Malco Theaters, Inc. v. Richard H. Roberts, Commissioner of Revenue, State of Tennessee

IN THE COURT OF APPEALS OF TENNESSEE

AT JACKSON

October 14, 2010 Session

MALCO THEATERS, INC. v. RICHARD H. ROBERTS1, COMMISSIONER

OF REVENUE, STATE OF TENNESSEE

Direct Appeal from the Chancery Court for Shelby County

No. CH-02-0491-1 Walter L. Evans, Chancellor

No. W2010-00464-COA-R3-CV - Filed April 26, 2011

This appeal concerns the franchise tax liability of a corporation operating motion picture theaters in

Tennessee. The Tennessee Department of Revenue assessed deficiencies against the corporation in

2001 and 2004 after audits revealed the corporation did not include the value of rented films within

its minimum franchise tax base. The corporation filed separate lawsuits in chancery court disputing

the assessments. After consolidating the cases, the chancery court granted summary judgment in

favor of the corporation. We reverse the grant of summary judgment, grant partial summary

judgment in favor of the Commissioner of Revenue, grant partial summary judgment in favor of the

corporation, and remand.

Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Reversed

and Remanded

DAVID R. FARMER, J., delivered the opinion of the Court, in which ALAN E. HIGHERS, P.J., W.S., and

HOLLY M. KIRBY , joined.

Robert E. Cooper, Jr., Attorney General and Report, Michael E. Moore, Solicitor General, and

Gregory O. Nies, Assistant Attorney General, Tennessee, for the appellant, Richard H. Roberts,

Commissioner of Revenue, State of Tennessee.

James A. Delanis, John B. Burns, Nashville, Tennessee and William H. D. Fones, Jr., Memphis,

Tennessee, for the appellee, Malco Theaters, Inc.

1

In accordance with Rule 19(c) of the Tennessee Rules of Appellate Procedure, Richard H. Roberts,

the current Commissioner of Revenue, has been substituted for his predecessors, Charles A. Trost, Reagan

Farr, Loren L. Chumley, and Ruth E. Johnson.

OPINION

I. Background and Procedural History

The following facts are undisputed. The plaintiff/appellee, Malco Theaters, Inc. (“Malco”),

is a corporation organized and existing under the laws of the State of Arkansas and qualified to do

business in the State of Tennessee. Malco owns and operates motion picture theaters in Tennessee

for profit. Malco at all times material to this lawsuit obtained reels of photographic film from

multiple distributors to facilitate the exhibition of motion pictures in its theaters.2 Malco obtained

these films under a series of universal film rental/license agreements (“film agreements”). The film

agreements, while varying in certain aspects, were fairly uniform. Each agreement provided Malco

a right to receive a film or “print” suitable for exhibition, which Malco could repair but not alter in

any way, and a limited license to display the film to the public under specified terms.

The film agreements provided several options for calculating the costs of procuring the films

and the attendant rights to display them, which Malco and the distributors negotiated on a picture-by-

picture, theater-by-theater basis. Factors pertinent to these negotiations included: (1) the motion

picture’s previous or expected popularity, (2) the length of time during which the motion picture

would run, (3) the time of year, (4) the demographics of the expected audience, and (5) the theater’s

previous history of drawing audiences. These costs typically correlated with the number of

moviegoers paying admission to attend showings of a particular film. Malco and its distributors

often determined the costs of procuring and displaying the films on either a percentage-of-receipts

or per-capita-attendance basis.

Most of the film agreements described the costs of procuring and utilizing the films as “film

rental,” whereas others described the costs as “license fees.” The Tennessee Department of Revenue

(the “Department”) determined monies paid under the film agreements equaled rents paid to obtain

and use taxable tangible property: reels of physical film. The Department consequently issued

separate notices of assessment against Malco in 2001 and 2004 after audits revealed the corporation

did not include the net annual rental associated with the films in its minimum franchise tax base from

1997-2003. The first notice included an assessment for the period beginning January 1, 1997, and

ending December 31, 1999, in the amount of $96,900.10 plus interest. The second notice included

an assessment in the aggregate amount of $110,182.64 for the period beginning January 1, 2000, and

ending December 31, 2003. The Department reduced the first assessment for unpaid franchise and

excise taxes after an informal conference to $72,959.00 plus interest, which totaled $102,121.00.

2

It is undisputed this appeal does not concern motion pictures transmitted to Malco’s theaters via

satellite or any other form of digital transmission. Malco utilized only physical reels of film to display

motion pictures in its theaters from 1997-2003. Malco ordinarily received these films in four smaller

sections which it spliced together and placed on spools. Malco then used the spools to thread the films into

projectors. These projectors displayed the images imprinted on the films onto large screens for the

enjoyment of moviegoers.

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Malco filed separate lawsuits against the Commissioner of Revenue for the State of

Tennessee (“Commissioner”) pursuant to Tennessee Code Annotated section 67-1-1801(a)(1)(B)

asserting the assessed deficiencies were illegal, invalid, and incorrect. Malco requested the chancery

court set aside the assessments, including all taxes and interest due thereunder, and award the

corporation attorney’s fees and expenses pursuant to Tennessee Code Annotated section 67-1-

1803(d).3 Commissioner responded with answers denying Malco’s legal assertions and seeking

awards of attorney’s fees and expenses pursuant to Tennessee Code Annotated section 67-1-1803(d).

The chancery court consolidated these cases and litigation ensued.

The parties eventually filed competing motions for summary judgment supported by

affidavits, statements of undisputed facts, memoranda of law, and other filings. Commissioner

argued the Department properly assessed deficiencies against Malco for unpaid franchise taxes

during the period in question. Commissioner asserted the Department properly characterized the

films as tangible property subject to the franchise tax set forth at Tennessee Code Annotated section

67-4-2104 (Supp. 1999), explaining the Tennessee Supreme Court had concluded under a similar

tax statute “that the rental or leasing of these moving picture films by exhibitors in Tennessee is a

rental or leasing of tangible personal property . . . and that the correct measure of the tax is the gross

amount of rent paid.” Crescent Amusement Co. v. Carson, 213 S.W.2d 27, 29 (Tenn. 1948).

Commissioner further asserted the rented films qualified as “equipment” for the purposes of

valuation pursuant to Tennessee Code Annotated section 67-4-2108(a)(3) (Supp. 1999).

Malco disagreed with Commissioner’s legal position. Malco characterized the costs

associated with procuring and displaying motion pictures in its theaters as “movie license fees” that

the distributors charged based on the value of the films as intangible intellectual property. Malco

rejected Commissioner’s assertion that decisions treating the rental of films as rental of tangible

property under the sales tax statutes of Tennessee and other states controlled the outcome of a case

arising under the franchise tax statute. Malco further argued that rented films and/or movie licenses,

even if they were tangible property, were not includable within the corporation’s franchise tax base

because they did not fall squarely within one of the four categories of rented property subject to the

franchise tax. In the alternative, Malco argued the films qualified as “mobile equipment” for the

purposes of valuation.

Malco offered a 1965 opinion of the Office of the Attorney General (“1965 opinion”) in

support of its position that the assessments were improper and illegal. The 1965 opinion stated, in

3

Tennessee Code Annotated section 67-1-1803(d) provides, in pertinent part:

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.

Tenn. Code Ann. § 67-1-1803(d) (Supp. 2010). Prior versions of this statutory provision provided similar

relief. See, e.g., Tenn. Code Ann. § 67-1-1803(d) (1998).

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pertinent part:

[O]utside the contemplation of the leased property concept would appear to be those

instances where is [sic] is impossible for the corporation carrying on its chartered

business to have title to the property of others which it uses for a consideration. A

corporation operating a theater could not conceivably purchase the film which it

shows to its patrons as its primary business. It can be obtained only from a rental

agency. It is to be remembered that the underlying purpose of including the value of

leased property in the minimum tax base is to prevent the avoidance of franchise tax

by the artifice of leasing rather than owning property necessary to the carrying on of

a corporation’s chartered purposes. Additionally, property other than that listed in

the leased property provisions of § 67-2909, T.C.A. should be regarded as outside its

contemplation.

According to Malco, the 1965 opinion correctly recognized rented films were not includable within

a corporation’s franchise tax base and, thus, Malco was entitled to summary judgment.

The chancery court resolved the competing motions for summary judgment in favor of

Malco. The court reasoned that “movie license fees” were not tangible property subject to inclusion

in Malco’s franchise tax base. Additionally, the court found neither the “movies” nor the “movie

licenses” were taxable tangible property because they did not squarely fall within one of the four

categories of Tennessee Code Annotated section 67-4-2108(a)(3), as strictly construed against the

taxing authority. In the chancery court’s view, “the uncontroverted facts” established Malco’s

movies and movie license agreements were not “real property;” “machinery and equipment used in

manufacturing and processing;” “furniture, office machinery and equipment;” or “delivery or mobile

equipment.” The chancery court held, in the alternative, Commissioner could not include the films

within Malco’s minimum franchise tax base even if the films constituted taxable tangible property,

citing Tennessee Code Annotated section 67-1-108.4 The court accepted Malco’s argument that the

1965 opinion represented the established policy of the Department regarding taxation of rented films

under the franchise tax statute and concluded Commissioner’s current interpretation of the statute

4

Tennessee Code Annotated section 67-1-108 provided at all times relevant to this case:

If the commissioner changes the policy of the department as to the taxability of any

privilege, such policy change shall be applied to the exercise of such privileges occurring

after the date of such policy change only, unless otherwise provided by law.

E.g. Tenn. Code Ann. § 67-1-108 (1998); Tenn. Code Ann. § 67-1-108 (2003). Malco did not cite Tennessee

Code Annotated section 67-1-108 as providing a basis for relief in either of its complaints or its motion for

summary judgment. The sole reference to this statutory provision is in Malco’s “Supplemental Memorandum

In Support of Its Motion for Summary Judgment and in Opposition to Defendant’s Motion for Summary

Judgment.” Commissioner, however, does not challenge the chancery court’s decision to reach this issue.

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violated that longstanding policy as to the tax years in dispute.5 In light of these conclusions, the

chancery court granted summary judgment to Malco and denied Commissioner’s motion for

summary judgment. Commissioner timely appealed.6

II. Issues Presented

The issues before this Court, as we perceive them, are as follows:

(1) whether motion picture films were tangible property subject to the franchise

tax from 1997-2003;

(2) whether motion picture films, if tangible property, were includable within

Malco’s minimum franchise tax base;

(3) whether the films, if taxable tangible property, fell within the category of

“furniture, office machinery and equipment” or “delivery or mobile

equipment” for valuation purposes;

(4) whether the fees Malco paid under the film agreements equaled the “net

annual rental” associated with the rented films;

(5) whether this Court must summarily affirm the chancery court’s conclusion

that Tennessee Code Annotated section 67-1-108 prohibited enforcement of

Commissioner’s legal position to the tax years in question; and

(6) whether the undisputed facts demonstrated that inclusion of rented films

within Malco’s minimum franchise tax base amounted to a change in policy

that Commissioner could not enforce retroactively to the tax years in

question.

III. Standard of Review

“Summary judgments are appropriate in virtually any civil case that can be resolved on the

basis of legal issues alone.” CAO Holdings, Inc. v. Trost, M2008-01679-SC-R11-CV,--- S.W.3d ---,

2010 WL 5111414, at *5 (Tenn. Dec. 15, 2010) (citations omitted). “Because legal disputes

5

The court described the tax years in dispute as 2001-2004. The actual tax years in question were

1997-2003.

6

On January 25, 2011, the chancery court certified its judgment as final pursuant to Rule 54.02 of

the Tennessee Rules of Civil Procedure. The court found Malco was entitled to attorney’s fees and expenses

as the prevailing party but reserved judgment on the amount of such fees and expenses pending the outcome

of all appeals in the case.

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involving the payment of taxes are frequently based on stipulated facts, they generally lend

themselves to disposition by summary judgment as issues of law.” Id. “However, the

well-understood principles generally governing the review of summary judgments are equally

applicable to summary judgments in proceedings involving tax disputes.” Id. (citation omitted).

Rule 56 of the Tennessee Rules of Civil Procedure provides that a party is entitled to

summary judgment if the “pleadings, depositions, answers to interrogatories, and admissions on file,

together with the affidavits . . . show that there is no genuine issue as to any material fact and that

the moving party is entitled to a judgment as a matter of law.” Tenn. R. Civ. P. 56.04. The moving

party has the ultimate burden of demonstrating that summary judgment is appropriate, Martin v.

Norfolk S. Ry. Co., 271 S.W.3d 76, 83 (Tenn. 2008) (citing Byrd v. Hall, 847 S.W.2d 208, 215

(Tenn. 1993)), and consequently bears the initial burden of providing a properly supported motion

showing there are no genuine issues of material fact and the moving party is entitled to judgment as

a matter of law, id. (citing Staples v. CBL & Assocs., 15 S.W.3d 83, 88 (Tenn. 2000); McCarley v.

W. Quality Food Serv., 960 S.W.2d 585, 588 (Tenn. 1998)). “The moving party may make the

required showing and therefore shift the burden of production to the nonmoving party by either: (1)

affirmatively negating an essential element of the nonmoving party’s claim; or (2) showing that the

nonmoving party cannot prove an essential element of the claim at trial.” Id. (citing Hannan v. Alltel

Publ'g Co., 270 S.W.3d 1, 5 (Tenn. 2008); McCarley, 960 S.W.2d at 588; Byrd, 847 S.W.2d at 215

n.5).

A party will not succeed on a motion for summary judgment merely by asserting that the

nonmoving party is without evidence to support a claim. Id. at 83-84 (citing Byrd, 847 S.W.2d at

215). “The moving party must either produce evidence or refer to evidence previously submitted

by the nonmoving party that negates an essential element of the nonmoving party’s claim or shows

that the nonmoving party cannot prove an essential element of the claim at trial.” Id. at 84 (citing

Hannan, 270 S.W.3d at 5). Production of evidence raising doubts about the merits of the nonmoving

party’s claim will not suffice. Id. (citing McCarley, 960 S.W.2d at 588). “[T]he moving party must

point to evidence that tends to disprove an essential factual claim made by the nonmoving party.”

Id. (citing Blair v. West Town Mall, 130 S.W.3d 761, 768 (Tenn. 2004)). If the moving party does

not carry its initial burden, the nonmoving party has no obligation to produce evidentiary materials

in support of its position. Id. (citing Staples, 15 S.W.3d at 88; McCarley, 960 S.W.2d at 588).

Once a moving party carries its initial burden, the focus of the inquiry shifts to the

nonmoving party who must “affirmatively show facts either (a) supporting the elements of its claim

or defense if it has the burden of persuasion, or (b) negating the movant's claim or defense if the

movant has the burden of persuasion.” Lawrence A. Pivnick, Tennessee Circuit Court Practice §

27:5, at 394-95 & n.49 (2011) (collecting cases). There are at least four ways in which the

nonmoving party can satisfy its burden of production and defeat a motion for summary judgment:

by pointing to evidence overlooked or ignored by the moving party that establishes

a material factual dispute; by rehabilitating the evidence attacked in the moving

party’s papers; by producing additional evidence showing the existence of a genuine

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issue for trial; or by submitting an affidavit explaining why further discovery is

necessary in accordance with Tenn. R. Civ. P., Rule 56.07.

Id. § 27:5, at 395-96 & n.50. Courts must accept the evidence proffered by the nonmoving party as

true and resolve any doubts concerning the existence of a genuine issue of material fact in favor of

the nonmoving party. Martin, 271 S.W.3d at 84 (citing McCarley, 960 S.W.2d at 588). “‘A

disputed fact is material if it must be decided in order to resolve the substantive claim or defense at

which the motion is directed.’” Id. (quoting Byrd, 847 S.W.2d at 215). “A disputed fact presents

a genuine issue if ‘a reasonable jury could legitimately resolve that fact in favor of one side or the

other.’” Id. (quoting Byrd, 847 S.W.2d at 215).

Courts must separately evaluate competing motions for summary judgment. Trost, 2010 WL

5111414, at *7 (citations omitted). “When considering individual competing cross-motions for

summary judgment, the court must take care to resolve all factual disputes and any competing

rational inferences in the light most favorable to the party opposing each motion.” Id. (citations

omitted). “With regard to each motion, the court must determine (1) whether genuine disputes of

material fact with regard to that motion exist and (2) whether the party seeking the summary

judgment has satisfied Tenn. R. Civ. P. 56’s standards for a judgment as a matter of law.” Id.

(citation omitted). “Both summary judgment motions should be denied if the court finds that there

is a genuine dispute regarding a material issue of fact with regard to both motions, or if the parties

disagree as to the inferences or conclusions to be drawn from the facts material to both motions.”

Id. (internal citations omitted).

The grant of summary judgment is appropriate only where “the evidence and the inferences

reasonably drawn from the evidence permit reasonable persons to reach only one conclusion—that

the moving party is entitled to a judgment as a matter of law.” Id. at *6 (citations omitted). We

review a trial court’s determination that the moving party is entitled to judgment as a matter of law

de novo with no presumption of correctness. Martin, 271 S.W.3d at 84 (citing Blair, 130 S.W.3d

at 763). We review the evidence in the light most favorable to the nonmoving party and draw all

reasonable inferences in favor of the nonmoving party. Id. (citing Staples, 15 S.W.3d at 89).

IV. Analysis

This dispute concerns the breadth of statutes imposing franchise tax liability on Malco from

1997-2003. The franchise tax is a yearly assessment for the privilege of doing business in

Tennessee. Crown Enterprises, Inc. v. Woods, 557 S.W.2d 491, 493 (Tenn. 1977) (citing Mid-Valley

Pipeline Co. v. King, 431 S.W.2d 277, 280 (Tenn. 1968); R. J. Reynolds Tobacco Co. v. Carson, 213

S.W.2d 45, 47 (Tenn. 1948)). An entity subject to the franchise tax pays the assessment “as a

recompense for the protection of its local activities and as compensation for the benefits it receives

from doing business in Tennessee.” Tenn. Code Ann. § 67-4-2105(b) (Supp. 2010); Tenn. Code

Ann. § 67-4-2105(b) (Supp. 1999). The franchise tax is not an ad valorem property tax. Omnicon,

Inc. v. King, 688 S.W.2d 818, 819 (Tenn. 1985). “It is levied upon the net worth or capital of the

corporation.” Id. (citations omitted). As we will explain below, Tennessee has historically required

a corporation to include property owned or used in Tennessee within its minimum net worth when

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determining the corporation’s franchise tax base. See, e.g., Crown, 557 S.W.2d at 492; Tollett v.

Franklin Equities, Inc., 586 S.W.2d 96, 99 (Tenn. 1979). The question of how a corporation should

calculate its minimum franchise tax base has nonetheless remained a source of disagreement.

A. Development of the Franchise Tax

The genesis of the present dispute traces to the Tennessee Supreme Court’s decision in

Memphis Peabody Corp. v. MacFarland, 365 S.W.2d 40 (Tenn. 1963). The Memphis Peabody court

considered whether the “Tennessee Franchise Tax Law,” Tennessee Code Annotated section 67-

2901 et seq., required a corporate taxpayer using leased property in the conduct of its business to

include such property in the corporation’s minimum franchise tax base. Memphis Peabody, 365

S.W.2d at 41. Tennessee Code Annotated section 67-2902, similar to the statutes at issue here,

imposed an annual franchise tax for the privilege of engaging in business in corporate form in

Tennessee. Tenn. Code Ann. § 67-2902 (1955); Memphis Peabody, 365 S.W.2d at 42. The

legislature imposed the franchise tax at the rate of “fifteen cents (15¢) on the one hundred dollars

($100), or major fraction thereof, of the issued and outstanding stock, surplus and undivided profits

of each such corporation as shown by the books and records of such corporation at the close of its

last calendar or fiscal year preceding the making of the sworn report hereinafter required.” Tenn.

Code Ann. § 67-2904 (1955); Memphis Peabody, 365 S.W.2d at 42. Additionally, Tennessee Code

Annotated section 67-2909 provided:

The measure of the tax hereby imposed shall in no case be less than the value of the

real and tangible personal property owned or used by such corporation in this state

as shown by the books and records of such corporation at the close of its last

calendar or fiscal year preceding the making of the sworn report hereinafter required,

excepting books with respect to investment costs kept pursuant to regulations of the

interstate commerce commission. No corporation when paying the tax upon the

minimum basis herein set forth shall be permitted to insist that the assessed valuation

of the real and tangible personal property in Tennessee is greater than the actual value

thereof, or that the value of said property, as shown by the books and records of such

corporation, excepting books and records with respect to investment costs kept

pursuant to the regulations of the interstate commerce commission, is greater than the

actual value thereof. This provision is intended to fix a minimum tax base and not

to substitute the value of property owned or used in Tennessee for the measure of the

tax hereinbefore provided.

Tenn. Code Ann. § 67-2909 (1955) (emphasis added); Memphis Peabody, 365 S.W.2d at 42.

The taxpayer, Memphis Peabody Corporation, operated the historic Peabody Hotel in

Memphis, Tennessee but leased the hotel property and certain improvements thereon from a separate

corporate entity, Peabody Hotel Corporation. Memphis Peabody, 365 S.W.2d at 41. The separate

corporate entity paid the franchise tax on the appropriate measure of the real property and

improvements leased to Memphis Peabody Corporation. Id. Memphis Peabody Corporation,

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however, did not include the value of the real property and improvements within its franchise tax

base because it did not carry the value of the property on its books or records. Id. The

Commissioner of Revenue disagreed with the taxpayer’s treatment of the leased property in relation

to the franchise tax, asserting Memphis Peabody Corporation should have included the value of the

property within its minimum franchise tax base. Id. After the Commissioner of Revenue assessed

additional franchise taxes, Memphis Peabody Corporation commenced an action to recover taxes

paid under protest. Id. The chancery court affirmed the franchise tax assessment and dismissed the

action. Id. The taxpayer appealed.

The Tennessee Supreme Court in Memphis Peabody reversed the decision of the chancery

court. Memphis Peabody, 365 S.W.2d at 44. Our supreme court held that leased property was not

properly includable within a corporation’s franchise tax base where the taxpayer did not carry the

value of the property on its books and where doing so would violate good accounting principles. Id.

at 43. The court reasoned:

If the Legislature meant that this phrase ‘as shown by the books and records of such

corporation’ to mean anything at all, it intended the phrase to mean exactly what it

says; that is, the tax should be measured by the assets of the corporation as shown by

its books. Of course, this means that the taxpayer would have to keep and maintain

its books and records in good faith and according to good accounting practices. It

could not arbitrarily and without reason disregard assets of the corporation in making

and filing its return. The proof in this case is that the books and records of the

corporation were set up and kept according to good accounting practices. There is

no indication of lack of good faith on the part of the taxpayer.

Id. The Memphis Peabody court accordingly held “that the basic purpose of the franchise tax law

clearly indicates that property which a corporation does not own but leases in the operation of its

business is not to be taken into consideration in determining its minimum franchise tax liability.”

Id.

The General Assembly soon thereafter amended the franchise tax law to counteract the

holding of Memphis Peabody, expressly including the value of rented property within the minimum

franchise tax base of a corporation. See 1963 Tenn. Pub. Acts, ch. 361, § 3; see also Tollett v.

Franklin Equities, Inc., 586 S.W.2d 96, 97-98 (Tenn. 1979). Tennessee Code Annotated section 67-

2909, as amended, stated:

The measure of the tax hereby imposed shall in no case be less than the actual value

of property owned, or property used, in Tennessee. In cases where part or all of the

property is rented the actual value of property will be deemed to be the book value

of all property owned as shown by the books and records of such corporation at the

close of its last fiscal year preceding the making of the sworn report hereinafter

required (excepting books with respect to the investment costs kept pursuant to

regulations of the interstate commerce commission) plus the value of the rental

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property used which shall be determined by multiplying the net annual rental by the

following multiples:

Multiples

(A) Real property ..................................................................................... 5

(B) Machinery and equipment used in manufacturing and processing..... 3

(C) Furniture, office machinery and equipment ....................................... 2

(D) Delivery or mobile equipment ........................................................... 1

“The net annual rental” shall mean the gross annual rental paid by the taxpayer less

the gross rental received by the taxpayer for sub-rental. For the purposes of this

section the term “used” shall mean only such property as is actually utilized by the

corporation in the conduct of its principal business.

1963 Tenn. Pub. Acts, ch. 361, § 3 (emphasis added).7

The Tennessee Supreme Court considered the purpose and effect of this amendment in Tollett

v. Franklin Equities, Inc., 586 S.W.2d 96 (Tenn. 1979). In Tollett, a taxpayer managed but did not

own a motel in Tennessee. Tollett, 586 S.W.2d at 97. The taxpayer did, however, own a fifty-one

percent interest in the limited partnership that owned the motel. Id. Tollett concerned whether that

partnership interest was “property owned” in Tennessee. Id. at 98. In answering this question, our

supreme court delved into the history of the statute:

The revision in the statute followed immediately the decision of this Court

in the case of Memphis Peabody Corp. v. MacFarland, 211 Tenn. 384, 365 S.W.2d

40 (1963), in which it was held that the value of property leased by a corporate

taxpayer was not required to be included in the minimum measure of the franchise

tax. The 1963 amendment provided for the inclusion of leased or rented property and

contained a formula for its valuation. The amendment, however, also deleted the

words “real and tangible personal” preceding the words “property owned or used.”

The taxpayer relies upon two opinions of the State Attorney General rendered

several years ago that the only change effected by the 1963 amendment was to

include leased or rented property. This, however, is not all that the amendment

provided. The Attorney General gave opinions that intangible property owned by

7

The legislature later revised the franchise tax law and re-codified this provision at Tennessee Code

Annotated section 67-2908. See 1976 Tenn. Pub. Acts, ch. 537, § 8. Tennessee Code Annotated section 67-

2908 retained the language of the amended provision but changed the multiple applying to “real property”

to 8. Id.; Tenn. Code Ann. § 67-2908 (1976). The revised provision further provided that “there shall not

be included within the meaning hereof the value of any property while construction of same is in progress

and, in addition thereto, there is no actual utilization of such property by the corporation either in whole or

in part.” 1976 Tenn. Pub. Acts, ch. 537, § 8; Tenn. Code Ann. § 67-2908 (1976).

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taxpayers was not affected by the 1963 amendment. In our opinion, this conclusion

was not justified from the revisions which were made in the statutory language. It

is true that the word “tangible” was retained in the caption of the code section which

the 1963 amendment revised, and indeed that word is found in the caption as quoted

in the 1963 act. In the text of the revised statute itself, however, all references to real

and tangible personal property were omitted, and the generic term “property” was

retained without any qualification or modifying language.

Tollett, 586 S.W.2d at 97-98. The court concluded “the taxpayer’s partnership interest is ‘property,’

albeit intangible, and there is nothing in the statute since its 1963 revision which excludes valuable

intangible assets or property rights such as this from the franchise tax measure.” Id. at 98.

The court’s opinion on the taxpayer’s petition to rehear affirmed the broad import of the 1963

amendment. The court explained:

It is clear that the 1963 amendment to the franchise tax law was enacted in

response to the opinion of this Court in Memphis Peabody Corp. v. MacFarland, 211

Tenn. 384, 365 S.W.2d 40 (1963). The General Assembly obviously intended to

make taxable in the future the type of business arrangement utilized by the taxpayer

in that case to avoid the minimum measure of the tax; namely, the leasing or renting

of property. It provided that property rented for use by corporate taxpayers in

Tennessee must be included, and it prescribed a method for the valuation of such

assets.

....

The thrust of our holding, which we reiterate here, was that the 1963

amendment was broader than originally suggested by the Attorney General in his

opinions and was not confined solely to the inclusion of property held under a lease.

We have not attempted to delineate completely the effect of the 1963 amendment, but

we are of the opinion that it was designed to close more than one single loophole

and, where necessary to reflect accurately the value of property owned or used in

Tennessee by a corporation, to authorize the inclusion of an intangible business

interest or ownership such as is shown in this case.

Tollett, 586 S.W.2d at 99-100 (footnote omitted) (emphasis added) (op. on pet. to rehear). Although

the legislature has amended the franchise tax laws on several occasions since Tollett, the statutes

controlling our decision remain substantially similar to the statute in Tollett.

The statutes controlling our decision are the “Franchise Tax Law” formerly codified at

Tennessee Code Annotated section 67-4-901 et seq. and the later enacted “Franchise Tax Law of

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1999” codified at Tennessee Code Annotated section 67-4-2101 et seq.8 Tennessee Code Annotated

§ 67-4-904 provided:

(a) The privilege tax hereby imposed shall be a tax of twenty-five cents (25¢)

on the one hundred dollars ($100), or major fraction thereof, of the issued and

outstanding stock, surplus and undivided profits of each such corporation as shown

by the books and records of such corporation at the close of its last fiscal year

preceding the making of the sworn report hereinafter required.

(b) For purposes of this section, “issued and outstanding” stock does not

include treasury stock.

Tenn. Code Ann. § 67-4-904 (1998). Tennessee Code Annotated section 67-4-2106 similarly

provided, in pertinent part:

(a) The privilege tax hereby imposed on all taxpayers shall be a tax of

twenty-five cents (25¢) per one hundred dollars ($100), or major fraction thereof, of

a taxpayer’s net worth, determined in accordance with subsection (b), at the close of

the tax year covered by the required return.

(b) For purposes of this section, for taxpayer's filing on a separate entity basis,

“net worth” is defined as the difference between a taxpayer’s total assets less its total

liabilities computed determined in accordance with subsection (b). However, if the

taxpayer does not maintain its books and records in accordance with generally

accepted accounting principles, net worth shall be computed in accordance with the

accounting method used by the taxpayer for federal tax purposes, so long as the

method fairly reflects the taxpayer's net worth for purposes of the tax levied by this

part.

Tenn. Code Ann. § 67-4-2106(a), (b) (Supp. 2000).

Although these provisions appeared to set forth the exclusive method for determining the

franchise tax due, the franchise tax statutes at issue also required that “[t]he measure of the tax

hereby levied shall in no case be less than the actual value of the real or tangible property owned or

used in Tennessee, excluding exempt inventory and exempt required capital investments.”9 Tenn.

8

As we noted in BellSouth Advertising & Publishing Corp. v. Chumley, 308 S.W.3d 350 (Tenn. Ct.

App. 2009), “[t]he excise and franchise tax statutes were substantially revised and reenacted in 1999.” Id.

at 351. The principal revision concerned the express inclusion of limited liability companies, limited

partnerships, limited liability partnerships, and business trusts as entities subject to the franchise tax. Alice

Marie Pettigrew, Note, The Constitutionality of an Income Tax in Tennessee, 30 U. Mem. L. Rev. 337, 338

(2000). As in BellSouth, the relevant “provisions of the current excise and franchise tax statutes and of those

repealed in 1998 are substantially the same.” BellSouth, 308 S.W.3d at 351.

9

Prior versions of this statute provided that “the measure of the tax hereby imposed shall in no case

(continued...)

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Code Ann. § 67-4-2108(a)(1) (Supp. 2000) (emphasis added). Each statute defined property “used”

in Tennessee to include only such property that a taxpayer “actually utilized” in the conduct of its

principal business. Tenn. Code Ann. § 67-4-906(a)(5) (1998); Tenn. Code Ann. § 67-4-

2108(a)(6)(F) (Supp. 1999). Importantly, each statute provided:

In cases where part or all of the property is rented, the actual value of property will

be deemed to be the book value of all property owned as shown by the books and

records of such corporation at the close of its last fiscal year preceding the making

of the sworn report hereinafter required (excepting books with respect to investment

costs kept pursuant to regulations of the interstate commerce commission), plus the

value of the rental property used which shall be determined by multiplying the net

annual rental by the following multiples:

Multiples

(A) Real property ..................................................................................... 8

(B) Machinery and equipment used in manufacturing and processing..... 3

(C) Furniture, office machinery and equipment ....................................... 2

(D) Delivery or mobile equipment ........................................................... 1

Tenn. Code Ann. § 67-4-906(a)(3) (1998); Tenn. Code Ann. § 67-4-2108(a)(3) (Supp. 1999).10 And

each statute defined “net annual rental” as meaning “the gross annual rental paid by the taxpayer, less

the gross rental received by the taxpayer for sub-rental.” Tenn. Code Ann. § 67-4-906(a)(4) (1998);

Tenn. Code Ann. § 67-4-2108(a)(6)(D) (Supp. 1999).

B. Statutory Construction

The issues presented require us to determine how the franchise tax statutes set forth above

apply to the undisputed facts of this case. Several well-established principles guide our analysis.

The first of these is “to ascertain and give effect to the legislative intent without unduly restricting

or expanding a statute’s coverage beyond its intended scope.” Lyons v. Rasar, 872 S.W.2d 895, 897

9

(...continued)

be less than the actual value of the property owned, or property used, in Tennessee, excluding exempt

inventory.” Tenn. Code Ann. § 67-4-906(a)(1) (1998); Tenn. Code Ann. § 67-4-2108(a)(1) (Supp. 1999).

Commissioner argues the specification added in the statute regarding tangible property does not alter our

analysis because the rented movie reels were tangible property utilized in Malco’s principal business.

Additionally, Commissioner concedes for the purposes of this appeal that intangible property was not

includable within Malco’s minimum franchise tax base.

10

The legislature amended Tennessee Code Annotated section 67-4-2108(a)(3) in 2000 to permit

valuation of a corporation’s property at cost less accumulated depreciation in accordance with generally

accepted accounting principles. Tenn. Code Ann. § 67-4-2108(3) (Supp. 2000). It maintained, however, the

requirement that “[i]n cases where part or all of the property is rented, the value of rented property used shall

be determined by multiplying the net annual rental by the following multiples . . . .” Id. (emphasis added).

-13-

(Tenn. 1994) (citing State v. Sliger, 846 S.W.2d 262, 263 (Tenn. 1993)). “In seeking to ascertain

legislative intent, we must look to the entire statute in order to avoid any forced or subtle

construction of the pertinent language.” Id. (citing McClain v. Henry I. Siegel Co., 834 S.W.2d 295

(Tenn. 1992)). “When a statute’s text is clear and unambiguous, the courts need not look beyond

the statute itself to ascertain its meaning.” Lee Medical, Inc. v. Beecher, 312 S.W.3d 515, 527

(Tenn. 2010) (citing Green v. Green, 293 S.W.3d 493, 507 (Tenn. 2009); State v. Strode, 232

S.W.3d 1, 9–10 (Tenn. 2007)). Courts should not seek guidance from “‘the broader statutory

scheme, legislative history, historical background, or other external sources of the Legislature’s

purpose’” if the language of the statute is clear. Elliott v. Cobb, 320 S.W.3d 246, 250-51 (Tenn.

2010) (quoting Calaway ex rel. Calaway v. Schucker, 193 S.W.3d 509, 516 (Tenn. 2005)) (citing

Beecher, 312 S.W.3d at 527).

If the meaning of a statute is unclear, courts may rely on established canons of statutory

construction, as well as the “broader statutory scheme, the history of the legislation, or other sources”

to guide the statute’s construction. State v. Sherman, 266 S.W.3d 395, 401 (Tenn. 2008) (citing

Parks v. Tenn. Mun. League Risk Mgmt. Pool, 974 S.W.2d 677, 679 (Tenn. 1998)). “One of those

rules of construction is ‘ejusdem generis,’ which means that ‘where general words follow special

words which limit the scope of the statute, general words will be construed as applying to things of

the same kind or class as those indicated by the preceding special words.’” State v. Young, 196

S.W.3d 85, 104 (Tenn. 2006) (quoting Lyons, 872 S.W.2d at 897). “In this way, ejusdem generis

limits the breadth of the general phrase so that neither the general phrase nor the specific terms are

inoperative.” State v. Marshall, 319 S.W.3d 558, 562 (Tenn. 2010) (citations omitted).

Courts choosing to employ a canon of construction such as ejusdem generis must

nevertheless temper their reliance on interpretive tools with the recognition that “canons of

construction, though helpful, should always be tested against the other interpretive tools at a court’s

disposal.” In re Estate of Tanner, 295 S.W.3d 610, 625 n.13 (Tenn. 2009) (citations omitted);

accord In re Estate of Davis, 308 S.W.3d 832, 842 (Tenn. 2010) (citation omitted). “Any canon of

statutory construction, if applied mechanically and without attention to context, may lead to an

incorrect result.” Tanner, 295 S.W.3d at 625 n. 13. Canons of construction, including the canon of

ejusdem generis, should not be used to frustrate legislative intent. See Marshall, 319 S.W.3d at 562

n.4 (citing United States v. Alpers, 338 U.S. 680, 682 (1950)); State v. Grosvenor, 258 S.W. 140,

141 (Tenn. 1924). We must remember “[t]he cardinal canon of statutory construction requires the

courts to ascertain and to carry out the General Assembly’s intent.” Norma Faye Pyles Lynch Family

Purpose LLC v. Putnam County, 301 S.W.3d 196, 213 (Tenn. 2009) (citing Colonial Pipeline Co.

v. Morgan, 263 S.W.3d 827, 836 (Tenn. 2008)).

The construction of tax statutes departs from the ordinary rules of statutory construction in

one significant aspect: “courts must construe tax statutes liberally in favor of the taxpayer and,

conversely, strictly against the taxing authority.” Am. Airlines, Inc. v. Johnson, 56 S.W.3d 502, 504

(Tenn. Ct. App. 2000) (citing White v. Roden Elec. Supply Co., 536 S.W.2d 346, 348 (Tenn. 1976);

Memphis St. Ry. v. Crenshaw, 55 S.W.2d 758, 759 (Tenn. 1933)). It is well-settled that courts

typically resolve any doubt concerning the meaning of a tax statute in favor of the taxpayer. Id.

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(citing Memphis Peabody Corp. v. MacFarland, 365 S.W.2d 40, 42 (Tenn. 1963); Carl Clear Coal

Corp. v. Huddleston, 850 S.W.2d 140, 147 (Tenn. Ct. App.1992)). “Courts may not extend by

implication the right to collect a tax ‘beyond the clear import of the statute by which it is levied.’”

Id. (quoting Boggs v. Crenshaw, 7 S.W.2d 994, 995 (Tenn. 1928)).

Courts, however, are not required to defer to a taxpayer’s strained or forced construction of

a statute. “When faced by an invocation of [the rule against extension by implication], it is still the

court’s duty to look to and apply all of the language of the act so as to achieve equal taxation, where

there is an evident intent to tax; even though this intent is ineptly expressed.” Univ. Computing Co.

v. Olson, 677 S.W.2d 445, 448 (Tenn. 1984). “[C]ourts must give effect to the ‘plain import of the

language of the act’ and must not use the strict construction rule to thwart ‘the legislative intent to

tax.’” Johnson, 56 S.W.3d at 504 (citing Int’l Harvester Co. v. Carr, 466 S.W.2d 207, 214 (Tenn.

1971); Bergeda v. State, 167 S.W.2d 338, 340 (Tenn. 1943)). It is the duty of courts, even in tax

cases, to “give full scope to the legislative intent and apply a rule of construction that will not defeat

the plain purposes of the act.” Bergeda, 167 S.W.2d at 340 (citing Knox v. Emerson, 131 S.W. 972,

973 (Tenn. 1910). Additionally, courts should not apply a construction of a statute that produces an

absurd result. State v. Flemming, 19 S.W.3d 195, 197 (Tenn. 2000) (citing State v. Legg, 9 S.W.3d

111, 116 (Tenn. 1999)). The rule of strict construction in favor of a taxpayer does not require the

court to reach a “ridiculous result . . . because some ingenious path may be found to that end.”

Sherwin-Williams Co. v. Johnson, 989 S.W.2d 710, 714 (Tenn. Ct. App. 1998) (citation omitted)

(internal quotation marks omitted).

An Attorney General’s opinion interpreting a tax statute is entitled to deference. H & R Block

E. Tax Servs., Inc. v. State, Dept. of Commerce & Ins., 267 S.W.3d 848, 861 (Tenn. Ct. App. 2008)

(citing State v. Black, 897 S.W.2d 680, 683 (Tenn. 1995)). The persuasiveness of an Attorney

General’s opinion is heightened where its legal conclusions have been consistently repeated. Id. As

this Court has noted, such opinions are “especially persuasive where . . . the State is a litigant arguing

for a more expansive statutory interpretation that it had previously disavowed - particularly where

that interpretation is one that has apparently never been asserted in any recorded case since the

disputed language was written . . . .” Id. Attorney General opinions, however, are not binding on

the courts. Black, 897 S.W.2d at 683. “[C]ourts are not required or obliged to follow them.”

Washington Cnty. Bd. of Educ. v. MarketAmerica, Inc., 693 S.W.2d 344, 348 (Tenn. 1985); see also

Tollett, 586 S.W.2d at 97-98 (rejecting opinions given by the Attorney General on the effect of the

1963 amendment of the franchise tax statute).

C. Films As Tangible Property

The first question before this Court is whether the rented films were tangible property Malco

utilized in the conduct of its principal business. As this Court noted at oral arguments, there is a

fundamental disconnect between the parties’ arguments on this issue. Commissioner framed the

initial question before this Court as whether the physical reels of film were tangible property that

Malco used to display motion pictures to its customers. Malco contended, to the contrary,

Commissioner sought “to tax a contractual right – Malco’s licenses to show movies.” The chancery

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court’s memorandum opinion reflects this disconnect; the court interchangeably described the

property at issue as both “movies and movie licenses” and “reels of movie film.”11

Commissioner did not purport to tax any intangible property rights which Malco possessed

from 1997-2003 or its “movie license fees.” Contrary to the assertions in Malco’s brief,

Commissioner has not asserted that Malco’s “movie license fees had to be calculated in one of four

categories of tangible property under Tenn. Code Ann. § 67-4-2108(a)(3) of the Franchise Tax

statute” or that Malco’s “movie license fees” were even includable within the corporation’s

minimum franchise tax base. Rather, Commissioner concedes for the purposes of this opinion that

Malco’s intangible property was not subject to inclusion in its minimum franchise tax base. We

therefore limit our initial consideration to whether the rented films were tangible property under the

franchise tax statute.

We conclude the rented films qualified as “tangible property” under any acceptable definition

of the term, including Malco’s proposed definition.12 A broad definition of tangible property would

include any property “[c]apable of being touched and seen; perceptible to the touch; capable of being

possessed or realized.” Black’s Law Dictionary 1494 (8th ed. 2004); see also Tenn. Code Ann. §

67-6-102(92)(A) (Supp. 2010) (defining tangible personal property under the sales tax statute as

“personal property that can be seen, weighed, measured, felt, or touched, or that is in any other

manner perceptible to the senses,” including “electricity, water, gas, steam, and prewritten computer

software”). A more narrow definition would include only “[p]roperty that has physical form and

characteristics.” Black’s Law Dictionary 1254 (8th ed. 2004). Malco proposes a definition similar

to the latter which would encompass “property such as a chair or watch which may be touched or

felt in contrast to a contract.” (Quoting Black’s Law Dictionary 1306 (5th ed. 1979)) (internal

quotation mark omitted). It is undisputed the physical reels of film were capable of being seen,

touched, felt, weighed, or measured. It is also undisputed the films possessed physical form.

11

Although the court stated one of the issues before it was “[w]hether the reels of movie film leased

by [Malco] during the audit periods are properly classified as tangible personal property within the meaning

of the franchise and excise tax statute,” the body of the opinion decided only that “movie license fees” were

intangible property. The court rejected the broad definition of tangible personal property under the sales tax

statute in favor of the more narrow definition set forth at Tennessee Code Annotated section 67-5-501, which

defined tangible personal property for purposes of the property tax statute as “personal property such as

goods, chattels, and other articles of value that are capable of manual or physical possession, and certain

machinery and equipment, separate and apart from any real property, and the value of which is intrinsic to

the article itself.” Tenn. Code Ann. § 67-5-501(12) (2006). The court reasoned movie license fees were

intangible because “their value does not arise from the ‘article,’ i.e. the film and reel.” This statement

nonetheless implied the film and reel amounted to articles of value that were capable of manual or physical

possession and, thus, tangible property. The court, however, decreed at the end of its opinion that “[t]he reels

of movie film leased by [Malco] during the relevant audit periods were not properly classified as tangible

personal property . . . .”

12

Commissioner concedes for the purposes of this appeal that Malco’s definition is “simple but

appropriate.”

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Commissioner therefore correctly characterized the films as “tangible property” when it assessed the

deficiencies at issue.

We disagree the tangible films should be classified as intangible property because the value

of the films’ intangible components greatly exceeded the value of the films’ physical materials. The

Tennessee Supreme Court addressed a nearly identical argument in Crescent Amusement Co. v.

Carson, 213 S.W.2d 27 (Tenn. 1948). Our supreme court described the issues before it in Crescent

as two-fold: (1) whether the rental of film was a rental of tangible personal property within the

meaning of the Sales Tax Law, and (2) whether the measure of the tax was the ““the gross proceeds

paid to the producer for the rental of the film print” or “the cost of the physical material in the film

print.” Crescent, 213 S.W.2d at 28. Under a nearly identical fact pattern, the court found the rented

films were tangible personal property. Id. at 29. The Crescent court rejected the argument that the

rental merely provided the theater operators “the privilege of using and exhibiting a copyrighted

production, and that this amount[ed] only to the exercise of an intangible property right.” Id. at 28.

The court reasoned:

There is scarcely to be found any article susceptible to sale or rent that is not the

result of an idea, genius, skill and labor applied to a physical substance. A loaf of

bread is the result of the skill and labor of the cook who mixed the physical

ingredients and applied heat at the temperature and consistency her judgment

dictated. A radio is the result of the thought of a genius, or of several such persons,

combined with the skill and labor of trained technicians applied to a tangible mass

of substance. An automobile is the result of all these elements, and of patents, etc.;

and so on, ad infinitum. If these elements should be separated from the finished

product and the sales tax applied only to the cost of the raw material, the sales tax act

would, for all practical purposes, be entirely destroyed. The material used in the

making of a phonograph record probably costs only a few cents. The voice of a

Caruso recorded thereon makes it sell for perhaps a dollar. To measure the sales tax

only by the value of the physical material in this phonograph record is to apply an

impossible formula.

Id. at 29. The Crescent court notably did not base its decision on the breadth of the statutory

provision defining tangible personal property. And the court did not, as Malco attempts to do here,

distinguish between the tangible and intangible components of the film rental for purposes of

valuation. We find the reasoning of Crescent persuasive on the undisputed facts before us.

This is not a case where the existence of a tangible medium was merely incidental to the

purchase or rental of intangible intellectual property. The Tennessee Supreme Court in Commerce

Union Bank v. Tidwell, 538 S.W.2d 405 (Tenn. 1976), concluded the purchase of computer software

transferred from seller to purchaser through a tangible medium was not the purchase of tangible

property. The Commerce Union court agreed with the taxpayer in that case “that while the

intellectual processes may be embodied in tangible and physical material, such as punch cards and

magnetic tapes, the logic or intelligence of the program is an intangible property right; and it is this

-17-

intangible property right which is acquired when computer software is purchased or leased.”

Commerce Union, 538 S.W.2d at 407. The Tennessee Supreme Court found a “crucial difference”

existed between the magnetic tapes used to transmit computer software from the seller to the

purchaser and the films at issue in Crescent:

In Crescent the tax was levied on the rental of a motion picture film. The film is

inherently related to the movie; without the film there could have been no movie. .

. . Magnetic tapes and cards are not a crucial element of software. The whole of

computer software could be transmitted orally or electronically without any tangible

manifestations of transmission.

Id. at 407-08 (citation omitted).

The Commerce Union court went on to distinguish the examples set forth in Crescent where

a purchaser has “no other viable method” of obtaining intangible intellectual property from the facts

of the case before it. Id. at 408. The court explained:

A magnetic tape is only one method whereby information may be transmitted from

the originator to the computer of the user. That same information may be transmitted

from the originator to the user by way of telephone lines, or it may be fed into the

user’s computer directly by the originator of the program.

When the information is transferred from the tape to the computer, the tape

is no longer of any value to the user; and it is not retained in the possession of the

user. The information on the tape, unlike the phonograph record, is not complete and

ready to be used at the time of its purchase. It must be translated into a language

understood by the computer. Once this information has been translated and

introduced into the computer and the tapes returned or the punch cards destroyed,

what actually remains in the computer is intangible knowledge; this is what was

purchased, not the magnetic tapes or the punch cards. Transfer of tangible personal

property under these circumstances is merely incidental to the purchase of the

intangible knowledge and information stored on the tapes.

Commerce Union, 538 S.W.2d at 408 (internal citations omitted). Our supreme court accordingly

held that the taxpayer had not purchased tangible personal property when it purchased computer

software, regardless of whether the intangible intellectual property constituting the software was

transferred to the taxpayer via some tangible medium. Id.

The rental of tangible property to Malco under the undisputed facts of this case was not

merely incidental to the provision of intangible intellectual property. In contrast with Commerce

Union, the rented physical films provided the only viable and/or permissible method of exhibiting

motion pictures in Malco’s theaters under the film agreements. The film agreements specifically

provided the manner in which a film exhibitor, including Malco, was permitted to exhibit motion

-18-

pictures to its customers. One of the agreements provided, for example:

25. CUTTING OR ALTERATION OF PRINTS. Exhibitor shall exhibit the

Picture in its entirety, without any intermission or interruption, and shall not

copy, duplicate, subrent or part with possession of any print thereof, nor shall

Exhibitor cut or alter the same, excepting to make necessary repairs thereto,

and Exhibitor shall return each print in the same condition as received,

reasonable wear only excepted.

If a film distributor failed or was unable to provide a suitable film, performance under the film

agreement was suspended for both parties until the breach was remedied. In the event of breach by

Malco, the distributors retained the right to repossess the film and Malco could no longer show the

motion picture. If a film was damaged, destroyed, lost, or stolen while in Malco’s possession, Malco

was required to pay the cost of replacement. Also, the film agreements ordinarily required Malco

to return its rented films to the distributors at the end of the specific engagements or forward the

films to other locations dictated by the distributors. Thus, Malco could not display motion pictures

in its theaters without utilizing the tangible films provided under the film agreements in the specific

manner provided in the films agreements.

The films in this case were akin to the design models at issue in Thomas Nelson, Inc. v.

Olsen, 723 S.W.2d 621 (Tenn. 1987), which were indispensable to the transfer of intangible

intellectual property. The taxpayer in Olsen was a Tennessee corporation that published Bibles and

other books. Olsen, 723 S.W.2d at 621. The taxpayer regularly employed an Illinois corporation

to design promotional concepts for the marketing of the taxpayer’s products. Id. The Illinois

corporation created several advertising design models during the progressive stages of promotional

development, charging a separate fee for each model. Id. When the taxpayer approved a design, a

third party received an appropriately developed model and produced the actual promotional material

based on that model. Id. The parties did not dispute in Olsen that the design models “were capable

of being ‘seen, weighed, measured, felt, or touched’” under the controlling language of the use tax

statute. Id. at 622. The taxpayer nevertheless argued the design models were not tangible personal

property subject to the use tax because they “constituted a minute part of what was actually a

contract to provide a service.” Id.

The Tennessee Supreme Court concluded the design models were tangible property subject

to the use tax because they were a “crucial element” of the contracts to create advertising concepts.

Id. at 621. The court emphasized the design models “where the only method” by which the taxpayer

could review the advertising concepts:

Without these models, Taxpayer would have had no way to correct mistakes or

change format in the promotional materials that it commissioned; without these

models, Taxpayer would not have been able to make an informed decision on

whether the proposed ad project was worthy of completion; without these models,

Taxpayer would not have even known what advertising idea had been created until

-19-

the end product was produced.

Id. at 624. This was important to the Olsen court because it demonstrated the models “were more

than merely incidental by-products to the purchase of intangible intellectual property.” Id. “Rather

these models were a crucial, i.e. necessary, element in the editing process that was structured so as

to create promotional materials that acceptably publicized Taxpayer’s product to consumers.” Id.

The court concluded the design models “were inherently related to the commissioned advertising

ideas-these models were the very embodiment of the ideas.” Id.

The Olsen court rejected an argument that the transfer of the design models was merely

incidental to the purchase of intangible intellectual property because the “commissioned ideas may

have been transmittable electronically through computers in a process referred to as ‘computer-aided

design.’” Id. (emphasis added). The court reasoned:

It is true that the Commerce Union Court noted that the Commissioner of Revenue

had apparently not attempted to tax transactions whereby the taxpayer’s computers

had been programmed by virtue of electronic transmissions over telephone lines.

This fact was deemed relevant because it illustrated that magnetic tapes and cards

were not the only method whereby the purchased information could be transmitted

from the originator to the user. The tapes and cards were not perceived, therefore,

to be a crucial element of the allegedly taxable transactions.

Whatever capabilities for the electronic transmission of advertising ideas may

have existed during the relevant audit period, the testimony is clear that Taxpayer had

no such capability. The only method by which Taxpayer could review the

commissioned ideas was through the tangible personal property acquired in the

transactions presently at issue. Once again, we believe that this fact illustrates the

crucial role that these models played in the contracts bargained for by Taxpayer.

Olsen, 723 S.W.2d at 624-25. The Olsen court accordingly held that the design models were

tangible property subject to the use tax, even though they embodied intangible intellectual ideas, and

subjected the “entire costs of these transactions to taxation.” Id. at 625.

The physical films at issue were equally inseparable from their intangible intellectual

property components. The fact that Malco may now receive the motion pictures via electronic

transmission is irrelevant under the undisputed facts of this case. Malco submits in its brief:

Movies currently may be transmitted to theaters through satellite transmission by

electronic signal with no tangible manifestation of that transmission. Movies also

now are transmitted to theaters through digital computer hard drives and access to the

movie is provided through electronic transmission. In the case of computer hard

drive transmission, once the contents of the hard drive are downloaded onto the

computer server, the hard drive is not used except as a backup in case the movie file

-20-

becomes corrupted in some way. These means of transmitting movies are well

established, widespread, well publicized, and have been growing.

It is undisputed, however, that Malco did not use any of the above methods of transmission during

the tax years in dispute. Rather, Malco rented physical films which it utilized in the conduct of its

principal business, and the delivery, display, and return of these films unaltered was vital to Malco’s

contractual performance under the film agreements. The question of whether this Court would reach

a different result in a case involving the rental and display of digitally transferred motion pictures

is not before us.

The films Malco obtained under the film agreements were tangible property for purposes of

taxation under the franchise tax statute. The rented films qualified as tangible property under any

acceptable definition of the term, including Malco’s proposed definition. This, in our view, is

enough to conclude the films were includable within Malco’s minimum franchise tax base under the

plain language of the franchise tax statutes at issue. To the extent decisions evaluating the purpose

or object of a transaction when determining whether the property obtained thereunder was tangible

or intangible apply under the franchise tax, we conclude the rented films were inherently related, and

not merely incidental, to the display of motion pictures in Malco’s theaters. We find no basis upon

which to conclude the rented films were intangible property.

Our determination that the rented films were tangible property under the franchise tax statutes

at issue nevertheless leaves two related questions for consideration: (1) whether the films were

taxable tangible property, and (2) whether the gross costs paid under the film agreements equaled

the “net annual rental” associated with the films. The latter issue goes directly to the heart of

Malco’s argument in this appeal that Commissioner attributed an unjustifiably high value to the

physical films when determining Malco’s minimum franchise tax base. We find Malco’s argument

regarding the taxation of its “movie license fees” best viewed as an attack on whether Commissioner

improperly calculated the “net annual rental” attributable to the films. This issue is only relevant,

however, if we first determine the rented films were taxable tangible property.

D. Rented Films As Taxable Tangible Property

The question of whether rented films were taxable tangible property during the applicable

tax years requires this Court to consider three sub-issues: (1) whether the legislature intended to

require inclusion of all rented tangible property within a corporation’s franchise tax base when it

amended the franchise tax statute following Memphis Peabody, (2) whether rented films qualified

as “equipment,” and (3) whether rented films were “equipment” or “mobile equipment” for the

purposes of valuation. We will address these sub-issues in turn.

i. Is all non-exempt, rented tangible property subject to inclusion in a corporation’s

minimum franchise tax base?

The chancery court held that only property squarely falling within the four categories of

-21-

tangible property listed in Tennessee Code Annotated section 67-4-2108(a)(3), as strictly construed

against the taxing authority, were includable within Malco’s minimum franchise tax base.

Commissioner submits the chancery court misconstrued Tennessee Code Annotated section 67-4-

2108(a)(3) as impliedly exempting certain types of rented property from a corporation’s minimum

tax base. Commissioner describes the four categories of Tennessee Code Annotated section 67-4-

2108(a)(3) as providing only for the valuation of tangible property, not specifically defining which

types of tangible property are subject to inclusion. According to Commissioner, the chancery court’s

approach frustrates the purpose of an amendment enacted to close a loophole that allowed the

exclusion of rented property from a corporation’s franchise tax base. Commissioner concludes that

all rented property is subject to inclusion in a corporation’s franchise tax base, including rented

films. From Commissioner’s perspective, the relevant question in this appeal is not whether rented

movie reels were subject to the franchise tax but what value should Malco have attributed to the

rented property when determining its minimum franchise tax base.

Malco disagrees, relying heavily on the maxim that tax statutes are strictly construed against

the taxing authority. Malco argues the chancery court properly applied a strict construction of

Tennessee Code Annotated section 67-4-2108(a)(3) to exclude the films as non-taxable tangible

property. Malco maintains that only property falling within one of the four categories of rented

property, as strictly construed, is subject to inclusion in a corporation’s franchise tax base. Because

a motion picture film is not realty, machinery, or equipment of any kind under a strict construction

of these terms, Malco argues the rented films at issue were not subject to inclusion in its minimum

franchise tax base. Malco concludes there is no basis in the franchise tax statute, its legislative

history, or case law to support the notion that a corporation must include all leased property within

its franchise tax base.

The franchise tax statutes at issue, similar to the 1963 amendment, each provided that the

measure of a corporation’s franchise tax base “shall in no case be less than the actual value” of

property owned or used in Tennessee, whether limited to real and tangible property or not. These

statutes further provided that “the value of rented property used shall be determined by multiplying

the net annual rental” by certain multiples. These provisions demonstrated a legislative intent to

include, at the very minimum, the actual value of a corporation’s non-exempt, rented tangible and

real property within its franchise tax base during the tax years at issue. The plain purpose of the

1963 amendment and subsequent provisions retaining similar language was to ensure the minimum

franchise tax base of a corporation in no case reflected less than the actual value of all property the

corporation owned or used in Tennessee. Commissioner’s construction of the statute is the only

construction consistent with this purpose.

The 1963 amendment to the franchise tax statute served two purposes: (1) it “provided for

the inclusion of leased or rented property” and (2) it “contained a formula for its valuation.” Tollett,

586 S.W.2d at 98. Given the language used elsewhere in the statute, we are unpersuaded by Malco’s

argument that the General Assembly devised the categories set forth in Tennessee Code Annotated

section 67-4-2108(a)(3) to limit the types of property a taxpayer must include in its franchise tax

base. We instead agree with Commissioner that “[t]o construe the ‘formula for valuation’ of leased

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property as actually providing additional loopholes for all items not expressly enumerated . . . is to

ignore the clear intent of the Legislature.” Any doubt concerning the meaning of the statute results

from an artful construction of the taxpayer seeking to avoid the tax. Courts, however, are not bound

to adopt an artful or forced construction that would frustrate the plain purpose of a tax statute. See

Bergeda, 167 S.W.2d at 340 (stating that “the plain purpose of an inheritance tax statute is to require

the payment of a tax by those who enjoy the privilege of receiving property from the estates of

decedents, and the courts should so construe it as not to frustrate the power of a state to collect it”).

We find no indication that the valuation categories were intended to limit which property was subject

to inclusion in a corporation’s minimum franchise tax; rather, the categories merely provided the

methodology for valuing all rented real or tangible property utilized in a Tennessee taxpayer’s

principal business.

Malco’s construction of the statute would impermissibly allow a corporation to calculate its

minimum franchise tax base to include less than the value of the real and tangible personal property

a corporation owned or used in Tennessee. Reading the statute as Malco suggests would create the

same type of loophole the legislature sought to close following Memphis Peabody. If Malco owned

the films at issue, the tangible property would clearly fall within the plain meaning of “property

owned” in Tennessee. Because the four categories listed in Tennessee Code Annotated section 67-4-

2108(a)(3) relate only to the valuation of rented property or “property used” in Tennessee, Malco

would be unable to rely on a strict construction of Tennessee Code Annotated section 67-4-

2108(a)(3) as providing a basis upon which to avoid inclusion of the films within its minimum

franchise tax base. Thus, the value of the films would be includable within Malco’s franchise tax

base if owned but not if rented. Such an interpretation would permit different tax treatment for the

same property depending on its ownership status. The legislature enacted the 1963 amendment,

however, to place rented and owned property on an equal footing under the franchise tax.

We acknowledge Malco did not rent the films at issue in an attempt to escape franchise tax

liability. The 1965 opinion suggested the franchise tax statute should not apply to rented property

that a corporation cannot own. The plain language of the statutes at issue, however, provided no

such exception; the statutes do not purport to limit their application to solely those instances where

a taxpayer attempted to avoid the franchise tax through the rental of property. The statutes instead

reflected an intent to include the actual value of rented property within a corporation’s minimum

franchise tax base in all cases except where expressly exempted. Malco’s construction of Tennessee

Code Annotated section 67-4-2108(a)(3) would encourage taxpayers to rent property not squarely

falling within the four categories of Tennessee Code Annotated section 67-4-2108(a)(3), as strictly

construed, in order to minimize franchise tax liability. Because such a construction would frustrate

the plain purpose of the statutory provision requiring inclusion of rented property within a

corporation’s minimum franchise base, we decline to adopt it. Thus, we will construe the four

categories of Tennessee Code Annotated section 67-4-2108(a)(3) as encompassing all forms of

rented tangible property not specifically exempted.

ii. Are rented films “equipment”?

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Our conclusion that Tennessee Code Annotated section 67-4-2108(a)(3) requires inclusion

of all rented tangible property within a corporation’s franchise tax base controls our resulting

construction of the term “equipment.” Commissioner contends the films qualified as equipment

Malco must own or rent to conduct its business in Tennessee, describing the films as “physical

resources that equip the theater owner with the tools necessary to operate the theater.”

Commissioner argues: “Like the seats, screens, and projector, the films are equipment that Malco

must have to run its business.” Malco rejects this position, pointing to an affidavit stating “the

movies are placed on a piece of equipment - a projector - and not used as a piece of equipment.”

Malco essentially argues the films equip the equipment, but the films are not equipment.13

The plain meaning of “equipment” broadly includes any “articles or implements used for a

specific purpose or activity” in connection with a corporation’s business. Black’s Law Dictionary

578 (8th ed. 2004); see also Random House Unabridged Dictionary 656 (2d ed. 1993) (defining

equipment as “anything kept, furnished, or provided for a specific purpose”); but see Tibbals

Flooring Co. v. Olsen, 698 S.W.2d 60, 62 (Tenn. 1985) (citation omitted) (internal quotation marks

omitted) (defining equipment as “the physical resources serving to equip a person [such as] the

implements (as machinery or tools) used in an operation or activity . . . all the fixed assets other than

land and buildings of a business enterprise”), superseded by statute as recognized in AFG Indus.,

Inc. v. Cardwell, 835 S.W.2d 583, 585 (Tenn. 1992) (recognizing the legislature amended the

statutory provision at issue following Tibbals Flooring Co. v. Olsen, 698 S.W.2d 60 (Tenn. 1985)

to include “equipment with all associated parts, appurtenances, and accessories”); KTVO, Inc. v.

Bair, 255 N.W.2d 111, 113 (Iowa 1977) (holding payments for the right to use a television

syndicator’s tapes, films and records pursuant to a license agreement were not taxable as “equipment

rental” under an Iowa use tax statute). We conclude this definition comports with the purpose of the

amendment requiring inclusion of rented property within a corporation’s minimum franchise tax

base, whereas a more narrow definition would frustrate the legislature’s intent. Because the films

13

Malco points to the affidavit of Bill Blackburn, Vice-President of Malco, stating the corporation

did not use the films as "furniture, equipment, or office machinery" as dispositive of this issue. That affidavit

states:

4. Malco does not use these movies as furniture, equipment, or office machinery.

Malco does not use the movies in any was as furniture - to sit on, to eat on, to write on as

you would a desk or, so far as I know, in any way like a piece of furniture. To the contrary,

the movies are placed on a piece of equipment - a projector - and not used as a piece of

equipment. These movies are shown from a projection room so that images are projected

onto a screen - they are not used in our offices as machinery in any way.

Malco argues this affidavit establishes as “undisputed fact” that the films were not furniture, office

machinery or equipment. The question of whether the films were any of these things is a legal question.

Malco cannot remove the legal question from the dispute by providing a conclusory affidavit supporting its

position. See Gardner v. Insura Prop. & Cas. Ins. Co., 956 S.W.2d 1, 3 (Tenn. Ct. App. 1997) (citing Riggs

v. Burson, 941 S.W.2d 44, 48 (Tenn. 1997)).

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were articles used for a specific activity in connection with Malco’s principal business, we conclude

the films were equipment.

We disagree the rule of ejusdem generis should limit the term “equipment” in

67-4-2108(a)(3)(C) to “office equipment” because such a construction would frustrate the purpose

of statutory provisions retaining the language of the 1963 amendment. Some tangible property, if

rented, would not be included within the franchise tax base because it is not strictly office equipment

under Malco’s line of reasoning. A movie theater, for example, presumably would not pay franchise

taxes on rented soda machines, projection systems, or projection screens. These items are not real

property, they are not machinery and equipment used in the manufacturing and processing as

contemplated by Malco, they are not furniture, office machinery or office equipment as strictly

construed, and they are not delivery or mobile equipment under the definition set forth below. The

same result would occur in other business contexts, creating an artifice by which businesses could

avoid paying the franchise tax based on the actual value of property used to conduct its business

within this State. Malco’s interpretation would again result in the taxation of non-enumerated items

if they were owned but not if they were rented. Such an interpretation is inconsistent with the plain

purpose of the 1963 amendment to the franchise tax statute and subsequent provisions retaining

substantially similar language. The 1963 amendment was intended to close the loophole which

previously allowed the exclusion of leased or rented property from a corporation’s franchise tax base.

We should not now partially re-open that loophole under the guise of statutory construction.

iii. Are rented films “equipment” or “mobile equipment” for valuation purposes?

The question that remains is whether the films are “equipment” or “mobile equipment” for

valuation purposes. Commissioner contends “general ‘equipment’ such as the reels of film [Malco]

uses to operate its theaters is most logically classified under the category of ‘furniture, office

machinery, and equipment,’ while the separate category of ‘delivery or mobile equipment’ is

reserved for delivery trucks, portable generators, etc., and other truly ‘mobile equipment.’”

Commissioner submits that “[c]ategorizing films as ‘mobile or delivery equipment’ merely because

it is possible to move them would essentially eliminate any category but ‘mobile or delivery

equipment,’ a result inconsistent with legislative intent.” According to Commissioner, [i]nterpreting

the leased reels of film to be ‘mobile equipment’ because they can be moved would effectively

render the term ‘equipment’ in category (C) ‘furniture, office machinery and equipment’ almost

entirely useless since all equipment can be relocated by some means.” Further, “[c]lassifying any

item that a taxpayer could potentially move as ‘delivery or mobile equipment’ would essentially

eliminate all but that one category for all tangible property.” Malco argues, on the other hand,

Commissioner’s approach “would completely ignore the use of the word ‘mobile’ in subpart D of

Tenn. Code Ann. § 67-4-2108(a)(3).”

The franchise tax statute does not define “mobile equipment.” Webster’s Ninth New

Collegiate Dictionary defines the adjective “mobile” in several ways, including: (1) “capable of

moving or being moved;” (2) “changeable in appearance, mood, or purpose;” and (3) “marked by

the use of vehicles for transportation.” Webster’s Ninth New Collegiate Dictionary 762 (1991).

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Each party advances one of the principal definitions of “mobile” to make its case. Malco advocates

a definition of “mobile equipment” as equipment that is capable of moving or being moved.

Commissioner argues, on the other hand, this Court should define “mobile equipment” as equipment

such as vehicles used for transportation and similar items such as generators that are specifically

designed for portable use. Although we agree Commissioner’s definition is the most logical, we

disagree it applies under the circumstances. The term “mobile equipment” is ambiguous, and we are

without any overarching statutory purpose or legislative history that provides guidance on which of

the term’s definitions we should accept as controlling. We must therefore liberally construe “mobile

equipment” as used in Tennessee Code Annotated section 67-4-2108(a)(3)(D) in favor of the

taxpayer.

We hold that “mobile equipment” is any equipment that is capable of being moved on a

regular basis to further a taxpayer’s business operations. We find this definition appropriate because

its ensures we do not render a portion of the statute superfluous by construing “mobile equipment”

as absolutely any equipment that is capable of being moved at any time, but it also construes the

statute liberally in favor of the taxpayer. The effect of our construction is that most “equipment” will

typically fall in the more narrowly defined category of “mobile equipment” for the purposes of

valuation. Although our construction limits the type of tangible property that will qualify only as

“equipment,” it nevertheless retains a broad, catch-all category for tangible property that is

permanently or semi-permanently attached to a corporation’s real property. We therefore ensure,

consistent with the purpose of the franchise tax statute, that all tangible property is capable of

classification.

The rented films qualified as “mobile equipment” for the purposes of valuation in this case.

The undisputed facts establish the films were capable of being moved from one projector to another

and from one theater to another in the conduct of Malco’s business operations. We accordingly

conclude Commissioner erroneously used a multiplier of 2 when valuing Malco’s rented tangible

property for purposes of its minimum franchise tax base. A proper valuation of Malco’s minimum

franchise tax base required the inclusion of the net annual rental costs associated with the films

multiplied by a factor of 1. In order to determine the resulting deficiencies, we must address whether

the Department properly calculated the net annual rental costs associated with Malco’s films.

E. Valuation

The chancery court did not reach the issue of whether the gross amount paid under the film

agreements to procure and utilize the films constituted their “net annual rental” for valuation

purposes. The franchise tax statutes governing this dispute required inclusion of “the value of rental

property” in a corporation’s minimum franchise tax base. Tenn. Code Ann. § 67-4-2108(3) (Supp.

2000); Tenn. Code Ann. § 67-4-2108(a)(3) (Supp. 1999); Tenn. Code Ann. § 67-4-906(a)(3) (1998).

The “value of rental property” equaled the “net annual rental” multiplied by one of four designated

factors discussed above. Tenn. Code Ann. § 67-4-2108(3) (Supp. 2000); Tenn. Code Ann. § 67-4-

2108(a)(3) (Supp. 1999); Tenn. Code Ann. § 67-4-906(a)(3) (1998). The franchise tax statutes

defined “net annual rental” as “the gross annual rental paid by the taxpayer, less the gross rental

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received by the taxpayer for sub-rental.” Tenn. Code Ann. § 67-4-906(a)(4) (1998); Tenn. Code

Ann. § 67-4-2108(a)(6)(D) (Supp. 1999). When it assessed deficiencies against Malco, the

Department equated the gross amount paid under the film agreements with the gross annual rental

paid by the taxpayer.14

Malco contends the assessed deficiencies improperly included the value of Malco’s

intangible property within the corporation’s minimum franchise tax base. Malco argues the value

of the physical film and reels must be separated from the value of the motion picture licenses.

Although Malco does not attach a precise value to the films, it describes this value as de minimis

when compared with the costs to obtain the intangible licensing right to display the films. Malco

essentially argues a proper valuation of the net annual rental associated with the physical films

includes only the value of the physical materials composing the film prints.

The Tennessee Supreme Court rejected a similar argument in Crescent. In addition to

considering whether rented films were tangible personal property under the sales tax statute, the

Crescent court considered whether the correct measure of the sales tax was “the gross proceeds paid

to the producer for the rental of the film print” or “the cost of the physical material in the film print.”

Crescent, 213 S.W.2d at 28. The court cited with approval two cases which are pertinent to our

decision: United Artists Corp. v. Taylor, 7 N.E.2d 254 (N.Y. 1937), and Saverio v. Carson, 208

S.W.2d 1018 (Tenn. 1948). The Taylor court, when confronting a similar question, concluded the

transfer from distributor to exhibitor of a film and a license to use the film constituted a single

transaction because “[t]he license to exhibit without the transfer of possession would be valueless.”

Crescent, 213 S.W.2d at 28 (quoting Taylor, 7 N.E.2d at 256) (internal quotation marks omitted).

Likewise, the Saverio court held that a construction of Tennessee’s sales tax act permitting a laundry

operator to divide between the rental charges associated with a tangible product, a clean diaper, and

the services of collecting, delivering and laundering the diapers would confuse the administration

of the sales tax statute and render the law unworkable. Saverio, 208 S.W.2d at 1019.

The Crescent court found the reasoning of these cases persuasive, noting that adopting the

laundry operator’s interpretation in Saverio would have effected a “destruction of the statute.”

Crescent, 213 S.W.2d at 29. Our supreme court accordingly held that the correct measure of the

sales tax was the gross amount the theater operators paid to rent the films. Id. Even though the

intangible elements of the rented films were of significantly greater value than the physical materials

composing the films, the Tennessee Supreme Court did not prorate the gross rental to correspond

only with the physical materials used to create the film or to exclude the value of any license

conveyed as a result of the rental.

We similarly hold the value of rented films under the franchise tax statute is not limited to

the costs of the physical materials composing the film. The suggested limitation of the rental fees

attributable to tangible property to encompass only the comparatively insubstantial value of the

physical components of the tangible property would effectively destroy the franchise tax as applied

14

The films agreements prohibited sub-rental of the films.

-27-

to rented tangible property. A corporation that rents portable generators subject to the franchise tax,

for example, enters into the rental agreement to obtain both the possession of the tangible property

and the right to utilize the property in its principal business. The tangible and intangible property

rights provided in exchange for the rental fees are inherently related. To value the “net annual

rental” of a portable generator based solely upon the portion of the fees attributable to its physical

components would require application of an “impossible formula.”

The situation in this case is no different. Both the physical reels of film as well as the

intangible property rights to display them were essential to the exhibition of motion pictures in

Malco’s theaters. The tangible property obtained under the films agreements was valueless without

the right to use the property and vice versa; the two were inescapably intertwined. This was

especially true where the film agreements placed great emphasis on the relation between the license

to display the films and the physical films provided. We accordingly hold that the “net annual

rental” attributable to the films equaled the gross fees paid under the film agreements to procure and

use the films in Malco’s principal business. Although these fees ensured Malco acquired both the

physical films and the intangible rights to display the films, attributing to the films a net annual rental

solely based on the value of the physical materials composing the tangible item would cause a

destruction of the minimum franchise tax provision. The Department therefore correctly equated the

rental value of the films with the gross amount paid under the film agreements, which it should have

multiplied by a factor of one when determining the correct amount of taxes due.

F. Waiver

The next question before this Court is whether we should affirm the grant of summary

judgment to Malco regardless of whether the films were taxable tangible property because

Commissioner waived argument on a dispositive basis of the chancery court’s decision. As Malco

correctly asserts, Commissioner did not present as an issue on appeal whether the chancery court

erroneously held Tennessee Code Annotated section 67-1-108 prohibited enforcement of Malco’s

position and Commissioner’s principal brief did not contain an argument on this precise issue.

Malco therefore argues Commissioner waived this issue, providing a basis to affirm the chancery

court regardless of our decision on the more weighty questions concerning the nature and taxability

of rented films under the franchise tax statutes. Malco argues the chancery court’s holding on this

issue, if undisturbed, would provide an independent basis to affirm the judgment regardless of

whether the rented films are taxable, tangible property. Commissioner disagrees, contending in his

reply brief that waiver did not occur because he raised and briefed the “actual issue” before this

Court: “whether the value of Malco’s leased films must be included in the minimum franchise tax

base pursuant to the requirements of the applicable statutes.”

If a party does not raise or adequately argue an issue on appeal, the issue is waived.

Childress v. Union Realty Co., 97 S.W.3d 573, 578 (Tenn. Ct. App. 2002) (citations omitted). This

rule extends to situations in which a party does not present an issue for review but nonetheless argues

the issue in a principal or reply brief. See id. As Justice Holder has explained, “appellate courts do

not sit as self-directed boards of legal inquiry and research, but essentially as arbiters of legal

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questions presented and argued by the parties before them. . . . ” State v. Northern, 262 S.W.3d 741,

767 (Tenn. 2008) (Holder, J., concurring in part and dissenting in part) (quoting Carducci v. Regan,

714 F.2d 171, 177 (D.C. Cir. 1983)) (internal quotation marks omitted). Thus, “appellate courts may

properly decline to consider issues that have not been raised and briefed in accordance with the

applicable rules.” Waters v. Farr, 291 S.W.3d 873, 919 (Tenn. 2009) (citing State ex rel. D’Amore

v. Melton, 212 S.W.2d 375, 376 (Tenn. 1948)). “It is not the role of the courts, trial or appellate, to

research or construct a litigant’s case or arguments. . . .” Sneed v. Bd. of Pro’l Responsibility, 301

S.W.3d 603, 615 (Tenn. 2010). It is likewise not the role of the courts, trial or appellate, to

determine which issues a litigant should present for appellate review. See Tenn. R. App. 27(a)(4),

(b); Tenn. R. App. 13(b). We agree Commissioner raised and argued on appeal the two issues most

heavily disputed before the chancery court but that does not excuse his waiver of a third, controlling

issue. Commissioner did not raise or argue as an issue in his principal brief whether the chancery

court erroneously applied Tennessee Code Annotated section 67-1-108 to the undisputed facts of this

case. Commissioner therefore waived this issue, which we agree would provide an independent

basis to affirm the chancery court’s decision.

We will nevertheless reach the merits of this issue. Appellate courts maintain discretion to

consider issues not properly presented on appeal. Waters, 291 S.W.3d at 881 n.10 (citing Tenn. R.

App. P. 13(b)). Rule 13 of the Tennessee Rules of Appellate Procedure provides that an appellate

court “may in its discretion consider other issues in order, among other reasons: (1) to prevent

needless litigation, (2) to prevent injury to the interests of the public, and (3) to prevent prejudice to

the judicial process.” Tenn. R. App. P. 13(b); Waters, 291 S.W.3d at 881 n.10; Burk v.

RHA/Sullivan, Inc., 220 S.W.3d 896, 902-03 (Tenn. Ct. App. 2006) (citation omitted). The Advisory

Commission Comment to subdivision (b) of Rule 13 explains:

This subdivision deals with the very difficult question of when an appellate court

should consider an issue not raised by the parties. Generally speaking, control over

the issues should reside in the parties, not in the court. Accordingly, this subdivision

provides that review will typically extend only to the issues set forth in the briefs.

Only the absence of subject-matter jurisdiction, whether at the trial or appellate level,

must be considered by the appellate court regardless of whether it is presented for

review. Cases appealed to the wrong appellate court must be transferred pursuant to

Rule 17 of these rules. In all the other situations described in this subdivision, the

appellate court has discretion to decide whether it will consider a matter not raised

by the parties. It is intended that this discretion be sparingly exercised.

Tenn. R. App. P. 13 advisory comm’n cmt. subdivision b. While enforcing the Department’s waiver

of this issue would provide a convenient basis for resolution of this appeal, we conclude in our

discretion the factors set forth in Rule 13 support consideration of this issue on the merits. Although

we rarely employ Rule 13 to consider issues not properly presented, we find consideration of this

issue particularly appropriate where Malco briefed the issue in its appellee’s brief and Commissioner

briefed the issue in his reply brief.

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G. The 1965 Opinion As Public Policy

The final question before this Court is whether the undisputed facts demonstrated that

inclusion of rented films within Malco’s franchise base constituted a change in policy Commissioner

could not enforce retroactively to the tax years in question. Tennessee Code Annotated section 67-1-

108 provided during the time period relevant to this appeal:

If the commissioner changes the policy of the department as to the taxability of any

privilege, such policy change shall be applied to the exercise of such privileges

occurring after the date of such policy change only, unless otherwise provided by

law.

Tenn. Code Ann. § 67-1-108 (1994); Tenn. Code Ann. § 67-1-108 (1998); Tenn. Code Ann. § 67-1-

108 (2003).

Malco contends that the chancery court correctly determined the 1965 opinion of the

Tennessee Attorney General’s Office represented the established policy of the Department. From

Malco’s perspective, the decision to include rented films within its franchise tax base directly

contravened the 1965 opinion and, therefore, constituted a change in policy. Malco argues

Commissioner could not retroactively enforce the change in policy to the years in question.

Commissioner, in his reply brief, wholly disagrees with Malco’s characterization of the 1965 opinion

as the established policy of the Department. Commissioner submits there is no factual basis to

support the conclusion that the 1965 opinion was the policy of the Department and that “merely

issuing an assessment after the Taxpayer has gotten away with noncompliance for years in the past

is not a ‘policy’ change as contemplated by Tenn. Code Ann. § 67-1-108.” Commissioner adds that

“properly enforcing the tax law is not a ‘policy’ decision – it is the statutory duty of the Department

and there is no discretion to choose to follow the law or not.”

We conclude the undisputed facts do not demonstrate the 1965 opinion served as the policy

of the Department as to the taxability of rented films. Malco has pointed this Court to no authority

supporting a finding that the 1965 opinion, by its mere issuance, established the policy of

Department concerning the taxability of rented films under current or prior franchise tax statutes.

Tennessee Code Annotated section 67-1-108 implicitly recognizes Commissioner is the executive

official, not the Attorney General, charged with establishing and changing the policy of the

Department as to the taxability of any privilege. It is consistent with Tennessee Code Annotated

section 67-1-102, which recognizes Commissioner’s powers to perform the duties imposed in the

tax code, Tenn. Code Ann. § 67-1-102(a) (Supp. 2010); and Tennessee Code Annotated section 67-

1-101, which provides Commissioner “all such incidental powers as may be necessary to carry out

and effectuate the purposes” of the tax code, Tenn. Code Ann. § 67-1-101(b) (2006). The Attorney

General’s duties related to the implementation of tax policy, on the other hand, are limited to

providing legal advice and written legal opinions on matters falling within the discharge of

Commissioner’s official duties. Tenn. Code Ann. § 8-6-109(5), (6) (Supp. 2010). Thus, although

the Attorney General is vested with authority over “[t]he trial and direction of all civil litigated

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matters and administrative proceedings in which the state of Tennessee or any officer, department,

agency, board, commission or instrumentality of the state may be interested[,]” Tenn. Code Ann. §

8-6-109(b)(1); we cannot agree with the suggestion that an opinion providing legal advice to

Commissioner ipso facto establishes the policy of the Department as to the taxability of any

privileges discussed therein.

The fact that Commissioner has never publicly repudiated the conclusion of 1965 opinion

regarding the taxability of rented films is irrelevant because Malco has not demonstrated the 1965

opinion represented the policy of the Department in the first instance. Malco submits the 1965

opinion “has remained the announced policy of Commissioner for the past forty-five years” but

provides no undisputed facts to support this assertion.15 The undisputed facts in the record do not

establish Commissioner relied upon the 1965 opinion as the policy of the Department, incorporated

the 1965 opinion as the policy of the Department, informed corporate taxpayers the 1965 opinion

represented the policy of the Department, or otherwise applied the reasoning of the 1965 opinion in

a manner that would support a conclusion that it amounted to the policy of the Department.

Although the undisputed facts establish Department did not question Malco’s previous treatment of

the rented films after an unspecified number of prior audits, we are without information on the

circumstances surrounding the non-inclusion of the rented films. We are unable, for example, to

consider how many occasions the Department affirmed Malco’s treatment of the rented films after

audit or whether the Department expressly acknowledged Malco’s exclusion of the rented films from

its minimum franchise tax base. We also have no basis upon which to decide whether Commissioner

declined to question Malco’s exclusion of the rental fees from its minimum franchise tax base as a

matter of error or rather “pursuant to a ‘policy’ with statewide application.” See Misenheimer Saw

& Tool, Inc. v. Huddleston, 03A01-9406-CH-00226, 1994 WL 652155, at *7 (Tenn. Ct. App. Nov.

21, 1994).

Moreover, the undisputed facts give reason to conclude Commissioner may have effectively

departed from the prior policy of the 1965 opinion when issued its first notice of assessment against

Malco in 2001. “It is possible for officials charged with the interpretation and administration of

revenue laws to change their interpretations and re-examine them, despite previous interpretation and

construction extending over a period of many years.” Illinois Cent. Gulf R.R. v. State, 805 S.W.2d

746, 749 (Tenn. 1991) (citing Carr v. Chrysler Credit Corp., 541 S.W.2d 152, 155 (Tenn. 1976)).

Although Tennessee Code Annotated section 67-1-108 prohibits retroactive enforcement of such

changes, Commissioner is permitted to enforce a new interpretation that amounts to a change in

policy on a prospective basis. The undisputed facts, however, do not address whether Commissioner

took any actions that would permit enforcement of the allegedly new policy against Malco for some

or all of the tax years in dispute. It is therefore not entirely clear whether and to what extent

Tennessee Code Annotated section 67-1-108 prohibited the Department from including the value

of the rented films within its separate assessments. Because genuine issues of material fact preclude

15

Neither Malco’s memoranda at summary judgment nor its appellate brief cite any evidentiary

support for the assertion that the 1965 Attorney General’s opinion has been established policy of

Commissioner for decades.

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the grant of summary judgment in favor of either party on this issue, we reverse the chancery court’s

decision.

V. Conclusion

We reverse the decision of the chancery court, grant Commissioner partial summary

judgment, grant Malco partial summary judgment, and remand for further consideration consistent

with this opinion. Costs of this appeal are taxed to the appellee, Malco Theaters, Inc., for which

execution may issue if necessary.

_________________________________

DAVID R. FARMER, JUDGE

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