Kellogg Co. v. Tennessee Assessment Appeals Commission , 1998 Tenn. App. LEXIS 405 ( 1998 )


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  •                            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
    

Document Info

Docket Number: 02A01-9612-CH-00302

Citation Numbers: 978 S.W.2d 946, 1998 Tenn. App. LEXIS 405, 1998 WL 338186

Judges: Farmer, Crawford, Highers

Filed Date: 6/26/1998

Precedential Status: Precedential

Modified Date: 10/19/2024