Tollett v. Franklin Equities, Inc.

OPINION ON PETITION TO REHEAR

Appellee has filed a petition for rehearing. A brief amicus curiae has been filed on behalf of the Tennessee Taxpayers’ Association and the Association of Tennessee Life Insurance Companies. It is suggested in these briefs that the opinion of the Court has subjected the entire portfolio of intangible properties held by corporate taxpayers to the minimum measure of the franchise tax under T.C.A. § 67-2908 (formerly T.C.A. § 67 — 2909), with serious consequences to financial institutions and other corporations in the state.

The opinion of the Court was addressed to a single specific issue developed by the parties in summary judgment proceedings. The Court did not hold, and does not now hold, that all of the intangible property and assets of appellee or of any other corporate taxpayer fall within the minimum measure of the tax. The only kind or type of intangible asset involved in this litigation is the corporate taxpayer’s interest in an operating partnership.

Appellee, a foreign corporation, formed a partnership to own or control Tennessee real estate and tangible personalty. It insisted that by this method it could place beyond the reach of the franchise tax law both these assets and the value of its partnership interest in the enterprise. We do not so construe the wording or the legal effect of the 1963 amendment to the statute. This is the only issue involved in the litigation and the only one considered in the original opinion. Both parties insisted that as a matter of law the assets or the value of the partnership interest were, or were not, includable. No other issue was developed.

It is clear that the 1963 amendment to the franchise tax law was enacted in response to the opinion of this Court in Memphis Peabody Corp, v. MacFarland, 211 Tenn. 384, 365 S.W.2d 40 (1963). The General Assembly obviously intended to make taxable in the future the type of business arrangement utilized by the taxpayer in that case to avoid the minimum measure of the tax; namely, the leasing or renting of property. It provided that property rented for use by corporate taxpayers in Tennessee must be included, and it prescribed a method for the valuation of such assets.

It is conceded by appellee, however, that the legislature did more than just change the language of the pre-existing statute to include the value of rented property. It made other changes, including deletion of the adjectives “real and tangible” preceding the word “property.” The taxpayer concedes that this deletion had some significance and “some meaning.” The significance which the taxpayer attaches to the amendment, however, is confined to the inclusion of property rented or leased. Throughout this litigation the appellee has urged the courts to so limit the amendment.

It is our opinion that the legislature, in amending the statute, not only sought to prevent the exclusion of leased or rented property, but also sought to close similar loopholes which might be discovered or urged by taxpayers through a narrow interpretation of the phrase “real and tangible” property. The legislature took out those modifying adjectives, and left only the word “property,” so that, as amended, this language remained:

“The measure of the tax hereby imposed shall in no case be less than the actual value of property owned, or property used, in Tennessee.”

It was and continues to be our opinion that under this amendment the legislature authorized the inclusion of intangible rights or assets such as those that are involved here. The original opinion was so worded. It stated that there was nothing in the statute since its 1963 revision which excludes intangible assets “such as this” from the franchise tax measure. The Court was not discussing an entire portfolio of intangible assets as alleged in the petition to rehear and in the amicus brief. It was *100considering an ownership interest in another business enterprise of a non-corporate nature.

The Court took occasion to cite T.C.A. § 67 — 2906, dealing not with the minimum measure of the tax but with the regular or basic measure, in which shares of stock in other taxpaying corporations are deductible. This provision was not changed in 1963. From this, it seemed to us that after the amendment a taxpayer could continue to utilize subsidiary or affiliate corporations to own or control assets without having included in its minimum tax base either the value of corporate shares of stock which it owned or the assets of subsidiary or affiliate corporations. Where, however, as in the present case, a corporation uses a partnership or some other nontaxable business entity in which to place title or control over assets which otherwise would fall within the minimum measure, then an appropriate portion of its interest in such business organization may be included.

The thrust of our holding, which we reiterate here, was that the 1963 amendment was broader than originally suggested by the Attorney General in his opinions1 and was not confined solely to the inclusion of property held under a lease. We have not attempted to delineate completely the effect of the 1963 amendment, but we are of the opinion that it was designed to close more than one single loophole and, where necessary to reflect accurately the value of property owned or used in Tennessee by a corporation, to authorize the inclusion of an intangible business interest or ownership such as is shown in this case.

We reaffirm our conclusion that a corporate taxpayer may not, through a business arrangement or organization such as was attempted here, escape the minimum measure of the tax. Ordinarily, of course, the tax is based upon the capital and net worth of the corporate enterprise. As an alternative, the minimum measure historically has been based upon the asset value of real and tangible property owned or used in the state. In our opinion, the General Assembly did not intend to change this minimum measure in any such drastic manner as suggested in the petition to rehear. The change which it did make in the language of the statute, however, and the circumstances under which it made that change, convince us that the General Assembly did not intend to permit corporate taxpayers to enter into other types of business arrangements, such as joint ventures, partnerships, sales and leasebacks and the like and thereby place assets beyond that minimum measure.

Thé franchise tax, by definition, is levied upon “the privilege of engaging in business in corporate form” in this state. T.C.A. § 67-2902. A taxpayer which exercises that privilege and obtains the legal advantages thereof cannot escape the related tax consequences by putting its assets into some other form of business organization.2 There are no express attribution provisions in the statute, permitting the Commissioner to impute outright ownership of the subsidiary’s assets to the corporate taxpayer. However, it is our opinion that the 1963 amendment was broader in scope than the mere inclusion of leased assets. Its legal effect permitted the inclusion of all or part of the taxpayer’s interest in a business entity such as is shown here.

The petition for rehearing is overruled at the cost of appellee.

BROCK, C. J., and HENRY, COOPER and FONES, JJ., concur.

. These opinions were not addressed, insofar as we can tell, to any question similar to that involved in this case; namely, the use by a corporation of some other form of subsidiary business organization.

. Cf. Tenn. Public Service Comm’n v. Nashville Gas Co., 551 S.W.2d 315, 320-21 (Tenn.1977), cert. denied, 434 U.S. 904, 98 S.Ct. 301, 54 L.Ed.2d 191 (1977) (regulated utility may not, through devices of holding companies or spinoffs, avoid reporting of revenues to Public Service Commission for rate-making purposes); General American Transp. Corp. v. Tennessee Bd. of Equalization, 536 S.W.2d 212 (Tenn.1976) (corporation not permitted to avoid classification of its rolling stock as utility property through leasing arrangements with common carriers).