                           IN THE COURT OF APPEALS OF TENNESSEE
                                        AT JACKSON


KELLOGG COMPANY and                    )
KELLOGG, U.S.A., INC.,                 )
                                       )
                Plaintiffs/Appellants, ) Shelby Chancery No. 107290-1 R.D.
                                       )
VS.                                    ) Appeal No. 02A01-9612-CH-00302
                                       )
TENNESSEE ASSESSMENT                   )
APPEALS COMMISSION, STATE OF )
TENNESSEE, STATE BOARD OF
EQUALIZATION; HAROLD S.
                                       )
                                       )
                                                   FILED
STERLING, SHELBY COUNTY                )
                                                  June 26, 1998
ASSESSOR; BOB PATTERSON,               )
SHELBY COUNTY TRUSTEE, STATE )
                                                Cecil Crowson, Jr.
OF TENNESSEE, DIVISION OF              )        Appellate C ourt Clerk
PROPERTY ASSESSMENTS, and              )
SHELBY COUNTY, TENNESSEE,              )
                                       )
                Defendants/Appellees.)

                   APPEAL FROM THE CHANCERY COURT OF SHELBY COUNTY
                                 AT MEMPHIS, TENNESSEE
                       THE HONORABLE C. NEAL SMALL, CHANCELLOR

ALLAN J. WADE
BAKER, DONELSON, BEARMAN
& CALDWELL
Memphis, Tennessee
Attorney for Appellants

JOHN KNOX WALKUP
Attorney General and Reporter
JOHN J. HANCOCK
Assistant Attorney General
Nashville, Tennessee
Attorney for Appellees Tenn. Assessment Appeals Comm.,
Tennessee State Board of Equalization, and
State of Tennessee Division of Property Assessments

THOMAS E. WILLIAMS
Special Counsel-Shelby County Government
Memphis, Tennessee
Attorney for Appellees Shelby County, Tennessee,
Bob Patterson, Shelby County Trustee, and
Harold S. Sterling, Shelby County Assessor

REVERSED AND REMANDED


                                                                   DAVID R. FARMER, J.



CONCUR:

W. FRANK CRAWFORD, P.J., W.S.

ALAN E. HIGHERS, J.
               Kellogg Company and Kellogg, U.S.A., Inc. (hereinafter collectively “Kellogg”),
appeal from the judgment of the trial court dismissing their “petition for judicial review” on the

ground that the court lacked subject matter jurisdiction. The petition sought review of the decision

of the Tennessee Assessment Appeals Commission and the Tennessee State Board of Equalization

(Board) that the Shelby County Assessor1 had properly assessed certain tangible personal property,

identified as “Construction In Process” (CIP), owned by Kellogg on the effective date of January 1,

1993. Kellogg paid the taxes under protest. The chancery court dismissed the petition on the ground

that Kellogg had failed to first exhaust its administrative remedies before seeking judicial review.

The parties now agree, in light of our supreme court’s decision in Thomas v. State Board of

Equalization, 940 S.W.2d 563 (Tenn. 1997), that the trial court erred in dismissing the petition. It

is clear from the parties’ briefs that they further do not dispute that this matter is properly before this

court for review on its merits and that a remand to the trial court is unnecessary. 2 We agree that

Kellogg’s petition was improperly dismissed by the trial court and hereby reverse its decision.

Furthermore, after review of the merits, we have determined that the taxation of Kellogg was

improper. We set forth our reasons below.



                Kellogg’s petition alleged the improper taxation of its CIP on the basis that prior to

May 17, 1993, no specific statute, promulgated rule, regulation or other document existed which

specifically mentioned or defined CIP property or authorized its assessment. Kellogg asserted that

the county assessor assessed the CIP based upon a written “directive” from the Division of Property

Assessments which was contrary to the established policies and procedures of the Board and

unsupported by any established Board rule or regulation. It was asserted that this change in policy

governing CIP assessment was neither promulgated by the Board nor in accordance with the Uniform

Administrative Procedures Act, T.C.A. §4-5-101 et seq., since the rule making was not preceded

by notice and a public hearing. Kellogg alleged that, for tax years prior to 1994, Tennessee law did

not authorize the taxation of CIP until such construction was completed and placed in service.



        1
        The remaining Appellees are Bob Patterson, Shelby County Trustee, the Division of
Property Assessments and Shelby County, Tennessee.
        2
        The brief of the Tennessee Assessment Appeals Commission, the Division of Property
Assessments and the State Board of Equalization indicates that although this issue “has been
resolved for the purposes of this proceeding,” it was being preserved with respect to further appeal.


                                                    2
Kellogg noted that under federal income and state excise tax rules, CIP costs are not capitalized and

depreciated until placed in service and maintained that the “long established rule” adopted by the

Board follows the federal tax guidelines. It was further asserted that the assessor made no attempt

to properly classify personal property which was to comprise CIP and that the Division’s directive

did not take into account the difficulty in classifying component parts until the time when they are

completed and placed in service.



                    Kellogg further contended that a “significant portion” of the CIP assessed was for

labor and freight which “are not capitalized as a part of the depreciable cost of CIP until the

constructive personalty is completed and placed in service.” Thus, it was asserted that until CIP is

functional, labor and freight costs are non-capitalized current expenditures and not personal property.

Kellogg also maintained that the assessment of CIP was premature because the component parts of

machinery, equipment and real estate are not assessable until completed and placed in service

pursuant to generally accepted accounting principles and Board rules. Kellogg therefore sought an

adjustment of the depreciation factors for the finished product into which CIP is incorporated to

reflect an earlier commencement date for depreciation of that particular item of personalty other than

that usually contemplated by current depreciation factors adopted by the Board, if the assessment was

upheld.



                    Finally, Kellogg pointed to the legislature’s enactment of T.C.A. § 67-5-903(g),3

providing for CIP to be valued at 15% of its reported cost, effective January 1, 1994. Kellogg

maintained that CIP should therefore not be assessed prior to the effective date or, alternatively,

Kellogg asserted that the statute should be construed so as to reduce the valuation basis of CIP to

15% of cost for tax year 1993 as opposed to the 100% that had been assessed. In regard to the latter,

Kellogg contended that in light of the statute’s requirement that no back assessments relative to CIP

were to be made prior to January 1, 1994 and that all taxes collected from such assessments were to

be refunded, it was not the legislature’s intent to permit valuation of CIP at 100% of cost on only

those taxpayers who voluntarily complied with the state’s reporting regulations for the 1993 tax year,



          3
              The statute was enacted May 17, 1993.

                                                      3
or to disregard that tax year in terms of the statute’s applicability. Consequently, Kellogg sought a

determination from the trial court that the assessment of its CIP property was void as having been

made without legal authority or, alternatively, that it was entitled to a reduction in its 1993

assessment valuation of CIP to 15% and that labor, freight and other expenditures not related to the

acquisition costs of CIP were to be excluded from its value. Kellogg also sought a refund of all or

a portion of the personal property taxes “erroneously assessed and collected” for tax year 1993.



               Kellogg amended its complaint to assert that § 67-5-903(g) is discriminatory on its

face and mandates unequal treatment under the law. It was also alleged that Appellees’ assessment

of CIP prior to May 17, 1993 violated Article 2, § 28 of the state constitution since the legislature

“has not established the ratio of assessment to value of [CIP] so that it will be equal and uniform

throughout the state nor has the Tennessee General Assembly directed the manner in which the value

of [CIP] prior to May 17, 1993 will be ascertained and the Tennessee General Assembly has not

defined the property constituting [CIP].”



               In answering the petition, Appellees4 asserted that the taxation of CIP “was well

within the contemplation of statutes relating to the assessment of tangible personal property

including § 67-5-901 et seq.” They acknowledged that CIP “was not specifically enumerated in

various manuals or regulations prior to 1993,” but argued that it was “included sufficiently within

the definitions and context of property that the Tennessee Constitution requires to be taxed.”

Appellees further admitted that the Board followed the federal tax principle that the cost of

personalty is not capitalized and depreciated until it is operational and placed in service.



                A hearing was held on September 20, 1995 before the administrative law judge (ALJ)

who made the following factual findings:



                      In tax year 1993, the taxpayer timely filed a tangible personal
               property schedule with the Assessor on the prescribed form. This
               schedule was accompanied by a letter from the taxpayer stating (in


       4
       The answer was filed on behalf of appellees Shelby County, Tennessee, the Shelby County
Assessor and the Shelby county Trustee only.

                                                  4
               relevant part) as follows:

                       To comply with instructions issued by the Shelby
                       County Assessor’s Office, we have included
                       Construction in Process (C-I-P) of $14,165,589 in the
                       $21,279,289 reported as “Raw Materials and
                       Supplies” in Group 8. We hereby protest the
                       inclusions of the C-I-P as reportable property and
                       reserve the right to raise any and all issues pertaining
                       to the assessment of this property.

                        The taxpayers did in fact complain to the Shelby County
               Board of Equalization that the C-I-P portion of the subject account
               was unlawfully assessed. After the county board refused to grant
               relief, the taxpayer filed this appeal.5



               The ALJ upheld the assessment of Kellogg’s CIP, finding “no legal basis for

exemption of such property from ad valorem taxation.”. The ALJ found no merit in Kellogg’s claim

of inequitable assessment, ruling that although some taxpayers may have escaped CIP assessment,

such did not warrant the setting aside of a proper assessment. The ALJ further held that T.C.A. §

67-5-903(g) was limited to back assessments of CIP with respect to tax year 1993 and that 100% of

reported cost was the proper valuation of CIP, irrespective of its treatment for federal income or state

excise tax purposes. Thereafter, the Assessment Appeals Commission issued its official certificate

certifying the ad valorem assessment of Kellogg’s property.



               We perceive the sole issue on appeal as whether the appellees’ assessment of

Kellogg’s CIP property for tax year 1993 was proper. Resolution of this issue necessarily involves

statutory interpretation. T.C.A. § 67-5-903(g)(1)-(2) states as follows:



                         Tangible personal property which the taxpayer treats as
                construction-in-process (hereinafter “CIP”) for federal income tax
                purposes as of the assessment date may be reported in the taxpayer’s
                schedule filed with the assessor at fifteen percent (15%) of its cost as
                reported for federal income tax purposes. Qualified pollution control
                property shall be valued as provided in § 67-5-604, notwithstanding
                its state of completion.

                       No back assessments of CIP, as the term is used in
                subdivision (g)(1), shall occur prior to January 1, 1994. If back
                assessments have occurred involving CIP, those assessments shall be


       5
        The record indicates that Kellogg’s property was appraised for tax year 1993 at $52,136,200
with an ad valorem assessment of $15,640,860.

                                                   5
                voided and all taxes paid shall be refunded to those taxpayers who
                have an action or claim pending before assessing authority or court on
                the CIP issue.



                The premier rule of statutory construction is to ascertain and give effect to the

legislative intent.   In ascertaining this intent, we are to look to the general purpose to be

accomplished by the legislature. Tidwell v. Collins, 522 S.W.2d 674 (Tenn. 1975). The legislative

intent or purpose is to be ascertained primarily from the natural and ordinary meaning of the

language used when read in the context of the entire statute and without any forced or subtle

construction to limit or extend the import of the language. Worrall v. Kroger Co., 545 S.W.2d 736,

738 (Tenn. 1977); City of Caryville v. Campbell County, 660 S.W.2d 510, 512 (Tenn. App. 1983).

This court is to reconcile inconsistent or repugnant provisions of the statute and to construe the

statute so as to avoid an interpretation that would render any of the language superfluous, void or

insignificant. We are to give effect to every word, phrase, clause and sentence of the act in order to

derive the legislature’s intent. Each section is to be construed so that no section will destroy another.

Dingman v. Harvell, 814 S.W.2d 362, 366 (Tenn. App. 1991).



                The record reveals that Kellogg served the appellees with a request for admissions,

including that “[p]rior to May 17, 1993, there was no statute, regulation, administrative rule,

directive, or other authority authorizing or directing the taxation of “[CIP].” Appellees “[d]enied

as stated” the request and answered as follows:



                        Tenn. Code Ann. § 67-5-901 provides that tangible personal
                property not in use shall nevertheless be classified according to its
                immediate most suitable economic use determined in part by
                “immediate past use, if any” (emphasis added). Tenn. Code Ann. §
                67-5-903 provides that business taxpayers shall report to the assessor
                for assessment, tangible personal property which is “used or held for
                use in such business” (emphasis supplied). These statutes were in
                effect prior to May 17, 1993, and they remain in effect today.

                        Rule 0600-5-.11 of the State Board of Equalization sets forth
                the standard reporting form for business tangible personal property
                and requires that property be listed if it is used or held for use by the
                reporting business. This rule has been in effect since at least 1989,
                and this form has been furnished annually to taxpayers for many
                years, and included instructions which also required reporting of
                property used or held for use. In addition, a special notice to
                taxpayers was sent with the 1993 schedules in late 1992 or early

                                                   6
                     1993, which contained specific definitions and directions concerning
                     CIP.6



The appellees admitted that prior to May 17, 1993, there were no statutes, regulations, or

administrative rules specifically defining CIP but denied that there were no “directives” defining

such prior to that time. The appellees denied that the Board had failed to promulgate any rules

regarding the taxation of CIP and cited rules 0600-5-.01, 0600-5-.06 and 0600-5-.11. Finally,

Appellees denied that prior to May 17, 1993, there was no statute directing the manner of valuing

CIP, stating that T.C.A. § 67-5-903 “provided standard methods of valuation for all tangible personal

property whether used or held for use, and the statute provided that all property not listed in another

group be listed in one of the several groups by type or be listed in Group 1 of the standard schedule

. . . .”



                     The record also includes a letter dated August 24, 1993 from the Board’s executive

secretary to the state attorney general requesting the latter’s opinion “concerning Public Chapter 323

of 1993, which creates special property tax assessment provisions for tangible personal property

construction-in-process (CIP).” It reads as follows, as here pertinent:



                              Tangible personal property “used or held for use” in business
                      is reported annually by businesses using a schedule provided by the
                      assessor and approved by the state Division of Property Assessments
                      (DPA). . . . Under rules of the State Board (Chapter 0600-5), taxable
                      value is presumed (in the absence of better evidence) to be the


           6
               The “special notice” mailed to taxpayers for tax year 1993 stated, as here relevant:

           SPECIAL NOTICE; CONSTRUCTION IN PROCESS (CIP)

                   As of January 1, 1993, Tennessee law requiring the assessment of tangible
           personal property construction in process has not changed, and taxpayers are
           instructed to include such property in Group 8 of the Tangible Personal Property
           Schedule unless a nonstandard value is being claimed. . . .

                   Tangible personal property construction in process means tangible personal
           property assets or groups of assets during a period of construction or assembly prior
           to their being committed to use, reflecting all direct and indirect costs as of the
           assessment date January 1). This would include equipment on location which has not
           yet been placed into operation.

                   If the legal assessment status of CIP is later changed for tax year 1993, you
           will be permitted to amend your schedule at least until September of 1994.

                                                       7
               taxpayer’s original cost less straight line depreciation, with the
               amount of standard depreciation based on categories of property
               established by the legislature. Neither the statutes (prior to 1993), the
               rules, nor the state constitution mention CIP, and in 1991, confusion
               arose concerning its assessment status. CIP is generally understood
               to mean personalty which has a taxable situs at the taxpayer’s place
               of business as of the assessment date but which is not yet in
               operation. CIP can range from unopened crates of ready-to-use
               equipment to complex arrays of unassembled or partly assembled
               components, and the final cost may include substantial labor costs for
               installation and assembly.

                       When asked about the assessment statutes of CIP, state
               assessment staff found it to be property “held for use” in business and
               therefore assessable, and DPA issued instructions which accompanied
               schedules mailed to taxpayers for tax years 1992 and 1993. On the
               theory that CIP was not yet in operation and therefore not depreciable,
               the instructions directed taxpayers to report CIP in a nondepreciable
               category reserved for raw materials and supplies, which would result
               in a standard value equal to 100% of the taxpayer’s cost of
               acquisition. It appears some taxpayers have never distinguished CIP
               from operating property and simply reported it with operating
               property, while others have not reported it. Some taxpayers,
               according to Tennessee Association of Business, may have been
               misled by the State Board rule which defines “original cost” for
               purposes of personalty assessment to mean gross capitalized cost
               before depreciation. CIP costs are not capitalized for federal income
               purposes. Several jurisdictions back assessed nonreporting taxpayers
               for CIP in reliance on the staff interpretations. (Emphasis added.)



The letter concludes by setting forth the “staff” interpretation of § 67-5-903(g) to mean that the 15%

valuation provisions were not to become operative until tax year beginning January 1, 1994 and for

years prior CIP was reportable at 100% of cost, including tax year 1993, “although omitted or under

assessed CIP [could] not be back assessed for those years . . . .”



               As heretofore set forth, Appellees admit that prior to May 17, 1993, there were no

statutes, regulations or administrative rules specifically defining or addressing CIP property. They,

however, deny there were no “directives” regarding the matter prior to this time. They rely

specifically on T.C.A. § 67-5-901 which concerns the “classification” of all tangible personal

property for purposes of taxation to include “tangible personal property which is not in use.” The

statute provides that such property is to be classified according to its immediate and most suitable

economic use taking into account certain identified factors. They further rely upon § 67-5-903(b)

which provides that business taxpayers are to report for assessment tangible personal property “used,

or held for use, in the taxpayers’ business or profession.” Appellees maintain that the foregoing

                                                  8
statutes along with Art. 2, § 28 of the state constitution, providing that “all property, real, personal

or mixed shall be subject to taxation . . . .”, lend clear indication that CIP was subject to taxation

in 1993. Appellees further assert that the instructions issued to taxpayers for tax year 1993 did not

change existing law but were merely utilized to clarify the status of the law as it then existed. They

state that the schedule on which taxpayers were to report their tangible personal property did not

identify a specific category in which to list CIP property. Therefore, the instructions to taxpayers

merely identified the category in which CIP property was to be included.



                In Sherwood Co. v. Clary, 734 S.W.2d 318 (Tenn. 1987), our supreme court

confronted the issue of the constitutionality of T.C.A. § 67-5-901(3)(A) with respect to the

assessment of non-business tangible personal property. Therein, the court addressed the fact that Art.

2, § 28 was “extensively revised by an amendment adopted in 1972.” Sherwood Co., 734 S.W.2d

at 320. The court stated:



                [T]he Tennessee Constitution prior to the amendment prohibited
                classification for tax purposes of property according to its use. It
                required all property to be taxed, except for certain exceptions or
                exemptions which the Legislature might authorize, and mandated that
                all property should be taxed according to its value so that taxes would
                be equal and uniform throughout the state . . . .

                        All of this was changed by the 1972 amendment, which made
                all property in the state subject to the taxing power of the Legislature
                but authorized classifications of real property and of tangible and
                intangible personal property. With respect to real property and
                tangible personal property the amendment provided for fixed ratios
                of assessment to value in each classification and required that every
                taxing authority apply the same tax rate to all property within its
                jurisdiction.



Id.



                Upon concluding that the statute did not violate the equal protection clause of the

Fourteenth Amendment, the court held:



                        The general assembly concluded that no appreciable revenue
                could be obtained by an attempt to tax household goods and chattels
                or other nonbusiness tangible personal property.

                                                   9
                          In our opinion the general assembly was not constitutionally
                  required to attempt to administer and maintain an impractical system
                  of taxation, and it was given very broad discretion with respect to
                  determining the value and definition of property in each of the
                  authorized classifications or subclassifications.

                         As previously stated, the earlier constitutional mandate that all
                  property be taxed was repealed by this amendment. Instead all
                  property was made subject to the taxing power, but the amendment
                  did not compel or mandate that the general assembly exhaust that
                  power. It gave general directions concerning classifications and
                  assessment ratios, and if the general assembly exercised its taxing
                  power through the use of these classifications, the ratios of
                  assessment to value were required to be used.



Id. at 321-22.



                  In the present case, the legislature chose for the first time to specifically address CIP

property by the enactment of § 67-5-903(g). As the legislature has chosen to specifically address this

particular kind of property by the enactment of subsection (g), we cannot conclude that the meaning

of CIP property equates merely to property that is “held for use.”7 In this respect, we note that Board

rule 0600-5-.01 as amended defines CIP property as “tangible personal property which as of the

assessment date is undergoing construction, assembly, or installation prior to being committed to

use.” Certainly, this definition is more limiting in nature than that which merely describes property

“held for use.”



                  T.C.A. § 67-5-1302(d) provides as follows:



                         The commission shall recognize specific valuation for
                  construction-in-process (“CIP”) tangible personal property in a
                  manner consistent with that provided for locally assessed property
                  under § 67-5-903(g)(1).

                          The state board of equalization is directed to prepare and
                  adopt rules and regulations for the administration and taxation of CIP
                  pursuant to this section and § 67-5-903, and communicate such rules
                  and regulations to taxpayers to ensure accurate and timely compliance
                  by taxpayers.

The record makes clear, and there is really no dispute, that the Board first adopted rules specifically


       7
        As indicated by the letter from the Board’s executive secretary, prior to this time, there was
only a “general understanding” of the meaning of CIP.

                                                     10
defining CIP property, as well as setting forth a standard for valuation, by amendment to its former

rules which became effective October 31, 1994. We conclude that although CIP was certainly subject

to the taxing power of the legislature prior to and including tax year 1993, it was not the legislature’s

intent that it be so taxed until its enactment of subsection (g).



                We note that in answering the Board’s question regarding the assessment status of

CIP for tax year 1993 in light of the legislature’s enactment of Public Chapter 323, the attorney

general, upon interpreting the statute, agreed that for tax year 1993 CIP should be assessed at 100%

of cost. The attorney general reasons that since CIP is not expressly made exempt from taxation and

since it is a species of tangible personal property, it must be taxable. The attorney general’s opinion

further states: “[t]he report of the tax study committee makes clear the legislative intent. The

legislature was well aware that the Act would allow no back assessments while also limiting refunds

to pending claims. The legislature was likewise well aware that before the effective date of the Act,

CIP was reportable at 100% of cost.” We emphasize here that the legislature’s awareness of the

Board’s assessment of certain tangible personal property does not necessarily indicate either

legislative approval or proper authorization.



                The statute in question does not address assessments of CIP property prior to January

1, 1994, but only back assessments. As it expressly voids all back assessments prior to January 1,

1994, we agree with Kellogg’s position that the Board’s assessment of Kellogg’s CIP property is

likewise void. We hold that Appellees were without proper authority to assess such property until

January 1, 1994, in accordance with the statutory mandate of § 67-5-903(g). Public Chapter 323

expressly states, in part, “[f]or the purpose of developing, promulgating, and communicating rules

and regulations, this act shall take effect upon becoming a law, the public welfare requiring it. For

all other purposes, including assessments, it shall take effect at the beginning of the assessment year

beginning after this act becomes a law, the public welfare requiring it.”



                We do not believe our decision runs counter to any of the statutory provisions

regarding the taxation of property. We are aware that under T.C.A. § 67-5-101, “[a]ll property, real

and personal, shall be assessed for taxation . . . except such as is declared exempt . . ., or unless

                                                   11
otherwise provided.” However, the real issue here clearly concerns the timing at which property

identified as CIP is to be assessed and not whether it is to be taxed. For the reasons herein

expressed, we hold that such property could not properly be assessed earlier than the time at which

it was completed and placed in service until the legislature’s enactment of § 67-5-903(g) which

specifically provides for a different time (by acknowledging for the first time a separate and distinct

category of personal property identified as CIP).



                The judgment of the trial court is hereby reversed and this cause remanded thereto

for further necessary proceedings. Costs are assessed against the appellees, for which execution may

issue if necessary.




                                                               FARMER, J.



CONCUR:




CRAWFORD, P.J., W.S.




HIGHERS, J.




                                                  12
