Dana Corporation v. Loren L. Chumley, Commissioner of Revenue, State of Tennessee ( 2010 )


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  •                  IN THE COURT OF APPEALS OF TENNESSEE
    AT NASHVILLE
    February 23, 2010 Session
    DANA CORPORATION v. LOREN L. CHUMLEY, Commissioner of
    Revenue, State of Tennessee
    Appeal from the Chancery Court for Davidson County
    No. 04-3225-III   Ellen H. Lyle, Chancellor
    No. M2009-00888-COA-R3-CV - Filed May 28, 2010
    This appeal involves the denial of a claim for job tax credits by the Commissioner of
    Revenue. The taxpayer asserts that it qualifies for the credits pursuant to 
    Tenn. Code Ann. § 67-4-2109
    (c)(2)(A). The trial court determined that the taxpayer, as a successor to the
    entity that originally earned the credits, is barred by 
    Tenn. Code Ann. § 67-4-2109
    (e)(1) from
    utilizing the remaining credits for the years at issue. The taxpayer appeals. We affirm.
    Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court
    Affirmed; Case Remanded
    J OHN W. M CC LARTY, J., delivered the opinion of the Court, in which H ERSCHEL P. F RANKS,
    P.J. and R ICHARD H. D INKINS, J., joined.
    Charles A. Trost, Brett R. Carter, and Christopher A. Wilson, Nashville, Tennessee, for the
    appellant, Dana Corporation.
    Robert E. Cooper, Jr., Attorney General & Reporter; Michael E. Moore, Solicitor General;
    and Jonathan N. Wike, Assistant Attorney General, for the appellee, Commissioner of
    Revenue, State of Tennessee.1
    OPINION
    I. BACKGROUND
    1
    When the suit was originally filed, Loren L. Chumley was the Commissioner of Revenue. Reagan
    Farr is the current Commissioner.
    Dana Corporation (“Dana”) is a Virginia corporation properly qualified to do business
    in Tennessee, with its principal office located in Toledo, Ohio. Dana and its affiliates are
    engaged in the manufacture of automobile parts and supplies.
    Plumley Companies, Inc. (“PCI”), was headquartered in Paris, Tennessee, and was
    engaged in the manufacture and distribution of extruded and molded rubber and silicone
    sealing products, primarily for automotive applications. PCI, employing more than 1,600
    people, had manufacturing facilities in Paris and McKenzie, Tennessee, as well as other
    locations, and a sales office in Troy, Michigan.
    Between 1992 and 1993, PCI made an investment of $2,016,708 in its manufacturing
    facilities located in Tennessee. PCI filed with the Tennessee Department of Revenue a
    business plan reflecting an increase of 109 net new full-time jobs in order to earn a job tax
    credit in the amount of $218,000. PCI subsequently used portions of the job tax credit to
    offset its franchise tax liability by separate offsets of $18,079, $17,374, $18,079, and
    $18,079. The final franchise and excise tax return filed by PCI was for the short period
    ending January 31, 1995.
    On February 1, 1995, Dana acquired PCI’s stock, which it contributed to a Dana
    subsidiary created for the purpose of acquiring PCI. The Dana subsidiary then merged with
    PCI. The surviving entity was called Plumley, Inc. (“Plumley”). On January 1, 1997, Dana
    merged with Plumley, with the surviving entity being Dana. Following the merger, the
    manufacturing operations formerly owned by PCI remained as a division of Dana.
    Dana claimed a job tax credit based on its acquisition of PCI on its franchise and
    excise tax returns for the years 2001 and 2002. By two notices of outstanding franchise and
    excise tax liability, each dated November 7, 2003, the Commissioner of Revenue
    (“Commissioner”) disallowed Dana’s claim in the total amount of $182,287.06 for the tax
    years 2001 and 2002. By check dated February 5, 2004, Dana paid the full amount of the
    franchise and excise tax liability, plus interest, for the tax years 2001 and 2002. On April 14,
    2004, Dana filed a claim seeking a refund. The claim was subsequently denied.
    In November 2004, Dana initiated this lawsuit, asserting that it had created job tax
    credits through its acquisition of PCI.2 In an amended complaint filed in May 2008, Dana
    2
    The basis for the refund claim in Dana’s original complaint was essentially the same as that argued
    by the taxpayer in Weyerhaeuser Co. v. Chumley, No. M2005-00212-COA-R3-CV, 
    2007 WL 2580025
    (Tenn. Ct. App. M.S., Sept. 7, 2007), namely, that a taxpayer company can create the required “net new full-
    time employee jobs[s],” pursuant to 
    Tenn. Code Ann. § 67-4-2109
    (c)(2)(A), through acquisition rather than
    through the original hiring of the employees.
    -2-
    no longer contended that it was entitled to tax credits as a result of its acquisition of PCI, but
    maintained that it was entitled to use the remaining carryover job tax credits generated by
    PCI. In its second amended complaint, filed in November 2008, Dana requested that it be
    refunded $36,158.
    In December 2008, both parties filed motions for summary judgment. Following a
    hearing, the trial court awarded summary judgment in favor of the Commissioner, holding
    that 
    Tenn. Code Ann. § 67-4-2109
    (e)(1) (Supp. 2002) bars successor entities from taking the
    credit for the years at issue. Dana filed a timely notice of appeal from this ruling.
    In a separate ruling that did not override the trial court’s denial of Dana’s refund
    claim, the court determined that Dana would not be barred as a successor entity based solely
    on 
    Tenn. Code Ann. § 67-4-2109
    (c)(2)(A). In this separate ruling, the trial court applied this
    court’s reasoning in Little Six Corp. v. Johnson, No. 01-A-01-9806-CH-00285, 
    1999 WL 336308
     (Tenn. Ct. App., M.S., May 28, 1999). In Little Six, this court found that credits
    generated by an entity may be used by its successors in interest. In the instant case, the trial
    court noted that 
    Tenn. Code Ann. § 67-4-2109
    (c)(2)(E) provides that any unused tax credits
    incurred for a period before July 1, 1999, may be carried forward “subject to the limitations
    established by prior law.” The court found that the law relating to the job tax credit
    carryforward in effect on the date of the merger was 
    Tenn. Code Ann. § 67-4-908
    , and that
    the language of that provision did not explicitly prohibit the carryforward of unused job tax
    credits by a successor merged corporation. Thus, the trial court concluded that, should 
    Tenn. Code Ann. §67-4-2109
    (c)(2)(E) control, Little Six dictates that Dana would be entitled to a
    refund.
    II. ISSUE
    The issue presented for our review is as follows:
    Whether the trial court correctly held that 
    Tenn. Code Ann. § 67-4-2109
    (e)(1)
    (Supp. 2002) bars Dana from taking a job tax credit against its Tennessee
    franchise and excise tax liability for the years 2000 and 2001, where Dana’s
    only means of claiming the credit is as a successor to PCI, which was the
    company that created the net new jobs on which the claim was based.
    The Commissioner requests that this court review the trial court’s decision on the separate
    issue decided in reliance upon Little Six and hold that 
    Tenn. Code Ann. § 67-4-2109
    (c)(2)(A)
    bars Dana’s refund claim independently of 
    Tenn. Code Ann. § 67-4-2109
    (e)(1).
    -3-
    III. STANDARD OF REVIEW
    “Issues of statutory interpretation are questions of law which this Court reviews de
    novo, with no presumption of correctness attached to the determination of the trial court.”
    Nissan N. Am., Inc. v. Haislip, 
    155 S.W.3d 104
    , 106 (Tenn. Ct. App. 2004) (citing State v.
    Morrow, 
    75 S.W.3d 919
    , 921 (Tenn. 2002)). “[W]hen there is no conflict in the evidence as
    to any material fact . . ., the question on appeal is one of law, and [the] scope of review is de
    novo with no presumption of correctness. . . .” Union Carbide Corp. v. Huddleston, 
    854 S.W.2d 87
    , 91 (Tenn. 1993) (citing Estate of Adkins v. White Consol. Indus.,
    788 S.W.2d 815
    ,
    817 (Tenn. Ct. App. 1989)).
    As noted in Gate Bluegrass Precast, Inc. v. Chumley, No. M2007-00250-COA-R3-
    CV, 
    2008 WL 695867
     (Tenn. Ct. App. W.S., Mar. 14, 2008),
    [t]he rules governing statutory construction are well-established. When
    interpreting a statute, the court is to “ascertain and give effect to the legislative
    intent without unduly restricting or expanding a statute’s coverage beyond its
    intended scope.” We must ascertain the intent of the legislature from the
    natural and ordinary meaning of the statutory language and in context of the
    entire statute, without forcing a construction that would limit or expand its
    scope. When the language of a statute is clear, we must utilize the plain,
    accepted meaning of the words used by the legislature to ascertain the statute’s
    purpose and application. If the wording is ambiguous, however, we must look
    to the entire statutory scheme and at the legislative history to ascertain the
    legislature’s intent and purpose. We must construe statutes in their entirety,
    assuming that the legislature chose the words of the statute purposely, and that
    the words chosen “convey some intent and have a meaning and a purpose”
    when considered within the context of the entire statute.
    The court must construe tax statutes liberally against the taxing authority. Tax
    exemptions, however, are construed strictly against the taxpayer, who must
    carry the burden of demonstrating an entitlement to the exemption. Tax
    exemptions will not be implied. Rather, there is a presumption against
    exemption, “and any well founded doubt defeats a claimed exemption.”
    
    Id. at *2
     (citations omitted) (emphasis added).
    -4-
    IV. DISCUSSION
    The statute that grants a job tax credit against a taxpayer’s franchise and excise tax
    liability and governs the tax years in question, 2001 and 2002, states, in relevant part:
    (c)(2)(A) A job tax credit of two thousand dollars ($2,000) for each net new
    full-time employee job shall be allowed against a taxpayer’s franchise and/or
    excise tax liability for that year; provided, that:
    (i) The job filled is for a position newly created in Tennessee,
    and, for at least ninety (90) days prior to being filled by the
    taxpayer, did not exist in Tennessee as a job position of the
    taxpayer or of another business entity;
    (ii) The job position was filled during the tax year and was in
    existence at the end of the tax year;
    (iii) The taxpayer has met the required capital investment in the
    qualified business enterprise;
    (iv) The credit shall first apply in the tax year in which the
    qualified business enterprise increases net full-time employment
    by twenty-five (25) or more jobs, and in those subsequent fiscal
    years in which further net increases occur above the level of
    employment established when the credit was last taken; and
    (v) The new full-time employee jobs are filled prior to January
    1, 2008.
    ***
    (E) Any unused job tax credit incurred for a tax year beginning prior to July
    1, 1999, may be carried forward for fifteen (15) years after the fiscal year in
    which the credit originated, subject to the limitations established by prior law.
    Any unused job tax credit incurred for a tax year beginning on or after July 1,
    1999, may be carried forward for fifteen (15) years after the tax year in which
    the credit originated.
    ***
    (e)(1) Each taxpayer is considered a separate entity; therefore, in the case of
    mergers, consolidations, and like transactions, no tax credit incurred by the
    predecessor taxpayer shall be allowed as a deduction on the tax return filed by
    the successor taxpayer. With the exception set forth in subdivision (e)(2), a
    -5-
    credit carryforward may be taken only by the taxpayer that generated it.
    (2) Notwithstanding the provisions contained in subdivision (e)(1), when a
    taxpayer merges out of existence and into a successor taxpayer that has no
    income, expenses, assets, liabilities, equity or net worth, any qualified
    Tennessee credit carryover of the predecessor that merged out of existence
    shall be available for carryover on the return of the surviving successor’
    provided, that the time limitations for the carryover have not expired.
    
    Tenn. Code Ann. § 67-4-2109
     (Supp. 2002).
    When the General Assembly completely revised the job tax credit statute in 1999, it
    inserted, among other things, section 67-4-2109(e)(1), which expressly prohibited successor
    use of carryovers. 1999 Pub. Acts, Ch. 406 deleted the prior provision contained in 
    Tenn. Code Ann. § 67-4-908
     (1998), which did not contain the express prohibition against
    successor use of the credits. Chapter 406 expressly provided that it “shall apply to tax years
    beginning on or after July 1, 1999.” Dana’s claim for a refund is based on job tax credits
    asserted for the tax years 2001 and 2002. Clearly, those tax years began after July 1, 1999.
    Thus, under the language of 1999 Pub. Acts, Ch. 406, and 
    Tenn. Code Ann. § 67-4
    -
    2109(e)(1), after July 1, 1999, no job tax credit was available to taxpayers claiming the credit
    as successor entities.
    Dana admits the language of 
    Tenn. Code Ann. § 67-4-2109
    (e)(1) clearly excludes
    successor entities. There is no dispute that PCI – not Dana – generated the credits by
    creating the jobs. Accordingly, 
    Tenn. Code Ann. § 67-4-2109
    (e)(1) specifically prohibits
    Dana from claiming the remaining job tax credits as a successor to PCI. Even if 
    Tenn. Code Ann. § 67-4-2109
    (c)(2)(A) would have permitted Dana to take the job tax credit against its
    tax liability for the years preceding 1999, any prior availability of the credit would not
    continue into the years in which 
    Tenn. Code Ann. § 67-4-2109
    (e)(1) was in effect.
    In our view, the trial court did not apply 
    Tenn. Code Ann. § 67-4-2109
    (e)(1)
    retroactively. While Dana argues that section (e)(1) was not part of the pre-1999 law and
    cannot be the basis for limiting job tax credits generated under pre-1999 law, the version of
    the tax law to be applied when determining a taxpayer’s liability is the tax law in effect
    during the period for which the tax is being paid. See Associated P’ship I, Inc. v.
    Huddleston, 
    889 S.W.2d 190
    , 195 (Tenn. 1994); Gate Bluegrass Precast, Inc. v. Chumley,
    No. M2007-00250-COA-R3-CV, 
    2008 WL 695867
    , at *3 (Tenn. Ct. App. W.S., Mar. 14,
    2008) (noting “[T]he Code applicable to this dispute is the Code as it existed during the tax
    period at issue.”). A taxpayer’s tax liability for any particular period includes the application
    of any credit that is available under the version of the statute in effect for that period. Thus,
    -6-
    whether or not a particular credit is available depends entirely on the version of the law in
    effect for the tax period for which the taxpayer’s tax liability is being determined. “[T]ax
    credits are, for all practical intents, ‘a matter of legislative grace,’ which the Legislature ‘may
    grant or deny in any manner it sees fit; . . . and the scope, application, and terms of eligibility
    are entirely for the Legislature to establish.’” State Bldg. & Constr. Trades Council of
    California v. Duncan, 
    162 Cal. App. 4th 289
    , 323 (Cal. Ct. App. 2008) (quoting Gen. Motors
    Corp. v. Franchise Tax Bd., 
    139 P.3d 1183
     (Cal. 2006)).
    Furthermore, as noted in Penn-Dixie Cement Corp. v. Kizer, 
    250 S.W.2d 904
     (Tenn.
    1952),
    it has been repeatedly held in this State that the Constitution, Art. I, Sec. 20,
    forbidding retrospective laws, means only that no retrospective law which
    impairs the obligation of a contract or divests or impairs vested rights shall be
    passed. . . . As the Act neither impairs the obligation of contracts, nor affects
    vested rights, it does not fall within the inhibition of either the State or
    National Constitutions.
    
    Id. at 908
    . The statutory provisions at issue do not involve contractual obligations, as the
    General Assembly expressed no intention to bind the State contractually. See Baker v.
    Arizona Dept. of Revenue, 
    105 P.3d 1180
    , 1184 (Ariz. Ct. App. 2005) (stating “[A]bsent
    some clear indication that the legislature intends to bind itself contractually, the presumption
    is that ‘a law is not intended to create private contractual or vested rights but merely declares
    a policy to be pursued until the legislature shall ordain otherwise.’”) (quoting Nat’l R.R.
    Passenger Corp. v. Atchison, Topeka & Santa Fe Ry., 
    470 U.S. 451
    , 465-66, 
    105 S.Ct. 1441
    (1985)). We further note that Dana’s acquisition of PCI in 1995 did not create a vested right
    to the credits contained in former section 67-4-908 that survived the replacement of that
    section by 1999 Pub. Acts, Ch. 406. A taxpayer has no vested right in unused credits the
    availability of which has been repealed. Capital Fin. Corp. v. Comm’r of Taxation and
    Finance, 
    639 N.Y.S.2d 501
    , 503 (N.Y. App. Div. 1996). As stated in Garofolo, Curtiss,
    Lambert & MacLean, Inc. v. Commonwealth, 
    648 A.2d 1329
     (Pa. Commw. Ct. 1994), “[a]
    tax deduction is not a vested right of the taxpayer. The . . . carry-forward deduction is a
    creature of the legislature, subject to repeal, suspension or reinstatement by the legislature,
    so long as it does not act in an arbitrary and unreasonable manner.” 
    648 A.2d at 1334
    . “[A]
    taxpayer has no vested rights in a taxing statute; hence, he or she has no vested right in the
    continuance of particular tax laws.” 16A C.J.S. Constitutional Law § 394; see also Penn-
    Dixie Cement Corp., 250 S.W.2d at 909 (stating “an income tax law is not unconstitutional
    merely because of its retrospective operation, especially where such laws only affect
    deductions that may be taken from income, which are matters of legislative favor . . . .” and
    “[t]he state was not cut off from . . . changing its method of . . . excise taxation.”).
    -7-
    Accordingly, even if one were to assume that Dana would have been entitled to PCI’s unused
    credits under the law as it existed prior to 1999, that eligibility was eliminated by the 1999
    Pub. Acts, Ch. 406, and any unused credits were lost. King v. Campbell County, 
    217 S.W.3d 862
    , 869 (Ky. Ct. App. 2006) (repeal of tax credit does not violate constitutional prohibition
    against retroactive impairment of “vested” rights); Rivers v. State, 
    490 S.E.2d 261
    , 263 (S.C.
    1997) (finding “case law from the United States Supreme Court and courts throughout the
    country makes clear that taxpayers have no vested interest in tax laws remaining
    unchanged”).
    Dana also argues that rather than focusing on the provision set forth in section (e)(1),
    the court should rely on the language of the revised job tax credit set forth in 
    Tenn. Code Ann. § 67-4-2109
    (c)(2)(E) that provides “[a]ny unused job tax credit incurred in a tax year
    beginning prior to July 1, 1999, may be carried forward for fifteen (15) years after the fiscal
    year in which the credit originated, subject to the limitations established by prior law.”
    (Emphasis added). By this language, Dana asserts that the Legislature intended for the law
    regarding carryover credits in effect prior to the enactment of the amended statute to continue
    applying to job tax credits incurred prior to the 1999 amendment. Thus, Dana claims that the
    law in effect during the tax years at issue in this case specifically incorporated “prior law”
    as the law applicable to determine how the job tax credits incurred prior to July 1, 1999, are
    to be carried forward and applied in subsequent periods. Dana relies on the fact that this
    “prior law” does not provide for a limitation on the ability of a successor entity to claim job
    tax credits.
    We do not find Dana’s argument concerning “prior law” persuasive. We agree with
    the Commissioner that the phrase “limitations established by prior law” refers to the
    provisions in 
    Tenn. Code Ann. § 67-4-908
    (c)(2)(E) and (F) (1998), which limited the dollar
    amounts of the credit for each tax year. The 1999 revision sets forth in § 67-4-2109(c)(2)(E)
    the limits on the dollar amount for credits and carryovers for tax years after July 1, 1999.
    Under the 1999 revision, the dollar amount for credits earned after July 1, 1999, is
    determined according to the percentages set forth in § 67-4-2109(c)(2)(F), while the dollar
    amount for credits earned before July 1, 1999, is determined according to “the limitations
    established by prior law,” namely the formula set forth in 
    Tenn. Code Ann. § 67-4
    -
    908(c)(2)(F)(1998).
    For the reasons discussed, we find that Dana has not met its burden to demonstrate an
    entitlement to the carryover credits. The trial court did not err in determining that 
    Tenn. Code Ann. § 67-4-2109
    (e)(1) bars Dana from using the job tax credits created by PCI.
    -8-
    Little Six Ruling
    Dana also relies on this court’s decision in Little Six Corp. v. Johnson, No., 01-A-01-
    9806-CH-00285, 
    1999 WL 336308
     (Tenn. Ct. App. M.S., May 28, 1999), in support of its
    claim to the carryover credit. The trial court agreed with Dana that under the statutory
    analysis in Little Six, a decision released shortly before section 67-4-2109(e)(1) was added
    to the Code, the statutory language of 
    Tenn. Code Ann. § 67-4-2109
    (c)(2)(A) would allow
    Dana to take the credit. The trial court held, however, that because § 67-4-2109(e)(1)
    absolutely bars Dana’s claim, its decision as to the Little Six argument did not result in an
    award of summary judgment to Dana. We concur in the trial court’s ruling that section 67-4-
    2109(e)(1) bars Dana’s claim; we further agree with the court that its decision based on
    section 67-4-2109(e)(1) renders its alternative decision on the Little Six analysis moot. Now
    that the subsection has been added, it is no longer necessary to analyze the statutory language
    to determine whether it implies that successor entities through merger are entitled to
    carryover credits. 
    Tenn. Code Ann. § 67-4-2109
    (e)(1) expressly holds that such entities are
    not entitled to the credit and renders any other statutory language extraneous to this issue.
    Accordingly, as we do not find it necessary to resolve the issue of whether the trial court
    erred in its separate ruling based on Little Six, we will not discuss it here.
    Attorney’s Fees
    The Commissioner seeks to recover attorney’s fees and expenses incurred in this
    litigation pursuant to 
    Tenn. Code Ann. § 67-1-1803
    (d). Tennessee follows the American
    Rule with regard to attorney’s fees, which provides that, absent a statute or agreement to the
    contrary, each litigant is responsible for paying its own attorney’s fees and litigation
    expenses. State v. Brown & Williamson Tobacco Corp., 
    18 S.W.3d 186
    , 194 (Tenn. 2000).
    However, the General Assembly enacted a statute that mandates an award of reasonable
    attorney’s fees and expenses to the prevailing party in tax litigation pursuant to 
    Tenn. Code Ann. § 67-1-1803
    . The relevant portion of the statute provides:
    The court shall award to the prevailing party reasonable attorneys’ fees and
    expenses of litigation up to twenty percent (20%) of the amount assessed or
    denied, including interest after payment. For purposes of this subsection (d),
    attorneys’ fees shall not exceed fees calculated on the basis of reasonable
    hourly rates multiplied by a reasonable number of hours expended in the case
    and shall not be calculated by application of any premium, enhancement, or
    contingency.
    
    Tenn. Code Ann. § 67-1-1803
    (d). It is up to the trial court to set the amount of fees within
    -9-
    the guidelines set forth in the statute. Carson Creek Vacation Resorts, Inc. v. State, Dept.
    of Revenue, 
    865 S.W.2d 1
    , 2 (Tenn. 1993).
    The Commissioner prevailed on the matters in controversy; therefore, the
    Commissioner is entitled to an award of attorney’s fees and expenses arising from this
    litigation, which includes her fees and expenses in the trial court and on appeal. See Carson
    Creek, 
    865 S.W.2d at 2
    . We therefore remand to the trial court for a proper determination
    of the fees and expenses the Commissioner is entitled to recover pursuant to 
    Tenn. Code Ann. § 67-1-1803
    (d).
    V. CONCLUSION
    The decision of the trial court disallowing the credits and denying the refund claim
    is affirmed. This case is remanded to the trial court for an award of attorney’s fees to the
    Commissioner as required by 
    Tenn. Code Ann. § 67-1-1803
    (d), and for assessment of costs
    below. Costs of the appeal are assessed against the appellant, Dana Corporation.
    _________________________________
    JOHN W. McCLARTY, JUDGE
    -10-