THE SHERWIN-WILLIAMS COMPANY, )
FL E
I D
)
Plaintiff/Appellant, )
)
v. ) Appeal No.
) 01-A-01-9711-CH-00651, 1 9 9 8
O c to b e r 2 1
RUTH E. JOHNSON, Commissioner of )
Revenue, State of Tennessee, ) Davidson Chancery . C r o w s o n
C e c il W
) A p p e lla te C o u r t C le r k
No. 93-2721-I
Defendant/Appellee. )
COURT OF APPEALS OF TENNESSEE
APPEAL FROM THE DAVIDSON COUNTY CHANCERY COURT
AT NASHVILLE, TENNESSEE
THE HONORABLE IRVIN H. KILCREASE, JR., CHANCELLOR
MICHAEL D. SONTAG
BRYAN W. METCALF
Bass, Berry & Sims
2700 First American Center
Nashville, Tennessee 37238-2700
MICHAEL T. CUMMINS
JOSEPH F. TIMMONS
The Sherwin Williams Co.
101 Prospect Avenue, N.W.
Cleveland, Ohio 44115
ATTORNEYS FOR PLAINTIFF/APPELLANT
JOHN KNOX WALKUP
Attorney General and Reporter
JOE C. PEEL
Cordell Hull Building, Second Floor
425 Fifth Avenue North
Nashville, Tennessee 37243-0489
ATTORNEYS FOR DEFENDANT/APPELLEE
AFFIRMED AND REMANDED
WILLIAM B. CAIN, JUDGE
OPINION
P l a i n t if f S h e rw in -W illia m s C o m p a n y file d s u it p u rs u a n t to T e n n e s s e e
C o d e A n n o ta te d s e c t i o n 6 7 - 1 - 1 8 0 2 s e e k in g a re fu n d o f c o rp o r a te e x c is e ta x e s
w ith r e s p e c t to ta x y e a r s 1 9 8 7 , 1 9 8 8 , 1 9 8 9 a n d 1 9 9 0 . T h e a p p e a l p r e s e n t s th r e e
q u e s tio n s , to -w it:
1 . Is re tu rn o f c a p ita l fr o m cash in v e s tm e n ts in c lu d a b le in th e
d e n o m i n a to r u n d e r T .C .A . 6 7 - 4 - 8 1 1 ( g ) ( 1 ) ?
2 . If th e a n s w e r to q u e stio n 1 is a ffirm a tiv e , d id th e c o m m is s io n e r
p r o p e rly e x e r c i s e h is d is c re tio n u n d e r T .C .A . 6 7 - 4 - 8 1 2 ( a ) in v a ry in g th e s ta tu to r y
fo rm u la ?
3 . Is S h e rw in -W illia m s ' re fu n d c la im fo r th e y e a r 1 9 8 7 b a rre d b y th e
s ta tu te o f lim ita tio n s ?
T e n n e s s e e a d o p te d th e U n i f o r m D i v i s i o n o f I n c o m e f o r T a x P u r p o s e s A c t
( U D I T P A ) i n 1 9 7 6 a n d i t i s c o d if i e d in T e n n e s s e e C o d e A n n o t a te d s e c t i o n 6 7 - 4 -
8 0 1 e t se q .
T h e re is little fa c tu a l d is p u te b e tw e e n th e p a r tie s a n d th e p ro b le m in
q u e s t i o n n u m b e r o n e is b e s t s t a te d in t h e b ri e f o f t h e a p p e ll e e .
T h e c e n t r a l i s s u e i n t h i s c a s e in v o l v e s th e d e te r m in a t io n o f th e p r o p e r
c a lc u la tio n o f th e d e n o m in a t o r o f th e s a le s f a c to r in th e s ta tu to r y a p p o rtio n m e n t
fo rm u la . T h e T e n n e s s e e E x c is e T a x la w in e ff e c t in 1 9 8 7 th r o u g h 1 9 9 0
r e q u ir e d t h e P la in t if f to p a y a n e x c i s e ta x e q u a l to s ix p e r c e n t ( 6 % ) o f its " n e t
e a r n i n g s " a s d e f in e d in T .C .A . § 6 7 - 4 - 8 0 5 . C o r p o r a tio n s d o in g b u s in e s s b o th
w i t h i n a n d w ith o u t T e n n e s s e e a r e p e r m itte d t o a l lo c a t e a n d a p p o r tio n th e i r
ta x a b le in c o m e u n d e r th e p ro v is io n s f o u n d in T .C .A . § § 6 7 - 4 - 8 0 9 th r o u g h 6 7 -4 -
8 1 6 . T h e se a p p o rtio n m e n t p ro v is io n s w e re a d o p te d b y th e T e n n e s se e G e n e r a l
A s se m b ly in 1 9 7 6 in C h a p te r 5 3 7 , P u b lic A c ts o f 1 9 7 6 w h ic h w a s b a s e d u p o n
th e U n i f o r m D iv i s io n o f In c o m e f o r T a x P u r p o s e s A c t (U D IT P A ). S in c e
S h e r w i n W i l l i a m s w a s e n g a g e d in b u s i n e s s b o t h w i t h i n a n d w i t h o u t t h e S t a t e
o f T e n n e s s e e d u r in g th e y e a r s in q u e s tio n , it w a s r e q u ir e d b y T .C .A . § 6 7 - 4 - 8 0 9
to a p p o rtio n its b u s in e ss e a rn in g s in a c c o rd a n c e w ith th e a p p o rtio n m e n t fo rm u la
f o u n d in T .C .A . § 6 7 - 4 - 8 1 1 .
T .C .A . § 6 7 - 4 - 8 1 1 d e fin e s th e s ta n d a r d a p p o rtio n m e n t f o r m u l a a s a
f r a c t i o n , t h e n u m e r a to r o f w h i c h i s th e s u m o f th e p r o p e r ty , p a y r o l l a n d s a le s
f a c to r s o f e a c h ta x p a y e r a s d e f in e d in th e s ta tu te a n d th e d e n o m in a t o r is th r e e
( 3 ) . T h e s t a tu t e d e f in e s e a c h f a c t o r a s a fr a c t i o n i n w h i c h th e n u m e ra to r i s t h e
t a x p a y e r 's r e s p e c t i v e p r o p e r t y , p a y r o l l o r s a l e s v a l u e s i n T e n n e s s e e a n d t h e
d e n o m i n a to r i s th e t a x p a y e r 's r e s p e c t i v e p r o p e r t y , p a y r o l l o r s a l e s v a l u e s i n a l l
ju ris d ic tio n s .
T h e p r o v is io n s o f T .C .A . § 6 7 - 4 - 8 1 1 r e a d in p e rtin e n t p a rt a re a s f o llo w s :
2
(a ) A ll b u s in e s s e a rn i n g s s h a l l b e a p p o r tio n e d to th is s ta te b y
m u ltip ly in g th e e a rn in g s b y a fra c tio n , th e n u m e ra to r o f w h ic h
is th e p ro p e rty f a c to r p lu s th e p a y r o ll f a c to r p lu s th e s a le s fa c to r ,
a n d th e d e n o m in a to r o f w h ic h is th r e e ( 3 ) ; . . .
(b )(1 ) T h e p ro p e rty fa c to r is a fr a c tio n , th e n u m e ra to r o f w h ic h
i s t h e a v e r a g e v a l u e o f t h e t a x p a y e r 's r e a l a n d ta n g ib l e a n d
p e r s o n a l p r o p e r ty o w n e d o r re n t e d a n d u s e d in t h i s s t a te d u ri n g
th e ta x p e r io d a n d th e d e n o m in a to r o f w h ic h is th e a v e ra g e v a lu e
o f a l l t h e t a x p a y e r 's r e a l a n d t a n g i b l e p r o p e r t y .
* * *
(e ) ( 1 ) T h e p a y ro ll fa c to r is a fra c tio n , th e n u m e ra to r o f w h ic h
is th e to ta l a m o u n t p a id in th is s ta te d u rin g th e ta x p e r io d b y th e
ta x p a y e r fo r c o m p e n s a tio n , a n d th e d e n o m in a to r o f w h ic h is th e
to ta l c o m p e n s a tio n p a id e v e r y w h e re d u rin g th e ta x p e r io d .
* * *
(g )(1 ) T h e s a le s fa c to r is a fr a c tio n , th e n u m e ra to r o f w h ic h is
th e to ta l s a le s o f th e ta x p a y e r in th is s ta te d u rin g th e ta x p e r io d ,
a n d th e d e n o m in a t or of w h ic h is th e t o t a l s a l e s o f th e ta x p a y e r
e v e ry w h e re d u rin g th e ta x p e rio d .
T .C .A . § 6 7 - 4 - 8 0 [ 4 ] ( a )( 1 2 ) d e fin e s " s a le s " a s f o llo w s :
" S a l e s " m e a n s a ll g ro s s re c e ip ts o f th e ta x p a y e r n o t
a llo c a te d u n d e r th is c h a p te r.
I n th e p r e s e n t c a s e , th e P la in t if f d e r iv e d in c o m e f r o m th e s h o r t- te r m
in v e stm e n t o f its e x c e ss w o rk in g c a p ita l. T h e s e tra n s a c tio n s w e re h a n d le d in
t h e P l a in t i f f 's C l e v e l a n d o f f i c e b y i t s t r e a s u r y d e p a r t m e n t p e r s o n n e l . O n a d a i l y
b a s i s , t h e t r e a s u r y p e r s o n n e l c o n s o l i d a t e d t h e b a n k a c c o u n ts o f t h e P l a in t i f f 's
v a r io u s l o c a t io n s i n t h e s t a te s w h e r e S h e r w i n - W i l l i a m s c o n d u c t s it s b u s i n e s s
o p e ra tio n s . T h e t re a s u r y p e r s o n n e l d e t e r m in e d th e c a s h p o s itio n o f t h e P l a i n t if f
a n d its f u tu r e fu n d in g n e e d s . A n y e x c e s s c a s h w a s i n v e s t e d i n s h o r t - te r m
in te r e s t b e a r in g s e c u r itie s w ith v a ri o u s m a tu ri tie s . ... F o r e x a m p le , S h e r w in -
W i l l i a m s w i r e tr a n s f e r r e d $ 1 1 ,0 0 0 , 0 0 0 f o r a o n e d a y d e p o s i t t o t h e S i g n e t B a n k
o n J a n u a r y 3 , 1 9 9 0 . ... T h e n e x t d a y , J a n u a r y 4 , 1 9 9 0 , S i g n e t B a n k w ir e
t r a n s f e r r e d th e p rin c i p a l a m o u n t o f $ 1 1 ,0 0 0 ,0 0 0 b a c k to S h e r w in - W illia m s p lu s
i n t e r e s t i n t h e a m o u n t o f $ 2 , 5 3 9 . 9 3 . G e n e r a ll y , a l l w o r k i n g c a p i t a l t r a n s a c ti o n s
in v o lv e in v e s tm e n t s in w h i c h S h e r w in - W illia m s m a k e s a n i n v e s tm e n t o f f u n d s
in s h o rt -t e rm in te re s t b e a ri n g s e c u ri tie s . S h e r w i n - W illia m s w ill u s u a lly h o ld
th e s e c u r itie s to m a tu r ity b u t if n e c e s s a ry t o m e e t c a s h r e q u ir e m e n t , S h e r w in -
W illia m s m a y s e l l s u c h s e c u r itie s .
In th i s c a s e , th e p a r tie s a re a g r e e d th a t th e i n t e r e s t in c o m e a n d a n y
g a i n s ( lo s s e s ) s h o u ld b e in c lu d e d in t h e d e n o m in a to r o f th e s a le s f a c to r .
S h e r w i n - W i l l i a m s c o n te n d s , h o w e v e r, t h a t t h e p ri n c ip a l a m o u n t s o f t h e w o r k i n g
c a p i t a l i n v e s te d w h i c h a r e r e t u r n e d t o S h e r w i n - W i l l i a m s w h e n t h e s e c u r it i e s
m a tu r e a n d a r e r e d e e m e d o r s o l d a r e a ls o r e q u i r e d t o b e i n c l u d e d i n t h e
d e n o m in a to r o f th e s a le s f a c to r . T h e P la in tif f c o n te n d s th a t th e te rm " to ta l
s a l e s " in th e d e n o m in a to r o f th e s a le s fa c to r o f th e s ta tu to r y a p p o rtio n m e n t
fo rm u la r e q u ir e s th e i n c l u s io n o f n o t o n ly t h e i n t e r e s t in c o m e a n d a n y g a in s
fro m th e w o r k in g c a p ita l tra n s a c tio n s b u t a ls o th e a m o u n ts o f th e re tu rn e d
p r in c i p a l f r o m th e w o r k in g c a p i ta l in v e s tm e n t o p e r a tio n s . T h e C o m m is s io n e r
d e t e r m i n e d t h a t o n l y t h e t o t a l in c o m e [ i n t e r e s t in c o m e a n d a n y g a i n s ( l o s s e s ) ]
3
fro m th e w o rk in g c a p ita l in v e stm e n ts s h o u ld b e in c lu d e d in th e c o m p u ta tio n o f
th e d e n o m in a t o r o f th e s a l e s f a c t o r a n d n o t th e returne d am o u n ts o f p r in c ip al
in v e s te d in th e w o r k in g c a p ita l in v e s tm e n ts . T h u s , th e k e y q u e s tio n is w h e th er
th e r e tu r n e d p rin c ip a l a m o u n ts a re p ro p e rly in c lu d e d in " to ta l s a le s e v e r y w h er e"
u n d e r th e p r o p e r a p p lic a t io n o f th e ab o v e refe r e n c e d s ta t u t e s .
T h e p o s itio n o f S h e r w i n - W illia m s is th a t T e n n e s s e e C o d e A n n o t a te d
s e c tio n 6 7 -4 -8 0 4 (a )( 1 2 ) m e a n s lite ra lly w h a t it s a y s w h e n c a lc u la tin g " . . . to ta l
s a le s o f th e t a x p a y e r e v e r y w h e r e . . . " p e r T e n n e s s e e C o d e A n n o ta te d s e c tio n 6 7 -
4 -8 1 1 (g )(1 ). T h e fo rm e r s e c tio n r e a d s : " S a l e s - A l l g r o s s r e c e i p t s o f th e
t a x p a y e r n o t a ll o c a t e d u n d e r th is c h a p te r." T en n . C o d e A n n . § 6 7 -4 -
8 0 4 (a )(1 2 )(1 9 9 7 ). (T h is s u b s e c tio n h a s b e e n re c o d ifie d a s T e n n . C o d e A n n . §
6 7 -4 -8 0 4 (a )(1 5 ) (1 9 9 8 )).
S h e rw in -W illia m s a rtic u la te s its p o s itio n o n th is is s u e in its re p ly b rie f
w ith c la rity :
T h e s ta tu t e c le a r ly c o n te m p la t e s th e i n c l u s i o n in th e s a l e s f a c t o r o f g r o s s
r e c e ip t s f r o m t h e s a l e o f in t a n g i b l e p r o p e r ty a s w e l l a s fr o m t h e s a l e o f ta n g i b l e
p r o p e r t y . I n f a c t, t h e s t a tu t e d e t a il s a s p e c i f i c m e th o d o f d e te rm i n i n g w h e th e r
" s a l e s , o t h e r t h a n s a le s o f t a n g i b l e p e r s o n a l p r o p e r ty " o c c u r in t h e S t a te o f
T e n n e s se e . S e e T e n n . C o d e A n n . § 6 7 - 4 - 8 1 1 ( I) ( p r o v i d i n g , g e n e ra lly , th a t if th e
m a jo rity o f th e " e a rn i n g s p r o d u c i n g a c tiv i tie s " w ith r e s p e c t to t h e s a le o f
in ta n g ib le s o c c u r in T e n n e s se e , th e n th e s a le is d e e m e d to o c c u r in T e n n e s se e ).
R a th e r th a n in c l u d in g th e g r o s s re c e ip t s fr o m th e s a le o f th e s e in v e s tm e n t s
in th e d e n o m in a t o r o f th e s a le s fa c to r , t h e C o m m is s io n e r in c lu d e d o n ly th e
i n t e r e s t i n c o m e a n d n e t g a in ( l o s s ) f ro m t h e O h i o T r a n s a c t io n s i n v e s t m e n t s i n
t h e d e n o m i n a t o r w h e n s h e r e c o m p u t e d t h e a m o u n t o f S h e r w i n - W i l l i a m 's
i n c o m e a p p o rt i o n e d to T e n n e s s e e . T h i s i n t e rp r e ta ti o n o f T e n n . C o d e A n n . § 6 7 -
4 - 8 1 1 ( g ) ( 1 ) ( d e s c rib in g th e s a le s f a c to r ) a n d 6 7 - 4 - 8 0 4 ( a ) ( 1 2 ) ( d e f in i n g " s a le s "
a s m e a n i n g a ll g r o s s r e c e ip ts o f th e t a x p a y e r n o t a llo c a t e d u n d e r th e e x c is e ta x
la w ) c a n n o t b e re c o n c ile d w ith th e p la in la n g u a g e o f th o s e s e c tio n s . C o u r ts a re
r e q u ir e d to g iv e e f f e c t to th e in te n tio n o r p u r p o s e o f th e l e g i s la tu r e a s e x p r e s s e d
i n a s t a tu t e , a n d t h e " l e g i s la t iv e i n t e n t o r p u r p o s e i s to b e a s c e r t a i n e d p r im a r i l y
f r o m th e n a tu r a l a n d o r d in a r y m e a n i n g o f th e la n g u a g e u s e d , w h e n re a d in
c o n te x t w i th t h e e n t ir e s ta tu te , w ith o u t a n y fo r c e d o r s u b tle c o n s tru c tio n to lim it
o r e x te n d th e im p o rt o f th e la n g u a g e ." W o r r a l l v . K r o g e r C o ., 5 4 5 S . W .2 d 7 3 6 ,
7 3 8 (T e n n . 1 9 7 7 ).
T h e n a tu r a l a n d o rd in a ry m e a n in g o f T e n n . C o d e A n n . § 6 7 - 4 - 8 1 1 ( g ) ( 1 )
r e q u ir e s th a t th e t o t a l s a le s o f th e ta x p a y e r e v e r y w h e re d u rin g th e ta x p e r io d b e
in c l u d e d in th e d e n o m in a to r o f th e s a le s f a c to r . T e n n . C o d e A n n . § 6 7 - 4 -
8 0 4 ( a )( 1 2 ) d e f in e s th e t e r m " s a le s " to i n c l u d e a l l g r o s s r e c e ip ts o f t h e ta x p a y e r
n o t o t h e r w is e a llo c a t e d u n d e r th e E x c i s e T a x L a w . T h e n a t u r a l a n d o r d in a r y
m e a n in g o f th e te r m " g r o s s r e c e ip ts " m a n d a te s th a t th e to ta l o r g r o s s p r o c e e d s
f r o m th e O h i o T r a n s a c tio n s (th a t is ; th e i n c o m e a n d th e re tu r n o f
p r in c i p a l /c a p i t a l) b e i n c l u d e d in th e s a l e s f a c t o r . C e r ta i n l y th e t e r m " g r o s s
r e c e ip ts " c a n n o t b e c o n s tr u e d to i n c l u d e o n ly t h e n e t in c o m e a n d n e t g a i n
d e r iv e d f r o m th e s a le o f s h o r t- te r m in v e s tm e n t s . I n f a c t , S h e r w i n - W i l l i a m s
r e s p e c t f u l l y s u b m i t s th a t t h e t e r m s " g r o s s " a n d " n e t " a r e m u t u a l l y e x c l u s iv e :
4
W e b s t e r 's T h i r d N e w I n t e r n a t i o n a l D ic tio n a r y d e f in e s th e t e r m " g r o s s " a s
" c o n s is tin g o f a n o v e ra ll to ta l e x c lu s i v e o f d e d u c t io n s ( ~ e a r n i n g s ) (~ p r o -
d u c tio n ) ( ~ a n n u a l p r o f i t) - - o p p o s e d to n e t." (e m p h a s is a d d e d ) . T h e s ta tu t e is
n o t a m b ig u o u s a n d le a v e s n o b a s is fo r w h ic h th e C o m m is sio n e r m a y co n te n d
th a t th e n a tu r a l a n d o r d in a r y m e a n i n g o f "g r o s s re c e ip ts " a s u s e d in th e s a le s
f a c to r s h o u ld s o m e h o w b e ig n o r e d .
T h e e ff o r t s b y ta x p a y e r s to in c lu d e re tu r n o f w o r k in g c a p it a l in v e s t e d i n
t h e d e n o m i n a to r o f th e s a le s f a c t o r is n o t n e w to s t a te s o p e ra ti n g u n d e r th e
U n ifo rm D i v is i o n o f I n c o m e fo r T a x P u r p o s e s A c t o r u n d e r c o m p a ra b le
le g is la tiv e e n a c tm e n t s . T h e r e s u l t in e a c h in s ta n c e i s a h y p e r - in f la te d s a le s
fa c to r.
I n A m e r ic a n T e l e p h o n e a n d T e le g r a p h C o . v . D ir e c to r , D iv is io n o f
T a x a tio n , 4 7 6 A .2 d 8 0 0 ( N .J . 1 9 8 4 ) t h e t a x p a y e r in c lu d e d in its 1 9 7 2
c o r p o r a t i o n b u s i n e s s t a x r e t u r n s t o t a l r e c e i p t s i n t h e d e n o m i n a to r o f e ig h t b i l l i o n
s e v e n h u n d r e d n in e ty - s i x m i l l i o n n i n e h u n d r e d s i x t y - o n e t h o u s a n d o n e h u n d r e d
f i f ty - s e v e n d o lla r s . O f th is a m o u n t, p r o c e e d s re c e i v e d fro m th e s a le o r
re d e m p tio n o f in v e stm e n t p a p e r to ta l s ix b illio n e ig h t h u n d re d fif te e n m illio n
s e v e n h u n d r e d n i n e ty - t w o t h o u s a n d th r e e h u n d r e d th r e e d o l l a rs , o f w h i c h m o r e
th a n fiv e b illio n e ig h t h u n d re d m illio n d o lla rs re p re s e n te d m o n e y flo w in g b a ck
to A T & T fr o m c e r tif ic a te s o f d e p o s it, c o m m e r c ia l p a p e r, a n d ba n k ers'
a c c e p t a n c e s . D u r i n g th i s s a m e y e a r , 1 9 7 2 , t h e to t a l a g g re g a t e r e c e i p t s f r o m
A T & T 's b u s i n e s s o f r e n d e r i n g te le c o m m u n ic a tio n s se rv ic e n a tio n a lly a n d
i n t e rn a ti o n a ll y w a s a p p ro x i m a te ly o n e b il l i o n n in e h u n d r e d m i l l i o n d o ll a rs .
A p p l y in g th e N e w J e rs e y s t a tu t e th e c o u r t h e ld :
[ 1 ] W e u p h o l d a s a g e n e r a l m a t te r th e e x c l u s i o n o f g r o s s r e v e n u e s r e c e iv e d
b y p l a i n t i f f f ro m t h e s a l e o r m a t u r it y o f in v e s t m e n t p a p e r . A s J u d g e C r a b t r e e
o b s e rv e d , id l e c a s h c a n b e t u r n e d o v e r re p e a t e d l y b y in v e s tm e n t in s h o r t te r m
s e c u r it i e s . I t i s n o t r u e r e f l e c t i o n o f t h e s c o p e o f A T & T 's b u s i n e s s d o n e w i t h i n
a n d w ith o u t N e w J e rs e y to a l lo c a t e to t h e n u m e r a to r o r th e d e n o m in a to r o f th e
r e c e ip ts f r a c tio n th e fu ll a m o u n t o f m o n e y re tu r n e d to A T & T u p o n th e s a le o r
r e d e m p tio n o f in v e s tm e n t p a p e r . T o in c l u d e s u c h r e c e i p t s in th e fr a c tio n w o u ld
b e c o m p a r a b le to m e a s u r i n g b u s in e s s a c ti v i t y b y t h e a m o u n t o f m o n e y t h a t a
ta x p a y e r r e p e a te d ly d e p o s ite d a n d w ith d r e w f r o m its o w n b a n k a c c o u n t. T h e
b u l k o f f u n d s f l o w i n g b a c k t o A T & T f r o m i n v e s tm e n t p a p e r w a s s im p l y i t s
o w n m o n e y . W h a t e v e r o th e r ju s t i f i c a ti o n t h e r e is fo r e x c l u d i n g s u c h r e v e n u e s
f r o m t h e r e c e ip t s f r a c t i o n , i t is s u f f i c i e n t to s a y t h a t to d o o t h e r w i s e p r o d u c e s
a n a b su rd in te rp re ta tio n o f § 6 (B ). " It is a x io m a tic th a t a s ta tu te w ill n o t b e
c o n s tr u e d to le a d to a b s u r d r e s u lts . A ll r u l e s o f c o n s tr u c t io n a r e s u b o r d in a te to
th a t o b v i o u s p r o p o s itio n . [ E v e n th e r u le o f s tr ic t c o n s tr u c t io n ] d o e s n o t m e a n
5
t h a t a r i d i c u l o u s r e s u l t s h a l l b e r e a c h e d b e c a u s e s o m e i n g e n io u s p a th m a y b e
f o u n d to th a t e n d ." S ta t e v . P r o v e n z a n o , 3 4 N .J . 3 1 8 , 3 2 2 , 1 6 9 A .2 d 1 3 5
(1 9 6 1 ).
A m e r i c a n T e l e p h o n e a n d T e l e g r a p h C o . v . D i r e c t o r D i v i s io n o f T a x a t i o n , 4 7 6 A .2 d 8 0 0 ,
8 0 2 ( N .J . 1 9 8 4 ) .
In 1 9 9 6 , th e In d ia n a ta x c o u rt d e a lt w ith a s ta tu te a lm o s t id e n tic a l to th a t
o f T e n n e s s e e w h e r e i n S h e r w i n - W i l l i a m s s o u g h t to in c lu d e re tu r n o f p r i n c i p a l i n
t h e d e n o m i n a to r o f th e s a l e s f a c t o r w h e r e " s a l e s " w a s d e f in e d a s " . . . a l l g r o s s
r e c e ip t s o f t h e ta x p a y e r n o t a ll o c a t e d u n d e r i .c . 6 - 3 - 2 - 2 ( g ) t h r o u g h 1 c 6 - 3 - 2 - 2 ( k ) ."
T h e c o u rt o b s e rv e d :
T h e c e n t r a l d e b a t e in t h i s c a s e i s h o w t o d e f i n e " g r o s s r e c e i p t s " fo r th e
p u r p o s e o f t h e d e n o m i n a t o r o f t h e s a le s fa c to r . T h e D e p a r tm e n t c o n s id e r s o n l y
th e in t e r e s t e a r n e d o n th e i n v e s tm e n t s e c u r itie s to b e g r o s s r e c e ip t s . S h e r w in -
W illia m s , o n th e o th e r h a n d , a r g u e s t h a t g r o s s r e c e ip ts e q u a ls th e a m o u n t
r e c e iv e d o n th e s a le , w h ic h in c lu d e s b o th th e in t e r e s t e a r n e d a n d th e p r in c i p a l .
T h e D e p a r t m e n t r e s p o n d s t h a t i n c lu s i o n o f p r i n c ip a l i n th e d e n o m i n a to r d i s t o r t s
t h e a p p o r tio n m e n t f o r m u la b y g iv in g e x tr a w e ig h t to o u t - o f -s ta te s a le s . T h e r e
i s a g r e a t p o t e n t i a l f o r a b u s e , a r g u e s th e D e p a r tm e n t , b e c a u s e S h e r w in - W il l i a m s
c o u ld u s e t h e s a m e p r in c i p a l m a n y t im e s a s i t r e - in v e s t s i n s h o r t - te r m s e c u r it i e s ,
r o llin g [ * 7 ] o v e r th e p rin c ip a l o f th e p re v io u s ly s o ld in v e s tm e n t.
T h e S h e r w in -W illia m s C o . v . In d ia n a D e p 't o f S ta te R e v e n u e , 6 7 3 N .E .2 d 8 4 9 , 8 5 1
(In d . T a x C t. 1 9 9 6 ).
R e ly in g o n A T & T v . D ir e c to r , 4 7 6 A .2 d 8 0 0 ( N .J . 1 9 8 4 ) , th e In d ia n a
c o u r t h e ld th a t " g r o s s re c e ip ts " d id n o t in c lu d e re tu r n o f p r in c ip a l.
T u r n in g n o w to t h e e f f e c t i n T e n n e s s e e o f in c lu d in g r e tu r n o f p r i n c ip a l in
t h e " s a l e s f a c t o r " , o n e m u s t r e m e m b e r t h a t th e p ri n c ip a l b u s i n e s s o f S h e r w i n -
W illia m s n a tio n w id e is th e m a n u fa c tu re a n d s a le o f p a in t a n d re la te d p ro d u c ts .
N a tio n w id e g r o s s r e c e ip ts f ro m th e s e o p e r a tio n s f o r e a c h o f th e y e a r s in is su e a r e
a s fo llo w s :
1 9 8 7 $ 1 ,7 5 1 ,0 2 9 ,6 5 2
1 9 8 8 $ 1 ,9 0 8 ,9 3 3 ,7 8 2
1 9 8 9 $ 2 ,0 1 6 ,4 8 5 ,0 2 5
1 9 9 0 $ 2 ,1 9 0 ,7 0 9 ,8 5 3
6
D u r in g th o s e s a m e y e a r s , r e tu r n o f p r in c i p a l w a s :
1 9 8 7 $ 2 ,0 0 8 ,0 5 3 ,4 6 4
1 9 8 8 $ 1 ,5 9 5 ,7 8 3 ,4 5 5
1 9 8 9 $ 3 ,3 2 0 ,5 8 5 ,8 6 8
1 9 9 0 $ 3 ,0 9 8 ,0 3 3 ,7 6 6
If th e g ro s s re c e ip ts fro m m a n u f a c t u r i n g a n d s a le o f p a in t a n d re la te d
p r o d u c ts a re th e n c o m b i n e d w i t h r e tu r n o f p r i n c ip a l a m o u n t s i n d e te rm i n i n g t h e
d e n o m i n a to r i n t h e " s a le s f a c t o r " , a n a v e ra g e o f 5 5 .1 6 9 % o f t h e c o m b i n e d to t a l
f o r e a c h y e a r w o u l d b e re tu r n o f p r i n c ip a l.
T h u s , t h e s a m e a b s u r d i t y e x i s t i n g i n N e w J e rs e y a n d In d i a n a w o u l d e x is t
in T e n n e s se e .
F o l l o w i n g th e le a d o f N e w J e rs e y a n d In d i a n a , t h e c h a n c e ll o r h e ld :
T h is c o u rt f in d s th a t to in c lu d e re tu r n o f p r in c ip a l in t h e s a le s fa c to r
d e n o m i n a to r w o u l d d i s t o r t t h e e x t e n t o f S h e r w i n - W i l l i a m s ' b u s in e s s a c ti v i t i e s
in T e n n e s s e e a n d o t h e r s ta te s in w h i c h i t d o e s b u s in e s s a n d d e f e a t th e in te n t a n d
p u r p o s e o f th e s ta tu te (T .C .A . 6 7 - 4 - 8 1 1 ) . A c c o r d in g ly , th e c o u r t fin d s th a t th e
a m o u n t o f r e tu rn o f p rin c ip a l to S h e rw in -W illia m s o n th e s a le o r r e d e m p tio n o f
i n t e r e s t b e a r i n g s e c u r itie s r e l a te d to its , w o r k in g c a p ita l in v e s tm e n ts s h o u ld n o t
b e i n c l u d e d i n t h e d e n o m in a t o r o f th e s a le s fa c to r . [ s ic ]
T h is h o ld in g b y th e c h a n c e llo r is lo g ic a l a n d a p p e a lin g , p a r tic u l a r ly s in c e ;
" I t is p r e s u m e d t h a t th e l e g i s la tu r e e n a c tin g a s ta tu t e d i d n o t in t e n d a n a b s u rd i ty ,
a n d s u c h a re s u lt w ill b e a v o id e d b y th is c o u rt if th e te rm s o f th e s ta tu te a d m it o f
i t b y r e a s o n a b le c o n s t r u c ti o n ." E p s t e i n v . S t a t e , 2 1 1 T e n n . 6 3 3 , 3 6 6 S . W .2 d 9 1 4
( 1 9 6 3 ); L o f tin v . L a n g s d o n , 8 1 3 S .W .2 d 4 7 5 , 4 8 0 (T e n n . A p p . 1 9 9 1 ).
T h is s o u n d r u le , h o w e v e r , is m e t b y th e e q u a l ly w e l l s e t tl e d r u l e t h a t : " I f
t h e w o r d s o f a s t a tu t e p la in l y m e a n o n e t h i n g t h e y c a n n o t b e g iv e n a n o t h e r
m e a n i n g b y ju d ic ia l c o n s t r u c ti o n ." H e n r y v . W h i t e , 1 9 4 T e n n . 1 9 2 , 1 9 8 , 2 5 0
S .W .2 d 7 0 , 7 2 (1 9 5 2 ).
I n c o n s tr u i n g th e t e r m " g r o s s r e c e ip ts " u n d e r T e n n e s s e e C o d e A n n o ta te d
s e c tio n 6 7 - 4 - 3 0 1 , th e S u p r e m e C o u r t o f T e n n e s s e e o b s e rv e d : " W e d o n o t b e l ie v e
t h a t t h e d e f i n i t i o n o f 'g r o s s r e c e i p t s ' u n d e r T . C . A . 6 7 - 4 - 3 0 1 i s a m b i g u o u s s o a s
7
to re q u ire re s o rt to ru le s d e a lin g w ith th e c o n s tr u c tio n o f u n c le a r s ta tu te s ."
S o u th C e n tr a l B e ll T e le . C o . v . O ls o n , 6 6 9 S .W .2 d 6 5 0 , 6 5 2 (T e n n . 1 9 8 4 ).
W ith d e fe re n c e to s is te r ju ris d ic tio n s , th is c o u rt is re lu c ta n t to a p p ly th e
s a m e “ a b s u r d r e s u lt s ta n d a r d ” . A n a b s u r d r e s u l t is n o t n e c e s s a ry f o r , in s p i te o f
t h e p l a in la n g u a g e o f T e n n e s s e e C o d e A n n o ta te d s e c tio n 6 7 - 4 - 8 1 1 ( g ) ( 1 ) , th e
c o m m is s io n e r m a y o p t f o r a d if f e r e n t s c h e m e o f a s s e s s m e n t w h e n e v e r th e
re s u ltin g a p p o rtio n m e n t d o e s n o t f a ir ly r e p r e s e n t th e t a x p a y e r ’s b u s in e s s in th is
s ta te . T h e v e r y a b s u r d i ty o f th e r e s u l t s o u g h t b y S h e r w in - W illia m s , la y s a s o u n d
b a s i s f o r t h e im p le m e n ta ti o n o f T e n n e s s e e C o d e A n n o ta te d s e c t i o n 6 7 - 4 - 8 1 2 ( a ).
The trial court found that applying the statutory scheme would "distort the extent
of Sherwin-Williams' business in Tennessee . . . ," and applied the alternative
method.
The alternative statute is clear upon its face:
(a) If the allocation and apportionment provisions of this part do not
fairly represent the extent of the taxpayer’s business activity in this
state, the taxpayer may petition for or the commissioner may require,
in respect to all or any part of the taxpayer’s business activity, if
reasonable:
. . .
(4) The employment of any other method to effectuate an equitable
allocation and apportionment of the taxpayer’s earnings. Tenn. Code
Ann. § 67-4-812(a)(4) (1994).emphasis added
The real question to be answered is whether, as a matter of law, the
variation in this case amounts to an abuse of discretion. Using the terminology
of the statute, the commissioner has abused his discretion where the alternative
computation reaches an inequitable result as to the apportionment.
In utilizing the variation, the Commissioner found, as did the Chancellor,
that by including the gross receipts from the sales of short term securities,
Sherwin-Williams did not fairly and accurately represent the total amount of
property, payroll and sales subject to state taxation (the denominator), and
therefore did not fairly represent the amount of property subject to taxation in
this state, (the ratio constructed using the above denominator).
8
Sherwin-Williams argues that absent a “grossly disproportionate” ratio as
described by this court in AT&T v. Huddleston, 880 S.W.2d 682 at 692
(Tenn.Ct. App. 1994), the alternative statute, Tennessee Code Anotated section
67-4-812 (a)(4), cannot be used. Both parties as well as the trial court have
acknowledged that the situation at bar represents a case of first impression
insofar as it concerns a Commissioner who seeks a variance rather than a
taxpayer. The two Tennessee cases that come closest to addressing this situation,
AT&T v. Huddleston, 880 S.W.2d 682 (Tenn. Ct. App. 1994) and Peterson
Mfg. Co. v. State, 779 S.W.2d 784 (Tenn. 1989), concern taxpayers seeking a
variance.
There is, however, much guidance to be drawn from these authoritative
sources. Contrary to Sherwin-Williams assertion in its brief, this court in AT&T
found that:
States are given wide latitude under the Federal Constitution to adopt
various methods for attributing earnings to a taxing state. See
Moorman Mfg. Co. v. Bair, 437 U.S. 267, 279, 98 S.Ct. 2340, 2347-48,
57 L.Ed.2d 197, 208 (1978). “[T]he Constitution imposes no single
formula on the States...” Container Corp., 463 U.S. at 164, 103 S.Ct.
at 2939, 77 L.Ed.2d at 552.
AT&T v. Huddleston, 880 S.W.2d 682, 689 (Tenn.Ct.App. 1994).
Indeed the court in AT&T cited Peterson for the proposition that the
burden is on a taxpayer to establish that “its own unique facts and circumstances
justify a departure from the standard apportionment formula.” AT&T v.
Huddleston, 880 S.W.2d 682 at 691. It can well be said that under the above
authorities the statutory apportionment scheme is presumptively correct.
However what can a state do when faced with a statutory scheme which does not
fairly represent the taxpayer’s income attributable to that state? The three factor
apportionment formula applied is clearly set out in Tennessee’s version of the
Uniform Distribution of Income for Tax Purposes Act (UDITPA). The goal of
the UDITPA is not pinpoint mathematical accuracy but fair apportionment. See
Tenn. Code Ann. § 67-4-804(b) (1998). The discretion accorded the
Commissioner as well as the bilateral ability to request a variance evidence this
goal. See Tenn. Code Ann. § 67-4-812 (1998). It is clear from the record before
this court that the Commissioner acted well within his discretion. At this point,
9
this court must examine the nature of the transactions which the taxpayer
claimed were “sales” below. The court’s attention is drawn specifically to the
following series of transactions:
DESCRIPTION DATE DATE GROSS SALES COST OR GAIN OR
ACQUIRED SOLD PRICE OTHER BASIS LOSS
FNC ETD MATURITY 1/3/90 1/4/90 $10,002,309.03 $10,000,000.00 $2,309.03
AMERITRUST ETD 1/3/90 1/4/90 $5,501,260.42 $5,500,000.00 $1,260.42
MATURITY
CONTINETNAL ETD 1/4/90 1/5/90 $10,042,500.00 $10,000,000.00 $42,500.00
1
MATURITY
In essence, the Commissioner found, as this court does, a very high
probability that the same investment basis may be used in these admittedly
efficient short-term purchases and sales to barely increase the company’s overall
net worth, while profoundly increasing the out-of-state portion of their “gross
receipts” for UDITPA purposes. In such a situation, the above transactions do
not fairly represent the taxpayer’s income connection to Ohio. The resulting
transactions do not amount to $35,046,069.45 of taxable income in that state.
Consider the logical result, if these transactions had Tennessee as their situs. If
the Commissioner were to apply the statutory scheme, then the taxpayer would
be on the steps of the courthouse claiming an abuse of discretion. Under the
authorities cited above this court would be bound to assess the Commissioner’s
actions with regard to whether such an arrangement fairly represented the
company’s business in this state. It strains the bounds of good sense to assert
that the taxpayer is attempting to fairly and completely represent his business
connection to this state, when, as fortune would have it, Ohio statutes do not
require inclusion of the “gross receipts” in it’s receipt factor. The action of the
chancellor in applying the alternative provisions of Tennessee Code Annotated
section 67-4-812(a)(4) is affirmed.
In view of this court’s affirmation of the Chancery Court’s ruling
regarding the Commissioner’s use of an alternate scheme, the issue regarding the
1
These items appear in Exhibit 8 to the Record on Appeal and represent only a portion
of "The Sherwin-Williams Company Business Receipts Generated By Investment
Transactions 12/31/90."
10
limitation of an action for refund for 1987 is moot. However, this court agrees
with the chancellor that Appellant’s refund claim for 1987 taxes paid was barred
by the Refund Statute, Tenn. Code Ann. § 67-1-1802. The statute is clear upon
its face. The claim for refund was filed well after the statutory period had run.
Under the authorities cited herein, and upon the record, the judgment of
the Chancellor is affirmed. Costs on appeal are taxed against the appellant. The
cause is remanded for such further proceedings as are deemed necessary.
_____________________________________________
WILLIAM B. CAIN, JUDGE
CONCUR:
_________________________________________
BEN H. CANTRELL, PRESIDING JUDGE, M.S.
_________________________________________
WILLIAM C. KOCH, JR., JUDGE
11
The Sherwin Williams Company v. Ruth E. Johnson, Commissioner of Revenue, State of Tennessee
Combined Opinion