                IN THE COURT OF APPEALS OF TENNESSEE
                           AT KNOXVILLE
                                 October 2, 2012 Session

    OAK RIDGE LAND COMPANY, LP., v. RICHARD H. ROBERTS,
   COMMISSIONER OF REVENUE FOR THE STATE OF TENNESSEE

                  Appeal from the Chancery Court for Blount County
                  No. 2009-045 Hon. David R. Duggan, Chancellor


            No. E2012-00458-COA-R3-CV-FILED-NOVEMBER 29, 2012




The Department of Revenue conducted an audit on plaintiff's partnership, and as a result
franchise and excise taxes of $317,659.72 plus interest of $59,525.59 were assessed against
plaintiff. Plaintiff brought an action contesting the assessments, and since the Commissioner
had relied on Tenn. Comp. R. & Regs. 1320-6-1-.20 to make the assessment, the plaintiff
charged the Rule was inconsistent with the provisions of Tenn. Code Ann. § 67-4-2006. The
Trial Judge held the regulation was in conflict with the code section to the extent that the
Rule attempted to restrict the deduction for charitable contributions made to only the book
basis, rather than the fair market value, and the plaintiff was entitled to summary judgment
on that issue and an abatement in the assessment of $303,049. The Court also found that the
plaintiff was in error in not including certain real property in calculating the net worth under
the ruling of Crown Enterprises, Inc., v. Woods, and that the defendant was entitled to a
judgment of additional tax in the amount of $14,610.72. Both parties appealed. On appeal,
we reverse the Trial Court's Judgment regarding excise tax and we remand for a Judgment
on the excise tax as assessed by the Commissioner. The Trial Court's Judgment regarding
the franchise tax is affirmed.


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


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.


Robert E. Cooper, Jr., Attorney General and Reporter, William E. Young, Solicitor General,
and R. Mitchell Porcello, Assistant Attorney General, Nashville, Tennessee, for the appellant,
Commissioner of Revenue.

Wayne R. Kramer, Knoxville, Tennessee, for the appellee, Oak Ridge Land Company, LP.


                                                OPINION

        Plaintiff, Oak Ridge Land Company Partnership, filed a Complaint against Reagan
    1
Farr , Commissioner of Revenue for the State of Tennessee, pursuant to Tenn. Code Ann.
§67-1-1801, challenging an assessment against it after an audit. Plaintiff asserted that the
Department of Revenue conducted an audit for the period of January 1, 2004, through
December 31, 2006, and as a result assessed Franchise and Excise Taxes of $317,659.72
against plaintiff, plus interest of $59,525.59. Plaintiff stated that, pursuant to the above
statute, it requested and received an informal conference before a hearing officer regarding
the assessment, and during such conference plaintiff asserted that the Department had
established plaintiff’s net earnings and net worth in a manner contrary to Tennessee law.
Plaintiff averred that the hearing officer affirmed the assessment, however, and found that
plaintiff improperly deducted the fair market value of certain realty that it donated to
qualified charities, rather than the book value, as provided by Tenn. Comp. R. & Regs.
1320-6-1-.20. Plaintiff asserted that this Rule was inconsistent with the provisions of Tenn.
Code Ann. §67-4-2006, and thus was void and of no effect. It argued that it properly
deducted certain property that was under construction and not being utilized from its net
worth.

         The Commissioner of Revenue filed an Answer and Counterclaim, asserting that its
assessment was correct pursuant to applicable law. The Commissioner thus counterclaimed
for the entire amount of the assessment, and asserted that interest would continue to accrue
until it was paid, and that attorney’ s fees and expenses were also sought pursuant to Tenn.
Code Ann. §67-1-1803. Plaintiff filed an Answer to Counterclaim, averring that the
assessment was invalid.

       The parties entered into a Stipulation of Facts, agreeing that on or about December
30, 2003, ORLC conveyed to the State of Tennessee, as a charitable gift, a conservation
easement against 50.54 acres of realty located in Roane County, and made other such gifts
to The Foothills Land Conservancy around the same time. ORLC deducted the fair market
value of these interests conveyed on its 2004, 2005, and 2006 Tennessee Franchise and
Excise Tax Returns, pursuant to Tenn. Code Ann. § 67-4-2006. The Commissioner, relying

        1
            Richard Roberts was later substituted for Farr as Commissioner.

                                                     -2-
on Tenn. Comp. R. & Regs. 1320-6-1-.20, determined that only the book basis of the
properties could be deducted. Tenn. Code Ann. §67-4-2006(b)(2)(D) states that the taxpayer
may deduct "the actual charitable contributions made during the tax year". Tenn. Code Ann.
§67-1-102(a) states that the Commissioner can prescribe "rules and regulations not
inconsistent with law." The parties also agreed that ORLC did not include certain parcels
of property that were being developed and ultimately purchased by Broadberry during the
audit period when calculating its net worth for Franchise Tax purposes.

       The Commissioner filed a Motion for Summary Judgment, stating that his assessment
should be upheld. The Commissioner stated that Tenn. Comp. R. & Regs. 1320-6-1-.20
required plaintiff to deduct only the book value, rather than the fair market value. The
Commissioner also stated that plaintiff was required to include the real property it owned in
Rarity Ridge in its net worth for franchise tax. Plaintiff likewise filed a Motion for Partial
Summary Judgment, stating that it was justified in deducting the fair market value pursuant
to Tenn. Code Ann. § 67-4-2006. A hearing was held before the Trial Judge sitting by
interchange. A Final Order was entered on February 1, 2012, wherein the Court found that
there was no genuine issue of material fact, and that summary judgment was appropriate.
The Court found that Tenn. Comp. R. & Regs. 1320-6-1-.20 was in conflict with Tenn. Code
Ann. §67-4-2006, to the extent the rule attempted to restrict the deduction for charitable
contributions made to only the book basis rather than the fair market value, and that plaintiff
was entitled to summary judgment on this issue, and an abatement of the assessment in the
amount of $303,049. The Court also found that plaintiff was in error in not including certain
real property in calculating its net worth under the ruling of Crown Enterprises, Inc., v.
Woods, 557 S.W.2d 491 (Tenn. 1977), and that defendant was entitled to a judgment of
additional tax in the amount of $14,610.72 due to this error.

       The Court found that issues regarding attorney’s fees and expenses should be reserved
pending the outcome of any appeals, and certified its order as final pursuant to Tenn. R. Civ.
P. 54. Both parties filed notices of appeal. The issues presented are:

       1.     Whether the Trial Court erred in ruling that the phrase “[t]he actual charitable
              contributions made during the tax year”, as used in Tenn. Code Ann. §67-4-
              2006(b)(2)(D) for the purpose of computing a taxpayer’s excise tax liability,
              requires property donated to charity to be deducted at its fair market value,
              even though Tenn. Comp. R. & Regs. 1320-6-1-.20 specifies that the book
              value is to be used?

       2.     Whether the Trial Court erred in ruling that certain real property excluded by
              plaintiff in calculating its net worth for franchise tax purposes should have
              been included

                                              -3-
        The Trial Court found that because of the references made in certain sections of the
above statute to the Federal Tax Law, the phrase "[t]he actual charitable contributions made"
should be construed as meaning the fair market value of those contributions, since that was
the measure of value used by the Federal law (even though the particular sub-section made
no reference to Federal law). The Court thus found that Rule 20 was in conflict with the
statute by requiring the taxpayer to use book value rather than the fair market value.

        Our problem with the Court's construction of that statute, however, is that it ignores
the rules of statutory construction and creates a forced interpretation. As stated the "statute
must be construed in its entirety and it should be assumed that the legislature used each word
purposely and that those words convey some intent and have a meaning and a purpose. The
background, purpose, and general circumstances under which words are used in a statute
must be considered, and it is improper to take a word or a few words from its context and,
with them isolated, attempt to determine their meaning." Eastman Chem. Co. v. Johnson,
151 S.W.3d 503 (Tenn. 2004). While the legislature made reference to the federal tax code
in Tenn. Code Ann. §67-4-2006(a)(4) and (b)(1)(D), it would be error to assume that the
legislature intended to incorporate a reference to the federal code in subsection (b)(2)(D) but
simply failed to do so. The omission of a reference to or reliance upon the federal code in
subsection (b)(2)(D) should not be assumed to be a mistake by the legislature, but rather
should be construed as the legislature’s intent to depart from the federal code in this instance.
See, e.g., State v. Davidson, 184 S.W. 18 (Tenn. 1916).

       Construing the statute as it is plainly written, the statute tells the taxpayer to take its
net earnings, add back any deductions taken under 26 U.S.C. §170, and then subtract the
"actual charitable contributions made during the tax year" to determine the final net earnings
figure. It is significant to note that under 26 U.S.C. §170, taxpayers in certain instances are
only allowed to deduct a portion or percentage of the actual contribution made. Thus, by
adding back the deduction taken under federal law (which was likely only a portion of the
actual contribution made) and then subtracting the "actual contribution made" as a dollar for
dollar deduction, the taxpayer is actually receiving a tax benefit in the form of a lesser
amount of net earnings to be taxed upon. Construing the statute in its entirety, this is the only
reasonable interpretation.

        Appellee asks this Court to instead take the phrase "actual charitable contributions
made" out of context and construe it to mean the fair market value of said contributions,
rather than the book value as proscribed in Rule 20. Rule 20 states:

       In determining net earnings for the purpose of computing the excise tax, [the statute]
       requires the charitable contributions deduction claimed under Section 170 of the

                                               -4-
       Internal Revenue Code to be added to federal taxable income whereas [the statute]
       permits a deduction for actual charitable contributions made by the corporation during
       the fiscal year. The term "actual charitable contributions" means all bona fide
       contributions expensed and paid in a given year without regard to any percentage as
       required under federal law. The same criteria used for federal purposes in determining
       whether or not a contribution is a bona fide contribution is used by this state;
       however, only the book basis of property donated to charity is permitted as a
       deduction in determining net earnings for the purpose of computing the excise tax.

Tenn. Comp. R. & Regs. 1320-6-1-.20.

        Appellee further argues that Rule 20 is somehow inconsistent with the statute,
however, as the statute should be construed with "actual contributions" meaning "fair market
value". However, the statute does not say "actual value", nor does it make any reference
whatsoever in the subsection to value or to the federal code/standard. What the statute says
is "actual", which is defined as "existing in fact or reality" or "based in fact". Webster’s II
New College Dictionary 12 (2001). What the statute does, as explained, is to allow the
taxpayer to subtract the whole amount of its contributions, rather than a percentage as
allowed under federal law. Rule 20 recognizes and expressly explains this. Rule 20 then
goes on to state that the value used should be book basis, which is not in conflict with the
language of the statute, as the statute does not mention fair market value at all. The Trial
Court erred in relying on a federal statutory interpretation, when Tenn. Code Ann.
§67-4-2006(b)(2)(D) makes no reference to the federal code. If the legislature had intended
for "actual charitable contributions made" to mean "fair market value of actual charitable
contributions made", then the legislature would have used those words. Construing the
statute as written, the phrase "actual charitable contributions made during the tax year" would
mean those charitable contributions actually made during the tax year.

       Appellee argues that the Commissioner does not have the authority to promulgate a
rule prescribing that book value should be used as the value of the "actual charitable
contributions made". The Commissioner, however, "is vested with power to prescribe rules
and regulations not inconsistent with law." Tenn. Code Ann. §67-1-102(a). As stated, there
has been no showing that Rule 20 is inconsistent with the statute. In the absence of a clear
showing that the rule is contrary to a statute, the court cannot substitute its judgment for the
Commissioner’s. Covington Pike Toyota, Inc., v. Cardwell, 829 S.W.2d 132 (Tenn. 1992).

        As further affirmation of this interpretation of the statute, the Commissioner points
this Court to the Supreme Court’s opinion in General Electric Broadcasting Co., Inc., v. Bob
Tollett, Commissioner of Revenue of the State of Tennessee, 1984 LEXIS 835 (Tenn. Aug. 27,
1984). In that case, the Supreme Court was confronted with a similar question, i.e., whether

                                              -5-
the taxpayer could deduct market value or book value of a property donated to charity when
calculating its net earnings for excise tax purposes. While the General Electric case was
decided before the statute and rule in question were enacted, we note that the
Commissioner’s rule/practice at that time was still to only allow book value and not fair
market value of the property contributed to be deducted for the purpose of computing net
earnings. The Supreme Court opined that this practice was "sound and reasonable", because
if the taxpayer were allowed to deduct fair market value, then the State would "find itself in
the incongruous position of having a taxpayer take advantage of depreciation to reduce its
excise tax payments over a period of years, and then make a charitable gift of the asset and
reduce his excise tax payment by deducting the appreciated value of the property rather than
its depreciated, or book, value. In short, the taxpayer would have its deduction from excise
taxes ‘coming and going.’" Id. at p. 3.

        For this reason, it is both sound and reasonable for the Commissioner to prescribe that
book value rather than fair market value of a charitable contribution shall be used for the
purpose of calculating net earnings today. The Commissioner’s rule does not conflict with
the statute, as the statute does not speak to value, but simply allows a deduction for "actual
charitable contributions made", and the only reasonable interpretation of that phrase is those
charitable contributions actually made during the tax year. The Trial Court's Judgment on
this issue is reversed.

        ORLC raises an issue regarding the Trial Court’s determination that it should not have
been allowed to exclude certain property from its net worth for franchise tax purposes,
arguing that the property in question met the statutory requirements of a) being under
construction and b) not being utilized by ORLC. Tenn. Code Ann. §67-4-2108 states that
"[t]here shall not be included within the meaning hereof the value of any property while
construction of that property is in progress and, in addition thereto, there is no actual
utilization of such property by the taxpayer, either in whole or in part." The Trial Court
found that the property in question did not satisfy the statutory requirements pursuant to the
Supreme Court’s opinion in Crown Enterprises, Inc. v. Woods, 557 S.W.2d 491 (Tenn. 1977),
and ruled that ORLC had to include the value of the property in its net worth for franchise
tax purposes.

       In Crown, the Supreme Court was faced with a similar question involving property
owned by a corporation engaged in the business of building and selling houses, wherein the
property at issue had homes that were under construction. Id. The Court ruled that the
statutory exemption for property under construction and not actually utilized by the
corporation was intended by the legislature to exclude "only property which has not yet
become a part of the capital employed in the particular business of the corporation." Id. The
Court gave an example of such exempt property as manufacturing facilities under

                                              -6-
construction/not utilized, where the corporation’s business was manufacturing. Id. The
Court stated that the utilization issue depended on the particular nature of the business. Id.
The Court thus held that where the corporation was in the business of buying and selling
houses, it was utilizing the homes under construction in conducting its business, and those
homes under construction were part of the capital employed by the business. Accordingly,
those properties also had to be included when figuring the franchise tax due. Id.

       Here, ORLC is in the business of buying and selling real property, as the parties
stipulated. As such, the Trial Court properly found that the parcels of land in question, which
were being developed for sale, should have been included for the purpose of computing the
franchise tax, as those properties were part of the capital employed by ORLC’s business.
The Trial Court properly ruled that these properties should have been included in ORLC’s
net worth based on the authority of Crown, and we affirm the Trial Court's ruling on this
issue.

       The Trial Court's Judgment regarding excise taxes is reversed and the case is
remanded to have the original excise tax assessment reinstated. The Trial Court's Judgment
regarding the franchise tax is affirmed.

       The cost of the appeal is assessed to Oak Ridge Land Company, LP.




                                                    _________________________________
                                                    HERSCHEL PICKENS FRANKS, P.J.




                                              -7-
