L. M. Berry & Co. vHuddleston

• Decision Date: 28 October 1999
• Docket Number: 98-00487
• Parties: L. M. BERRY & COMPANY, Plaintiff/Appellant, v. JOE B. HUDDLESTON, in his official capacity as COMMISSIONER OF REVENUE, STATE OF TENNESSEE, Defendant/Appellee. AppealA01-9809-APPEAL FROM THE CHANCERY COURT FOR DAVIDSON COUNTY AT NASHVILLE, TENNESSEE Filed
• Court: Tennessee Court of Appeals

L. M. BERRY & COMPANY, Plaintiff/Appellant,

v.

JOE B. HUDDLESTON, in his official capacity as COMMISSIONER OF REVENUE, STATE OF TENNESSEE, Defendant/Appellee.

Appeal No. 01 A01-9809-CH-00487

APPEAL FROM THE CHANCERY COURT FOR DAVIDSON COUNTY AT NASHVILLE, TENNESSEE

Filed October 28, 1999

Davidson Chancery No. 94-3189-I

THE HONORABLE IRVIN H. KILCREASE, JR., CHANCELLOR

This case concerns a suit for refund, under Tennessee Code Annotated section 67-1-1803, of excise taxes assessed as a result of an audit conducted by the Tennessee Department of Revenue's field audit division and covering tax years 1989-1991. The taxpayer, L. M. Berry and Company (LMB) sought the refund of $96,605.00 in excise tax, assessed on dividends declared by ITT World Directories, Inc. (ITTWD) and Promedia, S.A.(Promedia) and paid to LMB. LMB paid the assessed tax and brought suit for refund alleging that under Tennessee's version of the Uniform Distribution of Income for Tax Purposes Act, see Tenn. Code Ann. 67-4-801 et seq.; the dividends were not taxable as business earnings under section 67-4-804. In addition LMB argued that the inclusion of these dividends in LMB's income for excise tax purposes was inconsistent with the United States Constitution's Commerce clause and its Fourteenth Amendment Due Process provisions. On cross-motions for summary judgment, the chancellor dismissed LMB's complaint, holding as follows:

The court finds that the dividends received by the plaintiff from its affiliates ITTWD and Promedia during the audit period at issue are "business earnings" within the meaning of T.C.A. §67-4-804, and are subject to apportionment to Tennessee for purposes of the Tennessee Excise Tax, T.C.A. §67-4-801 et seq. The Court further finds that the Commissioner's application of the statutory apportionment formula to these earnings has not caused extraterritorial value to be taxed, and that the assessment is thus in accordance with the Due Process Clause and Commerce Clause of the United States Constitution.

From the grant of summary judgment below, LMB appeals.

RICHARD W. BELL, General Attorney, BellSouth Corporation, 1155 Peachtree Street, N.E., Suite 1800, Atlanta, Georgia 30309

GREGORY G. FLETCHER, Baker, Donelson, Bearman & Caldwell, 2000 First Tennessee Building, 165 Madison Avenue, Memphis, Tennessee 38103

JONATHAN COLE, Baker, Donelson, Bearman & Caldwell, 511 Union Street, Suite 1700, 1700 Nashville City Center, Nashville, Tennessee 37219

ATTORNEYS FOR PLAINTIFF/APPELLANT

PAUL G. SUMMERS, Attorney General and Reporter

JIMMY G. CREECY, Office of the Attorney General, 425 Fifth Avenue North, Nashville, Tennessee 37243

ATTORNEYS FOR DEFENDANT/APPELLEE

REVERSED AND REMANDED

WILLIAM B. CAIN, JUDGE

OPINION

I. TENNESSEE FRANCHISE AND EXCISE TAX AND "UNITARY BUSINESS THEORY"

Since this case concerns both Tennessee's statutory definition of "business earnings" as well as the constitutional application of unitary business theory, any discussion of the facts necessitates an explanation of how this tax law developed. The Court approves the concise summary of Tennessee's franchise and excise tax system in the brief on behalf of the commissioner. Appellee writes:

The tax at issue in this case, the excise tax, has been the major tax imposed on corporations by the State of Tennessee for over 75 years. Originally enacted in 1923, the excise tax, T.C.A. §§ 67-4-801, et seq., was most recently redrafted and adopted in 1976. The excise tax is upon the privilege of engaging in business in Tennessee in corporate form, First American Nat'l Bank v. Olsen, 751 S.W.2d 417 (1987), appeal dismissed, 485 U.S. 1001, 108 S.Ct. 1460, 99 L.Ed. 2d 691 (1988); Tennessee Growers, Inc. v. King, 682 S.W.2d 203 (Tenn. 1984) and is imposed at the rate of 6% "of the net earnings for the next preceding fiscal year for business done in this state." T.C.A. § 67-4-806(a). The other major tax on corporations, the franchise tax, is also a privilege tax "upon the privilege of doing business in corporate form in this state," T.C.A. § 67-4-903(a), and imposed at the rate of $.25 per $100 of issued and outstanding stock, surplus and undivided profits. T.C.A. § 67-4-904(a).

In the event that a corporation engages in business in Tennessee as well as other states, it is entitled to apportion its income and property for purposes of determining its tax liability. T.C.A. §§ 67-4-809 (excise tax) and 67-4-909 (franchise tax). Both taxes are considered in tandem and construed together as one scheme of taxation. American Bemberg Corp. v. Carson, 188 Tenn. 263, 272, 219 S.W.2d 169, 173 (1949); First American Nat'l Bank v. Olsen, 751 S.W.2d at 421. A state does possess inherent power to tax a non-domiciliary corporation's activities to compensate that State for the "protection, opportunities and benefits" the State confers on the corporation's activities within the State. Allied-Signal, Inc. v. Director, 504 U.S. 768, 112 S.Ct. 2251, 2258, 119 L.Ed.2d 133 (1992).

The Allied-Signal case, cited above, is considered one of the pantheon of cases charting the interplay between a state's ability to tax interstate entities doing business in the state on one hand, and the provisions of the Commerce Clause and the Due Process Clause of the United States Constitution on the other. See Art. I, §8, U.S. Const.; U.S. Const. amend. XIV. See also ASARCO, Inc. v. Idaho State Tax Comm'n, 458 U.S. 307, 102 S.Ct. 3103, 73 L.Ed. 2d 787 (1982); Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159, 103 S.Ct. 2933, 7 L.Ed.2d 545 (1983).

Allied-Signal concerned New Jersey's attempt to tax Allied-Signal Corp., a Delaware corporation doing business in all fifty states, for income received from the sale of stock in a New Jersey corporation principally located in New York. Justice Kennedy, writing for the majority, provided the following discussion of the unitary business principle:

Because of the complications and uncertainties in allocating the income of multistate businesses to the several States, we permit States to tax a corporation on an apportionable share of the multistate business carried on in part in the taxing state. That is the unitary business principle. It is not a novel construct, but one that we approved within a short time after the passage of the Fourteenth Amendment's Due Process Clause. We now give a brief summary of its development.

When States attempted to value railroad or telegraph companies for property tax purposes, they encountered the difficulty that what makes such a business valuable is the enterprise as a whole, rather than the track or wires that happen to be located within a State's borders. The Court held that consistent with the Due Process Clause, a State could base its tax assessments upon "the proportionate part of the value resulting from the combination of the means by which the business was carried on, a value existing to an appreciable extent throughout the entire domain of operation." Adams Express Co. v. Ohio State Auditor, 165 U.S. 194, 220-221, 17 S.Ct. 305, 309, 41 L.Ed. 683 (1987) (citing Western Union Telegraph Co. v. Attorney General of Massachusetts, 125 U.S. 530, 8 S.Ct. 961, 31 L.Ed. 790 (1888))...

Adams Express recognized that the principles that permit a State to levy a tax on the capital stock of a railroad, telegraph, or sleeping car company by reference to its unitary business also allow proportional valuation of a unitary business in enterprises of other sorts. As the Court explained: "The physical unity existing in the former is lacking in the latter; but there is the same unity in the use of the entire property for the specific purpose, and there are the same elements of value arising from such use." 165 U.S., at 221, 17 S.Ct., at 309.

The unitary business principle was later permitted for state taxation of corporate income as well as property and capital. Thus, in Underwood Typewriter Co. v. Chamberlain, 254 U.S. 113, 120-121, 41 S.Ct. 45, 47, 65 L.Ed. 165 (1920), we explained:

"The profits of the corporation were largely earned by a series of transactions beginning with manufacture in Connecticut and ending with the sale in other States. In this it was typical of a large part of the manufacturing business conducted in the State. The legislature in attempting to put upon this business its fair share of the burden of taxation was faced with impossibility of allocating specifically the profits earned by the processes conducted within its borders. It, therefore, adopted a method of apportionment which, for all that appears in this record, reached, and was meant to reach, only the profits earned within the State."

As these cases make clear, the unitary business rule is a recognition of two imperatives: the States' wide authority to devise formulae for an accurate assessment of a corporation's intrastate value or income; and the necessary limit on the State's authority to tax value or income that cannot in fairness be attributed to the taxpayer's activities within the State.

Allied-Signal, Inc. v. Director, Div. Of Taxation, 504 U.S.768, 778-80, 112 S.Ct. 2251, 2258-2259, 119 L.Ed.2d 533, (1992).

As is true of the case at bar, the Supreme Court stated in Allied Signal, "[i]t is this second component, the necessity for a limiting principle, that underlies this case." Allied-Signal, 504 U.S., at 780, 112 S.Ct., at 2259.

Regarding a working statutory and regulatory definition of "business earnings," our state statutes and rules provide the following:

"Business earnings" means earnings arising from transactions and activity in the regular course of the taxpayer's trade or business or earnings from tangible and intangible property if the acquisition, use, management or disposition of the property constitutes an integral part of the taxpayer's regular trade or business operations. In essence, earnings which arise from the conduct of the trade or trades or business operations of a taxpayer are "business earnings,"...