AT&T Corp. v. Ruth Johnson

IN THE COURT OF APPEALS OF TENNESSEE
AT NASHVILLE
February 17, 2004 Session
AT&T CORP. v. RUTH JOHNSON, ET AL.
Appeal from the Chancery Court for Davidson County
No. 99-206-I Irvin H. Kilcrease, Jr., Chancellor
No. M2003-00148-COA-R3-CV - Filed April 8, 2004
This appeal concerns a challenge to the Commissioner’s franchise and excise tax assessment. On
cross-motions for summary judgment the chancellor found for the Commissioner. We affirm.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court
Affirmed and Remanded
WILLIAM B. CAIN , J., delivered the opinion of the court, in which WILLIAM C. KOCH , JR., P.J., M.S.,
and PATRICIA J. COTTRELL, J., joined.
William Robert Pope, Jr., Jack W. Robinson, Jr., Mary Taylor Gallagher, Nashville, Tennessee, for
the appellant, AT&T Corporation.
Paul G. Summers, Attorney General and Reporter; Michael E. Moore, Solicitor General, M. Ty
Pryor, Assistant Attorney General, for the appellee, Ruth E. Johnson, Commissioner of Revenue,
State of Tennessee.
OPINION
In this appeal, AT&T challenges the Commissioner’s assessments of franchise and excise
tax for tax years 1991 through 1996. In its amended and supplemented complaint filed pursuant to
Tennessee Code Annotated section 67-1-1801, AT&T challenged first the Commissioner’s refusal
to allow credits for net operating losses and industrial machine credits sought pursuant to Tennessee
Code Annotated section 67-4-805, and section 67-4-808.1 Upon cross-motions for summary
judgment, the trial court found in favor of the Commissioner. From that order AT&T appeals. The
appellant raises two issues which this Court finds dispositive. The first issue on appeal concerns this
Court’s opinion in Little Six Corp. v. Johnson, No. 01-A-01-9806-CH-00285, 1999 WL 3363081
Sections applicable to the claim in this case have since been reorganized and repealed. See 1999 Tenn. Pub.
Acts chapter 406; see also Tenn. Code Ann. §§ 67-4-2001-2116 (2003). Discussion in this opinion will be confined to
those sections applicable to the tax years in question, 1991 through 1996.
(Tenn.Ct.App. May 28, 1999). The second issue on appeal concerns the Commissioner’s application
of Tennessee Code Annotated section 67-4-808 in declining to allow AT&T’s claim for industrial
machine credits. The facts are not in dispute; the only challenge on appeal is to the conclusions of
law reached by the trial court. These conclusions enjoy no presumption of correctness on appeal and
are reviewed de novo pursuant to Tennessee Rule of Appellate Procedure 13(d). See Tennessee
Farmers Mutual Ins. Co. v. American Mutual Liability Ins. Co., 840 S.W.2d 933, 936 (Tenn.Ct.App.
1992).
I. NET OPERATING LOSS CARRYOVER AND LITTLE SIX
A. AT&T and AT&TIS
This case involves two corporate entities, American Telephone and Telegraph (AT&T) and
American Telephone and Telegraph Information Systems (AT&TIS). AT&T formed AT&TIS in
order to comply with a Federal Communications Commission ruling originally issued in May 1980.
The Commission determined that the provision of customer premises equipment and certain other
“enhanced services” were not necessary to communications services, and thus were required to be
provided separate and apart from a telephone carrier’s tariffed services. AT&T contested this
decision throughout AT&TIS’s existence and met with success when the Commission reversed its
position in 1986. Nonetheless, AT&T formed the separate entity originally under the name of
American Bell, Inc. in 1982 for the provision of these services. The named was changed in 1983 to
AT&T Information Systems, Inc. AT&T was the sole stockholder and financing source for
AT&TIS. From its inception through its merger with AT&T, AT&TIS sustained operating losses
which it reported on its Tennessee Franchise and Excise Tax Returns.2 AT&T was the survivor
corporation in this corporate merger and attempted to carry over and deduct the net operating losses
incurred by AT&TIS prior to merger. The Commissioner disallowed the deduction and AT&T filed
suit. The chancellor’s order contains the following appropriate discussion:
A.
AT&T contends that it is entitled to deduct from its franchise and excise tax
liability, the net operating losses accrued by Information Systems.
The Commissioner disallowed AT&T’s use of Information Systems’ net
operating losses. The Commissioner’s disallowance of Information Systems’ net
operating losses was based on the provisions of T.C.A. § 67-4-805 and Revenue Rule
1320-6-1-.21(2)(d).
T.C.A. § 67-4-805(b)(2)(c)(I) provides in pertinent part concerning “net
operating losses”:
Any net operating loss incurred for fiscal years ending
on or after January 15, 1984, “net operating loss”
being defined as the excess of allowable deductions
over total income allocable to this state for the year of
2
Pursuant to this Court’s decision in AT&T v. Huddleston, 880 S.W .2d 682 (Tenn.Ct.App. 1994), AT&T and
AT&TIS were required to file separate returns throughout the existence of AT&TIS.
-2-
the loss, and which may be carried over and allowed
in succeeding tax years until fully [] utilized in the
next succeeding taxable year or years in which the
taxpayer has net income, but in no case for more than
fifteen (15) years after the table year in which the net
operating loss occurs . . . (emphasis added)
Tennessee Department of Revenue Rule 1320-6-1-.21(2)(d) provides in pertinent
part:
Each corporation is considered a separate entity;
therefore, in the case of mergers, consolidations, etc.,
no loss carryovers incurred by the predecessor
corporation will be allowed as a deduction from net
earnings on the tax return of the successor
corporation. (Emphasis added)
B.
AT&T argues that the Commissioner’s adoption and application of Revenue
Rule 1320-6-1-.21(2)(d) is arbitrary because the Rule exceeds the Commissioner’s
rule-making authority to prescribe rules and regulations pursuant to T.C.A. § 67-1-
102. Additionally, AT&T argues that the Rule places unreasonable and arbitrary
restrictions on the use of the net operating losses which are not within the scope of
T.C.A. § 67-4-805(b).
C.
The Tennessee Court of Appeals, in the case of Little Six Corporation v.
Johnson, 1999 WL 336308 (Tenn.Ct.App.) held that the Revenue Department acted
within its authority in creating Rule 1320-6-1-.21(2)(d). See T.C.A. § 67-1-102.
Further, the Court of Appeals opined that the legislature’s use of the singular form
in the phrase “in the next succeeding year or years in which the taxpayer has net
income”, indicates that the legislature “intended that the entity enjoying the tax
benefit flowing from an operating loss be the same one that suffered the loss.” See
T.C.A. § 67-4-805(b)(2)(C)(I).
D.
This court finds that AT&T and Information Systems are considered separate
corporations for purposes of Tennessee Franchise and Excise Tax Law. Therefore,
AT&T is not allowed to deduct from its net earnings on its tax return net operating
losses incurred by Information Systems, its predecessor corporation.
Accordingly, as to the “Net Operating Loss Carryover Issue”,
Commissioner’s motion for summary judgment is granted. AT&T’s motion for
summary judgment is denied.
-3-
On appeal AT&T argues that our holding in Little Six should be reconsidered or, in the
alternative, distinguished from the facts of this case. AT&T presents the same arguments advanced
by the taxpayer in Little Six, without presenting any mandatory or persuasive authority requiring the
abrogation of our prior decision.
In its argument that the facts in Little Six are distinguishable from the case at bar, AT&T
urges two points, first that the FCC had required the formation of AT&TIS, and that the actual
“taxpayer” for the purposes of Tennessee Code Annotated section 67-4-805 and Revenue Rule 1320-
6-1-.21(2)(d), is in fact AT&T. We are unpersuaded by either argument. The facts of this case seem
surprisingly similar to the facts in Little Six.
Little Six financed most of the start-up expenses for Short Mountain with
loans made from profits generated by its coal-mining operation. But as its coal
reserves dwindled, the owners of Little Six decided to wind down the coal-mining
operation and to concentrate on silica. On December 31, 1989, Little Six merged
with Short Mountain through a statutory merger, with Little Six being the surviving
corporation. One advantage of the merger was that it enabled Little Six to wipe $5.2
million in loans off its books.
Little Six Corp. v. Johnson, 1999 WL 336308, *1.
While the record does not reveal the advantages of the merger other than to regain the ability
to directly provide enhanced services, the similarity in facts requires the similarity of result:
Little Six claims that the regulation is invalid, because it enlarges the scope
of the taxing statute beyond the mandate of the legislature. See Covington Pike
Toyota v. Cardwell, 829 S.W.2d 132 (Tenn. 1992). However we believe that in
creating the regulation, the Department had acted within its authority “to promulgate
rules and regulations that are not inconsistent with the taxing statutes.” Tenn.Code
Ann. § 67-1-102. In particular, we agree with the Department that the legislature’s
use of the singular form in the phrase “in the next succeeding year or years in which
the taxpayer has net income,” (emphasis added) indicates that it intended that the
entity enjoying the tax benefit flowing from an operating loss be the same one that
suffered the loss.
Little Six, 1999 WL 336308, *2.
AT&T’s argument that it is the “taxpayer” for the purposes of the statute ignores the well
settled rule that a corporation is an entity separate and apart from the persons or corporations who
own the stock.
The position asserted by AT&T assumes that the rights of the sovereign are subject to the
same rules as are the rights of its citizens. The seemingly all inclusive language of a corporate
-4-
merger statute delineating the powers possessed by the survivor corporation is ineffective for any
purpose when applied to the taxing power of the sovereign. General Telephone Co. of the Southeast
v. Boyd, 343 S.W.2d 872 (Tenn. 1960). Said the supreme court in General Telephone Co. of the
Southeast;
Specifically, in the language of appellant’s brief, here is its reasoning:
“Words in a statute are always to be given the meaning they
have in common use. Use of the words, ‘rights, privileges, powers,
franchises and immunities as well of a public as of a private nature’
in a merger statute evidences a clear intention on the part of the
Legislature to allow the mergee corporation to continue operation of
business without being subjected to additional gross receipts tax
based upon the same business for the same taxing period. The
privilege of continuing operation of the same business at the same
locations during the same period without additional gross receipts tax
is a public privilege within the ordinary meaning of the term and,
therefore, under the expressed language of the merger statute passed
from Southern Continental Telephone Company to General
Telephone Company of the Southeast.”
While the reasoning in the foregoing quotation is logical and appeals strongly
to one’s sense of justice under the facts of this case, nevertheless, the Court cannot
escape the fact that under the holdings of this Court Section 48-505, T.C.A.,
hereinbefore quoted does not apply to the rights of the sovereign State of Tennessee.
343 S.W.2d 872, 875-76 (Tenn. 1960). While General Telephone Co. of the Southeast v. Boyd dealt
with gross receipts tax and this case deals with franchise and excise tax, the principles involved are
identical. The two corporations are separate entities.
Everything depends upon the wording of the statute imposing the tax. Tennessee Department
of Revenue rule 1320-6-1-.21(2)(d) allows for exactly the rule as stated in General Telephone
Company of the Southeast v. Boyd. AT&T does not have the benefit of a credit proviso in the statute
that is broader in scope than the actual tax imposing provision such as was the case in United
Intermountain Telephone Company v. Moyers, 426 S.W.2d 177 (Tenn. 1968). We affirm the trial
court’s grant of summary judgment to the Commissioner and denial of the same to AT&T. Since
our refusal to abrogate or distinguish Little Six determines the issues regarding the disallowance of
the credit for 1991 through 1996, it is unnecessary for us to address the jurisdictional argument
raised by the appellant or the statute of limitations argument raised by the appellee.
II THE INDUSTRIAL MACHINE CREDIT
AT&T also challenges the refusal of the Commissioner to allow the taxpayer an industrial
machine credit for tax years 1993 through 1996. AT&T argued that the industrial machine credit
statute as it existed in those years did not require qualification for the job tax credit as a pre-requisite
-5-
to industrial machine credit qualification. As grounds for that argument, AT&T asserts that a change
in the statutory language in later versions of the statute evidences a new intent by the legislature to
condition the extension of a credit only to taxpayers owning computer equipment and qualifying for
the job tax credit. Appellant refers to Nutt v. Champion Internat’l Corp., 980 S.W.2d 365, 368
(Tenn. 1998) as authority for the presumption that amendments affect statutes prospectively unless
the legislature clearly indicates otherwise. The Appellant urges that since the legislature amended
the industrial machine credit statute in 1999 to clearly condition the credits availability upon
qualification for the job tax credit for businesses using computer and computer equipment, this
amendment suggests the absence of such intent in the statutes prior to 1999.
To the contrary, the state argues that the 1999 amendment to the statute simply confirmed
the meaning of the previous state of law and did not indicate a change in legislative intent. See City
of Chattanooga v. Davis, 54 S.W.3d 248, 268 (Tenn.2001). For the purpose of the statutory
argument it is necessary to note that the industrial machine credit was always available to “industrial
machinery” as that term is defined in 67-6-102. In 1994, the legislature passed chapter 762 of the
Public Laws which, inter alia, provided an expansion to the definition of industrial machinery for
the purposes of the tax credit. That act provided the following change to Tennessee Code Annotated
section 67-4-808:
(A) On each excise tax return, a credit shall be allowed for a percentage
of the purchase price of industrial machinery purchased during the tax period covered
by the return and located in Tennessee. For purposes of this section, “industrial
machinery” means:
(i) “Industrial machinery” as defined by section 67-6-102; or
(ii) “computer,” “computer network,” “computer software,” or “computer
system” as defined by section 39-14-601 and any peripheral devices, including but
not limited to, hardware such as printers, plotters, external disc drives, modems, and
telephone units purchased in the process of making the “required capital investment”
in Tennessee described in section 67-4-908 to qualify for the job tax credit.
1994 Pub. Acts 762.
The expansion of the definition of industrial machinery always envisioned that in order for
computers, networks and software as defined in § 39-14-601, as well as their peripheral devices, to
qualify they had to be purchased in the process of making the “required capital investment”
described in 67-4-908.
Contrary to the argument of the taxpayer, this statute contains no ambiguity. “Where a
statute is plain and explicit in its meaning, and its enactment within the legislative competency, the
duty of the courts is simple and obvious, namely, to say sic lex scripta, and obey it.” Miller v.
Childress, 21 Tenn. 320, 321-22 (1841). We find that the consideration of the legislative history
-6-
therefore is unnecessary. Likewise, consideration of the supplemental authorities submitted by the
parties is unnecessary. The chancellor’s grant of summary judgment to the state and denial of the
same to AT&T is affirmed in all respects. The cause is remanded for the final calculation of the
amounts due. Costs are assessed against AT&T.
___________________________________
WILLIAM B. CAIN, JUDGE
-7-