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 :
3
(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 ) ]
4
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 :
5
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
6
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
7
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
8
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).
9
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,
10
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."
11
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