Broadmoor-Kingsport Apartments, Inc. v. State

• Decision Date: 04 March 1985
• Docket Number: BROADMOOR-KINGSPORT
• Parties: APARTMENTS, INC., and Broadmoor-Kingsport Associates, Appellees, v. STATE of Tennessee and John K. King, Commissioner of Revenue, Appellants.
• Court: Tennessee Supreme Court

Page 70

686 S.W.2d 70

BROADMOOR-KINGSPORT APARTMENTS, INC., and Broadmoor-Kingsport Associates, Appellees, v. STATE of Tennessee and John K. King, Commissioner of

Revenue, Appellants.

Supreme Court of Tennessee,

at Knoxville.

March 4, 1985.

Charles L. Lewis, Asst. Atty. Gen., W.J. Michael Cody, Atty. Gen. & Reporter, Nashville, for appellants.

William T. Gamble, Daryl J. Brand, Wilson, Worley, Gamble, & Ward, P.C., Kingsport, for appellees.

OPINION

COOPER, Chief Justice.

This action was instituted by Broadmoor-Kingsport Apartments, Inc. (BKAI) to recover $19,810.00 in corporate franchise taxes, penalty and interest assessed by the Tennessee Department of Revenue for 1975, 1976 and 1977, and paid under protest. BKAI contended that it had not been doing business in Tennessee within the meaning of T.C.A. § 67-2902 (now § 67-4-903(a)), and, in the alternative, that no tax was owed under T.C.A. § 67-2908 (now § 67-4-906(a)), since it had neither owned or used property of value in Tennessee. On considering the facts stipulated and the applicable statutes and authorities, the Chancellor found that BKAI did business in Tennessee during the tax years in question and was thus subject to pay the franchise tax. The Chancellor also found that BKAI did not own or use any property of value in Tennessee during the tax years, and that its tax liability was limited to the minimum tax of $10.00 in each tax year. The Chancellor then ordered a refund of the taxes paid under protest.

Two issues are presented to us on appeal. Did BKAI do business in Tennessee during the tax years in question? If so, should the value of the Kingsport apartment complex, to which appellee held record title, be included in the franchise tax base? The Commissioner included the value of the apartment complex in the tax base in making the assessment that resulted in this court action.

In 1973, a group of investors sought to acquire and develop an apartment complex in Kingsport, Tennessee. These investors formed Broadmoor-Kingsport Associates (BKA), a limited partnership, to be the ultimate record owner of the property, but they realized, as the parties have stipulated, "that because of the restrictions of usury statutes of various states the development might require or make desirable the interim use of other legal entities." Thus the taxpayer, Broadmoor Kingsport Apartments, Inc. (BKAI), was chartered in Missouri in December of 1974. It qualified to do business in Tennessee shortly thereafter. Title to the apartment complex and land was transferred to BKAI, and a Nominee and Agency agreement was entered into by BKA and BKAI. This agreement provided that BKAI agrees to acquire and hold record title to Property as nominee on behalf of and for convenience of Principal [BKA], and to borrow sums from time to time for construction of improvements of the Property as nominee on behalf of and for convenience of Principal (and in borrowing such sums to execute such notes, deeds of trust, deeds of release, building loan agreements, construction and disbursing escrow agreements, security agreements, and such other documents as directed by Principal).

BKAI also agreed to execute leases at BKA's direction, and to convey the property to BKA on demand. BKAI was paid $500.00 for its services, and was to receive $10.00 for each executed lease.

In 1975, BKAI executed a deed of trust securing a promissory note to First National Bank in St. Louis in the amount of $125,600.00. In 1976, BKAI closed a permanent loan on the property with the First National Bank of Memphis for the amount of $3,965,600.00. In doing so, BKAI executed numerous documents, including a promissory note, a deed of trust, an assignment of rents and leases, a UCC financing statement, and a security agreement. The loan proceeds were disbursed by BKAI on direction of BKA. While no portion of the loan proceeds went to the benefit of BKAI, it was paid a fee for its services. On December 30, 1978, BKAI released and quitclaimed to BKA its record title to the land and apartments. BKAI had no other business in Tennessee or elsewhere.

T.C.A. § 67-4-903(a) provides that "[a]ll corporations ... organized for profit under the laws of this state or any other state or country and doing business in Tennessee ... shall ... pay to the commissioner of revenue, annually a privilege tax ...." The privilege tax is imposed at a rate of fifteen cents per $100.00 of the issued and outstanding stock, surplus and undivided profits of the corporation as shown by the last fiscal year's books and records. T.C.A. § 67-4-904(a). In no case, however, is the measure of the tax imposed to be less than "the actual value of the property owned, or property used, in Tennessee." T.C.A. § 67-4-906(a).

The Tennessee franchise and excise taxes are taxes on the privilege of doing business in Tennessee in corporate form. Navarre Corporation v. Tidwell, 524 S.W.2d 647 (Tenn.1975). They are not placed upon a particular corporate business or transaction, but upon the privilege of doing business as a corporation and exercising corporate powers for the purpose of producing a profit....