                IN THE COURT OF APPEALS OF TENNESSEE
                           AT KNOXVILLE
                                November 9, 2010 Session

ALCOA, INC., v. TENNESSEE STATE BOARD OF EQUALIZATION, et al.

                  Appeal from the Chancery Court for Blount County
                  No. 08-142    Hon. Telford E. Forgety, Chancellor


               No. E2010-00001-COA-R3-CV - Filed February 18, 2011




In this case the Blount County property assessor assessed ad valorem taxes against defendant
for certain raw materials the defendant used to fabricate sheets of aluminum at its
manufacturing facility in Blount County. The State Board of Equalization and the Chancery
Court for Blount County upheld the assessment. Defendants have appealed to this Court
arguing that Article II, Sections 28 and 30 of the Tennessee Constitution provide exemptions
from ad valorem taxes for "the direct product of the soil in the hands of the producer, and his
immediate vendee". We affirm the Judgment of the Trial Court.


 Tenn. R. App. P.3 Appeal as of Right; Judgment of the Chancery Court Affirmed.


H ERSCHEL P ICKENS F RANKS, P.J., delivered the opinion of the Court, in which C HARLES D.
S USANO, J R., J., and J OHN W. M CC LARTY, J., joined.


Wayne R. Kramer and Jackson G. Kramer, Knoxville, Tennessee, for the appellant, Alcoa,
Inc.

Robert E. Cooper, Jr., Attorney General and Reporter, Michael E. Moore, Solicitor General,
and Gregory O. Nies, Assistant Attorney General, Nashville, Tennessee, for the appellee,
Tennessee State Board of Equalization.

Robert N. Goddard and LaJuana G. Atkins, Maryville, Tennessee, and Doyle R. Monday,
Brentwood, Tennessee, for the appellees, Mike Morton, Blount County Property Assessor,
and Blount County, Tennessee.
                                          OPINION

                                         Background

        Appellant, Alcoa, Inc., is a corporation organized and existing under and by virtue of
the laws of the Commonwealth of Pennsylvania. Alcoa maintains offices and manufacturing
operations in Blount County, Tennessee. The dispute in this case is whether Alcoa has met
its burden of proving that it is entitled to an exemption from ad valorem taxes assessed by
the Blount County Property Assessor on certain raw materials Alcoa used to fabricate sheets
of aluminum at its Tennessee manufacturing facility. The assessment made by the Blount
County Property Assessor was upheld by the Blount County Board, the State Board of
Equalization and the Chancery Court for Blount County Tennessee. Alcoa has appealed and
at the heart of its appeal are the provisions of Article II, Sections 28 and 30 of the Tennessee
Constitution that provide exemptions from ad valorem tax for “the direct product of the soil
in the hands of the producer, and his immediate vendee” and the “manufactured produce of
this State . . . in the hands of the manufacturer.” The relevant language of these
constitutional provisions is as follows:

       Article II, Section 28:

       . . . [A]ll property real, personal or mixed shall be subject to taxation, but the
       Legislature may except such as may be held by the State, by Counties, Cities or
       Towns, and used exclusively for public or corporation purposes, and such as may be
       held and used for purposes purely religious, charitable, scientific, literary or
       educational, and shall except the direct product of the soil in the hands of the
       producer, and his immediate vendee . . . . (emphasis added).

       Article II, Section 30:

       No article, manufactured of the produce of this State shall be taxed otherwise than to
       pay inspection fees.

       Also applicable to this appeal is Tenn. Code Ann. § 67-5-216. This provision states

as follows:

       (a) All growing crops of whatever kind, including, but not limited to, timber, nursery
       stock, shrubs, flowers, and ornamental trees, the direct product of the soil of this
       state or any other state of the union, in the hands of the producer or the

                                              -2-
       producer's immediate vendee, and articles manufactured from the produce of
       this state, or any other state of the union, in the hands of the manufacturer, shall
       be exempt from taxation. (emphasis added).

      The Final Decision and Order of the Board’s Assessment Appeals Commission
provides the background information regarding the tax assessments in question as follows:

              The subject commercial and industrial tangible personal property is located in
       the taxpayer’s manufacturing plants in Alcoa, Tennessee. Alcoa, like other
       businesses, is required by applicable property tax statutes to list its tangible personal
       property on a schedule to be filed with the county assessor of property by March 1.
       ...

              Alcoa was audited for tax years 2001 and 2002 and back assessed for omitted
       raw materials (mostly alumina) for tax years 2001 and 2002. The company omitted
       the alumina and related materials in the belief this property constituted products of the
       soil exempt under the Tennessee Constitution.

       Alcoa was also assessed for the omitted raw materials for the tax year 2003, and it
timely filed appeals with the Board for the years 2001, 2002 and 2003. A hearing was held
in January 2006 and the Administrative Law Judge (ALJ) issued an Initial Decision and
Order finding that the raw materials at issue were subject to assessment as personal property
and that the exemption sought by Alcoa under Article II, Section 28 of the Tennessee
Constitution and Tenn. Code Ann. § 67-5-216 did not apply because the raw materials were
imported from foreign countries. The holding was affirmed by the Board’s Assessment
Appeals Commission (AAC) by its Order of June 4, 2008. The ruling was adopted by the
Board and a Certificate of Assessment was issued on July 24, 2008. Neither the ALJ nor the
AAC actually ruled that the raw materials were or were not “direct products of the soil”.
Alcoa filed a Petition for Judicial Review on September 19, 2008 with the Chancery Court
for Blount County, Tennessee pursuant to Tenn. Code Ann. §§ 4-5-322(b)(1)(A) and 67-5-
1511.

                                The Chancery Court Trial

       The Chancery Court conducted a hearing on the Petition for Judicial review on
October 8, 2009, and the Chancellor issued a Memorandum Opinion and Order on
December 9, 2009 ruling in favor of the Board and the County. The Chancellor first set forth
the applicable legal principles in the Memorandum:

              In construing statutes, court must first determine the legislature’s purpose and

                                              -3-
       intent, and then give full effect to that intent and purpose. Waldschmidt v. Reassure
       American Life Ins. Co., 271 S. W. 3d 173, 176 (Tenn. 20008). In doing so, the court
       must (1) give words their natural and ordinary meaning, (2) consider them in the
       context of the entire statute, and (3) presume that the General Assembly intended that
       each word be given full effect. Id.

               In general, taxing statutes are construed liberally in favor of the taxpayer and
       strictly against the taxing authority. Covington Pike Toyota, Inc. v. Cardwell, 829
       S.W.2d 132, 135 (Tenn. 1992). On the other hand, exemptions from taxation are
       construed strictly against the taxpayer who bears the burden of showing that he is
       entitled to exemption. Id.

       The Court went on to address the fact that Alcoa had raised certain constitutional
questions regarding the taxing statutes at issue:

              The courts must not decided constitutional questions unless such questions are
       absolutely necessary for the disposition of the case, and the determinations of the
       parties’ rights. DeLaney v. Thompson, 982 S.W.2d 857, 858 (Tenn. 1998), reh’g
       denied. Moreover, if a case can be decided upon non-constitutional grounds, the
       courts must avoid decisions on constitutional questions. State v. Thompson, 151 S.
       W. 3d 434, 442 (Tenn. 2004).

        Based on these stated legal principles and the facts presented, the Chancellor ruled
that “the raw materials at issue were properly assessed and taxed by Blount County.”
Specifically, the Trial Court found that all the raw materials had gone through an “extensive
man-initiated and controlled refinement process” and therefore were not “direct products of
the soil” within the meaning of Article II, section 28 of the Tennessee Constitution or Tenn.
Code Ann. §§ 67-5-216 and 67-5-502. In so finding, the Trial Court relied on two Tennessee
Supreme Court decisions, Benedict v. Davidson County, 110 Tenn. 183, 67 S.W. 806 (1902)
and Nashville Tobacco Works v. City of Nashville, 149 Tenn. 551, 260 S.W. 449 (1924).
Although the Trial Court stated that this ruling was dispositive of the issue and that it was
not necessary to analyze the “products of the soil” exemption further, the Trial Court went
on to state that Alcoa also failed to qualify for the exemption under Article II, section 28 of
the Tennessee Constitution or Tenn. Code Ann. § 67-5-216 because the raw materials were
not “in the hands of the producer or immediate vendee”. 1 The Trial Court further stated that
because of its ruling that the raw materials were not “direct products of the soil” it was
unnecessary to address whether Tenn. Code Ann. § 67-5-216 was unconstitutional because


       1
          The trial court noted the alumina produced from March 1, 2001 to March 31, 2003 would qualify
as being in the hands of the producer or immediate vendee.

                                                 -4-
it unlawfully discriminated against products of the soil of foreign (non-United States)
nations.

        The Trial Court also held that Alcoa was not entitled to a tax exemption on the raw
materials at issue as they were not “products manufactured of the produce of this state” under
Article II, Section 30 of the Tennessee Constitution. The Court, relying on Morgan &
Hamilton Co. v. City of Nashville, 151 Tenn. 382, 270 S.W. 75 (1925), stated that the raw
materials “have certainly not been shown to be articles manufactured by Alcoa itself.” 2 The
Trial Court went on to state that in view of this ruling, it was unnecessary to address the
constitutional question, raised by Alcoa, that Article II, Section 30 of the Tennessee
Constitution and the controlling Tennessee tax statutes unlawfully discriminated against
articles manufactured from the produce of foreign nations.

        Alcoa timely filed a Notice of Appeal of the Chancellor’s Order.

        Alcoa presents these issues on appeal:

        A.      Was the Trial Court correct when it ruled that the alumina, coke, pitch and
                fluoride used by Alcoa at the Tennessee operation are not, as a matter of law,
                “direct products of the soil” under Article II, Section 28 of the Tennessee
                Constitution and Tenn. Code Ann. § 67-5-216?

        B.      Was the Chancellor correct in ruling that throughout some or all of the Audit
                Period, Alcoa was neither the “producer” nor “immediate vendee” of the
                alumina, coke, pitch and fluoride under Article II, Section 28 of the Tennessee
                Constitution and Tenn. Code Ann. § 67-5-216?

        C.      Did the Trial Court err in failing to rule that the alumina, coke, pitch and
                fluoride were improperly assessed despite, and contrary to the provisions of
                Article II, Section 28 of the Tennessee Constitution, Rule 0600-5-.04 of the
                Rules of the Tennessee State Board of Equalization, and Article I, Section 10,
                Clause 2, and Article I, Section 8, Clause 3 of the United States Constitution
                and either Tenn. Code Ann. § 67-5-216 or § 67-5-502?



        2
          The trial court stated that while two of the raw materials at issue, alumina and fluoride, could be
viewed as having been manufactured by an Alcoa subsidiary, the court would not ignore the separate
existence of the parent and subsidiary for purposes of finding an exemption based on the principle that “the
Court must construe a tax exemption strictly against the taxpayer, and resolve any doubts in favor of the
taxing authority.”

                                                    -5-
       D.      Did the Trial Court err (i) in ruling that the alumina, coke, pitch and fluoride
               used by Alcoa at the Tennessee operation, and any scrap metal, pot lining and
               allying metals also used by Alcoa at its Tennessee Operation, are not
               “manufactured articles” and (ii) in failing to rule that such items were
               improperly assessed under Article II, Section 30 of the Tennessee Constitution
               and Tenn. Code Ann. § 67-5-216?

       Alcoa maintains the Trial Court was in error when it ruled that the alumina, coke,
pitch and fluoride used by Alcoa at the Tennessee operation are not, as a matter of law,
“direct products of the soil” under Article II, Section 28 of the Tennessee Constitution and
Tenn. Code Ann. § 67-5-216? Article II, Section 28 in its pertinent part provides as follows:

       . . . [A]ll property real, personal or mixed shall be subject to taxation, but the
       Legislature may except such as may be held by the State, by Counties, Cities or
       Towns, and used exclusively for public or corporation purposes, and such as may be
       held and used for purposes purely religious, charitable, scientific, literary or
       educational, and shall except the direct product of the soil in the hands of the
       producer, and his immediate vendee . . . . (emphasis added).

       Tenn. Code Ann. § 67-5-216 states:

       (a) All growing crops of whatever kind, including, but not limited to, timber, nursery
       stock, shrubs, flowers, and ornamental trees, the direct product of the soil of this
       state or any other state of the union, in the hands of the producer or the
       producer's immediate vendee, and articles manufactured from the produce of
       this state, or any other state of the union, in the hands of the manufacturer, shall
       be exempt from taxation. (emphasis added).

       We must determine the meaning of “direct product of the soil” as used in the
Tennessee Constitution and Tenn. Code Ann. § 67-5-216. When interpreting a statute, our
primary purpose is to ascertain and give effect to the intention of the legislature. State, ex rel.
Davis v. A & F Const., M2008-00360-COA-R3-CV, 2009 WL 499421 at * 3 (Tenn. Ct. App.
Feb. 26, 2009), appeal denied (Sept. 28, 2009)(citing Lipscomb v. Doe, 32 S.W.3d 840, 844
(Tenn. 2000)). Legislative intent is ascertained, whenever possible, from the natural and
ordinary meaning of the language used, without forced or subtle construction that would limit
or extend the meaning of the language. A & F Const at *3 (citing Hawks v. City of
Westmoreland, 960 S.W.2d 10, 16 (Tenn.1997)). Furthermore, statutory language must be
read in the context of the entire statutory scheme. A & F Const at * 3 (citing National Gas
Distribs., Inc. v. State, 804 S.W.2d 66, 67 (Tenn.1991)).



                                                -6-
        When construing statutes that levy taxes or duties on citizens, courts are not to extend
by the application of the statute beyond the clear import of the language used, nor will the
statute’s operation be enlarged so as to embrace matters not specifically named or pointed
out. Union Carbide Corp. v. Alexander, 679 S.W.2d 938, 942 (Tenn. 1984) (citing Chero-
Cola Bottling Co. v. McDaniel, 145 Tenn. 615, 237 S.W. 1101 (1921); H.D. Watts Co. v.
Hauk, 144 Tenn. 215, 231 S.W. 903 (1923); Chattanooga Plow Co. v. Hays, 125 Tenn. 148,
140 S.W. 1068 (1911)). Doubts as to the application of a tax statute will be resolved in favor
of the citizen and tax statutes will be construed most strongly against the state. Id. (citing
H.D. Watts Co. v. Hauk, supra; State v. Louisville & Nashville R. Co., 139 Tenn. 406, 201
S.W. 738 (1918)); Covington Pike Toyota, Inc. v. Cardwell, 829 S.W.2d 132, 135 (Tenn.
1992)). Conversely, tax exemptions are construed against the taxpayer, who bears the
burden of proving entitlement to the exemption. Hyatt v. Taylor, 788 S.W.2d 554, 556
(Tenn.1990); Cordis Corp. v. Taylor, 762 S.W.2d 138, 139 (Tenn.1988).

       In this case, Alcoa, the tax payer, is seeking to avoid paying ad valorem taxes on the
raw materials pursuant to the tax exemptions contained in Article II, Sections 28 and 30 of
the Tennessee Constitution and Tenn. Code Ann. § 67-5-216. Alcoa bears the burden of
proving it is entitled to the exemptions and any doubts regarding the applicability of the
exemptions to the raw materials at issue must be construed in favor of the taxing entities and
against Alcoa.

       Alcoa maintains that the Trial Court erred as a matter of law when it held that the raw
materials at issue, alumina, coke, pitch and fluoride, were not “direct products of the soil”
within the meaning of Article II, Sections 28 of the Tennessee Constitution and Tenn. Code
Ann. § 67-5-216 because the raw materials were “created by man after some substantial
process of refinement” and otherwise went “through a more extensive man-initiated and
controlled refinement process” than is permitted under the law to still qualify as a direct
product of the soil. In so holding, the Trial Court relied on the Tennessee Supreme Court
decisions Benedict Bros. v. Davidson County, 110 Tenn. 183, 67 S.W. 806 (Tenn. 1902) and
Nashville Tobacco Works v. City of Nashville, 149 Tenn. 551, 260 S.W. 449 (Tenn. 1924).
The Trial Court, referring to these cases, stated that “it appears then that the Supreme Court
has twice said that direct products of the soil, such as wheat or tobacco, are not entitled to
the Article II, Section 28 exemption once they have been altered by some human initiated and
controlled process, viz. grinding in the case of wheat and flour, and conversion in the case
of tobacco (from leaf tobacco to chewing tobacco, smoking tobacco, etc.).” The Supreme
Court in Benedict Bros., discussing the application of Article II, Sections 28 and 30 of the
Tennessee Constitution, held:

       Wheat is a direct product of the soil, but it is not an article manufactured of the
       produce of the state. Flour made of wheat grown upon Tennessee soil is an article

                                              -7-
       manufactured of the produce of the state, but it is not a direct product of the soil
       though manufactured out of the direct product of the soil. Wheat grown on Tennessee
       soil is exempt, under the provision of section 28, supra, while flour manufactured of
       such wheat is not, but is exempt only under section 30.

Benedict Bros at 807.

       Likewise, the Supreme Court contemplated the meaning of “direct product of the soil”
as used in Article II, Section 28 of the Tennessee Constitution in Nashville Tobacco and
held:

       Tobacco like wheat is exempt from taxation [] in the hands of the producer and the
       immediate vendee of the producer under section 28, supra. Converted into chewing
       tobacco, smoking tobacco, or snuff, the converted leaf, like wheat ground into flour,
       is exempt from taxation under section 30, supra. But wheat stored in bins or elevators
       and leaf tobacco in bulk or in hogsheads or hanging in sheds, after it has passed from
       the hands of the producer or his immediate vendee, is not exempt under either of the
       foregoing sections. Benedict v. Davidson County, 110 Tenn. 187, 67 S. W. 806.

                                           ****

       Section 28 of article 2 of the Constitution contemplates products of the soil as the
       thing produced and sold after the planting, cultivation, and harvesting, and leaf
       tobacco as the result of husbandry remains a product of the soil within the meaning
       of this provision until it has been taken by the artisan and converted into plug tobacco,
       twist tobacco, or smoking tobacco, or snuff.

Nashville Tobacco at 450 - 451.

       In addition to relying on the reasoning of Benedict and Nashville Tobacco, the Trial
Court examined the plain language of the applicable section of the Constitution and statute:

       The Court is bolstered in its conclusion by the plain language of the Constitution and
       Statutes. The only things entitled to the exemption are direct products of the soil. The
       Court must construe the provisions at issue so that its words will be given full effect.
       Waldschmidt [v. Reassurance Life Ins. Co.], 271 S.W. [3d. 173], 176 [(Tenn. 2008)].
       While there has apparently not been a comprehensive definition of this term yet
       rendered, it seems logical that the exemption was intended to apply only to things that
       came directly, without substantial alteration by man, from the soil - such as wheat or
       tobacco. Black’s Law Dictionary (8th ed. 2004) defines “direct” as “1. (Of a thing)

                                              -8-
       straight; undeviating ‹a direct line›. 2. (Of a thing or person) straightforward ‹ a direct
       manner › ‹ direct instructions›. 3. Free from extraneous influence; immediate ‹ direct
       injury›.

      The Trial Court was not in error when it held that Alcoa’s raw materials are not exempt
from ad valorem taxes. Article II, Section 28 of the Tennessee Constitution provides the first
exemption claimed by Alcoa as follows :

       . . . [A]ll property real, personal or mixed shall be subject to taxation, but the
       Legislature may except such as may be held by the State, by Counties, Cities or Towns,
       and used exclusively for public or corporation purposes, and such as may be held and
       used for purposes purely religious, charitable, scientific, literary or educational, and
       shall except the direct product of the soil in the hands of the producer, and his
       immediate vendee . . . . (emphasis added).

        Accordingly, by the plain language of the Constitution, to qualify for the exemption,
the property at issue must be both: (1) the direct product of the soil; and (2) in the hands of
the producer or his immediate vendee. If the first prong of the exemption, the direct product
of the soil, is not met, there is no need to inquire whether the property is in the hands of the
producer or his immediate vendee. Likewise, Tenn. Code Ann. § 67-5-216 also expressly
provides the exact same exemption:

       (a) All growing crops of whatever kind, including, but not limited to, timber, nursery
       stock, shrubs, flowers, and ornamental trees, the direct product of the soil of this
       state or any other state of the union, in the hands of the producer or the producer's
       immediate vendee, and articles manufactured from the produce of this state, or any
       other state of the union, in the hands of the manufacturer, shall be exempt from
       taxation. (emphasis added).

       The first question for this Court is whether the raw materials Alcoa seeks to have
exempted from ad valorem taxes are “direct products of the soil”. If no, it is not necessary
to consider whether Alcoa is the producer or the immediate vendee of the producer. We are
required, as a matter of proper statutory construction, to give words their ordinary and plain
meaning. The dictionary definition for “direct” relied on by the Trial Court is: straight,
undeviating, straightforward, free from extraneous influence, immediate. Thus, only the
original, unprocessed products of the soil qualifies as a “direct” product of the soil. This
interpretation of the constitutional and statutory provisions is bolstered by the pronouncements
of the Tennessee Supreme Court in Benedict Bros., and in Nashville Tobacco Works.
Accordingly, the test we apply to the facts of the case is whether the raw materials at issue
have been processed at least to the extent of the processing required to convert wheat into

                                               -9-
flour or leaf tobacco into chewing or smoking tobacco.

       The facts the parties stipulated to show that all of the raw materials Alcoa seeks an
exemption for have been put through a process at least as extensive, and usually more
extensive, than that of milling wheat into flour. Moreover, in the course of the transformation
from the product of the soil to the raw material, each of the raw materials at issue changed
names and appearances and consistency. Based on the facts presented regarding the processes
that caused bauxite to become alumina, petroleum to become coke, coal to become pitch and
fluorspar to become fluoride, the Trial Court did not err when it stated that all of the raw
materials “have gone through a more extensive man-initiated and controlled refinement
process than those involved in converting wheat to flour or leaf tobacco to smoking tobacco.” 3
Accordingly, we affirm the Trial Court’s holding that the raw materials were not products of
the soil and, thus were not exemption from ad valorem taxation. Since we hold the raw
materials are not products of the soil, it is unnecessary to determine whether Alcoa is the
producer or the producer’s direct vendee.

        Alcoa contends that if the raw materials used by it at its Tennessee Operations are
found to not be “products of the soil” , then the raw materials plus any scrap metal, potlining
and alloying metals also used at its Tennessee Operations are “manufactured articles” and
were improperly assessed under Article II, Section 30 of the Tennessee Constitution and
Tenn. Code Ann. § 67-5-216. Article II, Section 30 of the Tennessee Constitution states: “No
article, manufactured of the produce of this State shall be taxed otherwise than to pay
inspection fees” and the applicable part of Tenn. Code Ann. § 67-5-216 provides:

       (a) All growing crops of whatever kind, including, but not limited to, timber, nursery
       stock, shrubs, flowers, and ornamental trees, the direct product of the soil of this state
       or any other state of the union, in the hands of the producer or the producer's
       immediate vendee, and articles manufactured from the produce of this state, or
       any other state of the union, in the hands of the manufacturer, shall be exempt
       from taxation. (emphasis added).

       The Trial Court concluded that the raw materials, alumina, coke, pitch and fluoride as
well as scrap metal, potlining and alloying metals were not entitled to exemption as articles
manufactured from the products of this state or another state and in the hands of the
manufacturer.



        3
         The parties stipulated that the raw material alumina at issue in this case originates from bauxite.
Bauxite is a mineral mined from the ground in various locations around the world. It is not mined in North
America, and alumina must be extracted from bauxite.

                                                   -10-
        The Trial Court relied on Morgan & Hamilton Co. v. City of Nashville, 151 Tenn. 382,
270 S.W. 75 (1925) where the Tennessee Supreme Court considered whether a manufacturer
of cotton, burlap and paper bags was entitled to a tax exemption under Article II, Sections 28
and 30 of the Tennessee Constitution. The taxpayer in Morgan claimed an exemption under
Section 30 for cotton, produced in Tennessee and Alabama, and jute imported from India.
These products were to be used by the taxpayer for the manufacture of burlap bags. Morgan
at 75 - 76. The Supreme Court held that until the taxpayer “converted” the jute and cotton
into the product it manufactured, burlap bags, the “Constitution would afford no exemption
from taxation . . . . The cotton and burlap in storage awaiting conversion is not exempt,
because they were not the articles which the Complainant [taxpayer] manufactured.” Morgan
at 76-77. The Morgan court elaborated on this holding stating that the exemption under
Section 30 is not available until “the artisan commences to produce an article different from
the original product which he bought of the use in manufacturing. Morgan at 77.

        Based on the holding in Morgan, the Trial Court stated that the coke, pitch, scrap
metal, potlining and alloying metals had not been shown to be articles manufactured by Alcoa
itself. The Trial Court rejected Alcoa’s argument that the aluminum and fluoride
manufactured by AWA, an Alcoa subsidiary, should be viewed as manufactured by Alcoa.
The Trial Court stated that it “cannot for purposes of the exemption ignore the separate
existence of the two entities” [Alcoa and AWA] citing Nashville Tobacco Works, 260 S.W.
at 450 - 451.

       We hold the Trial Court did not err on this issue.

       The subject constitutional provision and statute do not provide a definition of
manufacturer, however, the Tennessee Supreme Court has provided guidance in several cases:
In Chattanooga Plow Co. v. Hays, 125 Tenn. 148, 140 S.W. 1068 (1911) the Court adopted
the definition of manufacturer from Anderson's Dictionary of Law; Webster as “[a]
manufacturer is one engaged in making materials, raw or partly finished, into wares suitable
for use. Id. at 1069. Eleven years later the Court stated “ . . . “the definition of a
manufacturer contemplates the attainment of such object by adding to the value of the
property after purchase, by some process or combination with other materials . . . . The
material entering into the manufactured article may be modified, more or less, in its identity.
Neuhoff Packing Co. v. Sharpe, 146 Tenn. 293, 240 S.W. 1101 (1922). Years later, the Court,
in Morgan & Hamilton Co. 270 S.W. 75 (1925), noted that a product “is not exempt until it
becomes an article of manufacture, which would date from the time the artisan commences
to convert the product or commodity into an article which he manufactures; that is to say,
when he commences to produce an article different from the original product which he bought
for use in manufacturing. Id. at 76 - 77.



                                             -11-
       In this case, the parties stipulated that Alcoa is a manufacturer of aluminum and that
it manufactures sheets of aluminum for beverage cans. The stipulated facts also make is clear
that neither Alcoa nor any of its subsidiaries manufactured the coke, pitch scrap metal,
potlining or alloying metals that Alcoa used to manufacture aluminum at its Tennessee
Operation. We conclude the Trial Court did not err when it concluded that these items were
not exempt from ad valorem under Article II, Section 30 of the Constitution or under Tenn.
Code Ann. § 67-5-216. Moreover, the stipulated facts show that Alcoa itself had no hand in
producing/refining the alumina from bauxite or the fluoride from flurospar. However, at least
some of the alumina and fluoride that reached the Tennessee Operation during the subject
time period were manufactured by AWA, a subsidiary of Alcoa.

        Alcoa, on appeal, only addressed this issue in a footnote wherein it stated that “Alcoa’s
subsidiary AWA, should be ignored for purposes of determining whether Alcoa was the
manufacturer of aluminum and fluoride. Alcoa's brief suggests that this Court should “pierce
the corporate veil” and find that AWA is a mere instrumentality of Alcoa and that Alcoa is
in fact the “manufacturer” of aluminum and fluoride and thus entitled to the exemption.

       Alcoa acknowledges that AWA is a separate legal entity from Alcoa and also
acknowledges that “the courts in Tennessee have held that a subsidiary corporation is a
separate corporate entity for ad valorem property tax purposes.” Nashville Tobacco Works,
260 S.W. 449, 450 (1924). However, Alcoa argues that at the time AWA produced/refined
the aluminum from bauxite and fluoride from fluorspar, AWA was not “merely Alcoa’s
subsidiary” based on the stipulated facts regarding AWA’s operations. The stipulation states
that AWA had no employees, it had no payroll, all decisions regarding the manufacture of
alumina were made by Alcoa employees who were paid by Alcoa and entitled to Alcoa
benefits. Accordingly, Alcoa urges this Court to find that AWA was Alcoa’s instrumentality
as a matter of law. Alcoa’s position is that for the Court to do otherwise would “result in a
significance injustice” although Alcoa does not specify what the “significant injustice” would
be. Further, Alcoa offers no explanation of why or for what benefit AWA was set up as a
subsidiary of Alcoa, nor does the record shed any light on this issue.

       The Tennessee Supreme Court has noted that” form and structure are quite significant
in business and commercial transactions, and frequently the form or structure used has
controlling significance for taxes and other purposes.” Standard Adver. Agency, Inc. v.
Jackson, 735 S.W.2d 441, 443 (Tenn. 1987). The Court went on to state:

       While corporate entities may be disregarded where they are made the implement for
       avoiding a clear legislative purpose, they will not be disregarded where those in control
       have deliberately adopted the corporate form in order to secure its advantages and
       where no violence to the legislative purpose is done by treating the corporate entity as

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       a separate legal person.

Id. (quoting Schenley Distillers Corporation v. United States, 326 U.S. 432, 437, 66 S.Ct. 247,
249, 90 L.Ed. 181, 184 (1946)). Further, in Shelby County v. Barden, 527 S.W.2d 124, 130
(Tenn. 1975), the Court addressed the necessity of honoring the corporate status selected by
an entity when it stated “where parties have deliberately undertaken to do business in
corporate form, for tax purposes, accounting and other reasons, they must be held to the
corporate form and they cannot shunt aside at their convenience legal entities and the legal
aspects thereof”. Accordingly, the general policy of the courts of Tennessee has been to
honor the corporate structure selected by an entity, however, the courts have under certain
circumstances disregarded the selected corporate structure and “pierced the corporate veil”.

       The Tennessee Supreme Court, in Cont'l Bankers Life Ins. Co. of the S. v. Bank of
Alamo, 578 S.W.2d 625, 632 (Tenn. 1979), set forth the three elements that must be proven
by a party seeking to “pierce the corporate veil”:

       (1) The parent corporation, at the time of the transaction complained of, exercises
       complete dominion over its subsidiary, not only of finances, but of policy and business
       practice in respect to the transaction under attack, so that the corporate entity, as to that
       transaction, had no separate mind, will or existence of its own.

       (2) Such control must have been used to commit fraud or wrong, to perpetuate the
       violation of a statutory or other positive legal duty, or a dishonest and unjust act in
       contravention of third parties' rights.

       (3) The aforesaid control and breach of duty must proximately cause the injury or
       unjust loss complained of.

Id. at 632.

       The proof here supports a finding that the first element is met, but there is absolutely
no proof to support a finding that the second and third elements are present. There was no
evidence showing that the control Alcoa had over its subsidiary, AWA, was used to commit
fraud or a wrong or that such control caused injury or unjust loss to a third party.
Accordingly, the Trial Court did not err when it refused to pierce the corporate veil and find
that Alcoa was in fact the manufacturer of the aluminum and fluoride produced by AWA in
its Texas operation.

      In sum, the Trial Court’s holding that the raw materials used by Alcoa at its Tennessee
Operation were not “products of the soil” under Article II, Section 28 of the Tennessee

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Constitution and Tenn. Code Ann. § 67-5-216 is affirmed. Likewise, the Trial Court’s
holding that the raw materials were not manufactured by Alcoa under Article II, Section 30
of the Tennessee Constitution and Tenn. Code Ann. § 67-5-216 is affirmed. Consequently,
the Trial Court’s upholding of the tax assessment by the Blount County Assessor was correct
and is affirmed. The remaining constitutional issues raised on appeal by Alcoa will not be
addressed by this Court as the appeal has been decided on other grounds. See DeLaney v.
Thompson, 982 S.W.2d 857, 858 (Tenn. 1998)(Courts will rule on a constitutional question
only when it is absolutely necessary for the determination of the case and of the rights of
parties to the litigation)(citing Glasgow v. Fox, 214 Tenn. 656, 666-667, 383 S.W.2d 9, 13-14
(1964); Jackson v. Davis, 530 F.Supp. 2, 4 n. 1 (E.D.Tenn.)).

       The Judgment of the Trial Court is affirmed and the cause remanded, with the cost of
the appeal assessed to the appellant, Alcoa, Inc.




                                                   _________________________________
                                                   HERSCHEL PICKENS FRANKS, P.J.




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