PURPOSE: This rule serves as a guideline in the determination of the amount of individual, corporate or other taxpayer’s allowable modification upon the sale or other disposition of property having a higher adjusted basis for Missouri income tax purposes than for federal income tax purposes on December 31, 1972.

Editor’s Note: The secretary of state has determined that the publication of this rule in its entirety would be unduly cumbersome or expensive. The entire text of the material referenced has been filed with the secretary of state. This material may be found at the Office of the Secretary of State or at the headquarters of the agency and is available to any interested person at a cost established by state law.

1. (1) If a taxpayer’s federal adjusted gross income (FAGI) includes any gain from a sale or other disposition of property having a higher adjusted basis to the taxpayer for Missouri income tax purposes than for federal income tax purposes on December 31, 1972, a modification must be made to adjust for this difference in basis. This modification applies only if and to the extent that the gain is included in the FAGI of the taxpayer.
2. (2) Computing the Modification for Difference in Basis. This modification is made by subtracting from FAGI the portion of the gain included in the adjusted gross income which is not in excess of the amount by which Missouri basis exceeds federal basis at December 31, 1972. If the gain is a long-term capital gain for federal tax purposes, only fifty percent (50%) of that portion of the gain is to be deducted.
3. (3) Gain on Sale of Residence. A gain on the sale of a residence of a Missouri taxpayer illustrates the modification provided in this section. Under Internal Revenue Code (IRC) section 1034, a taxpayer’s gain on the sale of his/her principal residence is not recognized, in whole or in part, under certain circumstances. The nonrecognized gain reduces the basis of the subsequent residence for federal tax purposes. For taxable years prior to the application of sections 143.011—143.996, RSMo, no adjustment to Missouri basis was applicable, as any gain on the sale of a residence was fully recognized at the time of sale for Missouri tax purposes. When the taxpayer’s residence had a higher basis for Missouri tax purposes than for federal tax purposes on December 31, 1972, the gain, to the extent included in FAGI, will be a modification under section 143.121-3(b), RSMo.
4. (4) As an example, assume that the taxpayer purchased his/her present residence for $50,000. The adjusted basis for federal tax purposes on December 31, 1972 was $40,000 ($50,000 less a $10,000 gain not recognized under IRC section 1034 on the sale of his/her old residence and subsequent purchase of his/her present residence). The adjusted basis for Missouri tax purposes on December 31, 1972 was $50,000. S/he sells his/her residence in 1973 for $66,000 and does not purchase another home. The gain on the sale is fully recognized for federal tax purposes and is taxed as a long-term capital gain in 1973. There are no other capital gains or losses to report in that year. The taxpayer also has $30,000 of other FAGI in 1973 and there are no other Missouri modifications. Missouri adjusted gross income (MAGI) would be computed as follows:

Missouri adjusted basis Federal adjusted basis Difference in basis

Sales price Federal adjusted basis Net long-term capital gain 50% deduction (IRC Section 1202) Net long-term capital gain after IRC Section 1202 deduction Other income FAGI Modification under section 143.121-3(b), RSMo (1/2 of lesser of (A) or (B) but not more than (C)) MAGI

1. (5) This example illustrates the principle of the last sentence of section (1) of this rule. An individual sells a nondepreciable capital asset which s/he held over six (6) months for $100,000. The adjusted basis of this property for federal tax purposes was $50,000 on December 31, 1972 and for Missouri tax purposes was $70,000. In the same year, the taxpayer also has $67,000 of short-term capital losses and $40,000 of other FAGI. There are no other Missouri modifications. His/her MAGI would be computed as follows:

Missouri adjusted basis Federal adjusted basis Difference in basis $50,000 $40,000 $10,000(A)

$66,000 $40,000 $26,000(B)

$13,000

$30,000 $43,000(C)

($ 5,000) $38,000

$ 70,000 $ 50,000 $ 20,000(A) Sales price Federal adjusted basis Long-term capital gain Short-term capital losses Net short-term capital loss

Deduction for net capital loss limited to (IRC Section 1211) Other income FAGI Modification under section 143.121-3(b), RSMo (1/2 of lesser (A) or (B) but not more than (C)) MAGI

1. (6) As a further example, assume that a corporation sells a depreciable asset for $100,000 in 1973. The adjusted basis of this property for federal tax purposes was $80,000 on December 31, 1972 and for Missouri tax purposes was $108,000. Due to the federal depreciation recapture rules, all of the gain is reportable as ordinary income in 1973 and there are no other gains or losses to report for that year. Other federal taxable income for 1973 is $50,000 and there are no other Missouri modifications. Missouri taxable income would be computed as follows:

Missouri adjusted basis Federal adjusted basis Difference in basis

Sales price Federal adjusted basis Ordinary gain Other income Federal taxable income Modification under section 143.121-3(b), RSMo (lesser of (A) or (B) but not more than (C)) Missouri taxable income

1. (7) Property Acquired After December 31, 1972. Where a taxpayer realized a gain on the sale of property which was acquired after December 31, 1972 in a manner that the basis of that property is determined solely by reference to its cost to the taxpayer, no modification is allowed. The property necessarily has the same basis for both Missouri and federal tax purposes.
2. (8) Where a taxpayer owns property which has a higher Missouri basis than federal basis on December 31, 1972 and the property is subsequently exchanged for other property, the basis of which is determined by reference to the basis of the property disposed of, the difference in basis on December 31, 1972 $100,000 $ 50,000 $ 50,000 ($ 67,000) ($ 17,000)(B)

($ 1,000) $ 40,000 $ 39,000(C)

$ 0 $ 39,000

$108,000 $ 80,000 $ 28,000(A)

$100,000 $ 80,000 $ 20,000(B) $ 50,000 $ 70,000(C)

($ 20,000) $ 50,000 shall be carried forward to, and be associated with, the property received in the exchange, for purposes of determining the modification provided in this section.

1. (9) Where a taxpayer receives property which had a higher Missouri basis than federal basis on December 31, 1972, in a manner that the basis of the property in the hands of the transferor carries over to the transferee (for example, by gift—see IRC Section 1015); the difference in basis on December 31, 1972 shall be carried forward to, and be associated with, the property in the hands of the transferee, for purposes of determining the modification provided in this section.
2. (10) Separate Computation Required. Where two (2) or more assets are sold at a gain during the same taxable year, and the adjusted basis of each for Missouri tax purposes on December 31, 1972 was higher than its federal adjusted basis, the amount of the modification provided by this section shall be computed separately for each asset sold.
3. (11) Modification Not Allowed in Certain Cases. No modification is to be made where property was disposed of at a loss during the taxable year even though there was a difference between the Missouri and federal basis on December 31, 1972. No modification, adjustment or allowance under this section or any other section is to be made with respect to any federal capital loss carry-over.

4. (12) Installment Sales. In the case of an installment sale of an asset which on December 31, 1972 had a Missouri basis higher that its federal basis, the amount of the modification for any taxable year will be that proportion of the total amount of the modification as the amount received in that year bears to the total selling price from the sale.

   1. (A) Example: Assume the same facts as in section (4) of this rule, except that the residence was sold on the installment basis, the taxpayer receiving $11,000 per year for six
5. (6) years beginning in 1973. The Missouri modification for each of the six (6) years would be computed as follows: $5,000 × $11,000 = $833 $66,000

6. (13) Tax Return and Recordkeeping Requirements. Any modification permitted under this rule shall be fully explained and computations set forth in a statement attached to each Missouri tax return in which the modification is made. Taxpayer shall retain records as may be necessary to establish a difference in adjusted basis on December 31, 1972 and a modification under section 143.121-3(b), RSMo, if and when the property is sold. AUTHORITY: section 143.961, RSMo (1986).* Regulation 1.121-3(b) was originally filed March 15, 1974, effective March 25, 1974.

   *Original authority 1972.