Cook Export Corp. v. King
| Citation | 617 S.W.2d 879 |
| Parties | COOK EXPORT CORPORATION, Plaintiff-Appellee, v. John K. KING, Commissioner of Revenue of the State of Tennessee, Defendant-Appellant. |
| Decision Date | 26 May 1981 |
| Court | Supreme Court of Tennessee |
Frank L. Watson, Jr. & Louis Jay Miller, Waring, Cox, Sklar, Allen, Chafetz & Watson, Memphis, for plaintiff-appellant.
Jim G. Creecy, Deputy Atty. Gen., Nashville, for defendant-appellant; William M. Leech, Jr., Atty. Gen., Nashville, of counsel.
In this action Cook Export Corporation, a wholly owned corporate subsidiary of Cook Industries, Inc., seeks refund of corporate excise and franchise taxes for the years 1972 and 1973. During those years it did business in no other state than Tennessee, nor did it have any corporate officers, directors, offices, or employees in any other state during that period. Nevertheless the corporation contends it is wholly exempt from Tennessee corporate taxation upon the ground that it is nothing more than an "accounting entity" or "incorporated file drawer" and does not "do business" in Tennessee or in any other state. The Chancellor granted summary judgment to the plaintiff, sustaining its insistence as a matter of law, and the Commissioner has appealed. We reverse and remand for further proceedings.
Cook Industries, Inc., is a corporate conglomerate, having many subsidiaries and affiliate corporations. It is engaged in numerous domestic and foreign enterprises, including the export of grain and other commodities. It took advantage of congressional legislation, I.R.C. §§ 991-997, to create Cook Export Corporation, a wholly-owned subsidiary, in order to gain favorable income tax treatment for the parent's foreign export operations.
One of the basic requirements of the federal legislation is that such a subsidiary, known as a Domestic International Sales Corporation (DISC), be a legally incorporated and structured corporation under the laws of one of the states or of the District of Columbia. Cook Export Corporation was chartered under the laws of Delaware, with its parent, Cook Industries, Inc., being the sole stockholder. The charter is not in the record, but it is stipulated that six hundred shares of the common stock of a par value of five dollars each were issued to the parent, representing paid-in capital of three thousand dollars. It is stipulated that the parent has its principal office and place of business in Memphis, Tennessee, as does the subsidiary. Corporate officials of the parent are also the corporate officers and directors of the subsidiary. The subsidiary has a president, a vice president, a secretary, a treasurer, a comptroller, and two assistant secretaries. It adopted a corporate seal and was fully organized as a separate legal entity.
Numerous lengthy, detailed contracts were entered into between the parent and the subsidiary, all of them being executed in Memphis, Tennessee, and each reciting that the subsidiary had its principal office and place of business there. All of the contracts, except two, were to be construed according to the laws of the United States and the laws of the State of Tennessee. In addition, the subsidiary entered into sales contracts with Riverside Industries, Inc., a Mississippi corporation, also having its principal office in Memphis at the corporate headquarters of Cook Industries, Inc.
While it is quite apparent, and indeed is stipulated, that the purpose for the creation of the subsidiary was to enable the parent to take advantage of favorable federal income taxation, this, in itself, in our opinion does not exempt the subsidiary from state corporate taxation. All corporations are legal fictions, and all are created for business purposes of one type or another. Most subsidiaries are controlled, in large degree, by their parents and are created for business purposes, frequently including tax considerations, of the parent.
Appellee contends that this properly organized and chartered subsidiary corporation does not do business in Tennessee or in any other place and that in effect it is a mere phantom. We do not find that this contention is sustained by the record. The subsidiary entered into binding legal contracts with the parent which were amended from time to time. Under these the parent paid to it sales commissions on foreign sales. During the two tax years in question the parent funneled more than forty-two million dollars of income into the subsidiary, which was responsible for billings and collections on specified export sales. The subsidiary also entered into a contract with the parent under which it agreed to purchase accounts receivable from the parent, and in fact it did purchase large amounts of these. Separate books and records of the subsidiary were carefully kept. Clearly it would protest strenuously if federal tax authorities should contend that it was not a properly constituted separate corporate entity as required by the federal legislation involved. Its officers and directors declared dividends out of its earnings payable to the parent. The Tennessee Commissioner of Revenue allowed the parent to exclude these from its corporate earnings for excise tax purposes pursuant to the provisions of T.C.A. § 67-2701 et seq., 1 governing dividends from wholly-owned subsidiaries.
During the tax years in question the subsidiary did not pay state franchise or excise taxes, or their equivalent, to any other state of the United States. All of its contracts were executed in Tennessee, and all directors' meetings and management decisions occurred in this state. In our opinion the making of substantial contracts involving the receipt and disbursement of millions of dollars, the keeping of books and records and the complicated accountings incident to these contracts, the payment of corporate dividends, banking, the purchase and handling of accounts, and the management of corporate affairs constitute "doing business" within the purview of the Tennessee corporate franchise and excise tax laws.
Like appellee, many subsidiary corporations do not have separate employees or payrolls, but this does not mean that they lack corporate existence or do not do business within the meaning of the statutes under consideration. It is untenable for the parent to contend that this subsidiary does not effectively exist for purposes of state taxation and yet insist that it does exist as a viable legal entity for purposes of federal taxation. The record clearly shows that this subsidiary exercised its corporate franchise in Tennessee and received substantial earnings under financial arrangements with its parent. 2
The fact that parties may conduct business transactions in such a way as to take advantage of federal taxation does not necessarily entitle them to exemption from state taxation under other and different statutes. See Tidwell v. Berke, 532 S.W.2d 254 (Tenn.1975). Nor will parties which have deliberately adopted a corporate structure and form be permitted to disregard these when they become disadvantageous. In the case of Widdicombe v. McGuire, 221 Tenn. 601, 429 S.W.2d 815 (1968), a corporation had brought suit in the chancery court. Later it was to the procedural advantage of its principal stockholder to contend that the corporation was merely a sham or shell without separate legal existence apart from him. Rejecting that contention, and quoting from a decision of the United States Supreme Court, this Court said:
"There is shown no basis upon which we would be justified in saying that throughout all of the multiple transactions reflected in this record the corporation was a mere shell or sham, whose existence should be disregarded. We think that the following statement by the United States Supreme Court is appropriate:
" 221 Tenn. at 607-608, 429 S.W.2d at 817-818.
Numerous issues raised in the complaint were not considered by the Chancellor because of his ruling that the subsidiary, in effect, lacked separate corporate existence and was not "doing business." We reverse that decision and remand the case to the Chancery Court for further proceedings and development of other issues, including the right, if any, of the subsidiary to claim the benefit of an apportionment of its earnings among Tennessee and other states. 3
The judgment of the Chancellor is reversed and the cause is remanded for further proceedings consistent herewith. Costs incident to this appeal will be taxed to the appellee. All other costs will be fixed by the Chancellor.
T.C.A. §§ 67-2702 and 67-2902 as they exist now and as they existed during the tax years in question impose corporate excise and franchise taxes upon, "all corporations, ... organized for profit under the laws of this state or any other state or country and doing business in Tennessee, ...." Thus, a corporation is not subject to excise and franchise taxation simply because it is organized for profit. The corporation must also be "doing business in Tennessee" during the year of the assessment. The term "doing business" is not defined anywhere in the chapter on franchise taxes or the chapter on excise taxes. Therefore, the task of defining the term is left to the courts. Since there have been several decisions setting forth the perimeters of the term "doing business," I feel a review of these decisions is not only helpful but necessary.
Tennessee cases construing the...
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...1982); Bunge Corp. and Bunge Export Corp. v. Commissioner of Revenue, C.C.H. Minnesota Tax Reports, 200.988 (1980); Cook Export Corp. v. King, 617 S.W.2d 879 (Tenn.1981). ...
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...that appellant was not doing business in Tennessee and was thus not subject to franchise and excise taxation. Cook Export Corp. v. King, 617 S.W.2d 879 (Tenn.1981). The taxes are imposed on "[a]ll corporations ... organized for profit ... and doing business in Tennessee." T.C.A. §§ 67-2702,......
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