Opinion
Appeal No. 01-A-01-9601-CH-00023.
November 8, 1996.
Appeal from the Chancery Court of Giles County at Pulaski, Tennessee, Honorable James L. Weatherford, Judge, Giles Chancery No. 8901.
Christopher M. Was, TRABUE, STURDIVANT DeWITT, ATTORNEY FOR PLAINTIFF/APPELLEE.
CHARLES W. BURSON, Attorney General and Reporter, SEAN P. SCALLY, Assistant Attorney General, FOR DEFENDANT/APPELLANT.
AFFIRMED AND REMANDED
OPINION
The defendant/Commissioner has appealed from a summary judgment of the Trial Court requiring the Commissioner to refund to plaintiff $75,832 use tax paid under protest. The facts are uncontroverted. The question before the Trial Court and before this Court is the application of the law to the factual situation.
On and prior to June 25, 1993, plaintiff was the owner of a Model F90 Beech aircraft which he desired to replace with a jet aircraft. The desired aircraft was not immediately available. On June 25, 1993, plaintiff entered into an eight page written agreement with Bell Aircraft, Inc. which provided that the value of the Beech aircraft was $1,142,000, but that the agreed value of plaintiff's equity in the Beech aircraft was $629,086.52 because of an existing lien thereon; that plaintiff would convey the Beech aircraft to Bell on the date of the contract; that plaintiff would buy the replacement jet from or through Bell when a satisfactory jet was found; that Bell would deposit $629,086.52 with a named escrow agent to be used in the purchase of the jet when found; and that plaintiff would not have access to the escrow fund for any other purpose except to pay for the replacement and receive the surplus, if any, after the replacement.
The contract contained the following verbatim provision:
SECOND
A. The consideration for the conveyance of the property shall be the exchange by Bell of title to personal property of "like kind" within the meaning of § 1031 of the Internal Revenue Code which shall hereafter be acquired by Bell and which shall be acceptable to owner (referred to herein as "Exchange Property").
B. Owner shall enter into a contract for the acquisition of the Exchange Property which shall be assigned to Bell for use as the Exchange Property. The assignment shall be made in the form attached as Exhibit B, and notice of such assignment shall be given to the third party seller of the Exchange Property, prior to the deferred exchange closing date, in the form attached as Exhibit C.
The import of this provision is that, if plaintiff should find a suitable aircraft and contract for its purchase, plaintiff would assign the purchase contract to Bell so that the performance of the sale contract by the third party seller would be considered a performance by Bell of its agreement to acquire and sell the replacement aircraft to plaintiff.
Plaintiff learned that the desired aircraft could be bought from Cessna Aircraft Company and executed a contract with Cessna, whereby Cessna would sell the Cessna Aircraft to plaintiff for $2,250,000. Plaintiff assigned the contract to Bell; Bell released the escrow fund to Cessna in part payment of the $2,250,000 purchase price and instructed Cessna to convey the replacement aircraft to plaintiff. Plaintiff paid or financed the remainder of the $2,250,000 and Cessna conveyed the aircraft to plaintiff.
Plaintiff paid use tax upon the entire $2,250,000, but that part of the tax which was attributable to the $1,142,000 value of the Beech aircraft was paid under protest.
As stated, the Trial Court awarded plaintiff summary judgment for $75,832, which was the amount of tax which would have been due upon $1,142,000. The commissioner appealed.
The issues on appeal are whether plaintiff is entitled to any refund under the above stated undisputed facts and, if so, the correct amount of the refund. TCA § 67-6-510. At the time of the transaction, T.C.A. § 67-6-510 read as follows:
Computation on trade-ins. Where used articles are taken in trade, or in a series of trades, as a credit or part payment on the sale of new or used articles, the tax levied by this chapter shall be paid on the net difference, that this, the price of the new or used article sold less the credit for the used article taken in trade. [Acts 1947, ch. 3, subsec. 6; mod. C. Supp. 1950, § 1248.62 (Williams, § 1328.28); T.C.A. (Orig. Ed.), § 67-3015.]
The Commissioner insists that the trade-in exemption is inapplicable because the transaction between Cessna and plaintiff did not involve a trade-in; indeed the sales contract between Cessna and plaintiff stated the purchase price as $2,250,000 and contained the following:
Less trade-in allow: -0-
Plaintiff responds that, under his contract with Bell quoted above, he was required to and did, assign his contract with Cessna to Bell, so that Cessna's action in selling and conveying the aircraft to plaintiff was done at the direction of Bell and in satisfaction of Bell's agreement to sell such an aircraft to plaintiff.
Unquestionably, if Bell had purchased the replacement aircraft from Cessna and reconveyed it to plaintiff, the value of the Beechcraft would be exempt from use tax as a "trade-in" under the quoted statute.
Considering the Cessna contract alone, plaintiff is not entitled to a trade-in allowance.
On the other hand, if the Bell contract is considered, it is possible to consider the Cessna contract as a fulfillment of the Bell contract as to which there was a "trade-in."
The Commissioner cites State v. Slieger, Tenn. 1993, 846 S.W.2d 262, wherein the Supreme Court declined to extend the "flagrant non-support statute" to include a parent who has never resided in Tennessee and remains outside the state to avoid being forced to support a child. The Court did indicate an aversion to "unduly restricting or expanding the legislative intent."
The Commissioner cites the definition of "trade-in," and asserts correctly that Cessna did not receive title to the Beechcraft aircraft as a trade-in. On the other hand, Bell did receive title to the Beechcraft aircraft as a trade-in and did place its net equity value in escrow to be used as part payment of the jet aircraft plaintiff had agreed to buy from Bell, and said net value did reduce the cost of the Cessna purchased by plaintiff.
The Commissioner next argues that the contract between Cessna and plaintiff cannot be varied by extraneous evidence. This rule is applicable between the parties to the contract; but, where the contract is assigned by one of the parties, the circumstances of the performance of the contract may be considered in determining tax liability upon the contract.
The Commissioner next argues that plaintiff did not comply with regulations promulgated by the Commissioner requiring the model and serial number of the trade-in to be listed in the invoice evidencing the transaction. The Beechcraft trade-in was described with particularity in the exhibit attached to the Bell contract. Although not a precise compliance with the regulation, the exhibit was a substantial compliance, and the commissioner does not point out wherein the State was prejudiced thereby or why, in equity and good conscience plaintiff should be required to pay use tax on that part of the purchase price of the Cessna which was not paid by plaintiff but by the escrowed value of the trade-in.
In McDonald's Restaurant of Ill. v. Commissioner, 7th Cir. 1982, 688 F.2d 520, the McDonald restaurant chain purchased a chain of restaurants for which the sellers demanded cash. McDonald's issued stock to the sellers but registered the stock so that the sellers could readily sell the stock and obtain the cash they desired. The Appeals Court held that the transaction could be treated as a cash purchase for income tax purposes under "pooling of interests." The Court said:
The step-transaction doctrine is a particular manifestation of the more generous tax law principle that purely formal distinctions cannot obscure the substance of a transaction.
. . . .
[U]nder the "end result test," "purportedly separate transactions will be amalgamated with a single transaction when it appears that they were really component parts of a single transaction intended from the outset to be taken for the purpose of reaching the ultimate result" (Citations omitted).
. . . .
A second test is the "interdependence" test, which focuses on whether "the steps are so interdependent that the legal reactions created by one transaction would have been fruitless without a completion of the series." (Citations omitted)
. . . .
The "binding commitment" test forbids use of the step-transaction doctrine unless "if one transaction is to be characterized as a `first step' there [is] a binding commitment to take the later steps."
Although the foregoing relates to tax other than use tax, its reasoning is appropriate to the circumstance of the present case and is adopted by this Court.
The Commissioner argues that his findings of fact are entitled to a presumption of correctness. The issue in this appeal involves a finding of law applicable to undisputed facts. This Court respectfully differs with the Commissioner's finding of law, and agrees with the Trial Court that the amount of the "trade-in," should be deducted from the total sale price to determine the net taxable amount of the sale.
It appears, however, that the Trial Court miscalculated the amount of the "trade-in exemption" by computing 6% tax on $1,142,000, the gross value of the "trade-in." This was incorrect, for the amount credited to the sale price of the Cessna aircraft was the net value of the trade in after deduction of the lien, which was $629,006.52, the amount of the escrow funds delivered to Cessna, and actually credited to the sale price. The taxable amount of the sale of the Cessna was $2,250,000 minus $629,006.52, or $1,620,993, on which 6% tax would be $97,259.61.
The judgment of the Trial Court is therefore vacated and the casue is remanded for recomputation of the amount of penalty and attorneys fees and the entry of a judgment for refund in comformity with this opinion including prejudgment interest on the amount of the revised judgment from the date of payment under protest, and attorneys fee on the revised amount of the judgement. Statutory interest will accrue on the revised judgment from November 27, 1995, the date of the judgment of the Trial Court.
As modified, judgment of the Trial Court is affirmed. One half of the costs of this appeal will be paid by each party. The cause is remanded to the Trial Court for any necessary further proceedings.
AFFIRMED AND REMANDED.
___________________________________ HENRY F. TODD PRESIDING JUDGE, MIDDLE SECTION
CONCUR:
_____________________________ BEN H. CANTRELL, JUDGE
DISSENTS IN SEPARATE OPINION _____________________________ WILLIAM C. KOCH, JR., JUDGE
DISSENTING OPINION
The majority has decided that Tenn. Code Ann. § 67-6-510 (1994) permits the purchaser of a used jet aircraft to reduce his state tax liability by deducting the value of a previously owned prop-driven aircraft from the purchase price of the jet aircraft. I do not agree that Tenn. Code Ann. § 67-6-510 applies to the purchase of the jet because the transaction does not involve a trade or series of trades.
I.
David Hutton decided to replace his prop-driven aircraft with a jet aircraft. Since he had not identified the particular aircraft he wished to purchase, he entered into an "exchange agreement" in June 1993 with Bell Aviation, Inc. that embodied a series of transactions structured as a deferred exchange of "like-kind" business property under I.R.C. § 1031 (1988). In the first transaction, Mr. Hutton agreed to sell his prop-driven aircraft to Bell for $1,142,000. In the second transaction, Mr. Hutton agreed to "contract for the acquisition of" a replacement aircraft and to assign this contract to Bell. In the third transaction, Mr. Hutton agreed to assign his interest in the contract to purchase the replacement aircraft to Bell, and Bell agreed to "convey" the replacement aircraft back to Mr. Hutton and to apply the $629,086.52 to the purchase price of the replacement aircraft. If Mr. Hutton did not purchase a replacement aircraft within 180 days after selling his prop-driven aircraft to Bell, the exchange agreement required the escrow agent to pay the $629,086.52 over to Mr. Hutton.
For its part, Bell agreed to use $512,913.48 to pay off the loan secured by the prop-driven aircraft and to hold the remaining $629,086.52 at interest to be applied toward the purchase of the jet aircraft. For the purposes of this transaction, the parties agreed that the "equity property value" of the prop-driven aircraft was equal to the net proceeds of the sale available to be applied toward the purchase of the jet aircraft, that is $629,086.52.
See Exchange Agreement ¶ SECOND (B). In another portion of the agreement, Bell agreed to use its best efforts to "acquire" any replacement aircraft identified by Mr. Hutton. See Exchange Agreement ¶ FOURTH (B). However, the exchange agreement also provided that Bell had no obligation to "locate, negotiate for or acquire" a replacement aircraft. See Exchange Agreement ¶ FIFTH (A).
The exchange agreement did not require Bell to actually convey the replacement aircraft to Mr. Hutton. It defined Bell's "conveyance" to include "a direct conveyance from the third party seller to . . . [Mr. Hutton], at the direction of, and in satisfaction of the obligations of Bell." See Exchange Agreement ¶ THIRD (B).
See Exchange Agreement ¶ FOURTH (C)(3). In order to obtain an exemption from federal taxation, I.R.C. § 1031(a)(3) requires the property to be identified and the exchange completed within 180 days.
The transaction occurred precisely as the parties envisioned. Mr. Hutton conveyed his prop-driven aircraft to Bell in June 1993. Bell used $512,913.48 to pay off the loan on the prop-driven aircraft and deposited the remaining $629,086.52 with the designated escrow agent. Then Mr. Hutton, rather than Bell, undertook to locate a replacement aircraft. In December 1993, he entered into a used aircraft purchase agreement with Cessna Aircraft Company in which he agreed to purchase a 1985 Citation S/II jet for $2,250,000. The agreement reflected Mr. Hutton's $112,500 deposit but also reflected that the purchase price was not being reduced by a "trade allowance." The agreement also specifically stated that it was not assignable except on prior written consent of Cessna.
There is no evidence in the record that the deposit for the replacement aircraft came from the proceeds of the sale of Mr. Hutton's prop-driven aircraft to Bell.
Section IV(7) provided, in part: "This Agreement, including the rights of Purchaser [Mr. Hutton] hereunder, may not be assigned by Purchaser except to a wholly-owned subsidiary or successor in interest by name change or otherwise and then only upon the prior written consent of Seller [Cessna]. . . ." See Used Aircraft Purchase Agreement § IV(7).
On December 17, 1993, Mr. Hutton executed an "assignment" of his interest in the contract with Cessna to Bell. On the same date, Bell directed the escrow agent to pay over the proceeds of the sale of the prop-driven aircraft to Cessna and also, by letter, "directed" Cessna to convey the Citation to Mr. Hutton. The closing for the sale of the Cessna Citation occurred on December 20, 1993. The record contains no evidence that Cessna ever received Bell's "direction" or that it ever agreed in writing to Mr. Hutton's "assignment" of the contract to Bell. The assignment was not a necessary ingredient for the closing between Cessna and Mr. Hutton.
Mr. Hutton actually took possession of the Cessna Citation on January 20, 1994.
Mr. Hutton did not pay Tennessee use tax on the Cessna Citation. On September 2, 1994, the Tennessee Department of Revenue sent Mr. Hutton a notice of delinquency stating that he owed $178,866 in tax, penalty, and interest. The amount of the tax was calculated on the Cessna Citation's $2,250,000 purchase price. Mr. Hutton immediately paid $71,403, although he insisted that he should not be required to pay additional tax because Tenn. Code Ann. § 67-6-510 permitted him to deduct the value of the prop-driven aircraft ($1,142,000) from the purchase price of the Cessna Citation ($2,250,000). When the department disagreed, Mr. Hutton paid the remainder of the disputed tax, penalty, and interest and filed suit in the Chancery Court for Giles County seeking a refund. Although they disagree with regard to amount of the trade-in credit, both the trial court and a majority of this panel agree that Mr. Hutton is entitled to a trade-in credit under Tenn. Code Ann. § 67-6-510. I do not agree that Mr. Hutton is entitled to a trade-in credit under the facts of this case.
II.
It is axiomatic that statutes imposing tax liability are construed against the taxing authority and, conversely, that statutes providing exemptions from taxation are construed against the taxpayer. AFG Indus., Inc. v. Cardwell, 835 S.W.2d 583, 584-85 (Tenn. 1992); Covington Pike Toyota, Inc. v. Cardwell, 829 S.W.2d 132, 135 (Tenn. 1992). Even though these statutes are construed strictly, the courts must still give effect to their clearly expressed purpose, Stratton v. Jackson, 707 S.W.2d 865, 866 (Tenn. 1986), and must construe the words of the statute using their ordinary sense, without any forced or subtle construction. Nashville Golf Athletic Club v. Huddleston, 837 S.W.2d 49, 53 (Tenn. 1992); Jersey Miniere Zinc Co. v. Jackson, 774 S.W.2d 928, 930 (Tenn. 1989).
Taxpayers have the burden of demonstrating that they are entitled to a tax exemption. Tibbals Flooring Co. v. Huddleston, 891 S.W.2d 196, 198 (Tenn. 1994); American Cyanamid Co. v. Huddleston, 908 S.W.2d 396, 400 (Tenn.Ct.App. 1995). This burden has been characterized as "heavy and exacting." Pan Am World Servs., Inc. v. Jackson, 754 S.W.2d 53, 55 (Tenn. 1988); Rogers Group, Inc. v. Huddleston, 900 S.W.2d 34, 36 (Tenn.Ct.App. 1995). Thus, in order for Mr. Hutton to be entitled to an exemption from the use tax under Tenn. Code Ann. § 67-6-510, he must demonstrate that his purchase of the Cessna Citation involved a "trade" or "series of trades" in which "used articles are taken . . . as a credit or part payment on the sale of new or used articles."
Tenn. Code Ann. § 67-6-510 applies to trade-in allowances — that is the value of property taken in lieu of money as full or part payment for the purchase of other goods or property. The statute's use of the phrase "series of trades" indicates that it should not be limited to one-step transactions. However, each transaction must still be a "trade" if Tenn. Code Ann. § 67-6-510 is to apply. A "trade" connotes the exchange of goods for money. Seegle v. State Dep't of Insts., 198 So.2d 154, 158 (La. Ct. App. 1967).
I can find no "trade" or "series of trades" in this case. Mr. Hutton's sale of his prop-driven aircraft to Bell did not involve a trade. It was simply the sale of an aircraft for $1,142,000. Similarly, Mr. Hutton's purchase of the Cessna Citation, by the very terms of the sales agreement, did not involve a trade. Finally, Mr. Hutton's attempted assignment of his contract with Cessna, whether effective or ineffective, did not involve a trade.
Likewise, I do not believe that the "step-transaction doctrine" should be used to transform these transactions into one involving a "trade" or "series of trades." The "step-transaction doctrine" is a more precise way to apply the established concept that substance should prevail over form. McDonald's Restaurants of Ill., Inc. v. Commissioner, 688 F.2d 520, 524 (7th Cir. 1982); Koch v. Commissioner of Revenue, 605 N.E.2d 301, 306 (Mass. App. Ct. 1992). It permits the courts to disregard intervening meaningless transactions undertaken solely to obtain more favorable tax treatment. Penner v. County of Santa Barbara, 44 Cal.Rptr.2d 606, 610 (Ct.App. 1995). It does not permit the courts to manufacture facts that never occurred. Greene v. United States, 13 F.3d 577, 583 (2d Cir. 1994).
Mr. Hutton's assignment of his interest in his contract with Cessna to Bell and Bell's return assignment to Mr. Hutton are without question meaningless transactions undertaken solely to obtain more favorable tax treatment. As a matter of law, these assignments had no effect on either party's rights and obligations under Mr. Hutton's contract with Cessna because they were not the type permitted by the contract. More importantly, the record contains no evidence that Cessna ever agreed to, or even knew about, the assignment. When these assignments are disregarded, all that remains are two separate contracts — the contract between Mr. Hutton and Bell and the contract between Mr. Hutton and Cessna.
The first contract could not have contemplated the second contract because Mr. Hutton had not found a replacement aircraft when the first contract was signed. Similarly, the contracts were not interdependent because legal relationships created by the first contract did not depend on the completion of the series of transactions. The first contract did not require Bell to find or acquire a replacement aircraft. Had Mr. Hutton not purchased a replacement aircraft within 180 days, the escrow agent would simply have paid over to him the proceeds of his contract with Bell.
Accordingly, I would reverse the trial court because Mr. Hutton has not met his burden of proving that he is entitled to an exemption under Tenn. Code Ann. § 67-6-510 for the value of the prop-driven aircraft he sold to Bell. For the purposes of this particular transaction, his use tax should have been calculated on the full $2,250,000 price of the Cessna Citation.
____________________________ WILLIAM C. KOCH, JR., JUDGE
ORDER
Upon consideration of the petition to rehear filed by the appellant and the response thereto filed by appellee, it is ordered that the opinion filed on August 30, 1996, be with-drawn and that the opinion filed contemporaneously with this order be substituted for said August 30, 1996, opinion.
It is further ordered that the judgment entered on August 30, 1996, be vacated.
ENTER ________________
___________________________________ HENRY F. TODD PRESIDING JUDGE, MIDDLE SECTION
CONCUR:
______________________________ BEN H. CANTRELL, JUDGE
DISSENTS IN SEPARATE OPINION
______________________________ WILLIAM C. KOCH, JR., JUDGE