Commercial Equities Corp. v. Tollett

• Decision Date: 24 March 1980
• Citation: Commercial Equities Corp. v. Tollett, 596 S.W.2d 801 (Tenn. 1980)
• Court: Tennessee Supreme Court
• Parties: COMMERCIAL EQUITIES CORP., Plaintiff-Appellant, v. Bob TOLLETT, Commissioner of Revenue of the State of Tennessee, Defendant-Appellee.

Page 801

596 S.W.2d 801

COMMERCIAL EQUITIES CORP., Plaintiff-Appellant, v.Bob TOLLETT, Commissioner of Revenue of the State of Tennessee, Defendant-Appellee.

Supreme Court of Tennessee.

March 24, 1980.

Stanly T. Snodgrass, Snodgrass & Kresge, Nashville, for plaintiff-appellant.

William M. Leech, Jr., Atty. Gen., Jim G. Creecy, Asst. Atty. Gen., Nashville, for defendant-appellee.

HENRY, Justice.

This is a suit for the refund of corporate franchise taxes paid under protest for the tax years 1972, 1973 and 1974.Plaintiff taxpayer is a Tennessee corporation engaged, according to its charter, in the business of "construction, ownership, sale, lease and other disposition of real property."During the tax years in question plaintiff's only business undertaking was the construction and lease of Airways Plaza, an office building complex located in Nashville.

For the years 1972, 1973 and 1974, plaintiff excluded from its corporate franchise tax base $1,102,052.00 in 1972, $273,804.00 in 1973, and $1,274,204.00 in 1974, amounts representing the value of construction in progress on the buildings comprising Airways Plaza.The Commissioner of Revenue determined that the amounts excluded should have been included in the franchise tax base and therefore made demand for payment of additional taxes, plus interest, in the amount of $5,238.95.Plaintiff paid this additional assessment under protest and sued to recover the sums paid.

The trial court dismissed the taxpayer's complaint, finding that the corporate taxpayer made "actual utilization" of the property within the meaning of Section 67-2908, T.C.A., ¹ and therefore was not entitled to the exemption provided by that section.

I.

Sections 67-2901, et seq., T.C.A., form the statutory basis for the corporate franchise tax which is imposed on the privilege of engaging in business in corporate form in Tennessee.Mid-Valley Pipeline Co. v. King, 221 Tenn. 724, 431 S.W.2d 277(1968).A minimum tax base is established under Section 67-2908, T.C.A.The provision reads, in pertinent part, as follows:

The measure of the tax hereby imposed shall in no case be less than the actual value of the property owned, or property used, in Tennessee.Provided, however, there shall not be included within the meaning hereof the value of any property while construction of same is in progress and, in addition thereto, there is no actual utilization of such property by the corporation either in whole or in part.²

The minimum tax base includes, then, the actual value of all property used or owned by the corporation in Tennessee, unless the property is under construction and is not being utilized, in whole or in part, by the corporation.

It is not disputed that this taxpayer's property the value of which was excluded from the franchise tax base was property under construction.The issue is whether there was "actual utilization" by the corporate taxpayer of that property in the conduct of its business.

The Commissioner contends that plaintiff made actual utilization of the construction in progress in doing its corporate business.The "construction in progress" which plaintiff taxpayer excluded from its corporate franchise tax base consisted of buildings erected by the corporation for use as rental property.Commercial Equities' business is the construction, ownership and lease of these buildings.It follows, according to the Commissioner, that plaintiff was using them in the conduct of his business within the meaning of Section 67-2908, T.C.A.

The corporate taxpayer argues that it utilized the construction in progress only when it began to lease the office space and obtain income from the property.Taxpayer maintains that the Legislature, in setting out the exemption clause in Section 67-2908, T.C.A., intended to exclude from the minimum tax base the type of property which is involved in this suit property under construction which is economically unproductive and provides no income or cash flow.

II.

The Court has previously faced this same question, presented in a factual situation very similar to the case at bar.It answered the taxpayer's argument in the negative.In Crown Enterprises v. Woods, 557 S.W.2d 491(Tenn.1977), the corporate taxpayer was in the business of building and selling homes.It excluded from its corporate franchise tax base the value of property being used during construction of residential units it was building for sale.The taxpayer argued, as does Commercial Equities here, that "actual utilization" within the meaning of Section 67-2908, T.C.A., occurred at the point at which taxpayer obtained the economic value of its capital investment.This Court rejected the taxpayer's argument and held that the property was actually utilized and that its value, therefore, could not be excluded from the minimum tax base."A corporation that is engaged in the business of building and selling houses is...