Malco Theaters Inc v. Roberts1
| Decision Date | 26 April 2011 |
| Docket Number | No. W2010-00464-COA-R3-CV,W2010-00464-COA-R3-CV |
| Parties | MALCO THEATERS, INC. v. RICHARD H. ROBERTS1, COMMISSIONER OF REVENUE, STATE OF TENNESSEE |
| Court | Tennessee Court of Appeals |
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Direct Appeal from the Chancery Court for Shelby County
Walter L. Evans, Chancellor
This appeal concerns the franchise tax liability of a corporation operating motion picture theaters in Tennessee. The Tennessee Department of Revenue assessed deficiencies against the corporation in 2001 and 2004 after audits revealed the corporation did not include the value of rented films within its minimum franchise tax base. The corporation filed separate lawsuits in chancery court disputing the assessments. After consolidating the cases, the chancery court granted summary judgment in favor of the corporation. We reverse the grant of summary judgment, grant partial summary judgment in favor of the Commissioner of Revenue, grant partial summary judgment in favor of the corporation, and remand.
and Remanded
Robert E. Cooper, Jr., Attorney General and Report, Michael E. Moore, Solicitor General, and Gregory O. Nies, Assistant Attorney General, Tennessee, for the appellant, Richard H. Roberts, Commissioner of Revenue, State of Tennessee.
James A. Delanis, John B. Burns, Nashville, Tennessee and William H. D. Fones, Jr., Memphis, Tennessee, for the appellee, Malco Theaters, inc.
OPINIONThe following facts are undisputed. The plaintiff/appellee, Malco Theaters, Inc. ("Malco"), is a corporation organized and existing under the laws of the State of Arkansas and qualified to do business in the State of Tennessee. Malco owns and operates motion picture theaters in Tennessee for profit. Malco at all times material to this lawsuit obtained reels of photographic film from multiple distributors to facilitate the exhibition of motion pictures in its theaters.2 Malco obtained these films under a series of universal film rental/license agreements ("film agreements"). The film agreements, while varying in certain aspects, were fairly uniform. Each agreement provided Malco a right to receive a film or "print" suitable for exhibition, which Malco could repair but not alter in any way, and a limited license to display the film to the public under specified terms.
The film agreements provided several options for calculating the costs of procuring the films and the attendant rights to display them, which Malco and the distributors negotiated on a picture-by-picture, theater-by-theater basis. Factors pertinent to these negotiations included: (1) the motion picture's previous or expected popularity, (2) the length of time during which the motion picture would run, (3) the time of year, (4) the demographics of the expected audience, and (5) the theater's previous history of drawing audiences. These costs typically correlated with the number of moviegoers paying admission to attend showings of a particular film. Malco and its distributors often determined the costs of procuring and displaying the films on either a percentage-of-receipts or per-capita-attendance basis.
Most of the film agreements described the costs of procuring and utilizing the films as "film rental," whereas others described the costs as "license fees." The Tennessee Department of Revenue (the "Department") determined monies paid under the film agreements equaled rents paid to obtain and use taxable tangible property: reels of physical film. The Department consequently issued separate notices of assessment against Malco in 2001 and 2004 after audits revealed the corporation did not include the net annual rental associated with the films in its minimum franchise tax base from 1997-2003. The first notice included an assessment for the period beginning January 1, 1997, and ending December 31, 1999, in the amount of $96,900.10 plus interest. The second notice included an assessment in the aggregate amount of $110,182.64 for the period beginning January 1, 2000, and ending December 31, 2003. The Department reduced the first assessment for unpaid franchise and excise taxes after an informal conference to $72,959.00 plus interest, which totaled $102,121.00.
Malco filed separate lawsuits against the Commissioner of Revenue for the State of Tennessee ("Commissioner") pursuant to Tennessee Code Annotated section 67-1-1801(a)(1)(B) asserting the assessed deficiencies were illegal, invalid, and incorrect. Malco requested the chancery court set aside the assessments, including all taxes and interest due thereunder, and award the corporation attorney's fees and expenses pursuant to Tennessee Code Annotated section 67-1-1803(d).3 Commissioner responded with answers denying Malco's legal assertions and seeking awards of attorney's fees and expenses pursuant to Tennessee Code Annotated section 67-1-1803(d). The chancery court consolidated these cases and litigation ensued.
The parties eventually filed competing motions for summary judgment supported by affidavits, statements of undisputed facts, memoranda of law, and other filings. Commissioner argued the Department properly assessed deficiencies against Malco for unpaid franchise taxes during the period in question. Commissioner asserted the Department properly characterized the films as tangible property subject to the franchise tax set forth at Tennessee Code Annotated section 67-4-2104 (Supp. 1999), explaining the Tennessee Supreme Court had concluded under a similar tax statute "that the rental or leasing of these moving picture films by exhibitors in Tennessee is a rental or leasing of tangible personal property... and that the correct measure of the tax is the gross amount of rent paid." Crescent Amusement Co. v. Carson, 213 S.W.2d 27, 29 (Tenn. 1948). Commissioner further asserted the rented films qualified as "equipment" for the purposes of valuation pursuant to Tennessee Code Annotated section 67-4-2108(a)(3) (Supp. 1999).
Malco disagreed with Commissioner's legal position. Malco characterized the costs associated with procuring and displaying motion pictures in its theaters as "movie license fees" that the distributors charged based on the value of the films as intangible intellectual property. Malco rejected Commissioner's assertion that decisions treating the rental of films as rental of tangible property under the sales tax statutes of Tennessee and other states controlled the outcome of a case arising under the franchise tax statute. Malco further argued that rented films and/or movie licenses, even if they were tangible property, were not includable within the corporation's franchise tax base because they did not fall squarely within one of the four categories of rented property subject to the franchise tax. In the alternative, Malco argued the films qualified as "mobile equipment" for the purposes of valuation.
Malco offered a 1965 opinion of the Office of the Attorney General ("1965 opinion") in support of its position that the assessments were improper and illegal. The 1965 opinion stated, inpertinent part:
[O]utside the contemplation of the leased property concept would appear to be those instances where is [sic] is impossible for the corporation carrying on its chartered business to have title to the property of others which it uses for a consideration. A corporation operating a theater could not conceivably purchase the film which it shows to its patrons as its primary business. It can be obtained only from a rental agency. It is to be remembered that the underlying purpose of including the value of leased property in the minimum tax base is to prevent the avoidance of franchise tax by the artifice of leasing rather than owning property necessary to the carrying on of a corporation's chartered purposes. Additionally, property other than that listed in the leased property provisions of § 67-2909, T.C.A. should be regarded as outside its contemplation.
According to Malco, the 1965 opinion correctly recognized rented films were not includable within a corporation's franchise tax base and, thus, Malco was entitled to summary judgment.
The chancery court resolved the competing motions for summary judgment in favor of Malco. The court reasoned that "movie license fees" were not tangible property subject to inclusion in Malco's franchise tax base. Additionally, the court found neither the "movies" nor the "movie licenses" were taxable tangible property because they did not squarely fall within one of the four categories of Tennessee Code Annotated section 67-4-2108(a)(3), as strictly construed against the taxing authority. In the chancery court's view, "the uncontroverted facts" established Malco's movies and movie license agreements were not "real property;" "machinery and equipment used in manufacturing and processing;" "furniture, office machinery and equipment;" or "delivery or mobile equipment." The chancery court held, in the alternative, Commissioner could not include the films within Malco's minimum franchise tax base even if the films constituted taxable tangible property, citing Tennessee Code Annotated section 67-1-108.4 The court accepted Malco's argument that the 1965 opinion represented the established policy of the Department regarding taxation of rented films under the franchise tax statute and concluded Commissioner's current interpretation of the statuteviolated that longstanding policy as to the tax years in dispute.5 In light of these conclusions, the chancery court granted summary judgment to Malco and denied Commissioner's motion for summary judgment. Commissioner timely appealed.6
The issues before this Court, as we perceive them, are as follows:
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