Niuklee, LLC v. Comm'r
| Decision Date | 09 November 2015 |
| Docket Number | No. M2014-01644-COA-R3-CV,M2014-01644-COA-R3-CV |
| Court | Tennessee Court of Appeals |
| Parties | NIUKLEE, LLC, v. COMMISSIONER, TN DEPT. OF REVENUE |
Appeal from the Chancery Court for Davidson County
Ellen H. Lyle, Chancellor
The Commissioner of Revenue assessed a tax based on the taxpayer's use of an aircraft purchased out of state. Taxpayer sought review from the Tennessee Department of Revenue but was denied relief following an informal hearing. Taxpayer paid the tax and filed a complaint in the Chancery Court for Davidson County seeking a refund on the ground that it qualified for the sale for resale exemption in the Tennessee Retailers' Sales Tax Act because it provided the seller with a certificate of resale and immediately leased the aircraft to third party users. The Department responded, arguing that the leases did not satisfy the exemption's "bona fide sale" requirement. Following a non-jury trial, the Chancery Court reversed the Department's assessment, concluding that the exemption applied because (1) the leases were legitimate and not illusory and were not chiefly motivated by tax avoidance, (2) the economic substance doctrine has not been adopted in Tennessee to analyze the "bona fide sale" requirement, and (3) the Department failed to present proof sufficient to pierce the corporate veil of the taxpayer. The Department appealed. Discerning no error, we affirm.
Tenn. R. App. P. 3 Appeal as of Right: Judgment of the Chancery Court Affirmed and Remanded
Herbert H. Slatery, III, Attorney General and Reporter; Andrée S. Blumstein, Solicitor General; and Nicholas G. Barca, Senior Counsel, Nashville, Tennessee, for the appellant, Richard H. Roberts, Commissioner of Revenue, State of Tennessee.
Brett R. Carter, Nashville, Tennessee, for the appellee, Niuklee, LLC.
OPINIONIn January 2004, Robert Klee and Charles Ingram founded Hometown Quotes, LLC ("Hometown"), an insurance shopping portal that provided insurance price quotes to consumers and sold consumer information to insurance carriers. They each had a 50% ownership interest in the company and shared equal control of all business decisions. Hometown grew rapidly, with more than 40 employees and revenues over $1 million per month by 2008. As the company grew, Klee and Ingram were increasingly required to travel around the country to attend conventions and meet with insurance agents. In early 2008, Klee, who was taking private flying lessons at the time, decided that the increased travel demands justified the purchase of an aircraft to make Hometown's business calls. Klee also wanted access to an aircraft for personal use. Klee testified that he discussed the possibility of purchasing an aircraft through Hometown with Ingram, but Ingram indicated that he would not approve of the purchase.
Although Klee lacked the authority to purchase an aircraft on behalf of Hometown without Ingram's approval, he still wanted access to an aircraft for personal use and use in connection with Hometown's business. After speaking with his attorneys and accountant, Klee retained the assistance of Advocate Consulting Legal Group, PLLC ("Advocate Consulting"), a law firm specializing in structuring transactions involving aircraft. In April 2008, acting on the advice of Advocate Consulting, Klee formed a Delaware limited liability company, Niuklee, LCC ("Niuklee"). Klee was the 98% owner and chairman of Niuklee; Klee's wife, Wenying Niu, was the 2% owner and secretary of the company. The principal place of business of Niuklee was Hometown's office. The purpose of Niuklee was to purchase and hold title to the aircraft and to lease it to Hometown and Klee.
On April 2, 2008, Niuklee purchased a Cessna Skylane C-182T for approximately $360,000 from a company in Ohio and entered into lease agreements with Hometown and Klee.1 In December 2008, Niuklee traded that aircraft for a $329,000 credit towards the purchase of the aircraft at issue in this case, a Cessna C-400, from the same company. The purchase price of the Cessna C-400 aircraft was $620,000. To pay the balance owed on the first aircraft and the remainder of the Cessna C-400 purchase price, Niuklee took out a $325,000 bank loan, and Klee and his wife paid approximately $300,000 of their ownmoney.2 Rather than pay sales tax on the purchase price of the Cessna C-400 aircraft, Niuklee provided the seller with a blanket certificate of resale.
After completing its purchase of the Cessna C-400 aircraft, Niuklee entered into new lease agreements with Hometown and Klee. Under the terms of its lease with Hometown, Niuklee agreed to lease the aircraft to Hometown for business use at a rate of $80 per flight hour, and Hometown agreed to be responsible for all operating costs of the aircraft. Under the terms of its lease with Klee, Niuklee agreed to lease the aircraft to Klee for noncommercial transportation at a rate of $183 per flight hour, less the cost of fuel. Niuklee did not lease the plane to any parties other than Hometown and Klee.
In early 2009, Hometown's business declined sharply and never recovered. Over the course of the next three years, Hometown gradually laid off all of its employees. Ingram left the company in 2011, and, in 2012, Klee sold Hometown for $1.2 million, all of which was used to cover its debts. As Hometown's business declined, so did its need to use the plane. As a result, Niuklee struggled financially, and Klee, Niu, and Hometown frequently transferred money into its bank accounts to cover its expenses. According to its flight logs, Hometown and Klee began using the aircraft in December 2008. Niuklee's annual rental calculations reflect that between 2009 and 2011, Niuklee leased the aircraft to Hometown for approximately 377 flight hours and to Klee for approximately 15. During that three-year period, Niuklee collected and remitted $2,286 to the Department in sales tax on its income from the leases. In March 2012, Niuklee sold the aircraft for approximately $485,000.
After discovering Niuklee's purchase of the Cessna C-400 aircraft, the Department sent a letter to Niuklee requesting the information needed to determine whether the required sales or use tax had been paid on the aircraft. Niuklee apparently did not respond to the Department's request, and the Department calculated the amount of tax and interest due based on an estimated value of $400,000 for the aircraft. On June 9, 2010, the Department issued a notice of assessment seeking payment of $28,080, plus interest, from Niuklee for its failure to pay use tax in Tennessee. Shortly after receiving the assessment, Niuklee requested an informal taxpayer conference with the Department. Niuklee maintained that the sale-for-resale exemption applied and that it was therefore not required to pay use tax on the cost of the aircraft.
In December 2010, the Department provided Niuklee with a written response to the informal taxpayer conference. The Department upheld its tax assessment based on the finding of its auditor that Niuklee and Hometown were owned and operated by the same persons. The Department further concluded that the lease transactions between the twoentities were part of a scheme to avoid paying sales and use taxes on the purchase price of the airplane. Though the Department acknowledged that Niuklee disputed that characterization of its relationship with Hometown, the Department concluded that Niuklee had not presented sufficient proof to overturn its tax assessment. Later, after learning that Niuklee purchased the Cessna C-400 aircraft for $620,000, the Department issued a revised assessment seeking a payment of $43,480 plus interest.
On February 22, 2011, Niuklee filed suit against Richard H. Roberts, the Commissioner of Revenue for the State of Tennessee, in the Davidson County Chancery Court seeking a declaratory judgment that the Department's assessment was invalid because Niuklee's lease of the aircraft to Hometown qualified as a "sale" under Tennessee Code Annotated Section 67-6-102(78)(A) (Supp. 2015).3 Niuklee asserted that because it purchased the aircraft with the intent to resell it and did, in fact, resell it in accordance with the Department's regulations, the purchase constituted a "sale for resale" within the meaning of Section 67-6-102(75)(A) and was therefore exempt from sales and use tax. On May 3, 2011, the Department filed an answer to Niuklee's complaint and a counterclaim seeking a judgment against Niuklee for the amount of the unpaid taxes, plus interest.
Following a lengthy period of discovery, both Niuklee and the Department filed cross motions for summary judgment on October 18, 2013. In its motion for summary judgment and supporting documents, Niuklee emphasized that it was a legal entity separate from the aircraft lessees and argued that its purchase and lease of the aircraft satisfied the "bona fide sale" requirement of the sale for resale exemption in accordance with Tennessee's sales and use tax law. Conversely, the Department argued that summary judgment should be entered in its favor for $43,480, plus interest and attorney's fees, because Klee created Niuklee to purchase and lease the aircraft solely to avoid tax liability. The Department asserted that Niuklee had no reasonable possibility of generating a profit on its own and served no business purpose other than to avoid tax liability.
Following a hearing, the trial court entered an order denying both cross motions for summary judgment. The trial court noted that one of the parties' primary disputes was the legal effect of the General Assembly's addition of the bona fide sale requirement to the sale for resale exemption in 2008.4 The trial court also noted that many of the material facts of the case were undisputed. Nevertheless, the trial court concluded that a trial would be...
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