Scott Bldg. Supply Corp. v. Mississippi State Tax Commission

• Decision Date: 26 January 1959
• Docket Number: No. 40875,40875
• Citation: 108 So.2d 557,235 Miss. 22
• Parties: SCOTT BUILDING SUPPLY CORPORATION and AMERICAN EMPLOYER'S INS. CO. v. MISSISSIPPI STATE TAX COMMISSION, Noel Monaghan, Chairman.
• Court: Mississippi Supreme Court

Page 557

108 So.2d 557

235 Miss. 22

SCOTT BUILDING SUPPLY CORPORATION and AMERICAN EMPLOYER'S INS. CO. v. MISSISSIPPI STATE TAX COMMISSION, Noel Monaghan, Chairman.

No. 40875.

Supreme Court of Mississippi.

Jan. 26, 1959.

Ben Ferrell Mitchell, Cleveland, for appellant.

John E. Stone, Jackson, for appellee.

KYLE, Justice.

This case is before us on appeal by Scott Building Supply Corporation, hereinafter referred to as the appellant, and the surety on its appeal bond, from a decree of the Chancery Court of the First Judicial District of Hinds County sustaining an additional assessment of franchise taxes made by the Chairman of the State Tax Commission against the appellant, Scott Building Supply Corporation, for the years 1954, 1955 and 1956, and awarding a judgment against the appellant and said surety for the amount claimed to be due.

The record shows that the appellant, Scott Building Supply Corporation, is a Tennessee corporation, qualified to do business in Mississippi; that its main office and place of business is located at Cleveland, in Bolivar County, Mississippi; that all of its business is transacted within the State of Mississippi; and that all of its assets are situated in the State of Mississippi.

The record also shows that during the year 1949 the appellant applied to the Cleveland State Bank and the Reconstruction Finance Corporation for a loan in the sum of $100,000, and that the application was finally approved by the Reconstruction Finance Corporation. Before agreeing to participate in the loan, however, the Reconstruction Finance Corporation required that an appraisal be made of the appellant's assets, and that the appellant submit balance sheets showing its assets valued according to the appraisal, and that the appellant also agree to submit periodic financial reports to the Reconstruction Finance Corporation from time to time based upon the appraised value of its assets. An appraisal of the assets of the appellant corporation was duly made in compliance with the Reconstruction Finance Corporation requirements; and after the making of the appraisal the appellant corporation caused to be entered upon its books the increased valuations of the assets as shown by the appraisal, and the amount of the increase over and above the cost values was entered on the books as a 'Revaluation Surplus'. The loan was made by the Cleveland State Bank pursuant to a participation agreement entered into by the Reconstruction Finance Corporation, by the terms of which the Reconstruction Finance Corporation agreed to participate in an amount equal to 70 percent of the loan. The loan was secured by a mortgage deed of trust on the physical properties of the appellant corporation and additional collaterals, which included an assignment of a $25,000 life insurance policy on the life of George E. Scott, principal stockholder of the appellant corporation, and also an assignment of 350 shares of the capital stock of the Merigold Building Supply Company, which was owned by the appellant corporation, and a mortgage deed of trust on the land and buildings and automotive equipment owned by the Merigold company, and also the unconditional guarantee of George E. Scott and Mrs. Sadie W. Scott.

In the course of an audit of the appellant's franchise tax returns for the years 1954, 1955 and 1956 by representatives of the State Tax Commission, it was found that the appellant had failed to include in the measure of the tax shown to be due for each of those years the increase in the value of the corporate assets reflected in the appraisal made at the instance of the Reconstruction Finance Corporation in 1949 and the 'revaluation surplus' shown on its balance sheets and its books of account; and on August 24, 1956, the Commissioner made an additional assessment of franchise taxes against the appellant for each of those years aggregating the sum of $710.35, and notified the appellant of the additional assessment. The assessment was based upon information obtained from the appellant's balance sheets and other records relating to the increased valuations of the corporate assets shown by the above mentioned appraisal. The appellant protested the additional assessment, and after a hearing the Commissioner disallowed the protest. An appeal was taken to the State Tax Commission, and the Commission on review overruled the appellant's objections and approved the assessment. The appellant then filed its petition in the Chancery Court requesting a hearing of the case on its merits, as provided by Section 7 of Chapter 412, Laws of 1956 (Section 9328, Miss.Code of 1942 Rec.).

In its petition for a hearing of the case on its merits the appellant stated the facts relating to the loan obtained by the appellant from the Reconstruction Finance Corporation in 1949 and the appraisal of the corporate assets at that time. The appellant stated that the appraisal was made pursuant to a requirement of the Reconstruction Finance Corporation, and that a pro forma balance sheet was submitted to the Reconstruction Finance Corporation showing the assets valued in accordance with the appraisal values. The appellant also stated in its petition that the requirements of the loan agency included a requirement that the appellant submit periodic financial reports to the loan agency based upon the appraisal values, and that, for convenience in maintaining a permanent record of the appraisal values, as distinguished from the values which reflected the cost of the assets, the appellant entered upon its books of account the amounts by which the appraised values exceeded the cost values, and in order to balance its books the appellant entered the same amount on the credit side of its books as a 'Revaluation Surplus'. The appellant stated that, in filing its annual franchise tax returns since 1949, it had not included the 'revaluation surplus' in the measure of the tax shown to be due, as defined in Section 9317, Miss.Code of 1942 Rec., and because of its failure to do so the State Tax Commission had imposed an additional assessment for each of the years 1954, 1955 and 1956, amounting to $710.35. The appellant alleged that the additional assessment was unlawful for the reason that the 'revaluation surplus', as shown in the appellant's books of account, was a reserve representing a valuation account, a mere bookkeeping entry, and was therefore specifically exempt by statute, and that the Commission, in making the additional assessment, was seeking to levy the tax upon the value of the appellant's property, instead of the 'value of the capital used, invested or employed within this state,' as provided by the statute. Code 1942, Sec. 9314.

The appellee in its answer admitted that the additional assessment of franchise taxes had been made against the appellant because of the failure of the appellant to include in the measure of the tax shown to be due in the returns filed the increased value of the corporate assets reflected in the appraisal made at the instance of the Reconstruction Finance Corporation prior to the making of the loan to the appellant in 1949, and shown as a 'revaluation surplus' on the appellant's books of accounts. The appellee in its answer denied that the 'revaluation surplus' represented a mere bookkeeping entry, and the appellee averred in its answer that the appellant had obtained the loan from the Reconstruction Finance Corporation only after its property had been appraised and its true value placed upon the books of account, and that the entry reflected the increased values of the appellant's capital assets. The appellee denied that the assessment was invalid, and asked that the petition be dismissed.

It was agreed at the beginning of the hearing before the chancellor that there was no dispute as to the amount of the tax claimed to be due. The appellant's attorneys admitted that, if the appellant owed any of the tax, it owed all of it.

N. L. Cassibry, Sr., President of the Cleveland State Bank, was called to testify as a witness for the Scott Building Supply Corporation. Cassibry stated that the application for a deferred participating agreement, whereby the Reconstruction Finance Corporation would participate in the $100,000 loan up to 70 percent, was filed by the Cleveland State Bank with the Reconstruction Finance Corporation on May 11, 1949, on RFC Form L-377. The names of the borrowers, as stated in the application, were Scott Building Supply Corporation and Merigold Building and Supply Company. The application stated that the business of Scott Building Supply Corporation was 'retail lumber, building supplies and home appliances, including construction of homes.' The proceeds of the loan were to be used in paying current bills and to supply additional working capital. The collateral offered to secure the loan was a first mortgage on the land, buildings and equipment, and the repayment of the loan was to be guaranteed by George E. Scott, principal stockholder. On the reverse side of the application there were detailed instructions, which included a requirement that the bank submit with the application a borrower's financial statement, and also a signed and dated copy of an appraisal of the collateral made by the bank, or by an independent appraiser satisfactory to the bank accompanied by a schedule showing the cost, net book value and appraised value, separately, of the land, buildings, machinery and equipment, etc. Cassibry stated that the appraisal was made by the Noel Lumber Company, and the appraisal report was...