Memphis Peabody Corp. v. MacFarland

• Decision Date: 07 February 1963
• Citation: 15 McCanless 384,365 S.W.2d 40,211 Tenn. 384
• Parties: , 211 Tenn. 384 MEMPHIS PEABODY CORPORATION v. Alfred T. MacFARLAND, Commissioner of Revenue, State of Tennessee.
• Court: Tennessee Supreme Court

Page 40

365 S.W.2d 40

15 McCanless 384, 211 Tenn. 384

MEMPHIS PEABODY CORPORATION v. Alfred T. MacFARLAND, Commissioner of Revenue, State of Tennessee.

Supreme Court of Tennessee.

Feb. 7, 1963.

H. A. McBridge, Memphis, Armstrong, McCadden, Allen, Braden & Goodman, Memphis, of counsel, for appellant.

George F. McCanless, Atty. Gen., Milton P. Rice, Walker T. Tipton, Asst. Attys. Gen., Nashville, for appellee.

WHITE, Justice.

This case presents the question of whether a corporation using leased property in the conduct of its business is properly required in computing its franchise tax to include in the minimum measure thereof the assessed value of such leased property, under T.C.A. § 67-2909.

The Commissioner assessed the tax. It was paid under protest under T.C.A. § 67-2303. This action was then commenced pursuant to T.C.A. § 67-2305 to recover said sum so paid.

Appellant is a Tennessee Corporation engaged in the business of operating the Peabody Hotel in Memphis. In the operation of said Hotel it leases all of the real property and improvements thereon from Peabody Hotel Corporation, a separate corporate entity which holds legal title to said real property and improvements. For the tax years in question, the lessor, Peabody Hotel Corporation, paid its franchise tax and included in the measure thereof the real property and improvements leased to the appellant. Appellant for the same years did not include the value of said property in the measure of its franchise tax.

The value of said real property and improvements thereon is not carried upon appellant's books and records. The amount of the rental paid is shown on the records as an expense item.

This case was heard and determined upon bill, answer and depositions of witnesses, from all of which it appeared to the Chancellor that the appellant was liable for the additional taxes and, therefore, the bill herein was dismissed.

T.C.A. § 67-2902 makes provision that all corporations organized under the laws of this State, except those for general welfare, shall pay annually a franchise tax, which is imposed against such corporations for the privilege of engaging in business in corporate form in this State and is in addition to all other taxes levied by any other law of the State.

The amount of such tax is fifteen (15cents) cents per $100.00, or major fraction thereof, of the issued and outstanding stock, surplus and undivided profits of the corporation as shown by its books and records at the close of the calendar or fiscal year.

The statute for construction herein may be found in T.C.A. § 67-2909, the pertinent portions of which are:

'The measure of the tax hereby imposed shall in no case be less than the value of the real and tangible personal property owned or used by such corporation in this state as shown by the books and records of such corporation at the close of its last calendar or fiscal year * * *.' (Emphases supplied.)

It is shown that the value of said property is not carried on the books of the appellant, because it does not own said property. It would be in violation of good accounting practices to do so. This real property under lease to the appellant could never in any case be considered an asset of the corporation. Of course, the leasehold may or may not be considered an asset depending upon the value or lack of value thereof.

While it is true that the lessee corporation used the property under lease to it, it did so only to the extent permitted by the lease agreement. The appellant was in reality using the leasehold which has a diminishing value commensurate with the time it has to run.

It would be highly inequitable and completely unjust, in our opinion, to require the taxpayer to include in its return the value of said real property which it in no way owns, but in which it does have a leasehold interest limited by time. It is this interest which may or may not have a value to the taxpayer.

In the case of State v. Grosvenor, 149 Tenn. 158, at page 167, 258 S.W. 140, at page 142, it was held:

'If property is rented for its full value, if it costs the lessee all its worth, then the leasehold has no separate or taxable value. The value of a leasehold is to be based on the difference between the rent paid and the value of the use of the property. In most cases the leasehold is worth nothing, for property is ordinarily rented for the value of its use.'

Again in the same case the Court said:

'In the case before us there was no effort to separately assess the leasehold of defendant Loew's Metropolitan Theatre Company. The assessment was made upon the property as a whole--really upon the reversion. There was no attempt to value the leasehold separately, and such an assessment is therefore void against the lessee.'

Statutes of taxation are to be strictly construed against the taxing authority and, therefore, liberally construed in favor of the taxpayer. These being accepted legal and equitable principles, we are of the opinion that the Legislature never intended that the value of real property, as herein, be included in the returns filed by two separate corporate entities for the purpose of measuring a franchise tax to be paid by each. City of Memphis v. Bing, 94 Tenn. 644, 30 S.W. 745; Gulf Refining Co. of Louisiana v. City of Chattanooga, 136 Tenn. 505, 190 S.W. 463; ...