Union Carbide Corp. v. Alexander

• Decision Date: 05 November 1984
• Citation: 679 S.W.2d 938
• Parties: UNION CARBIDE CORPORATION, Plaintiff-Appellee, v. Lamar ALEXANDER, Gentry Crowell, William C. Koch, Jr., William Snodgrass, Harlan Matthews, Claude Ramsey, Martha Olsen, and John E. Sloan, Jr., each of whom is sued in his official capacity as a Member of the Board of Equalization of the State of Tennessee; Board of Equalization of the State of Tennessee, and Anderson County, Tennessee, Defendants-Appellants. 679 S.W.2d 938
• Court: Tennessee Supreme Court

Page 938

679 S.W.2d 938

UNION CARBIDE CORPORATION, Plaintiff-Appellee, v. Lamar ALEXANDER, Gentry Crowell, William C. Koch, Jr. William Snodgrass, Harlan Matthews, Claude Ramsey, Martha Olsen, and John E. Sloan, Jr., each of whom is sued in his official capacity as a Member of the Board of Equalization of the State of Tennessee; Board of Equalization of the State of Tennessee, and Anderson County, Tennessee Defendants-Appellants.

679 S.W.2d 938

Supreme Court of Tennessee at Nashville.

Nov. 5, 1984.

W.J. Michael Cody, Atty. Gen., Jim G. Creecy, Deputy Atty. Gen., Charles L. Lewis, Asst. Atty. Gen., Nashville, Mike Lawson, Goodlettsville, George Keto, Washington, D.C., for defendants-appellants.

G. Wilson Horde, Oak Ridge, Jackson C. Kramer, Wayne R. Kramer, Erma G. Greenwood, David L. Oakley, Jr., Kramer Johnson, Rayson, McVeigh & Leake, Knoxville, for plaintiff-appellee.

OPINION

DROWOTA, Justice.

We granted Defendants' Rule 11 application to consider the taxability, under Tennessee's real property taxation statutes, T.C.A. Sec. 67-5-501 et seq., of property owned by the United States in Anderson County, Tennessee. Defendants seek to tax a private corporation that manages and operates the Y-12 Plant under a contract with the United States. The specific issue in this case is whether Union Carbide Corporation owns an interest in the real property at the Y-12 Plant separate from the ownership interest of the United States. It is undisputed that the fee interest of the United States is exempt from real property taxation.

The United States, through the Department of Energy (hereinafter DOE) owns 37,185 acres of land in Anderson and Roane Counties, on which government-owned production and research facilities are located. The property was acquired in 1942 and the facilities have been performing functions relating to the development of nuclear energy and the production of nuclear weapons components for the national defense. The Y-12 Plant is located on approximately 805 acres in Anderson County and consists of 271 buildings and structures, all of which are owned in fee simple by the United States.

In 1946 Congress authorized the Atomic Energy Commission (the predecessor of DOE) to contract with private and public entities for the research and development of nuclear processes, utilizing the government's own facilities. The contract pursuant to which Union Carbide has operated the Y-12 Plant is a "Management Contract" which authorizes Plaintiff to manage, operate and maintain the facility in accordance with the directions of the Department of Energy. Union Carbide procures materials, supplies and equipment, although DOE retains the right to furnish any of these items. Payment for such purchases is made by Carbide from funds provided by the government, and title passes directly from the vendor to the government.

Union Carbide performs all the work under the contract with its own employees, which numbered approximately 7,000 at the time of this litigation. Union Carbide has no capital investment in the Y-12 Plant. The contract costs include all expenditures under the contract, including the salaries of Carbide employees. In fiscal year 1980, the allowable costs totaled $272,642,000. In addition to the allowable costs under the contract, Carbide receives a negotiated fee for operating, managing and maintaining three industrial facilities, one of which is the Y-12 Plant. DOE estimates that Carbide received $1.8 million for its work at Y-12 in 1980. DOE can terminate the contract for any reason upon six months notice. The fee is unrelated to the value of the real or personal property managed or to the amount of weapon components produced. Union Carbide performs no work as a private entrepreneur on behalf of itself or any other private entity at the Y-12 Plant. Union Carbide is not obligated to pay any rent, fee or other consideration in exchange for its presence at, and right of access to, the Y-12 Plant for the purpose of performing its duties under its management contract.

The contractual relationship is reviewed periodically in accordance with applicable agency regulations. Each review has resulted in an extension of the contract. Effective April 1, 1984, Union Carbide decided to sever its contractual relationship with DOE and was replaced by the Martin Marietta Corporation as management contractor.

After Anderson County levied the assessment against Union Carbide, Carbide sought review before the Assessment Appeals Commission. In a unanimous decision, the Commission found that "Carbide does not have a separate interest as required by the statute. Accordingly, we can find no interest of Carbide in the plant which rises to the dignity of a taxable interest for ad valorem property tax purposes." The Commission ordered the assessment be stricken in its entirety.

Anderson County appealed this ruling to the State Board of Equalization. The State Board, in a 4-3 decision, reversed the decision of the Assessment Appeals Commission and found that Carbide was the owner of real property as defined by T.C.A. Sec. 67-601(1) [now 67-5-501(9) ] and fixed the assessment at $325,000,000.00.

Union Carbide sought review of the Board's ruling in the Chancery Court for Davidson County, pursuant to T.C.A. Sec. 4-5-322. The Chancellor affirmed the decision of the Board of Equalization and found that Carbide enjoyed two significant rights in the Y-12 Plant--the right to use it and the right to enter or leave it. The Chancellor stated that "Union Carbide Corporation pursuant to contract with the United States does possess a separate property interest under Tennessee law in the Y-12 Plant and ... this interest is subject to property taxation in Tennessee ...."

While this litigation was pending in Chancery Court, the United States sought a declaration in federal court that the real property tax imposed upon Carbide was invalid. Union Carbide was not a party to the suit. The District Court originally abstained, pending resolution of the suit in Chancery Court, but that decision was reversed by the United States Court of Appeals for the Sixth Circuit and the case was remanded to the District Court. United States v. Anderson County, Tennessee, 547 F.Supp. 18 (E.D.Tenn.1982), rev'd, 705 F.2d 184 (6th Cir.1982). On remand, Judge Taylor concluded that Union Carbide's interest in the Y-12 Plant was a "mere license" and was not taxable under Tennessee's real property taxing statutes. 575 F.Supp. 574 (E.D.Tenn.1983).

The Tennessee Court of Appeals concluded that it was bound by the district court's finding that the contract granted a license to Union Carbide, since the interpretation of a contract to which the United States is a party is a federal question, citing United States v. Allegheny County, 322 U.S. 174, 64 S.Ct. 908, 88 L.Ed. 1209 (1944). However, the Court of Appeals recognized that it was not bound by the District Court's finding that the interest of Union Carbide was not taxable, since state courts of Tennessee are the interpreters of Tennessee statutes. Nevertheless, the Court of Appeals did agree with the District Court that the interest was not taxable. Speaking for the Court, Judge Lewis stated that "we are unable to find any instance in which a property tax has been imposed unless the entity being taxed had some incident of ownership traditionally recognized as valid under the law. The mere use by Carbide of the real property for purposes of performing the contract does not amount to an incident of ownership." The Court of Appeals reversed the decisions of the Chancellor and the State Board of Equalization and affirmed the decision of the Assessment Appeals Commission that the interest of Carbide was not taxable.

Defendants argue that Union Carbide has a real property interest in the Y-12 Plant that is separate and distinct from the fee ownership of the United States. They maintain that Carbide has a possessory interest in Y-12 arising from its possession, use, control and enjoyment of real property for purposes of performing its contractual obligations with the United States. Defendants concede that their whole theory turns on the notion of the "bundle of rights." In a property assessment manual (International Association of Assessing Officers, Property Assessment Valuation (1977)), it is said that there are six basic rights associated with the ownership of property: (1) the right to use; (2) the right to sell; (3) the right to lease or rent; (4) the right to enter or leave; (5) the right to give away; (6) the right to refuse to do any of these.

The Chancellor found that Carbide had the right to use and the right to enter and leave. It is not disputed that Carbide cannot sell, lease or give away the Y-12 Plant. We do not believe that the right to use and the right to enter and leave are sufficient to allow Anderson County to claim that Carbide has a real property interest in the Y-12 Plant. As the Court of Appeals pointed out, the right to alienate is an important element of ownership. See 63 Am.Jur.2d Pr...