L. M. BERRY & COMPANY,                         )

                                                FILED
                                                   October 28, 1999

                                               Cecil Crowson, Jr.
                                              Appellate Court Clerk
                                   )
     Plaintiff/Appellant,              )
                                   )         Appeal No.
v.                                     )      01A01-9809-CH-00487
                          )
JOE B. HUDDLESTON, in his official   )     Davidson Chancery
capacity as COMMISSIONER OF        )     No. 94-3189-I
REVENUE, STATE OF TENNESSEE,           )
                          )
     Defendant/Appellee.       )



                                 COURT OF APPEALS OF TENNESSEE


              APPEAL FROM THE CHANCERY COURT FOR DAVIDSON COUNTY

                                           AT NASHVILLE, TENNESSEE

                   THE HONORABLE IRVIN H. KILCREASE, JR., CHANCELLOR



RICHARD W. BELL                             JONATHAN COLE
General Attorney                        Baker, Donelson, Bearman & Caldwell
BellSouth Corporation                   511 Union Street, Suite 1700
1155 Peachtree Street, N.E., Suite 1800        1700 Nashville City Center
Atlanta, Georgia 30309                   Nashville, Tennessee 37219

GREGORY G. FLETCHER
Baker, Donelson, Bearman & Caldwell
2000 First Tennessee Building
165 Madison Avenue
Memphis, Tennessee 38103
    ATTORNEYS FOR PLAINTIFF/APPELLANT
PAUL G. SUMMERS
Attorney General and Reporter

JIMMY G. CREECY
Office of the Attorney General
425 Fifth Avenue North
Nashville, Tennessee 37243
     ATTORNEYS FOR DEFENDANT/APPELLEE




                                      REVERSED AND REMANDED

                                                                          WILLIAM B. CAIN, JUDGE

                                          OPINION

       This case concerns a suit for refund, under Tennessee Code Annotated section 67-1-1803, of
excise taxes assessed as a result of an audit conducted by the Tennessee Department of Revenue’s
field audit division and covering tax years 1989-1991. The taxpayer, L. M. Berry and Company
(LMB) sought the refund of $96,605.00 in excise tax, assessed on dividends declared by ITT World
Directories, Inc. (ITTWD) and Promedia, S.A.(Promedia) and paid to LMB. LMB paid the assessed
tax and brought suit for refund alleging that under Tennessee’s version of the Uniform Distribution of
Income for Tax Purposes Act, see Tenn. Code Ann. 67-4-801 et seq.; the dividends were not taxable
as business earnings under section 67-4-804. In addition LMB argued that the inclusion of these
dividends in LMB’s income for excise tax purposes was inconsistent with the United States
Constitution’s Commerce clause and its Fourteenth Amendment Due Process provisions.               On
cross-motions for summary judgment, the chancellor dismissed LMB’s complaint, holding as follows:
           The court finds that the dividends received by the plaintiff from its affiliates
           ITTWD and Promedia during the audit period at issue are “business earnings”
           within the meaning of T.C.A. §67-4-804, and are subject to apportionment to
           Tennessee for purposes of the Tennessee Excise Tax, T.C.A. §67-4-801 et seq.
           The Court further finds that the Commissioner’s application of the statutory
           apportionment formula to these earnings has not caused extraterritorial value to be
           taxed, and that the assessment is thus in accordance with the Due Process Clause
           and Commerce Clause of the United States Constitution.

From the grant of summary judgment below, LMB appeals.



                                                                                                         2
I.          TENNESSEE FRANCHISE AND EXCISE TAX AND “UNITARY BUSINESS
          THEORY”

     Since this case concerns both Tennessee’s statutory definition of “business earnings” as well as
the constitutional application of unitary business theory, any discussion of the facts necessitates an
explanation of how this tax law developed. The Court approves the concise summary of Tennessee’s
franchise and excise tax system in the brief on behalf of the commissioner. Appellee writes:
          The tax at issue in this case, the excise tax, has been the major tax imposed on
          corporations by the State of Tennessee for over 75 years. Originally enacted in
          1923, the excise tax, T.C.A. §§ 67-4-801, et seq., was most recently redrafted and
          adopted in 1976. The excise tax is upon the privilege of engaging in business in
          Tennessee in corporate form, First American Nat’l Bank v. Olsen, 751 S.W.2d
          417 (1987), appeal dismissed, 485 U.S. 1001, 108 S.Ct. 1460, 99 L.Ed. 2d 691
          (1988); Tennessee Growers, Inc. v. King, 682 S.W.2d 203 (Tenn. 1984) and is
          imposed at the rate of 6% “of the net earnings for the next preceding fiscal year for
          business done in this state.” T.C.A. § 67-4-806(a). The other major tax on
          corporations, the franchise tax, is also a privilege tax “upon the privilege of doing
          business in corporate form in this state,” T.C.A. § 67-4-903(a), and imposed at the
          rate of $.25 per $100 of issued and outstanding stock, surplus and undivided
          profits. T.C.A. § 67-4-904(a).

          In the event that a corporation engages in business in Tennessee as well as other
          states, it is entitled to apportion its income and property for purposes of
          determining its tax liability. T.C.A. §§ 67-4-809 (excise tax) and 67-4-909
          (franchise tax). Both taxes are considered in tandem and construed together as one
          scheme of taxation. American Bemberg Corp. v. Carson, 188 Tenn. 263, 272, 219
          S.W.2d 169, 173 (1949); First American Nat’l Bank v. Olsen, 751 S.W.2d at 421.
           A state does possess inherent power to tax a non-domiciliary corporation’s
          activities to compensate that State for the “protection, opportunities and benefits”
          the State confers on the corporation’s activities within the State. Allied-Signal,
          Inc. v. Director, 504 U.S. 768, 112 S.Ct. 2251, 2258, 119 L.Ed.2d 133 (1992).


      The Allied-Signal case, cited above, is considered one of the pantheon of cases charting the
interplay between a state’s ability to tax interstate entities doing business in the state on one hand, and
the provisions of the Commerce Clause and the Due Process Clause of the United States Constitution
on the other. See Art. I, §8, U.S. Const.; U.S. Const. amend. XIV. See also ASARCO, Inc. v. Idaho
State Tax Comm’n, 458 U.S. 307, 102 S.Ct. 3103, 73 L.Ed. 2d 787 (1982); Container Corp. of
America v. Franchise Tax Bd., 463 U.S. 159, 103 S.Ct. 2933, 7 L.Ed.2d 545 (1983).


          Allied-Signal concerned      New Jersey’s attempt to tax Allied-Signal Corp., a Delaware
                                                                                                              3
corporation doing business in all fifty states, for income received from the sale of stock in a New
Jersey corporation principally located in New York.         Justice Kennedy, writing for the majority,
provided the following discussion of the unitary business principle:
         Because of the complications and uncertainties in allocating the income of
         multistate businesses to the several States, we permit States to tax a corporation on
         an apportionable share of the multistate business carried on in part in the taxing
         state. That is the unitary business principle. It is not a novel construct, but one
         that we approved within a short time after the passage of the Fourteenth
         Amendment’s Due Process Clause. We now give a brief summary of its
         development.

         When States attempted to value railroad or telegraph companies for property tax
         purposes, they encountered the difficulty that what makes such a business valuable
         is the enterprise as a whole, rather than the track or wires that happen to be located
         within a State’s borders. The Court held that consistent with the Due Process
         Clause, a State could base its tax assessments upon “the proportionate part of the
         value resulting from the combination of the means by which the business was
         carried on, a value existing to an appreciable extent throughout the entire domain of
         operation.” Adams Express Co. v. Ohio State Auditor, 165 U.S. 194, 220-221, 17
         S.Ct. 305, 309, 41 L.Ed. 683 (1987) (citing Western Union Telegraph Co. v.
         Attorney General of Massachusetts, 125 U.S. 530, 8 S.Ct. 961, 31 L.Ed. 790
         (1888))...

         Adams Express recognized that the principles that permit a State to levy a tax on
         the capital stock of a railroad, telegraph, or sleeping car company by reference to
         its unitary business also allow proportional valuation of a unitary business in
         enterprises of other sorts. As the Court explained: “The physical unity existing in
         the former is lacking in the latter; but there is the same unity in the use of the entire
         property for the specific purpose, and there are the same elements of value arising
         from such use.” 165 U.S., at 221, 17 S.Ct., at 309.

         The unitary business principle was later permitted for state taxation of corporate
         income as well as property and capital. Thus, in Underwood Typewriter Co. v.
         Chamberlain, 254 U.S. 113, 120-121, 41 S.Ct. 45, 47, 65 L.Ed. 165 (1920), we
         explained:

             “The profits of the corporation were largely earned by a series of
             transactions beginning with manufacture in Connecticut and ending with the
             sale in other States. In this it was typical of a large part of the manufacturing
             business conducted in the State. The legislature in attempting to put upon
             this business its fair share of the burden of taxation was faced with
             impossibility of allocating specifically the profits earned by the processes
             conducted within its borders.           It, therefore, adopted a method of
             apportionment which, for all that appears in this record, reached, and was

                                                                                                         4
             meant to reach, only the profits earned within the State.”

         As these cases make clear, the unitary business rule is a recognition of two
         imperatives: the States’ wide authority to devise formulae for an accurate
         assessment of a corporation’s intrastate value or income; and the necessary limit on
         the State’s authority to tax value or income that cannot in fairness be attributed to
         the taxpayer’s activities within the State.

Allied-Signal, Inc. v. Director, Div. Of Taxation, 504 U.S.768, 778-80, 112 S.Ct. 2251, 2258-2259,
119 L.Ed.2d 533, (1992).


       As is true of the case at bar, the Supreme Court stated in Allied Signal, “[i]t is this second
component, the necessity for a limiting principle, that underlies this case.” Allied-Signal, 504 U.S., at
780, 112 S.Ct., at 2259.


     Regarding a working statutory and regulatory definition of “business earnings,” our state statutes
and rules provide the following:
         "Business earnings" means earnings arising from transactions and activity in the
         regular course of the taxpayer's trade or business or earnings from tangible and
         intangible property if the acquisition, use, management or disposition of the
         property constitutes an integral part of the taxpayer's regular trade or business
         operations. In essence, earnings which arise from the conduct of the trade or
         trades or business operations of a taxpayer are "business earnings," and the
         taxpayer must show by clear and cogent evidence that particular earnings are
         classifiable as nonbusiness earnings. . . .

Tenn. Code Ann. §67-4-804(a)(1)
-and-
        Dividends are business earnings where the stock with respect to which the
        dividends are received arises out of or was acquired in the regular course of the
        taxpayer’s trade or business operations or where the purpose for acquiring and
        holding the stock is related to or incidental to such trade or business operations.

Tenn. Comp. R. & Regs. R. 1320-6-1-.23(d)(1991). The assessment in question was made by the
commissioner allegedly pursuant to this statutory and regulatory authority. Since this case comes to us
on appeal from the grant of summary judgment on cross-motions, and since the litigants before us
dispute only the legal effect of undisputed facts, the review of the trial court’s action is de novo upon
the record with no presumption of correctness on appeal.         See Cowden v. Sovran Bank/Central
South, 816 S.W.2d 741, 744 (Tenn. 1991); Gehl Corp. v. Johnson, 991 S.W.2d 246, 248 (Tenn. Ct.

                                                                                                            5
App. 1998); see also Byrd v. Hall, 847 S.W.2d 208 (Tenn. 1993). Thus the issue framed by the “
unitary business theory” and Tennessee’s definition of business income is whether the undisputed
facts below establish that LMB, ITTWD and Promedia either operate as a unit, or are at least related
enough, so that dividends received as a result of LMB’s stock holdings in the latter two corporations
can be taxed as income “related or incidental to” LMB’s yellow pages solicitation in Tennessee. With
the issues thus established, the Court now must analyze the undisputed facts with regard to the nature
and operation of the three business entities to determine their relationship. At the end of this analysis in
this de novo review, the proper test for determining integration and interrelation will be ascertained and
applied to the facts to evaluate the legal correctness of the chancellor’s action. See Tenn. R. App. P.
13(a).


II. THE NATURE OF LMB’S BUSINESS
         LMB, a Georgia corporation with its principal place of business in Ohio, sells “Yellow Pages”
advertising to commercial customers in several states including Tennessee. In most transactions, LMB
acts as a sales agent between local telephone companies and commercial telephone subscribers within
those companies’ service areas. LMB receives commissions from the telephone companies on the
eventual advertising contracts. On certain advertising contracts requiring publishing of “Yellow Pages”
, LMB generally out sources the publishing portion of its agreement, charging a higher commission to
the telephone company to cover the cost. The advertising contracts between telephone company and
commercial customers are renewed annually, whereas the commission contract between LMB and the
telephone company have a five- to seven-year term. Occasionally, LMB will sell advertising space to a
customer outside a telephone company’s service area and bill that customer directly. Through a
subsidiary, LMB also furnishes “national” yellow pages services, under which an advertiser may deal
with a single sales agent (LMB) in placing advertisements in yellow pages nationally.


III. THE NATURE AND FORMATION OF ITTWD AND PROMEDIA
     In 1966, LMB, then a Maryland corporation headquartered in Ohio, and International Telephone
and Telegraph Corporation (ITT), a Delaware corporation, formed another Delaware corporation ITT
World Directories, Inc. (ITTWD) for the purpose of developing a telephone directory business in
foreign markets. As evidenced by the undisputed portions of LMB’s “Statement of Material Facts in
support of Plaintiff’s Motion for Summary Judgment:”

                                                                                                               6
         13.      ITTWD, which maintains its principal offices in Brussels, Belgium, created
         a number of international subsidiaries or “units,” to sell telephone directory
         advertising similar to the “yellow pages.” Each of these “units” was a foreign
         corporation or association. Generally, these “units” operated within, and were
         confined to, specific countries, since most foreign telephone companies were
         owned by foreign governments. All such “units” operated solely overseas.

         14.     ITT and LMB, acting outside of ITTWD, also created a number of “units”
         through a wholly-owned subsidiary of ITT, International Standard Electric Corp., a
         Delaware corporation. One of these was Promedia, S.A., a Belgium corporation.
         ...

                                               ***
         17.       During the audit period (January 1, 1989 through December 31, 1991),
         ITTWD operated units in Belgium, UK, Holland, Ireland, Portugal, Puerto Rico,
         Japan, Turkey, the Virgin Islands, Ecuador, France and Germany. ITTWD and its
         units employed more than 2500 employees worldwide, with none located in
         Tennessee. Between 1986 and 1996, ITTWD had fewer than 12 employees in the
         United States, all of whom were located at small ITTWD offices in New York or
         New Jersey.
         18.     ITTWD had no employees, facilities or property in Tennessee at any time.

         19.          Promedia operated at all times only in Belgium; it had no employees,
         facilities or property in Tennessee at any time.


IV. THE INTERRELATION OF LMB, ITTWD AND PROMEDIA
     The undisputed facts disclose the following with regard to LMB’s relationship with ITTWD and
Promedia. LMB held a 20% stock interest in ITTWD and Promedia respectively. LMB held one of
five seats on ITTWD’s board of directors. In addition, considering LMB’s “Statement of Material
Facts in Support of Plaintiff’s Motion for Summary Judgment” and excising the portions to which the
commissioner objects, we find the following factual statements in the record:
          21.      All decisions regarding the operations of ITTWD and Promedia,
                 including the business plans and strategic direction of ITTWD and
                 Promedia, are controlled by ITT-appointed directors and by
                 ITTWD officers and were so controlled by them during the audit
                 period.

          22.     ...[T]he CFO and Chairman of LMB served as assistant controller
                 and director, respectively, for ITTWD... .

          23.      ITTWD generally enters into “full service” contracts with foreign
                 telephone companies under which ITTWD sells advertising,
                                                                                                      7
                   publishes the directory, and invoices and collects from the
                   customer/advertiser.

            24.      ITTWD and Promedia did not sell “yellow pages” advertising for
                   the United States directories, nor did ITTWD or Promedia have
                   any telephone company customers in common with LMB.


             25.        There may have been international businesses who obtained “
                   yellow pages” advertising through LMB for directories published in
                   the United States and who also obtained similar advertising through
                   ITTWD for directories published overseas. However, LMB and
                   ITTWD did not sell for one another, nor did they share or
                   exchange telephone subscriber lists or sales contact lists.

      Other than the payment of dividends (specifically the 1991 payment totaling $12,000,000 from
ITTWD and $1,650,000 from Promedia, which were the objects assessed) and the corporate
genealogy listed above, the only connection remaining between LMB, ITTWD and Promedia is the fact
that during the audit period, six of LMB’s executives were on loan to ITTWD for the purpose of
training ITTWD’s sales staff. These executives were “loaned” for an average of one year per person.
They were paid by LMB, who was reimbursed by ITTWD.


      The upshot of LMB’s argument below and on appeal is that the “unitary business theory” as
related by this court in Louis-Dreyfus, infra, is recognized in the case at bar more by the absence of its
components than by their presence. Specifically, in addition to those listed above, LMB urged the
following undisputed facts in support of that contention:
       1.     LMB did not provide accounting, legal, data processing, research and
            development, engineering, or planning services to either ITTWD and Promedia;
       2.      LMB did not use the same data processing systems as these corporations;
       3.     LMB did not use the same system of accounting as these corporations;
       4.     LMB and these corporations did not advertise for one another;
       5.     LMB did not prepare income tax returns for these corporations;
       6.     LMB did not use the same CPA firm as these corporations;
       7.     LMB internal auditors did not audit the books and records of these
            corporations;
       8.      LMB, ITTWD and Promedia did not share a common workers
            compensation insurance policy;
      9.      LMB provided no purchasing or service function for ITTWD or Promedia;
      10.      LMB did not conduct research and development for these corporations;
      11.      LMB did not sell products to these corporations;

                                                                                                             8
      12.       LMB did not purchase products from these corporations;
      13.       LMB and these corporations did not loan funds to one another by
            assignment of accounts receivable;
      14.       LMB and these corporations did not borrow jointly;
      15.       LMB did not guarantee any debts of these corporations, nor did ITTWD or
            Promedia guarantee any debts of LMB;
      16.       LMB did not pledge its ITTWD stock as collateral for its own borrowing;
      17.       LMB never commingled operating funds or other monies or accounts with
            ITTWD or Promedia;
      18.       No LMB employee was authorized to issue drafts on any ITTWD or
            Promedia bank accounts, nor were any ITTWD or Promedia employees
            authorized to issue drafts on any LMB bank account;
      19.       LMB and these corporations did not share any common selling,
            manufacturing, storage or transportation facilities;
      20.       LMB did not exchange fixed assets with these corporations;
      21.       LMB did not negotiate or approve contracts for these corporations;
      22.       Although the CFO and Chairman of LMB served as assistant controller and
            director, respectively, for ITTWD, there are no other individuals who were
            officers, directors, or employees of both LMB and ITTWD;
      23.       LMB and ITTWD do not have the same revenue and expense structure.
            Generally, LMB’s revenues are derived from sales of advertising by LMB as
            agent for the telephone company, with the telephone company performing all
            customer/advertiser billing and collection and, in many instances, with the
            telephone company undertaking all publishing and distribution of directories.
            By contrast, ITTWD generally enters into “full-service” contracts with foreign
            telephone companies under which ITTWD sells advertising, publishes the
            directory, and invoices and collects from the customer/advertiser.


       The commissioner seeks to assert that the income derived by LMB is at least an operational
investment asset if not the income of a unitary business engaged in the marketing of “yellow pages”
advertising worldwide. The commissioner points to the shared employees and officers, the genealogy
of ITTWD and Promedia referenced above, and the similar business purpose to support the premise
that LMB’s investment was not merely passive, but actually an operational function of LMB’s business
in Tennessee.
V. THE PROPER STANDARD
      It is the taxpayer’s assertion in the case at bar, that the commissioner’s attempt to tax is well
outside Tennessee’s authority under the unitary business principle. In support of that assertion, LMB
would point the court to our decision on Louis Dreyfus Corp. v. Huddleston, 933 S.W.2d 460 (Tenn.
Ct. App. 1996).


                                                                                                          9
      The commissioner attempts to simplify the discussion below and on appeal to suggest one of
two alternative tests. The State would argue that the persuasive power of the “unitary business
principle” as discussed in Louis-Dreyfus Corp. and Allied-Signal, supra, was eroded in Allied-Signal
to allow taxation of any investment of an operational nature. To support this position, the State quotes
the following language:
            We agree that the payee and the payor [of dividends] need not be engaged in the
            same unitary business as a prerequisite to apportionment in all cases. Container
            Corp. says as much. What is required instead is that the capital transactions
            serve an operational rather than an investment function . . . .

            To be sure the existence of a unitary relation between the payor and the payee is
            one means of meeting the constitutional requirement. Thus, in ASARCO and
            Woolworth we focused on the question whether there was such a relation. We
            did not purport, however, to establish a general requirement that there be a
            unitary relation between the payor and the payee to justify apportionment, nor
            do we do so today.

Allied-Signal, supra, at 787, 112 S.Ct. at 2263. This position, however, begs the questions that both
alleged tests attempt to answer, i.e.,
            1. Does the capital transaction allegedly subject to tax add value to the interstate
            business as a whole as well as to the value within the jurisdiction providing “
            protection, oppor-tunities, and benefits” to the taxpayer? See Wisconsin v. J.C.
            Penney Co.,311 U.S. 435, 444, 61 S.Ct. 246, 250, 85 L.Ed. 267 (1946).
and
            2. Does the realization of that capital bear such a functional or operational
            relationship to the taxpayer’s business and minimum connection with the
            jurisdiction as to make taxation of that asset constitutionally proper. See
            generally, Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159,
            170, 103 S.Ct. 2933, 2942, 7 L.Ed.2d 545 (1983).

The United States Supreme Court stated this inquiry best:

            Although our modern due process jurisprudence rejects a rigid, formalistic
            definition of minimum connection, we have not abandoned the requirement that,
            in the case of a tax on an activity, there must be a connection to the activity
            itself, rather than a connection only to the actor the state seeks to tax.

Allied-Signal, supra, at 778, 112 S.Ct. at 2258 (citing Quill Corp. v. North Dakota, 504 U.S. 298,
306-308, 112 S.Ct. 1904, 1909-1910, 119 L.Ed.2d 91 (1992)).


      The commissioner argues that Louis Dreyfus is distinguished on its facts from the case at bar.
                                                                                                           10
Insofar as the court in Louis Dreyfus applied the same principles enunciated by the United States
Supreme Court in its long line of “unitary business” cases, including Allied Signal, supra, and
applicable to the case at bar, we find the commissioner’s argument unpersuasive. Says the Court:
           The courts have devised several tests for determining whether a business is
           unitary. The earliest of these, the so-called "three unities" test required the
           courts to examine the unity of ownership, the unity of operation as evidenced by
           central purchasing, advertising, accounting, and management, and the unity of a
           centralized executive force and general system of operation. Butler Bros. v.
           McColgan, 315 U.S. 501, 508, 62 S.Ct. 701, 704-05, 86 L.Ed. 991 (1942);
           Peterson Mfg. Co. v. State, 779 S.W.2d at 786; W.S. Dickey Clay Mfg. Co. v.
           Dickinson, 200 Tenn. at 34-35, 289 S.W.2d at 537. The second test employed
           by the United States Supreme Court requires the courts to examine the record
           for evidence of functional integration, centralization of management, and
           economies of scale. F.W. Woolworth Co. v. Taxation and Revenue Dep't, 458
           U.S. at 364, 102 S.Ct. at 3135; Mobil Oil Corp. v. Commissioner of Taxes, 445
           U.S. at 438, 100 S.Ct. at 1232. Other courts have used the "dependency and
           contri-bution" test to determine whether the business components under
           consideration contribute to each other and the operation of the business as a
           whole. A.M. Castle & Co. v. Franchise Tax Bd., 36 Cal.App.4th 1794, 43
           Cal.Rptr.2d 340, 346 (1995); Ramsay, Scarlett & Co. v. Comptroller, 302 Md.
           825, 490 A.2d 1296, 1302 (1985); Silent Hoist & Crane Co. v. Director, Div. of
           Taxation, 100 N.J. 1, 494 A.2d 775, 784 (1985). These tests are not mutually
           exclusive but rather are alternative ways to determine whether the components of
           the business operate under "an umbrella of central management and controlled
           interaction," Exxon Corp. v. Wisconsin Dep't of Revenue, 447 U.S. at 224, 100
           S.Ct. at 2120.

           No single factor is controlling under any of the tests. Instead, the courts
           examine these factors in combination to determine whether the business is
           unitary. Since states may only tax value having substantial connection with the
           state, the courts must consider not only the relationship between the
           non-resident business and the non-resident component whose income is sought
           to be taxed but also the relationship between the in-state component and the
           non-resident component. See Central National-Gottesman, Inc. v. Director,
           Div. of Taxation, 14 N.J. Tax 545, 556-57 (Tax.Ct.1995); In re Income Tax
           Protest of Griffin Television, Inc. (Griffin Television, Inc. v. State ex rel.
           Oklahoma Tax Comm'n), 877 P.2d 588, 593 (Okla.1994).

Louis Dreyfus Corp. v. Huddleston, 933 S.W.2d 460, 468 (Tenn. Ct. App. 1996).


       The state also argues that its interpretation of the facts under the “operational investment”
standard would trump the abundance of evidence regarding the absence of a unitary business. In this
attempt, however, the commissioner seems to echo New Jersey’s argument in Allied-Signal.
                                                                                                       11
     Said the Supreme Court:
           New Jersey does not appear to dispute the basic proposition that a state may
           not tax value earned outside its borders. It contends instead that all income of a
           corporation doing any business in a State is, by virtue of common ownership,
           part of the corporation’s unitary business and apportionable. New Jersey’s
           sweeping theory cannot be reconciled with the concept that the Constitution
           places limits on a State’s power to tax value earned outside of its borders. To
           be sure, our cases give States wide latitude to fashion formulae designed to
           approximate the in-state portion of value produced by a corporation’s truly
           multistate activity. But that is far removed from New Jersey’s theory that any
           business in the State, no matter how small or unprofitable, subjects all of a
           corporation’s out-of-state income, no matter how discrete, to apportionment.

Allied-Signal, supra, at 784, 112 S.Ct. at 2261 (citations omitted). We are equally unpersuaded.


VI. ANALYSIS
     The unavoidable conclusion is that the facts as presented show neither a unitary business on the
part of LMB, ITTWD and Promedia, nor an operational or functional investment on the part of LMB
in ITTWD and Promedia. Neither party disputes the fact-sensitive nature of any taxation inquiry. Tax
assessments are presumed valid unless the taxpayer proves by clear and cogent evidence that the
commissioner has caused extraterritorial value to be taxed.      See Container Corp. Of America v.
Franchise Tax Bd., 463 U.S. 159, 170, 103 S.Ct. 2933, 2942, 7 L.Ed.2d 545 (1983); Stratton v.
Jackson, 707 S.W.2d 865, 867 (Tenn. 1986); Ace of Clubs v. Huddleston, 872 S.W.2d 679, 681
(Tenn. Ct. App. 1993); Louis Dreyfus Corp. v. Huddleston, 933 S.W.2d 460 (Tenn. Ct. App. 1996).
In our de novo review we find clear and cogent proof that extraterritorial value has been taxed. The
undisputed facts in the record before us suggest no unitary relationship between the taxpayer and the
entities concerned and no operational investment.


         Even if one could say that the birth, nature and interplay of executive officers in these
corporations could amount to ownership and control of ITTWD and Promedia by LMB and its parent
BellSouth Enterprises, this ownership and control is but one of many circumstances which may be
examined to show Constitutional taxability. LMB showed below that the entities involved had very
little in common, much less in kind. Their economies were functionally separate entities. Though

                                                                                                        12
ITTWD and Promedia may have been born from LMB and ITT, neither owes its continued existence
to LMB. Under the circumstances, we find it hard to believe that ITTWD, Promedia and LMB are
functionally integrated under any standard.


VII. CONCLUSION

        Under the undisputed facts of this case, the dividends earned by LMB are not taxable by
Tennessee. The chancery court’s judgment to the contrary should be and is hereby reversed. The
case is remanded with the chancellor directed to enter summary judgment in favor of LMB in the
amount of its refund plus any interest properly accrued and owing, and for such further proceedings as
may be necessary. Costs on appeal are taxed against the State of Tennessee.


                                ______________________________
                                WILLIAM B. CAIN, JUDGE


CONCUR:


__________________________________
BEN H. CANTRELL, P.J., M.S.


__________________________________
WILLIAM C. KOCH, JR., JUDGE




                                                                                                         13
