in the hands of the grantor, increased in the amount of gain, or decreased in the amount of loss, recognized to the grantor upon such transfer under this section.

(6) Property acquired in tax-free exchanges. If the property was acquired upon an exchange described in subsection (f), the basis shall be the same as in the case of the property exchanged, decreased in the amount of any money received by the taxpayer and increased in the amount of gain or decreased in the amount of loss to the taxpayer that was recognized upon such exchange by the terms of this act. If the property so acquired consisted in part of the type of property permitted by subsection (f) to be received without recognition of gain or loss, and in part of other property, the basis provided in this subsection shall be allocated between the properties (other than money) received, and for the purpose of the allocation there shall be assigned to such other property an amount equivalent to its fair market value at the date of the exchange.

(7) Property acquired in tax-free distribution. If the property consists of stock or securities distributed to a taxpayer in connection with a transaction described in subsection (f), the basis in the case of the stock in respect of which the distribution was made shall be apportioned, under rules and regulations prescribed by the commissioner, between such stock and the stock or securities distributed.

(8) Property acquired in involuntary conversions. If the property was acquired as the result of a compulsory or involuntary conversion described in subsection (f), the basis shall be the same as in the case of property so converted, decreased in the amount of any money received by the taxpayer which was not expended in accordance with the provisions of said subsection determining the taxable status of the gain or loss upon such conversion, and increased in the amount of gain or decreased in the amount of loss to the taxpayer recognized upon such conversion.

(9) Property acquired in wash sales. If substantially identical property was acquired in place of stock or securities which were sold or disposed of and in respect of which loss was not allowed as a deduction under Section 27-7-17(d), the basis in the case of property so acquired shall be the basis in the case of the stock or securities so sold or disposed of, except that, if the repurchase price was in excess of the sales price, such basis shall be increased in the amount of the difference, or if the repurchase price was less than the sales price, such basis shall be decreased in the amount of the difference.

(10) Property acquired before March 16, 1912. The basis for determining the gain or loss from the sale or other disposition of property acquired before March 16, 1912, shall be:

(A) The cost of such property (or in the case of such property as is described in subsection (d)(2) or (4) of this section the basis as therein provided, or in the case of property acquired by gift or transfer in trust, the fair market value of such property at the time of such acquisition); or

(B) The fair market value of such property as of March 16, 1912, whichever is greater.

In determining the fair market value of stock in a corporation as of March 16, 1912, due regard shall be given to the fair market value of the assets of the corporation as of that date.

(e) Adjustments to basis.

(1) In general. In computing the amount of gain or loss from the sale or other disposition of property, proper adjustment shall be made for any expenditure, receipt, loss or other item, properly chargeable to capital account since the basis date. The cost or other basis of the property shall also be diminished by the amount of the deductions for exhaustion, wear and tear, obsolescence, amortization, and depletion, which have since the acquisition of the property been allowable in respect of such property whether or not such deductions were claimed by the taxpayer or formerly allowed. In the case of stock, the basis shall be diminished by the amount of distributions previously made in respect to such stock, to the extent provided under this section.

(2) Substituted basis. Whenever it appears that the basis of the property in the hands of a taxpayer is a substituted basis, then the adjustments provided in subsection (e)(1) shall be made after first making in respect of such substituted basis proper adjustments of a similar nature in respect of the period during which the property was held by the transferor, donor or grantor, or during which the other property was held by the person for whom the basis is to be determined. The term "substituted basis" as used in this subsection means a basis determined under any provision of this section or under any corresponding provision of a prior Income Tax Law, providing that the basis shall be determined by reference to the basis in the hands of a transferor, donor or grantor, or, by reference to other property held at any time by the person for whom the basis is to be determined.

(f) Recognition of gain or loss -- exceptions.

(1) Exchange solely in kind.

(A) Property held for productive use or investment.

No gain or loss shall be recognized if property held for productive use in trade or business or for investment (not including stock in trade or other property held primarily for sale, nor stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidence of indebtedness or interest) is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment.

(B) Stock for stock in same corporation. No gain or loss shall be recognized if common stock in a corporation is exchanged solely for common stock in the same corporation, or if preferred stock in a corporation is exchanged solely for preferred stock in the same corporation.

(C) Transfers to corporation controlled by transferor.

No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and if immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two (2) or more persons, this subsection shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.

(D) Stock for stock on reorganization. No gain or loss shall be recognized if stock or securities in a corporation, a party to a reorganization, are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation, a party to a reorganization.

(2) Gain from exchanges not solely in kind. If an exchange would be within the provisions of subsection (f)(1) of this section, if it were not for the fact that the property received in exchange consists not only of property permitted by subsection (f)(1) to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property so received.

(3) Loss from exchanges not solely in kind. If an exchange would be within the provisions of subsection (f)(1) of this section, if it were not for the fact that the property received in exchange consists not only of property permitted by subsection (f)(1) to be received without the recognition of gain or loss but also of other property or money, then no loss from the exchange shall be recognized.

(4) Distribution of stock on reorganization. If in pursuance of a plan of reorganization, there is distributed to a shareholder in a corporation, a party to the reorganization, stock or securities in such corporation or in another corporation, a party to the reorganization, without the surrender by such shareholder of stock or securities in such corporation, no gain to the distributee from the receipt of such stock or securities shall be recognized.

(5) Distribution with effect of taxable dividend. If a distribution made in pursuance of a plan of reorganization is within the provisions of subsection (f)(4) of this section, but has the effect of the distribution of a taxable dividend, then there shall be taxed as a dividend to each distributee such an amount of the gain recognized under subsection (f)(2) as is not in excess of his rateable share of the undistributed earnings and profits of the corporation. The remainder, if any, of the gain recognized under subsection (f)(2) shall be taxed as a gain from the exchange of property.

(6) Involuntary conversions. If property, as a result of its destruction in whole or in part, theft, seizure or requisition or condemnation, or threat or imminence thereof, is compulsorily or involuntarily converted:

(A) Into property similar or related in service or use to the property so converted, no gain shall be recognized, but loss shall be recognized;

(B) Into money, no gain shall be recognized if such money is expended, within a period ending two (2) years after the close of the first taxable year in which any part of the gain upon the conversion is realized, in the acquisition of other property similar or related in service or use to the property so converted, or in the acquisition of control of a corporation owning such other property, or in the establishment of a replacement fund, but loss shall be recognized. If any part of the money is not so expended, the gain shall be recognized to the extent of the money which is not so expended, regardless of whether such money is received in one or more taxable years and regardless of whether or not the money which is not so expended constitutes gain. Provided, gain realized on property which is compulsorily or involuntarily converted for public use under Title II, Chapter 27, Mississippi Code of 1972, or any federal law relating to the involuntary conversion of property for public use shall not be recognized. Provided further, that gain realized on property which is voluntarily converted for public use shall not be recognized after it becomes evident that eminent domain proceedings are probable.

The provisions of this subsection relating to the nonrecognition of gain, including the exception provided in subparagraph (B), shall apply only to an owner of the converted property who has held title to such property for a period at least three (3) years prior to the date of the disposition of the converted property, provided that an owner who acquired such property by bequest, devise, gift or inheritance shall be excluded from this limitation, if the preceding owner acquired title to such property at least three (3) years prior to the date of disposition.

(7) Property exchanged treated as equivalent of cash. When property other than property specified in subsection (f)(1)(A) of this section is exchanged for other property, the property received in exchange shall, for the purpose of determining gain or loss, be treated as the equivalent of cash to the amount of its fair market value.

(8) Distribution of assets of corporation. The distribution to the taxpayer of the assets of a corporation shall be treated as a sale of the stock or securities of the corporation owned by him, and the gain or loss shall be computed accordingly.

(9) Organization of a corporation. In the case of the organization of a corporation, the stock and securities received shall be considered to take the place of property transferred therefor, and no gain or loss shall be deemed to arise therefrom.

(10) 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; provided, however, that any gain that would otherwise be excluded by this provision shall first be applied against, and reduced by, any losses determined from sales or transactions described by this provision if the losses were incurred in the year of the gain or within the two (2) years preceding or subsequent to the gain.

(B) 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;

(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.

(g) Reorganization defined. The term "reorganization" means:

(1) A statutory merger or consolidation;

(2) The acquisition by one (1) corporation, in exchange solely for all or a part of its voting stock (or in exchange solely for all or a part of the voting stock of a corporation which is in control of the acquiring corporation), of stock of another corporation if, immediately after the acquisition, the acquiring corporation has control of such other corporation, or of substantially all the properties of another corporation;

(3) A transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor, or one or more of its shareholders (including persons who were shareholders immediately before the transfer), or any combination thereof, is in control of the corporation to which the assets are transferred;

(4) A recapitalization; or

(5) A mere change in identity, form, or place of organization, however effected.

(h) Party to a reorganization defined. The term "a party to a reorganization" includes a corporation resulting from a reorganization and includes both corporations in the case of an acquisition by one (1) corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation.

(i) Control defined. As used in this section, the term "control" means the ownership of at least eighty percent (80%) of the voting stock and at least eighty percent (80%) of the total number of shares of all other classes of stock of the corporation.

(j) Special rules.

(1) Liquidation of subsidiaries. A transfer to a parent corporation from its subsidiary of property distributed in complete liquidation of the subsidiary shall result in no recognized gain or loss if the basis of the property in the hands of the parent corporation is the same as it was in the hands of the subsidiary.

(2) Gain or loss on sales or exchanges in connection with certain liquidations. Corporations adopting a plan of complete liquidation under the provisions of Section 337 of the Internal Revenue Code shall recognize the gain or loss from the sale or exchange of property by the corporation under said plan. The total gain or loss from the liquidating distributions shall be recognized by the shareholders; however, a credit for the tax paid by the liquidating corporation on the gain from the sale or exchange of property under the plan of liquidation will be allowed to the extent of any tax liability to the shareholders. The corporation shall provide to the State Tax Commission a list of all shareholders with their percentage of ownership, distribution, tax credit allowed, and any other information requested.

(3) Distribution of stock and securities of a controlled corporation. 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.

(4) Notwithstanding the other provisions of this section, a corporation or other entity that is involved in restructuring, reorganizing, distributing assets or profits, or changing ownership that results in an adjustment to its asset basis is required to report a gain in the year such transaction occurs on any such transaction when the transaction involves assets owned or used in this state, or otherwise represents assets owned or used in this state. If a transfer of income or a change in asset valuation occurs on the tax records of the taxpayer, such transaction shall result in taxation to this state to the extent of the transfer of income or change in asset valuation.

(5) If a corporation or other entity makes an Internal Revenue Code Section 338 election, or other similar election under which the aggregate basis in assets are increased on the tax records of the taxpayer, then a similar election must also be made for Mississippi purposes, but the gain must be recognized by the corporation in which the increase in basis of the assets occurs. The corporation or other entity is allowed to increase its basis by the amount of gain recognized. An aggregate write-down of assets is not allowed. The parent corporation shall recognize the gain on the disposition of its stock.

(6) For state tax purposes, a corporation or other legal entity is considered separate from its shareholders, affiliated corporations or other entities. * * * All transactions entered into by a corporation must be at "arms-length." If requested by the commissioner, the taxpayer must be able to substantiate that the transaction occurred at "arms-length." If not, the transaction may be adjusted to the satisfaction of the commissioner. For purpose of this subsection, compliance with federal regulations promulgated under Internal Revenue Code Section 482, shall constitute "arms-length." The provisions deleted from this subsection (j)(6) by House Bill No. , 1998 Regular Session, shall be deleted retroactively to January 1, 1990, and shall not apply to any transaction (whether occurring before, on, or after January 1, 1990), except those provisions shall not be retroactively deleted as to and shall apply to a transaction to the extent those provisions have been applied to the transaction in a taxable year of the taxpayer that is (a) subject to a settlement with or decision by the commissioner that is final and nonappealable as of the date of passage of House Bill No. , 1998 Regular Session, or (b) subject to a judgment by a court of this state that is final and nonappealable as of the date of passage of House Bill No. , 1998 Regular Session.

(k) Sale or exchange of residence.

(1) Loss on sale or exchange of residence. Loss from the sale or exchange of property used by the taxpayer as his principal residence is not recognized and cannot be deducted.

(2) Nonrecognition of gain. Gain shall be computed in accordance with the provisions of the Internal Revenue Code, rules, regulations and revenue procedures relating to the sale or exchange of a personal residence not in direct conflict with the provisions of the Mississippi Income Tax Law.

(3) Gain on the sale or exchange of residence. A recognizable gain on the sale or exchange of a personal residence shall be included in gross income and treated as ordinary income.

(l) Distributions by corporations.

(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 total gain or loss from the distributions to the shareholders shall be recognized by the shareholders subject to subsections (f)(8) and (j)(1); however, a credit for the tax paid by the distributing corporation on the gain from the sale or exchange of property under the plan of distribution will be allowed to the extent of any liability to the shareholders. The corporation shall provide to the State Tax Commission a list of all shareholders with their percentage of ownership, distribution, tax credit allowed, and any other information requested.

(2) Source of distributions. For the purposes of this act, every distribution is made out of earnings or profits to the extent thereof, and from the most recently accumulated earnings and profits. Any earnings or profit accumulated, or increase in value of property acquired, before March 16, 1912, may be distributed exempt from tax (after the earnings and profits accumulated after March 16, 1912, have been distributed), but any such tax-free distribution shall be applied against and reduce the basis of the stock provided in subsection (d).

(3) Distributions in liquidation. Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under subsection (a), but shall be recognized only to the extent provided in subsection (f). In the case of amounts distributed in partial liquidation, the part of such distribution which is property chargeable to capital account shall not be considered a distribution of earnings or profits within the meaning of paragraph (2) of this subsection for the purpose of determining the taxability of subsequent distributions by the corporations.

(4) Other distributions. If any distribution (not in partial or complete liquidation) made by a corporation to its shareholders, is not out of increase in value of property accrued before March 16, 1912, and is not out of earnings or profits, then the amount of such distribution shall be applied against and reduce the basis of the stock provided in subsection (d), and if in excess of such basis, such excess shall be taxable in the same manner as a gain from the sale or exchange of property.

(5) Stock dividends. A stock dividend shall not be subject to tax.

(6) Cancellation or redemption of stock. If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after March 16, 1912, shall be treated as a taxable dividend.

(7) "Amounts distributed in partial liquidation" defined. As used in this subsection, the term "amounts distributed in partial liquidation" means distribution by a corporation in complete cancellation or redemption of a part of its stock, or one (1) of a series of distributions in complete cancellation or redemption of all or a portion of its stock.

(8) Distributions of stock pursuant to order enforcing the Antitrust Laws. Any distribution of stock which is made pursuant to the order of any court enforcing the Antitrust Laws of the United States, or of any state, shall be a distribution which is not out of earnings and profits of the distributing corporation, but the value of the stock so distributed shall be applied against and reduce the basis of the stock of the distributing corporation provided in subsection (d), and if in excess of such basis, such excess shall be taxable in the same manner as a gain from the sale or exchange of property.

SECTION 2. Section 27-7-17, Mississippi Code of 1972, is amended as follows:

27-7-17. In computing taxable income, there shall be allowed as deductions:

(1) Business deductions.

(a) Business expenses. All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; nonreimbursable traveling expenses incident to current employment, including a reasonable amount expended for meals and lodging while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition of the continued use or possession, for purposes of the trade or business of property to which the taxpayer has not taken or is not taking title or in which he had no equity. Expense incurred in connection with earning and distributing nontaxable income is not an allowable deduction. Limitations on entertainment expenses shall conform to the provisions of the Internal Revenue Code of 1986.

(b) Interest. All interest paid or accrued during the taxable year on business indebtedness, except interest upon the indebtedness for the purchase of tax-free bonds, or any stocks, the dividends from which are nontaxable under the provisions of this article; provided, however, in the case of securities dealers, interest payments or accruals on loans, the proceeds of which are used to purchase tax-exempt securities, shall be deductible if income from otherwise tax-free securities is reported as income. Investment interest expense shall be limited to investment income. * * * For the purposes of this paragraph, the phrase "interest upon the indebtedness for the purchase of tax-free bonds" applies only to the indebtedness incurred for the purpose of directly purchasing tax-free bonds and does not apply to any other indebtedness incurred in the regular course of the taxpayer's business. Any corporation, association, organization or other entity taxable under Section 27-7-23(c) shall allocate interest expense as provided in Section 27-7-23(c)(4)(H). The provisions deleted from this subsection (1)(b) by House Bill

No. , 1998 Regular Session, shall be deleted retroactively to January 1, 1990, and shall not apply to any transaction (whether occurring before, on, or after January 1, 1990), except those provisions shall not be retroactively deleted as to and shall apply to a transaction to the extent those provisions have been applied to the transaction in a taxable year of the taxpayers that is (a) subject to a settlement with or decision by the commissioner that is final and nonappealable as of the date of passage of House Bill No. , 1998 Regular Session, or (b) subject to a judgment by a court of this state that is final and nonappealable as of the date of passage of House Bill No. , 1998 Regular Session.

(c) Taxes. Taxes paid or accrued within the taxable year, except state and federal income taxes, excise taxes based on or measured by net income, estate and inheritance taxes, gift taxes, cigar and cigarette taxes, gasoline taxes, and sales and use taxes unless incurred as an item of expense in a trade or business or in the production of taxable income. In the case of an individual, taxes permitted as an itemized deduction under the provisions of subsection (2)(a) of this section are to be claimed thereunder.

(d) Business losses.

(i) Losses sustained during the taxable year not compensated for by insurance or otherwise, if incurred in trade or business, or nonbusiness transactions entered into for profit.

(ii) Limitations on losses from passive activities and rental real estate shall conform to the provisions of the Internal Revenue Code of 1986.

(e) Bad debts. Losses from debts ascertained to be worthless and charged off during the taxable year, if sustained in the conduct of the regular trade or business of the taxpayer; provided, that such losses shall be allowed only when the taxpayer has reported as income, on the accrual basis, the amount of such debt or account.

(f) Depreciation. A reasonable allowance for exhaustion, wear and tear of property used in the trade or business, or rental property, and depreciation upon buildings based upon their reasonable value as of March 16, 1912, if acquired prior thereto, and upon cost if acquired subsequent to that date.

(g) Depletion. In the case of mines, oil and gas wells, other natural deposits and timber, a reasonable allowance for depletion and for depreciation of improvements, based upon cost, including cost of development, not otherwise deducted, or fair market value as of March 16, 1912, if acquired prior to that date, such allowance to be made upon regulations prescribed by the commissioner, with the approval of the Governor.

(h) Contributions or gifts. Except as otherwise provided in subsection (2)(a) of this section for individuals, contributions or gifts made by corporations within the taxable year to corporations, organizations, associations or institutions, including Community Chest funds, foundations and trusts created solely and exclusively for religious, charitable, scientific or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inure to the benefit of any private stockholder or individual. This deduction shall be allowed in an amount not to exceed twenty percent (20%) of the net income. Such contributions or gifts shall be allowable as deductions only if verified under rules and regulations prescribed by the commissioner, with the approval of the Governor. Contributions made in any form other than cash shall be allowed as a deduction, subject to the limitations herein provided, in an amount equal to the actual market value of the contributions at the time the contribution is actually made and consummated.

(i) Reserve funds - insurance companies. In the case of insurance companies the net additions required by law to be made within the taxable year to reserve funds when such reserve funds are maintained for the purpose of liquidating policies at maturity.

(j) Annuity income. The sums, other than dividends, paid within the taxpayer year on policy or annuity contracts when such income has been included in gross income.

(k) Contributions to employee pension plans. Contributions made by an employer to a plan or a trust forming part of a pension plan, stock bonus plan, disability or death-benefit plan, or profit-sharing plan of such employer for the exclusive benefit of some or all of his, their, or its employees, or their beneficiaries, shall be deductible from his, their, or its income only to the extent that, and for the taxable year in which, the contribution is deductible for federal income tax purposes under the Internal Revenue Code of 1986 and any other provisions of similar purport in the Internal Revenue Laws of the United States, and the rules, regulations, rulings and determinations promulgated thereunder, provided that:

(i) The plan or trust be irrevocable.

(ii) The plan or trust constitute a part of a pension plan, stock bonus plan, disability or death-benefit plan, or profit-sharing plan for the exclusive benefit of some or all of the employer's employees and/or officers, or their beneficiaries, for the purpose of distributing the corpus and income of the plan or trust to such employees and/or officers, or their beneficiaries.

(iii) No part of the corpus or income of the plan or trust can be used for purposes other than for the exclusive benefit of employees and/or officers, or their beneficiaries.

Contributions to all plans or to all trusts of real or personal property (or real and personal property combined) or to insured plans created under a retirement plan for which provision has been made under the laws of the United States of America, making such contributions deductible from income for federal income tax purposes, shall be deductible only to the same extent under the Income Tax Laws of the State of Mississippi.

(l) Net operating loss carrybacks and carryovers.

(i) A net operating loss for any taxable year ending after December 31, 1991, shall be a net operating loss carryback for one (1) taxable year preceding the taxable year of the loss. If the net operating loss for any taxable year is not exhausted by carrybacks for one (1) taxable year preceding the taxable year of the loss, then there shall be a net operating loss carryover to each of the fifteen (15) taxable years following the taxable year of the loss beginning with any taxable year after December 31, 1991.

(ii) A net operating loss for any taxable year ending after December 31, 1992, shall be a net operating loss carryback to each of the two (2) taxable years preceding the taxable year of the loss. If the net operating loss for any taxable year is not exhausted by carrybacks to the two (2) taxable years preceding the taxable year of the loss, then there shall be a net operating loss carryover to each of the fifteen (15) taxable years following the taxable year of the loss beginning with any taxable year after December 31, 1991.

(iii) A net operating loss for any taxable year ending after December 31, 1993, and taxable years thereafter, shall be a net operating loss carryback to each of the three (3) taxable years preceding the taxable year of the loss. If the net operating loss for any taxable year is not exhausted by carrybacks to the three (3) taxable years preceding the taxable year of the loss, then there shall be a net operating loss carryover to each of the fifteen (15) taxable years following the taxable year of the loss beginning with any taxable year after December 31, 1991.

The term "net operating loss," for the purposes of this paragraph, shall be the excess of the deductions allowed over the gross income; provided, however, the following deductions shall not be allowed in computing same:

1. No net operating loss deduction shall be allowed.

2. No personal exemption deduction shall be allowed.

3. Allowable deductions which are not attributable to taxpayer's trade or business shall be allowed only to the extent of the amount of gross income not derived from such trade or business.

Any taxpayer entitled to a carryback period as provided by this paragraph may elect to relinquish the entire carryback period with respect to a net operating loss for any taxable year ending after December 31, 1991. The election shall be made in the manner prescribed by the State Tax Commission and shall be made by the due date, including extensions of time, for filing the taxpayer's return for the taxable year of the net operating loss for which the election is to be in effect. The election, once made for any taxable year, shall be irrevocable for that taxable year.

(m) Amortization of pollution or environmental control facilities.

(i) Allowance of deduction. Every taxpayer, at his election, shall be entitled to a deduction with respect to the amortization of any certified pollution or environmental control facility (as defined in subsection (1)(m)(iv) of this section), based on a period of sixty (60) months. Such amortization deduction shall be an amount, with respect to each month of such period within the taxable year, equal to the amortizable basis of the pollution or environmental control facility at the end of such month divided by the number of months (including the month for which the deduction is computed) remaining in the period. Such amortizable basis at the end of the month shall be computed without regard to the amortization deduction for such month. The amortization deduction provided in this subparagraph shall be in lieu of the depreciation deduction with respect to such pollution or environmental control facility for such month provided by subsection (1)(f) of this section. The sixty-month period shall begin, as to any certified pollution or environmental control facility, at the election of the taxpayer, with the month following the month in which such facility was completed or acquired, or with the succeeding taxable year.

(ii) Election of amortization. The election of the taxpayer to take the amortization deduction authorized in this subsection shall be made only after certification of such pollution or environmental control facility by the Mississippi Commission on Environmental Quality and notice of such certification is given as further provided in subsection (1)(m)(viii) of this section.

(iii) Termination of amortization deduction. A taxpayer which has elected under subsection (1)(m)(ii) of this section to take the amortization deduction provided in subsection (1)(m)(i) of this section may, at any time after making such election, discontinue the amortization deduction with respect to the remainder of the amortization period, such discontinuance to begin as of the beginning of any month specified by the taxpayer in a notice in writing filed with the Chairman of the State Tax Commission before the beginning of such month. The depreciation deduction provided under subsection (1)(f) of this section shall be allowed, beginning with the first month as to which the amortization deduction does not apply, and the taxpayer shall not be entitled to any further amortization deduction under subsection (1)(m) with respect to such pollution or environmental control facility.

(iv) Definitions. For purposes of subsection (1)(m) of this section:

1. Certified pollution or environmental control facility. The term "certified pollution or environmental control facility" means a new identifiable treatment facility which is used in connection with a plant or other property to abate or control noise, water or atmospheric pollution or contamination by removing, altering, disposing, or storing of pollutants, contaminants, wastes, or heat and which has been certified to by the Mississippi Commission on Environmental Quality, as provided in subsection (1)(m)(viii) of this section, as having been constructed, reconstructed, erected, or acquired in conformity with the Mississippi program or requirements for abatement or control of noise, water or atmospheric pollution or contamination.

2. New identifiable treatment facility. For purposes of subsection (1)(m)(iv)1 of this section, the term "new identifiable treatment facility" includes only tangible property (not including a building and its structural components, other than a building which is exclusively a treatment facility) which is of a character subject to the allowance for depreciation provided in subsection (1)(f) of this section, which is identifiable as a treatment facility, and which is property:

a. The construction, reconstruction or erection of which is completed by the taxpayer after December 31, 1972; or

b. Acquired after December 31, 1972, if the original use of the property commences with the taxpayer and commences after such date.

In applying the provisions of subsection (1)(m) of this section in the case of property described in subsection (1)(m)(iv)2a of this section, there shall be taken into account only that portion of the basis which is properly attributable to construction, reconstruction, or erection after December 31, 1972.

3. Plant or other property. For purposes of subsection (1)(m)(iv)1 of this section, the phrase "plant or other property" means any tangible property whether or not such property is used in the trade or business or held for the production of income.

4. Buildings. For purposes of subsection (1)(m)(iv)2 of this section, the term "building" generally means any structure or edifice enclosing a space within its walls, and usually covered by a roof, the purpose of which is to provide shelter or housing, or to provide working, office, parking, display, or sales space. The term includes structures such as apartment houses, factory and office buildings, warehouses, barns, garages, railway or bus stations, stores, and other similarly used structures. The term does not include:

a. A structure which is essentially an item of machinery or equipment; or

b. An enclosure which is so closely combined with the machinery or equipment which it supports, houses or serves that it must be replaced, retired or abandoned contemporaneously with such machinery or equipment, and which is depreciated over the life of such machinery or equipment.

5. Structural components. For purposes of subsection (1)(m)(iv)2 of this section, the term "structural components" includes chimneys and other components relating to the operating or maintenance of a building. The term "structural components" does not include machinery or a device which serves no function other than the abatement or control of noise, water or atmospheric pollution.

6. Amortizable basis. For purposes of subsection (1)(m)(i) of this section, the "amortizable basis" of a certified pollution or environmental control facility is the adjusted basis of such facility for purposes of determining gain (Section 27-7-9) reduced by the cost of any pollution or environmental control facility:

a. Completed or acquired by the taxpayer prior to December 31, 1972;

b. Which is a profit-making abatement works; and

c. Requiring allocation of nonpollution or environmental control equipment.

(v) Profit-making abatement works. The Mississippi Commission on Environmental Quality shall not certify any property under the provisions of subsection (1)(m) of this section to the extent it appears that by reason of profits derived through the recovery of wastes or otherwise in the operation of such property, its costs will be recovered over its actual useful life.

(vi) Application for certification. Applications for certification for the amortization deduction authorized under subsection (1)(m) of this section for pollution or environmental control facilities shall be submitted to the Mississippi Commission on Environmental Quality in such manner as such commission may prescribe; shall be signed by the applicant or agent thereof; and shall include the following information:

1. Name, address and federal employer identifying number of the applicant;

2. Type and narrative description of the new identifiable facility for which certification is (or will be) sought, including a copy of schematic or engineering drawings, and a description of the function and operation of such facility;

3. Address (or proposed address) of facility location;

4. A general description of the operation in connection with which such facility is (or will be) used and a description of the specific process or processes resulting in discharges or emissions which are (or will be) controlled by the facility;

5. If the facility is (or will be) used in connection with more than one (1) plant or other property, a description of the operations of the facility in respect to each plant or other property, including a reasonable allocation of the costs of the facility among the plants being serviced, and a description of the reasoning and accounting methods used to arrive at such allocation;

6. Description of the effect of such facility in terms of type and quantity of noise, pollutants, contaminants, wastes or heat, removed, altered, stored, or disposed of by such facility;

7. If the facility performs a function other than removal, alteration, storage, or disposal of pollutants, contaminants, wastes or heat, or noise, a description of all functions performed by the facility, including a reasonable identification of the costs of the facility allocable to removal, alteration, storage, or disposal of pollutants, contaminants, wastes or heat, or noise, and a description of the reasoning and the accounting methods used to arrive at such allocation;

8. Date when such construction, reconstruction, or erection will be completed or when such facility was (or will be) acquired;

9. Date when such facility is placed (or is intended to be placed) in operation;

10. Cost of construction, acquisition, installation, operation, and maintenance of the facility;

11. Estimated profits reasonably expected to be derived through the recovery of wastes or otherwise in the operation of the facility; and

12. Such other information as the Mississippi Commission on Environmental Quality deems necessary for certification.

(vii) Requirements for certification. The Mississippi Commission on Environmental Quality will certify a facility if it makes the following determinations:

1. It removes, alters, disposes of, or stores pollutants, contaminants, wastes or heat, or noise, which, but for the facility, would be released into the environment.

2. The facility furthers the general policies of Mississippi in the prevention and abatement of pollution and noise.

3. The facility is suitable and reasonably adequate to satisfy the interests and purposes of the Mississippi Commission on Environmental Quality, and regulations thereunder.

4. The applicant has complied with all the other requirements of subsection (1)(m) of this section and has submitted all requested information.

(viii) Certification. When the Mississippi Commission on Environmental Quality has certified a facility as a pollution or environmental control facility under the requirements and provisions of subsection (1)(m) of this section, a notice of certification shall be given by mail to the applicant, the Chairman of the State Tax Commission, and the tax assessor of the county or counties in which the facility is located, said notice of certification to contain such information and data as may be required by the State Tax Commission in the proper administration and control of the amortization deduction authorized by subsection (1)(m) of this section.

(ix) Revocation. Certification under subsection (1)(m) of this section may be revoked by the Mississippi Commission on Environmental Quality on thirty (30) days' written notice to the applicant, served by certified mail, whenever such commission shall determine that the facility in question is no longer being operated consistent with the requirements for certification (subsection (1)(m)(vii) of this section) in effect at the time the facility was placed in service. Within such period of thirty (30) days, the applicant may submit to the Mississippi Commission on Environmental Quality such evidence, data, or other written materials as the applicant may deem appropriate to show why the certification under subsection (1)(m) of this section should not be revoked. Notification of a revocation under this subparagraph shall be given to the Chairman of the State Tax Commission. The Mississippi Commission on Environmental Quality shall consider the issues presented by the applicant, according to law and the facts, and shall within thirty (30) days from the date of the applicant's petition make a determination and notify the applicant of its findings, with a copy of such findings to the Chairman of the State Tax Commission.

(x) Appeals. An applicant may appeal any decision of the Mississippi Commission on Environmental Quality which:

1. Denies certification; or

2. Disapproves the applicant's suggested method of allocating cost pursuant to subsection (1)(m)(vi) of this section.

The petition for an appeal to the Mississippi Commission on Environmental Quality shall be in writing and shall be filed with such commission within thirty (30) days from the date of the decision to which the appeal applies. The Mississippi Commission on Environmental Quality shall promptly consider the petition, grant a hearing, and notify the petitioner of the time and place fixed for the hearing. At said hearing, the Mississippi Commission on Environmental Quality shall try the issues presented, according to the law and facts and shall, as soon as practical thereafter, notify the applicant of its determination.

(n) Dividend distributions - investment trusts. Dividends distributed by an investment trust defined in Section 79-15-3, if the dividend distributions meet the requirements of Section 857 or are otherwise deductible under Section 858 or 860, federal Internal Revenue Code of 1986, as amended. The deductions allowed in this paragraph shall be effective for the 1985 taxable year of the investment trust and for each taxable year thereafter.

(2) Individual nonbusiness deductions.

(a) The amount allowable for individual nonbusiness itemized deductions for federal income tax purposes, except the deduction for state income taxes paid, where the individual is eligible to elect, for the taxable year, to itemize deductions on his federal return; or

(b) In lieu of the individual nonbusiness itemized deductions authorized in paragraph (a), for all purposes other than ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, an optional standard deduction of:

(i) Three Thousand Four Hundred Dollars ($3,400.00) through calendar year 1997, Four Thousand Two Hundred Dollars ($4,200.00) for the calendar year 1998 and Four Thousand Six Hundred Dollars ($4,600.00) for each calendar year thereafter in the case of married individuals filing a joint or combined return;

(ii) One Thousand Seven Hundred Dollars ($1,700.00) through calendar year 1997, Two Thousand One Hundred Dollars ($2,100.00) for the calendar year 1998 and Two Thousand Three Hundred Dollars ($2,300.00) for each calendar year thereafter in the case of married individuals filing separate returns;

(iii) Three Thousand Four Hundred Dollars ($3,400.00) in the case of a head of family; or

(iv) Two Thousand Three Hundred Dollars ($2,300.00) in the case of an individual who is not married.

In the case of a husband and wife living together, having separate incomes, and filing combined returns, the standard deduction authorized may be divided in any manner they choose. In the case of separate returns by a husband and wife, the standard deduction shall not be allowed to either if the taxable income of one (1) of the spouses is determined without regard to the standard deduction.

(c) A nonresident individual shall be allowed the same individual nonbusiness deductions as are authorized for resident individuals in paragraph (a) or (b) of this subsection; however, the nonresident individual is entitled only to that proportion of the individual nonbusiness deductions as his net income from sources within the State of Mississippi bears to his total or entire net income from all sources.

(3) Nothing in this section shall permit the same item to be deducted more than once, either in fact or in effect.

SECTION 3. (1) The same or similar principles to the provisions deleted from Section 27-7-9(j)(6) by House Bill No. , 1998 Regular Session, shall not be utilized to any transaction (whether occurring before, on, or after January 1, 1990) in making any adjustments or eliminations to arrive at taxable income to this state (such prohibited adjustments or eliminations including, but not being limited to, disallowing any interest expense deduction or reattributing any indebtedness between or among persons), except those same or similar principles may be so utilized to a transaction to the extent such principles have been so utilized to the transaction in a taxable year of the taxpayer that is (a) subject to a settlement with or a decision by the commissioner that is final and nonappealable as of the date of passage of House Bill No. , 1998 Regular Session, or (b) subject to a judgment by a court of this state that is final and nonappealable as of the date of passage of House Bill No. , 1998 Regular Session).

(2) The same or similar principles to the provisions deleted from Section 27-7-17(1)(b) by House Bill No. , 1998 Regular Session, shall not be utilized to any transaction (whether occurring before, on, or after January 1, 1990) in disallowing any interest expense deduction or in reattributing any indebtedness between or among persons, except those same or similar principles may be so utilized to a transaction to the extent such principles have been utilized to the transaction in a taxable year of the taxpayer that is (a) subject to a settlement with or a decision by the commissioner that is final and nonappealable as of the date of passage of House Bill No. , 1998 Regular Session, or (b) subject to a judgment by a court of this state that is final and nonappealable as of the date of passage of House Bill No. , 1998 Regular Session.

SECTION 4. Nothing in this act shall affect any applicable statute of limitations on the time for the assessment or refund of any income tax to this state or for the determination of any taxable income to this state.

SECTION 5. Section 3 of this act shall be codified as a separate code section in Chapter 7, Title 27, Mississippi Code of 1972.

SECTION 6. If any section, paragraph, sentence, clause, phrase or any part of this act is declared to be unconstitutional or void, or if for any reason is declared to be invalid or of no effect, the remaining sections, paragraphs, sentences, clauses, phrases or parts thereof shall be in no manner affected thereby but shall remain in full force and effect.

SECTION 7. This act shall take effect and be in force from and after its passage.