Cao Holdings Inc. v. Trost

• Decision Date: 04 June 2010
• Docket Number: No. M2008–01679–SC–R11–CV.,M2008–01679–SC–R11–CV.
• Citation: 333 S.W.3d 73
• Parties: CAO HOLDINGS, INC.v.Charles A. TROST, Commissioner of Revenue.
• Court: Tennessee Supreme Court

333 S.W.3d 73

CAO HOLDINGS, INC.

v.Charles A. TROST, Commissioner of Revenue.

No. M2008–01679–SC–R11–CV.

Supreme Court of Tennessee, at Nashville.

June 4, 2010 Session.Dec. 15, 2010.

Robert E. Cooper, Jr., Attorney General and Reporter; Michael E. Moore, Solicitor General; and Brad H. Buchanan, Assistant Attorney General, Nashville, Tennessee, for the appellant, Charles A. Trost,¹ Commissioner of Revenue, State of Tennessee.Brett R. Carter, Christopher A. Wilson, and G. Michael Yopp, Nashville, Tennessee, for the appellee, CAO Holdings, Inc.

OPINION

WILLIAM C. KOCH, JR., J., delivered the opinion of the Court, in which CORNELIA A. CLARK, C.J., JANICE M. HOLDER, J., and DAVID H. WELLES, SP. J., joined.WILLIAM C. KOCH, JR., J.

This appeal involves a corporation's liability for the payment of use tax following its purchase of a business jet. After it received an assessment from the Tennessee Department of Revenue for over $700,000, the corporation paid the tax and filed suit in the Chancery Court for Davidson County seeking a refund on the ground that it qualified for the sale for resale exemption under Tenn.Code Ann. § 67–6–102(a)(28)(A) (Supp.2004) because it had leased the aircraft to another corporation. Both the corporation and the Department filed motions for summary judgment. The trial court granted the corporation's motion for summary judgment, and the Department appealed. A divided Court of Appeals panel affirmed the trial court. CAO Holdings, Inc. v. Chumley, No. M2008–01679–COA–R3–CV, 2009 WL 1492230 (Tenn.Ct.App. May 27, 2009). We granted the Department's application for permission to appeal. We have now determined that neither party is entitled to a summary judgment because material disputes exist regarding the factual inferences or conclusions that can be drawn from the facts.

I.

James L. Clayton is a successful business executive who lives in Knoxville. He is also an accomplished pilot and owns or has owned various aircraft personally and in connection with his many businesses. Prior to the events that gave rise to this litigation, Mr. Clayton owned a Cessna Citation V Ultra business jet and a Bell 407 corporate helicopter. In 2002 or 2003, after deciding that he wanted a larger, quieter, and more comfortable aircraft, Mr. Clayton ordered a Cessna Citation Excel 560–XLS business jet. He later explained that the new aircraft would permit passengers to “walk up the stairs into the airplane much like you'd see the President of the United States walking into Air Force One” and that he could “even get a wheelchair in it, if necessary.”

The purchase price of the aircraft was $10,022,800. Mr. Clayton realized that this was a “very high price” for someone like him who planned to use the aircraft approximately 150 hours per year. He understood that the aircraft would need to be flown at least three times more often than he planned to fly it in order for its operating costs to be less than the cost of chartering or owning a timeshare in an aircraft. Accordingly, Mr. Clayton decided that “in order to justify that airplane, I had to have other people paying for part of it.”

While waiting on the delivery of his new airplane, Mr. Clayton obtained the assistance of Advocate Consulting Legal Group, PLLC (“Advocate Consulting”), a firm specializing in structuring transactions involving aircraft. ² On December 27, 2004, acting on advice from Advocate Consulting, Mr. Clayton incorporated two corporations—CAO Holdings, Inc. (“CAO Holdings”) and CAM Management, Inc. (“CAM Management”). Mr. Clayton was the sole shareholder and president of both corporations. The principal place of business of CAO Holdings and CAM Management was Mr. Clayton's personal residence, where he maintained an office.

CAO Holdings was created to insulate Mr. Clayton from personal liability for the operation of the new aircraft. Its role was to complete the transaction with Cessna and to hold title to the aircraft. The purpose of CAM Management was to arrange for the time sharing agreements for the use of the aircraft by third parties. CAM Management hired Peter Breazeale as its sole employee.³ Mr. Breazeale's responsibilities included piloting the aircraft, managing the aircraft's maintenance, and paying the company's bills.

On February 14, 2005, and in anticipation of the completion of the purchase of the aircraft, CAO Holdings filed registrations for sales and use tax and for franchise and excise tax with the Tennessee Department of Revenue (“Department”). The effective date of the sales and use tax registration was March 1, 2005; while the effective date of the franchise and excise tax registration was March 16, 2005.

On February 25, 2005, CAO Holdings took delivery of the new aircraft at Cessna's factory in Wichita, Kansas and finalized the sale of the aircraft using funds provided by Mr. Clayton personally. CAO Holdings did not pay Kansas sales tax when it purchased the aircraft based on its promise to provide Cessna with a blanket certificate for resale as soon as the Department issued it.⁴ After the transaction was completed, Mr. Breazeale flew the aircraft back to Tennessee. Mr. Clayton was co-pilot for part of this trip.

On February 25, 2005, the same day it purchased the aircraft, CAO Holdings entered into a “non-exclusive aircraft lease agreement” with CAM Management. Under the terms of this agreement, CAM Management agreed to lease the aircraft from CAO Holdings at a “dry lease” rate of $550 per flight hour with an initial $5,000 deposit due on March 31, 2005. CAM Management also agreed to be responsible for all operating costs of the aircraft. In addition, the agreement provided that CAM Management would pay the rent due to CAO Holdings on October 31 of each year. For its part, CAO Holdings agreed to calculate the sales tax due and to remit the tax to the Department.

CAO Holdings believed that its February 25, 2005 lease agreement with CAM Management was a valid exempt “resale” under Tenn.Code Ann. § 67–6–102(a)(28)(A) (Supp.2004). Accordingly, CAO Holdings did not remit use tax to the State of Tennessee when it purchased the aircraft.

According to its flight logs, the aircraft was flown fairly regularly beginning in March 2005. Mr. Clayton used the aircraft to visit his banks in Tennessee and to visit his banks' customers in Colorado, Arizona, and Florida. These flight logs list “CAO,” not CAM Management, as the “operator” of the aircraft and state that Mr. Clayton himself was either the pilot or co-pilot on a substantial number of the flights.

In order to have others pay for part of the aircraft's operations, Mr. Clayton “lined up” several other entities who “felt they'd use the plane 25 to 100 hours a year.” However, it was not until April 27, 2005, two months after taking delivery of the aircraft, that CAM Management began to enter into time sharing agreements with other entities.⁵ By this time, the aircraft had made eighteen separate flights, and Mr. Clayton had been the pilot or co-pilot on seventeen of them.

On June 8, 2005, after receiving information from the Federal Aircraft Administration regarding CAO Holdings's purchase of the aircraft, the State of Tennessee sent a letter to CAO Holdings requesting the information needed to determine whether the required sales or use tax had been paid on the aircraft. While the record does not clearly show that CAO Holdings responded directly to this letter, the company filed a tax return on July 11, 2005, stating that no tax was due.⁶ CAO Holdings later filed an amended return and remitted a $430 tax payment based on the $5,000 payment it had received from CAM Management on March 31, 2005. On August 5, 2005, the Department issued a notice of assessment seeking the payment of $703,232 for failure to pay use tax in Tennessee based on the estimated purchase price of the aircraft. CAO Holdings requested an informal taxpayer conference with the Department shortly after receiving the assessment.

It was at this time that Mr. Clayton began to experience buyer's remorse. In addition to receiving the Department's substantial tax assessment, Mr. Clayton was disappointed that those who had promised to use the aircraft were not using it as much as he had anticipated they would. Accordingly, on August 18, 2005, CAO Holdings stopped permitting CAM Management to use the aircraft and, with the assistance of Advocate Consulting, put the aircraft up for sale. A business in Argentina purchased the aircraft on September 6, 2005. On October 7, 2005, CAO Holdings filed its September 2005 tax return along with a $1,694 use tax payment.⁷

In late December 2005, the Department provided CAO Holdings with a written response to the informal taxpayer conference. The Department upheld its tax assessment based on the following findings: (1) CAM Management was not registered with either the Department or the Secretary of State; (2) CAO Holdings had failed to comply with the reporting requirements in Tenn.Code Ann. § 42–1–113 (2000) regarding aircraft transactions; (3) CAO Holdings had failed to comply with the regulations regarding sales for resale by failing to properly register with the Department; and (4) the lease between CAO Holdings and CAM Management was not genuine because Mr. Clayton had signed on behalf of both the lessor and lessee, the legal existence of the lessee (CAM Management) could not be verified, and CAO Holdings had failed to pay any tax until contacted by the Department.

On March 22, 2006, CAO Holdings filed suit in the Chancery Court for Davidson County seeking a declaratory judgment that the Department's assessment was invalid because its lease of the aircraft to CAM Management qualified as a sale under Tenn.Code Ann. § 67–6–102(a)(34)(A) (Supp.2004). On April 28, 2006, the Department issued a revised assessment in the amount of $779,521.57 based on the correct purchase price of the aircraft appearing in CAO Holdings's complaint. On May 18, 2006, CAO Holdings paid the...