                IN THE COURT OF APPEALS OF TENNESSEE
                            AT NASHVILLE
                             SEPTEMBER 8, 2010 Session

    VALENTI MID-SOUTH MANAGEMENT, LLC v. REAGAN FARR,
      COMMISSIONER OF REVENUE, STATE OF TENNESSEE

            Direct Appeal from the Chancery Court for Davidson County
                   No. 08-1978-II   Carol L. McCoy, Chancellor


              No. M2010-00313-COA-R3-CV - Filed November 15, 2010


Plaintiff filed suit in chancery court to challenge an assessment of Plaintiff’s franchise tax
liability by the Department of Revenue. The chancery court upheld the assessment. We
affirm.


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

A LAN E. H IGHERS, P.J., W.S., delivered the opinion of the Court, in which D AVID R. F ARMER,
J., and J. S TEVEN S TAFFORD, J., joined.

Candi Henry, Donald Capparella, Nashville, Tennessee, for the appellant, Valenti Mid-South
Management, LLC

Robert E. Cooper, Jr., Attorney General and Reporter, Michael E. Moore, Solicitor General,
Brad H. Buchanan, Assistant Attorney General, Nashville, Tennessee, for the appellee,
Commissioner of Revenue
                                                 OPINION

                                            I.   B ACKGROUND

        Valenti Mid-South Management, LLC (“Valenti Management”) is a Florida limited
liability company that operates 46 Wendy’s restaurants in the State of Tennessee. The
Tennessee Department of Revenue audited Valenti Management’s tax returns for the 2003,
2004, and 2005 tax years and issued a “Notice of Assessment” reflecting that Valenti
Management owed $197,615.55 in additional Tennessee franchise taxes and $71,478.30 in
interest, as of March 7, 2008.
                               II. F RANCHISE T AX L AW

       Tennessee’s Franchise Tax Law is found at Tennessee Code Annotated section 67-4-
2101, et seq. “All persons1 doing business in Tennessee,” with certain exceptions not
applicable here, must pay the franchise tax annually to the Commissioner of Revenue. Tenn.
Code Ann. § 67-4-2105(a). The franchise tax is “a privilege tax in addition to all other
taxes.” Id. It is “paid for the privilege of doing business in Tennessee,” id., and it serves “as
a recompense for the protection of [the taxpayer’s] local activities and as compensation for
the benefits [the taxpayer] receives from doing business in Tennessee.” Tenn. Code Ann.
§ 67-4-2105(b).

       The franchise tax is imposed at the rate of 25 cents per 100 dollars of a taxpayer’s net
worth. Tenn. Code Ann. § 67-4-2106(a). “Net worth” means “the difference between a
taxpayer’s total assets less its total liabilities computed in accordance with generally accepted
accounting principles.” Tenn. Code Ann. § 67-4-2106(b). However, the measure of the
franchise tax “shall in no case be less than the actual value of the real or tangible property
owned or used in Tennessee, excluding exempt inventory and exempt required capital
investments.”2 Tenn. Code Ann. § 67-4-2108(a)(1). Therefore, a taxpayer’s franchise tax

        1
          As noted, the franchise tax is to be paid by “[a]ll persons doing business in Tennessee.” Tenn.
Code Ann. § 67-4-2105(a). For purposes of the Franchise Tax Law, a “person” or “taxpayer” is defined as
a “corporation, subchapter S corporation, limited liability company, professional limited liability company,
registered limited liability partnership, professional registered limited liability partnership, limited
partnership, cooperative, joint-stock association, business trust, regulated investment company, real estate
investment trust, state-chartered or national bank, or state-chartered or federally chartered savings and loan
association.” Tenn. Code Ann. § 67-4-2004(34). Thus, a “person” includes business entities but not natural
persons.
        2
           This provision establishing a minimum tax base using the value of tangible property as a measure
indicates that the Legislature intended to tax corporations for the use of their corporate franchise, regardless
of earnings or losses. Commercial Equities Corp. v. Tollett, 596 S.W.2d 801, 804 (Tenn. 1980). “This
                                                                                                  (continued...)

                                                      -2-
liability is calculated based on the greater of its net worth or the value of the property it owns
or uses in Tennessee.

       Pursuant to a statutory amendment, for tax years beginning on or after January 1,
2004, “a taxpayer that is a member of an affiliated group . . . may elect to compute its net
worth on a consolidated basis.” Tenn. Code Ann. § 67-4-2103(d); Acts 2004, ch. 932, § 11.
“For a taxpayer electing to compute its net worth on a consolidated basis, net worth is
defined as the difference between the total assets less the total liabilities of the affiliated
group at the close of business on the last day of the tax year, as shown by a pro forma
consolidated balance sheet including all members of the group.” Tenn. Code Ann. § 67-4-
2106(b). An “affiliated group” is defined as:

        (A) . . . (i) A taxpayer that, standing alone, is subject to the Tennessee
        franchise tax;
        (ii) All other domestic persons in which the taxpayer, directly or indirectly, has
        more than fifty percent (50%) ownership interest;
        (iii) All other domestic persons that, directly or indirectly, have more than fifty
        percent (50%) ownership interest in the taxpayer; and
        (iv) All other domestic persons in which a person described in subdivision
        (2)(A)(iii), directly or indirectly, has more than fifty percent (50%) ownership
        interest, regardless of whether such persons do business in Tennessee;

        (B) For purposes of this subdivision . . . , a noncorporate taxable entity is more
        than fifty percent (50%) owned, if, upon liquidation more than fifty percent
        (50%) of the assets of the noncorporate taxable entity, directly or indirectly,
        accrue to a member or members of the affiliated group;

Tenn. Code Ann. § 67-4-2004(2).

                      III.   V ALENTI M ANAGEMENT’S C IRCUMSTANCES

      Valenti Management is subject to the Tennessee franchise tax because it is a “person”
doing business in Tennessee. See Tenn. Code Ann. § 67-4-2105(a). It is undisputed that
during the period in question, Valenti Management’s net worth was negative. As such,


       2
         (...continued)
provides the method for determining the minimum net worth of the capital of the corporation.” Tollett v.
Franklin Equities, Inc., 586 S.W.2d 96, 97-98 (Tenn. 1979) (quoting Crown Enterprises, Inc. v.
Woods, 557 S.W.2d 491, 492 (Tenn. 1977)). Thus, the minimum measure of the franchise tax is the value
of the property owned, or property used, in Tennessee. Id.

                                                  -3-
Valenti Management was necessarily required to utilize the “property value” measure when
calculating its franchise tax liability rather than the “net worth” measure. See Tenn. Code
Ann. § 67-4-2108(a)(1). Thus, it was required to calculate “the actual value of the real or
tangible property owned or used in Tennessee.” Id. “Used” means property that is “utilized
by the taxpayer in the conduct of its principal business.” See Tenn. Code Ann. § 67-4-
2108(a)(6)(F). The statute provides a specific formula for including the value of rented
property when calculating the value of property “owned or used in Tennessee” under the
property value measure. Tenn. Code Ann. § 67-4-2108(a)(3).

       Valenti Management leases the land and buildings where its 46 restaurants are
operated from Valenti Mid-South Realty, LLC (“Valenti Realty”), which is a separate and
distinct Florida limited liability company that is also qualified to do business in Tennessee.
Five individuals own approximately 87% of the ownership interests in the two LLCs in
identical percentages. Mr. Darrell Valenti owns approximately 55% of Valenti Management
and 59% of Valenti Realty.

       When Valenti Management calculated its franchise tax liability using the property
value measure, it did not include the value of the 46 properties it rents from Valenti Realty.
Valenti Management took the position that its relationship with Valenti Realty constituted
an “affiliated group” pursuant to Tennessee Code Annotated section 67-4-2004(2). Valenti
Management then argued that the “Valenti Group” was entitled to calculate its property value
as a group. Because Valenti Realty had already included the value of the 46 properties it
owned when calculating its franchise tax liability, Valenti Management contended that it was
not required to include the value of those same properties, which it rented from Valenti
Realty, when calculating the value of the property it “owned or used in Tennessee.”

                                  IV.    T RIAL C OURT P ROCEEDINGS

       Valenti Management filed a complaint in chancery court to challenge the assessment
of additional liability. The Commissioner of Revenue filed a counterclaim for the unpaid
amount of the assessment. Before the trial court, Valenti Management argued that it was a
member of an affiliated group and that it was entitled to calculate its property value on a
consolidated basis with Valenti Realty. The Commissioner of Revenue filed a motion for
summary judgment, contending that the relationship between Valenti Management and
Valenti Realty did not qualify as an affiliated group, and further arguing that affiliated groups
can only calculate their net worth as a group, not their property value.3 Valenti Management


        3
           The statute states that “a taxpayer that is a member of an affiliated group . . . may elect to compute
its net worth on a consolidated basis,” but it does not mention the property value measure. Tenn. Code Ann.
                                                                                                    (continued...)

                                                       -4-
contended that “any attempt by the Department to impose double taxation on Valenti
constitutes a violation of the equal protection and due process clauses of the Tennessee and
federal [C]onstitutions.”

        The trial court ultimately granted summary judgment to the Commissioner of Revenue
and upheld the assessment in its entirety. The court concluded that Valenti Management and
Valenti Realty’s relationship did not qualify as an affiliated group, and that even if it did,
affiliated groups cannot utilize consolidated computation for the property value measure of
the franchise tax base. The court also found that “the foregoing result does not constitute
double taxation as alleged by Valenti [Management].” As a result, the trial court dismissed
the complaint and awarded the Commissioner a judgment for $299,041.17, in addition to
interest accruing until the date of payment. The court reserved judgment as to the amount
of attorney’s fees and expenses to be awarded and certified its order as final pursuant to
Tennessee Rule of Civil Procedure 54.02. Valenti Management timely filed a notice of
appeal to this Court.

                                  V.    I SSUES P RESENTED

        Valenti Management presents the following issues, as we perceive them, for review:

1.      Whether Valenti Management is part of an “affiliated group”for franchise tax
        purposes;
2.      Whether Valenti Management and Valenti Realty can calculate their property value
        on a consolidated basis if they qualify as an affiliated group;
3.      Whether the assessment at issue is unconstitutional because it constitutes double
        taxation and/or taxes members of the same class differently; and
4.      Whether the trial court erred in denying Valenti Management’s motion to compel
        discovery responses.

For the following reasons, we affirm the decision of the chancery court.

                                       VI.   D ISCUSSION

                                  A.     Affiliated Groups

      Valenti Management first contends that it and Valenti Realty constitute an “affiliated
group” for purposes of the Franchise Tax Law. As previously noted, for tax years beginning


       3
        (...continued)
§ 67-4-2103(d).

                                              -5-
on or after January 1, 2004, “a taxpayer that is a member of an affiliated group . . . may elect
to compute its net worth on a consolidated basis.” Tenn. Code Ann. § 67-4-2103(d); Acts
2004, ch. 932, § 11. “For a taxpayer electing to compute its net worth on a consolidated
basis, net worth is defined as the difference between the total assets less the total liabilities
of the affiliated group at the close of business on the last day of the tax year, as shown by a
pro forma consolidated balance sheet including all members of the group.” Tenn. Code Ann.
§ 67-4-2106(b).

       For purposes of the Franchise Tax Law, an “affiliated group” means:
       (A) . . . (i) A taxpayer that, standing alone, is subject to the Tennessee
       franchise tax;
       (ii) All other domestic persons in which the taxpayer, directly or indirectly, has
       more than fifty percent (50%) ownership interest;
       (iii) All other domestic persons that, directly or indirectly, have more than fifty
       percent (50%) ownership interest in the taxpayer; and
       (iv) All other domestic persons in which a person described in subdivision
       (2)(A)(iii), directly or indirectly, has more than fifty percent (50%) ownership
       interest, regardless of whether such persons do business in Tennessee;

       (B) For purposes of this subdivision . . . , a noncorporate taxable entity is more
       than fifty percent (50%) owned, if, upon liquidation more than fifty percent
       (50%) of the assets of the noncorporate taxable entity, directly or indirectly,
       accrue to a member or members of the affiliated group;

Tenn. Code Ann. § 67-4-2004(2). Clearly, Valenti Management is a taxpayer that, standing
alone, is subject to the Tennessee franchise tax, to satisfy subsection (i). Pursuant to
subsection (ii), Valenti Management could form an affiliated group with “other domestic
persons in which [Valenti Management], directly or indirectly, has more than fifty percent
(50%) ownership interest.” It is undisputed that Valenti Management does not directly own
more than 50% of Valenti Realty. Neither LLC owns any interest in the other. However,
Valenti Management argues that it indirectly owns more than 50% of Valenti Realty because
Mr. Darrell Valenti owns more than half of both companies. Valenti Management claims
that if Valenti Realty was liquidated, more than half of its assets would accrue to Darrell
Valenti, thereby indirectly accruing to Valenti Management. In response, the Commissioner
argues that “[t]his is not how ownership works. If assets accrue to Darrell Valenti as a
natural individual, they do not accrue to a separate legal entity that he happens to own.” We
agree with the Commissioner. To hold that Valenti Management indirectly owns the majority
of Valenti Realty would completely ignore Valenti Management’s status as a legal entity
separate from Darrell Valenti. Valenti Management, as an entity, has no ownership interest
in Valenti Realty. Thus, subsection (ii) does not apply because there are no “other domestic

                                               -6-
persons in which the taxpayer, directly or indirectly, has more than fifty percent (50%)
ownership interest.”

        Under subsection (iii), Valenti Management could form an affiliated group with “other
domestic persons that, directly or indirectly, have more than fifty percent (50%) ownership
interest in [Valenti Management].” Using the same reasoning discussed above, Valenti
Management claims that Valenti Realty is a domestic person that indirectly owns more than
half of Valenti Management. We reject this assertion for the reasons previously discussed.
Valenti Realty owns no ownership interest in Valenti Management, directly or indirectly.

       Finally, under subsection (iv), Valenti Management could form an affiliated group
with “other domestic persons in which a person described in subdivision (2)(A)(iii), directly
or indirectly, has more than fifty percent (50%) ownership interest, regardless of whether
such persons do business in Tennessee.” In other words, it could form a group with other
persons that are, directly or indirectly, majority-owned by a person who is also one of Valenti
Management’s majority owners. Valenti Management and Valenti Realty are both majority-
owned by the same individual, Darrell Valenti, but he does not qualify as a “person” under
the Franchise Tax Law. See Tenn. Code Ann. § 67-4-2004(34) (defining “person” or
“taxpayer” to include business entities but not natural individuals). Because no domestic
person, within the meaning of the Franchise Tax Law, owns more than half of Valenti
Management, it cannot utilize subsection (iv) to form an affiliated group.

       In sum, we conclude that Valenti Management is not a member of an affiliated group
for purposes of the Franchise Tax Law. Therefore, we need not address the issue presented
regarding whether members of affiliated groups can calculate the value of their property on
a consolidated basis. As separate persons and separate taxpayers under the Franchise Tax
Law, it is clear that Valenti Management and Valenti Realty must separately calculate the
value of the property each company owns or uses in Tennessee.

                                 B.     Constitutional Issues

       Valenti Management argues on appeal that if affiliated groups are required to calculate
the value of their assets on an individual basis, then the Franchise Tax Law “results in
impermissible double taxation,” “treats members of the same class disparately,” and may
have “impermissibly made the Valenti group a class unto itself.”

                                   1.    Double Taxation

      In support of its double taxation argument, Valenti Management cites E & L
Transport Co. v. Ellington, 371 S.W.2d 456, 459 (Tenn. 1963), where the Court explained:

                                              -7-
       In order to constitute double taxation in the objectionable or prohibited sense
       the same property must be taxed twice when it should be taxed but once; both
       taxes must be imposed on the same property or subject matter, for the same
       purpose, by the same state, government, or taxing authority, within the same
       jurisdiction or taxing district, during the same taxing period, and they must be
       the same kind or characte[r] of tax.

Id. (quoting 84 C.J.S. Taxation § 39, at 131-32). Valenti Management explains the basis of
its argument as follows:

               Under the code, affiliated groups are treated for all practical purposes
       as one taxpayer when they calculate net worth on a consolidated basis. When,
       as here, the law treats the entities as one taxpayer, subjecting that one taxpayer
       to tax twice in the same reporting period for the same piece of property is
       impermissible double taxation. Thus, it constitutes impermissible double
       taxation for Valenti Management to be assessed Franchise Tax that includes
       in its basis the value of the real estate it rents, when Valenti Realty has already
       paid Franchise Tax based upon the value of that same property.

(citation omitted). We have already determined that Valenti Management and Valenti Realty
do not constitute an “affiliated group” for purposes of the Franchise Tax Law. Therefore,
the underlying assumption of Valenti Management’s argument is incorrect. Because Valenti
Management and Valenti Realty are separate entities, separately exercising the privilege of
doing business in the State of Tennessee, each company is subject to the franchise tax as a
separate taxpayer. See Tenn. Code Ann. § 67-4-2105(a), (b) (explaining that the franchise
tax is “a privilege tax” that is “paid for the privilege of doing business in Tennessee”). The
franchise tax “is not an ad valorem property tax but is a tax levied upon the privilege of
engaging in business in corporate form in this state.” Tollett, 586 S.W.2d at 97 (citing
Crown Enterprises, Inc., 557 S.W.2d at 491). Furthermore, a privilege tax does not become
a property tax when it is measured by the value of the taxpayer’s property. Corn v. Fort, 95
S.W.2d 620, 624 (Tenn. 1936). In short, we reject Valenti Management’s assertion that the
assessment at issue constituted double taxation due to Valenti Management’s relationship
with Valenti Realty. See Memphis Peabody Corp. v. MacFarland, 365 S.W.2d 40, 44
(Tenn. 1963) (stating that the franchise tax “is a privilege tax and not a property tax, and
there is no double taxation”).

                                    2.   Equal Protection

       Next, Valenti Management alleges that the Commissioner’s interpretation of the law
is unconstitutional because persons in the same class are being treated differently without

                                               -8-
justification. Specifically, Valenti Management claims that “the result of the franchise tax
as applied by the state is that an affiliated group can avoid being taxed on intercompany rents
only if the group has a positive net worth.” Thus, Valenti Management claims that affiliated
groups with a negative net worth are being taxed on a different basis than affiliated groups
with a positive net worth. It claims that it is arbitrary to tax “a class of taxpayers – members
of affiliated groups” – in a non-uniform manner. In response, the Commissioner argues that
there is a rational basis for having two different methods of computing franchise tax liability.

        It is our opinion that Valenti Management does not have standing to complain about
the constitutionality of some affiliated groups being treated differently than other affiliated
groups when Valenti Management is not a member of any affiliated group. “Before a law
can be assailed by any person on the ground that it is unconstitutional, he must show that he
has an interest in the question in that the enforcement of the law would be an infringement
on his rights.” National Gas Distributors v. Sevier County Utility Dist., 7 S.W.3d 41, 44
(Tenn. Ct. App. 1999) (citing Parks v. Alexander, 608 S.W.2d 881, 885 (Tenn. Ct. App.
1980)). We decline to address Valenti Management’s equal protection argument regarding
the treatment of affiliated groups based upon our conclusion that it is not an affiliated group.

                                     3.   Class Legislation

         Finally, Valenti Management maintains that “[i]f the Valenti Group is the only one
of its kind – that is, the only affiliated group that calculates its tax on a consolidated basis and
has a negative net worth – then the legislature has arbitrarily created a class of one.” Valenti
Management claims that the trial court abused its discretion in denying its Motion to Compel
Discovery which, according to Valenti Management, sought information related to this issue,
including statistical information about other similarly situated taxpayers and affiliated
groups.

       Because we have concluded that Valenti Management is not an affiliated group, its
argument regarding the possibility that it is the only affiliated group of its kind is
pretermitted. The trial court’s order denying the motion to compel is affirmed.

                                  VII. C ONCLUSION
        For the aforementioned reasons, we affirm the decision of the chancery court and
remand for such further proceedings as may be necessary. Costs of this appeal are taxed to
the appellant, Valenti Mid-South Management, LLC, and its surety, for which execution may
issue if necessary.

                                                      _________________________________
                                                      ALAN E. HIGHERS, P.J., W.S.

                                                -9-
