The opinion
IN THE COURT OF APPEALS OF TENNESSEE
AT NASHVILLE
January 30, 2001 Session
IN THE MATTER OF: ALL ASSESSMENTS,
REVIEW OF AD VALOREM ASSESSMENTS OF
PUBLIC UTILITY COMPANIES FOR TAX YEAR 1999
IN THE MATTER OF: ALL ASSESSMENTS,
REVIEW OF AD VALOREM ASSESSMENTS OF
PUBLIC UTILITY COMPANIES FOR TAX YEAR 2000
Appeal from the Tennessee State Board of Equalization
No. None
Nos. M2000-00399-COA-R12-CV & M2000-03117-COA-R12-CV - Filed September 14, 2001
In these consolidated cases, a consortium of counties and cities appeals the actions of the Tennessee
State Board of Equalization in reducing public utility assessments by fifteen per cent.
Acknowledging that all sub-constitutional issues involved in the cases have been foreclosed by the
decision of the Tennessee Supreme Court in In Re: All Assessments 1998, No. M1998-00243-SC-
R11-CV, 2000 WL 1710174 (Tenn. Nov. 16, 2000), Appellants challenge the constitutionality of
Tennessee Code Annotated section 67-5-903(f) and section 67-5-1302(b)(1). We hold both sections
of the Code to be constitutional and affirm the decision of the Tennessee State Board of
Equalization.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Tennessee State Board of
Equalization Affirmed
WILLIAM B. CAIN , J., delivered the opinion of the court, in which BEN H. CANTRELL , P.J., M.S. and
WILLIAM C. KOCH , JR., J., joined.
Jean Dyer Harrison, Nashville, Tennessee, for the appellants, Tennessee County Government and
Tennessee City Governments.
Jeffrey Dean Moseley, Franklin, Tennessee, for the appellant, Williamson County, Tennessee.
Robert B. Rolwing and Donnie E. Wilson, Memphis, Tennessee, for the appellant, Shelby County,
Tennessee.
James Charles, Paul D. Krivacka, Jennifer Clinard Surber and Karl Dean, Nashville, Tennessee, for
the appellant, Metropolitan Government of Nashville and Davidson County.
Jeffrey Dean Moseley, Franklin, Tennessee, for the appellant, Williamson County Government.
Robert B. Rolwing, Memphis, Tennessee, for the appellant, Shelby County Government.
Paul Stuart Parker and Kemper Harlan Dodson, III, Nashville, Tennessee, for the appellee, ANR
Pipeline.
Everett B. Gibson, Memphis, Tennessee, for the appellees, Colonial Pipeline Co., MCI
Telecommunications, MCI Metro Access Transmission Services, Inc., and Norfolk Southern
Railway Co.
Thomas Arthur Scott and Suzanne S. Cook, Kingsport, Tennessee, for the appellees, Kingsport
Power Co. and Appalachian Power Co.
Brigid M. Carpenter, Nashville, Tennessee, James W. McBride, Washington, D.C., and Stephen
Door Goodwin, Memphis, Tennessee, for the appellee, Coalition of Public Utilities.
Paul G. Summers, Attorney General & Reporter; and Jimmy G. Creecy, Chief Special Counsel,
Nashville, Tennessee, for the appellee, Tennessee State Board of Equalization.
Richard W. Bell, Atlanta, Georgia, for the appellee, BellSouth Corporation.
OPINION
These consolidated cases are “sister” cases to:
1. In the Matter of: All Assessments, No. M1998-00243-SC-R11-CV, Review of Ad
Valorem Assessments of Public Utility Companies for Tax Year 1998.
2. Williamson County v. Tennessee State Board of Equalization, No. M2000-03178-
COA-R3-CV (review of all commercial and industrial tangible personal property
assessments, tax years 1998 and 1999).
Case number M1998-00243-SC-R11-CV, regarding Ad Valorem Assessments of Public
Utility Companies for the tax year 1998, has already been decided by the Supreme Court of
Tennessee on November 16, 2000 in an opinion not yet reported. In Re All Assessments 1998, No.
M1998-00243-SC-R11-CV, 2000 WL 1710174 (Tenn. Nov. 16, 2000). Case number M2000-03178-
COA-R3-CV, involving commercial and industrial tangible personal property assessments for tax
years 1998 and 1999, decided by the Chancery Court of Davidson County, has been briefed and
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argued in this Court and is now under advisement. Williamson County v. Tennessee State Bd. of
Equalization, No. M2000-03178-COA-R3-CV (Tenn. Ct. App. filed Oct. 26, 2000)
While the opinion of this Court relative to public utility assessments for tax year 1998 was
reversed by the supreme court in In Re All Assessments 1998, the opinion, authored by Judge
Crawford for this Court on August 20, 1999, contains an accurate and useful overview of taxing
procedures which is helpful in the consideration of these consolidated cases.
The authority to tax property is established by Article II, Section 28
of the Tennessee Constitution. For purposes of taxation, Article II,
Section 28 classifies all property into three classes: real property,
tangible personal property, and intangible personal property. 1 As
pertinent to the case before us, Article II, Section 28 further provides:
Tangible Personal Property shall be classified into
three (3) subclassifications and assessed as follows:
(a) Public Utility Property, to be assessed at fifty-five
(55%) percent of its value;
(b) Industrial and Commercial Property, to be
assessed at thirty (30%) percent of its value; and
(c) All other Tangible Personal Property, to be
assessed at five (5%) percent of its value. . . .
***
The ratio of assessment to value of property in each
class or subclass shall be equal and uniform
throughout the State, the value and definition of
property in each class or subclass to be ascertained in
such manner as the Legislature shall direct. Each
respective taxing authority shall apply the same tax
rate to all property within its jurisdiction.
The procedure for valuing and assessing property for tax
purposes is provided in T.C.A. § 67-5-101 et seq. (1998). Most
commercial, industrial, and residential property is valued and
assessed locally by county assessors. T.C.A. §§ 67-5-102, 103.
Assessments of personal property are made annually primarily on the
basis of information supplied by the property owner in schedules filed
with the assessor. T.C.A. §§ 67-5-902, 903. Under T.C.A. § 67-5-
903(f), fixed rates of allowable depreciation costs are established for
valuing the nine categories of locally assessed business and industrial
personal property. 2
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With regard to public utility and common carrier property, the
property is centrally assessed annually by the comptroller of the
treasury. T.C.A. § 67-5-1301.3 The comptroller must complete the
assessments and send notice to the property owner by the first
Monday in August. T.C.A. § 67-5-1327(a). Thereafter, the property
owner or any taxing authority may file exceptions to the assessment,
and the assessments will be acted upon by the comptroller within the
time prescribed. T.C.A. § 67-5-1327(b). By the first Monday in
September, the comptroller must file the assessments with the State
Board of Equalization. The comptroller is also required to notify any
person or entity that filed an exception of the action taken on the
exception. Within the time prescribed, such person or entity may file
further exceptions with the Board. T.C.A. § 67-5-1327(c).
The Board then reviews the assessments as authorized and
directed by the provisions of T.C.A. § 67-5-1328. On or before the
third Monday in October, the Board is required to certify to the
comptroller of the treasury “the valuation fixed by it upon each
property assessed.” T.C.A. § 67-5-1329. The comptroller is then
required to certify to the counties and municipalities the valuation
from the Board which is the amount to be taxed in the respective
taxing jurisdictions. T.C.A. § 67-5-1331.
_____________________
1
Real property is divided into four subclassifications with
varying assessment percentages. As for intangible property, the
legislature is given the authority to establish classifications and
assessment percentages for such.
2
T.C.A. § 67-5-903 is not applicable to public utilities since
public utility personal property is valued and assessed by the
comptroller of the treasury. T.C.A. §§ 67-5-1301, 1303, 1314.
3
The property owner is required to annually file “under oath,
schedules and statements giving [information as prescribed in statute]
concerning all properties owned or leased by such owners.” T.C.A.
§ 67-5-1303. The comptroller makes the assessment as provided in
T.C.A. § 67-5-1302.
In Re All Assessments 1998; No. 01A01-9812-BC-00642, 1999 WL 632824, at * 1-2 (Tenn. Ct. App.
Aug. 20, 1999), rev’d, 2000 WL 1710174 (Tenn. Nov. 16, 2000).
These consolidated cases and the two “sister” cases are so interrelated that proper chronology
is essential. The first of the cases involves Public Utility Ad Valorem Assessments for the Tax Year
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1998, which was decided by the Court of Appeals on August 20, 1999 with the judgment of the
Court of Appeals being reversed by the Supreme Court on November 16, 2000. See In Re All
Assessments, 2000 WL 1710174. That case involved judicial review, under Tennessee Code
Annotated section 4-5-322 and Tennessee Rule of Appellate Procedure 12(I), of an October 15, 1998
order of the Tennessee State Board of Equalization overruling exceptions by the Metropolitan
Government of Nashville and Davidson County, Williamson County and Shelby County. This order
provided in part:
With regard to equalization, the Board finds that settlements of past claims
oblige the Board to grant the 15% personalty equalization adjustment recognized for
tax year 1997, to most public utility taxpayers for 1998. The remaining minority of
taxpayers, not directly party to these settlements, should be extended the same relief
for the equitable considerations we cited in 1997. This adjustment is mandated under
the settlements so long as there are no legislative amendments to the local business
personalty depreciation statute (Tenn. Code Ann. § 67-5-903), or judicial or
administrative findings regarding the statutes that are inconsistent with the rationale
of the adjustment. Although an administrative proceeding is pending which will
consider the effects of § 67-5-903, disposition is not near enough to warrant a lengthy
delay in certifying the 1998 public utility assessments.1
In Re All Assessments 1998, 1999 WL 632824, at * 3.
The Court of Appeals, in its August 20, 1999 opinion, In Re All Assessments 1998, reversed
the October 15, 1998 Board of Equalization Order allowing a 15% reduction in the valuations of
public utility property. The court held in part: “We simply find no authorization for the Board to
reduce the valuation of taxable property below the fair market value of the property absent legislative
authorization to do so. We have found no legislative authorization.” Id. at * 9.
In the argument of the consolidated cases at bar on January 30, 2001, all parties agreed that
the In Re All Assessments 1998 opinion of the Supreme Court on November 16, 2000 was dispositive
of all issues presented in these cases except for questions involving the constitutionality of section
67-5-903 and section 67-5-1302(b) of the Tennessee Code.
1
The “administrative proceeding” referred to was a declaratory proceeding pursuant to Title 67 of
Tennessee Code Annotated to determine whether or not the depreciation schedules forming a part of Tennessee Code
Annotated section 67-5-903 resulted in locally assessed commercial and industrial personal property being valued at less
than 100% of its full market value . This proc eeding wa s required in a settl ement agreement entered into between
BellSou th Teleco mmunica tions, Inc., the M etropolitan Govern ment of N ashville and D avidson C ounty, the City of
Chattanooga, Hamilton County, Shelby County and Williamson County, along with the Comptroller of the Treasury of
Tennessee, the Tennessee Municipal League and the Tennessee County Services Association. This settlement agreement
was entered into in February 1998.
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It suffices to say that the Supreme Court, in In Re All Assessments 1998, assumed the
constitutionality of both Tennessee Code Annotated sections 67-5-903 and 67-5-1302(b) and
believed that the statutory scheme evidenced by Title 67 Chapter 5 of the Code provided authority
to the Tennessee Board of Equalization to take the action evidenced by its October 15, 1998 order.
Said the Supreme Court: “The Tennessee Board of Equalization is authorized to reduce (or increase)
the appraised (and therefore corresponding assessed) value of centrally-assessed public utility
tangible personal property as part of the equalization process, the purpose of which is to equalize the
ratio of the appraised value to fair market value of public utility property in any particular county
with the corresponding ratio for industrial and commercial property in that county.” In Re All
Assessments 1998, 2000 WL 1710174, at * 7.
In the wake of this background, we address the constitutional issues presented in the
consolidated cases at bar.
Intervening between the October 15, 1998 order of the Board of Equalization, which
provided the basis for the appeal of the 1998 Public Utility Assessments resulting in the Supreme
Court’s In Re All Assessments 1998 decision, and the order of the Board of Equalization of February
10, 2000 was the November 3, 1999 Initial Order of Administrative Law Judge William B. Hubbard
issued in the “administrative proceeding” pending at the time of the October 15, 1998 order of the
Board of Equalization in the tax year 1998 Public Utility Assessment case. Judge Hubbard’s order
provided in part:
This is a declaratory proceeding convened by the Board of Equalization
(Board) for the purpose of determining whether the application of certain
depreciation schedules found in T.C.A. § 67-5-903 results in undervaluing property
for the purpose of ad valorem taxes. The schedules addressed in this proceeding are
Group 1, Furniture, Fixtures, General Equipment and All Other Property Not Listed
in Another Group; and Group 5, Manufacturing Machinery. The statute provides for
these two Groups to be depreciated over eight years with a residual of 20% of
original cost.
....
“Value” is defined as “. . . the evidences of its sound, intrinsic and immediate
value, for purposes of sale between a willing seller and a willing buyer without
consideration of speculative values. . . .” T.C.A. § 67-5-601(a).
Tennessee appraises property on a mass appraisal basis. The generally
accepted methodology for a mass appraisal is to obtain the original cost; apply a trend
factor to the original cost, thus arriving at “current cost new;” and then depreciate the
current cost new by a factor which embraces all forms of normal obsolescence.
....
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Determining value by mass appraisal produces an inexact result. This is
particularly exacerbated where, as in Tennessee, property having wide variances
between their useful lives are grouped together.
....
The administrative judge finds that the application of the Tennessee statute
results in the under valuation of Group 1 and Group 5 properties. Group 1 should
have a depreciation schedule of 10 years and Group 5 should have a depreciation
schedule of 11 years. Group 1 is undervalued by 11.6% and Group 5 is undervalued
by 16.6%.2
In Re All Assessments 1998, (Tenn. State Bd. of Equ. Nov. 3, 1999) (Initial Order).
Following final review of assessments pursuant to Tennessee Code Annotated section 67-5-
1328 for the tax year 1999, the Tennessee State Board of Equalization issued its “Order on
Objections to Tangible Personal Property Equalization.” This order, entered on February 10, 2000,
is the order from which direct appeal was taken to this Court pursuant to Tennessee Code Annotated
section 4-5-322 and Tennessee Rule of Appellate Procedure 12(I). This February 10, 2000 order
provided:
In this matter the Board is reviewing objections filed by Tennessee counties
to certain equalization actions proposed with respect to 1999 assessments of public
utility companies. These are the same actions taken by the Board for tax years 1997
and 1998, to wit, a 15% reduction in the tangible personal property portion of the
utility assessments, to equalize those assessments to the perceived level of locally
assessed commercial and industrial tangible personal property. The latter property
is valued by a mass appraisal method that employs standard useful lives for
depreciation set forth in Tenn. Code Ann. § 67-5-903, and it is alleged that this
method tends to undervalue locally assessed personalty.
2
While the 1998 Public Utility Assessment’s case was before the Supreme Court, the counties and cities
sought, pursuant to Tennessee Rule of Appellate Procedure 14, to have the Supreme Court consider the November 3,
1999 initial order of Judge Hubbard as post-judgment facts. By order of December 27, 1999, the Supreme Court refused
to do so ho lding:
The only issue considered by the Court of Appeals was whether the Tennessee State Board of
Equalization erred and /or exceed ed its authority wh en it granted a 15% reduction in the assessed value
of certain centra lly-assessed pu blic utility tangible personal p roperty. T he only issue b efore this Court
is whether the C ourt of Ap peals erred in determining the State Board of Equ alization exc eeded its
authority. . . . Although the Court of Appeals mentioned the then on-going administrative hearing, the
Court of Appeals did not base its decision on the hearing. The Initial Order does not affect the
positions o f the parties or su bject matter of the dispute currently befo re this Court.
In Re All Assessments 1998, No. M1998-00243-SC-R11-CV (Tenn. Dec. 27, 1999) (Order denying motion to consider
post-judgm ent facts.)
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The Board initially postponed equalization of utility personalty for 1999
pending a decision by its administrative judge in declaratory proceedings intended
to measure the effects of § 67-5-903. After lengthy hearings, the judge concluded the
statute undervalues local personalty in reportable Groups 1 and 5 by 11.1% and
16.6% respectively, and we have concurred in his findings by separate order. The
affected counties have renewed their objections, and assert the Board should
appropriately increase local assessments rather than reduce the utility assessments,
under the authority of various Tennessee statutes and Carroll v. Alsup, 107 Tenn.
257, 64 S.W. 193 (1901).
Carroll v. Alsup involved a taxpayer who conceded his property was assessed
at less than its market value but who nonetheless sought a reduction to the levels of
assessment demonstrated for other properties or classes of property. The Tennessee
Supreme Court rejected this argument, noting the taxpayer could properly seek to
have other assessments raised but had no right to be underappraised to the level of
others. Carroll v. Alsup remains the law of this state, but exceptions have been
recognized. First, federal courts have recognized a constitutional equal protection
claim by public utility companies that local assessment practices which discriminate
against them in taxation can be redressed by reducing the utility assessments.
Further, the legislature has since Carroll v. Alsup authorized equalization
adjustments to mitigate the effects of different methods of assessment applicable to
centrally assessed public utilities versus locally assessed property (Tenn. Code Ann.
§ 67-5-1302) or real property versus tangible personal property (Tenn. Code Ann. §
67-5-1509). The statutes cited by the counties, on the other hand, refer to specific
authorization to the Board to change individual assessments to conform to the full
value standard.
The valuation of locally assessed personal property has been established by
the legislature. The State Board cannot unilaterally defy a lawfully enacted statute.
To the contrary, it must “effect the assessment of property in accordance with the
constitution of Tennessee and the laws of this state.” Tenn. Code Ann. § 67-5-
1509(a). The law specifically requires adjustment of public utility assessments to the
level of property in each jurisdiction, recognizing that periodic revaluations of non-
utility property may not always result in the full value assessments required by law.
Tenn. Code Ann. § 67-5-1302(b).
In his ruling regarding the effects of § 67-5-903 on locally assessed
personalty, Judge Hubbard made specific findings only for Groups 1 and 5. The level
of underassessment for the largest category, manufacturing equipment (Group 5), was
found to be 16.6%, but the average for Groups 1 and 5 would be less since the
smaller Group 1 was undervalued by only 11.1%. The average may or may not be
affected by other groups, but in any event these findings clearly afford a basis for
equalization of the public utility personalty assessments at a level commensurate with
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our actions in 1997 and 1998. The utility taxpayers have sought no greater reduction,
and we have no basis to grant less. It is therefore ORDERED, that the objections of
the counties and cities are overruled, and the public utility assessments will be
equalized by a reduction of 15% in the tangible personal property portion of any
nonforced assessments.
In Re All Assessments 1999 (Tenn. State Bd. of Equ. Feb. 10, 2000) (Order on Objections to
Tangible Personal Property Equalization).
The consortium of counties and cities, having properly appealed the 1999 Public Utility
Assessments in number M2000-00399-COA-R12-CV, briefed, argued and submitted the case to this
Court on January 30, 2001. During the course of these proceedings, the Tennessee Board of
Equalization entered an order in all respects conforming to the February 10, 2000 order, with such
order reflecting public utility assessments for the tax year 2000. This case, upon appeal, was
assigned number M2000-03117-COA-R12-CV.
On April 5, 2001, the following order was entered by this Court, to-wit:
Upon the motions of the Tennessee State Board of Equalization and the
consortium of counties and cities and pursuant to Tenn. R. App. P. 16(b), this appeal
is hereby consolidated with App. No. M2000-00399-COA-R12-CV. The
consolidated appeal shall be decided upon the briefs and argument already presented.
Should any appellee deem it necessary to present additional argument related to the
2000 tax year case, they may file a supplemental brief within thirty (30) days
following the entry of this order.
In Re All Assessments 2000, No. M2000-03117-COA-R12-CV (Tenn. Ct. App. April 5, 2001)
(consolidation order).
THE PROBLEM
These cases involve centrally assessed public utility tangible personal property. Assessments
of real property are not involved.
The problem has deep roots in Tennessee history.
Prior to the 1973 amendments thereto, Article II, Section 28 of the Constitution of Tennessee
provided: “All property shall be taxed according to its value, that value to be ascertained in such
manner as the Legislature shall direct, so that taxes shall be equal and uniform throughout the State.
No one species of property from which a tax may be collected shall be taxed higher than any other
species of property of the same value, ....” Louisville and Nashville R.R. Co. v. Public Serv. Comm’n
of Tenn., 249 F.Supp. 894, 904-05 (M.D. Tenn. 1966), aff’d, 389 F.2d 247 (6th Cir. 1968) (“L & N
I”).
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Historically, public utility properties were centrally assessed by the Public Service
Commission. (Upon the abolition of the Public Service Commission, this duty to assess was vested
in the comptroller of the treasury).3 All other property, including commercial and industrial tangible
personal property, was assessed by county assessors and local officials. The county tax rate in a
given jurisdiction would be applied to all properties assessed either by the Public Service
Commission or by the local assessors. If both the Public Service Commission and the county
assessor followed the constitutional provision in effect prior to the 1973 amendments and the statutes
implementing it, no problem would exist, as all properties would be assessed at 100% of actual cash
value and the uniform tax rate would be applied to all property. Historically, however, as late as
1966, county and local assessors refused to assess local property at anything approaching its actual
cash value. In fact, on an average, such properties were assessed at approximately 20% of actual
cash value. L & N I, 249 F.Supp. at 898.
At the same time, there was serious question about whether or not the Public Service
Commission valued utility properties at 100% of actual cash value. It was, however, clear in 1966
that the equalized Public Service Commission assessments were at least 55-65% of actual cash
value. Id. at 898. Thus, when the fixed tax rate was applied to the assessed values, it was also clear
that public utilities were paying three times the amount in taxes as was being paid by taxpayers
locally assessed on an average 20% of actual cash value.
Tennessee law provided no remedy to the public utilities to equalize this disparity because
of the decision of the Tennessee Supreme Court in Carroll v. Alsup. That case held that no taxpayer
could challenge the existing assessments scheme unless that plaintiff could prove that his own
individual property was assessed at greater than 100% of actual cash value. Thus, public utilities,
assessed at 55-65% of actual cash value, could not be heard to complain about locally assessed
properties being valued at an average of 20% of actual cash value since such utilities could not prove
that the assessments of their own property exceeded 100% of actual cash value.
Thus, stymied in state court, L & N Railroad filed suit in the United States District Court for
the Middle District of Tennessee asserting successfully that the long standing policy of the Public
Service Commission assessing railroad property within the State of Tennessee at a much higher
percentage of actual cash value than local assessors were assessing local property resulted in a
violation of the Equal Protection Clause of the Fourteenth Amendment to the Constitution of the
United States. In a very scholarly opinion, United States District Judge William E. Miller sustained
the equal protection claim of L & N Railroad. At the conclusion of the opinion, Judge Miller states:
“Realizing the possibility that a ruling in its favor could have serious disruptive effects throughout
the state, the plaintiff, in open court, offered to accept the assessment of $74,865,850.00, as
determined by the State Board of Equalization, less a reduction of 15%, for the current tax biennium,
without prejudice to its rights as to future tax years, and without prejudice to its insistence that the
discrimination against it is represented by a much higher percentage.” L & N I, 294 F.Supp. at 904.
3
Public Acts of 1995 Chap. 305, Sec. 124.
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The decision of Judge Miller was affirmed by the Sixth Circuit Court of Appeals, 389 F.2d 247 (6th
Cir. 1968).
In the wake of L & N I, Article II, Section 28 of the Constitution of Tennessee was amended
effective January 1, 1973 to provide, as the Tennessee Supreme Court recently observed:
In accordance with the following provisions, all property real,
personal or mixed shall be subject to taxation, . . .
The ratio of assessment to value of property in each class or subclass
shall be equal and uniform throughout the State, the value and
definition of property in each class or subclass to be ascertained in
such manner as the Legislature shall direct. Each respective taxing
authority shall apply the same tax rate to all property within its
jurisdiction. (emphasis added).
This amendment to Article II, § 28 also divided property “for purposes of
taxation,” into “real property, tangible personal property and intangible personal
property.” Tangible personal property was further divided into subclassifications as
follows:
Tangible Personal Property shall be divided into three (3)
subclassifications and assessed as follows:
(a) Public Utility Property, to be assessed at fifty-five (55%) percent
of its value;
(b) Industrial and Commercial Property, to be assessed at thirty (30%)
percent of its value; and
(c) All other Tangible Personal Property, to be assessed at five (5%)
percent of its value; provided, however, that the Legislature shall
exempt Seven Thousand Five Hundred ($7,500) Dollars worth of
such Tangible Personal Property which shall cover personal
household goods and furnishings, wearing apparel and other such
tangible property in the hands of a taxpayer.
In Re All Assessments 1998, 2000 WL 1710174, at * 2-3.
In construing the 1973 amendments to Article II, Section 28 of the Tennessee Constitution
shortly after they became effective, the Tennessee Supreme Court said:
The history of real property taxation in this state, and the amendment itself,
leaves no doubt whatever as to the purpose and objective of Article II, Section 28.
As shown by the proof in Louisville & Nashville R.R. v. Public Service Commission,
D.C., 249 F.Supp. 894 (1966), Affirm’d 389 F.2d 247 (6th Cir. 1968), the railroad’s
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property was being assessed in the counties of Tennessee in which it operated at not
less than 55% Of (sic) actual cash value, while other real property was being assessed
at a statewide average of not more than 30%. In fact, according to proof in that case,
properties other than utilities were being assessed in some counties as low as 7%, and
in 22 counties the assessment was below 15%. The District Court and the Sixth
Circuit held that practice to be in violation of the equal protection clause of the 14th
Amendment.
In Southern Railway Company v. Clement, 57 Tenn. App. 54, 415 S.W.2d
146 (1967), the Chancellor and the Court of Appeals made it clear that in its pre-
amendment status Article II, Section 28 provided no basis for the assessment of any
species of property at less than its actual cash value. This Court denied certiorari in
May, 1967. It is a matter of common knowledge that these two cases and the report
of the Tax Study Commission created by legislative act in 1966 precipitated the
amendment of Article II, Section 28, which was accomplished by the process known
as Question 3.
The purpose and objective of the Question 3 amendment is to tax income-
producing property at a higher rate than owner-occupied residences and farms. That
such classification is constitutionally permissible is beyond question. The
constitutional and statutory scheme that has resulted from the Question 3 amendment
has brought about a state of uniformity and equality of assessment of real property
in Tennessee that while not perfect can conservatively be described as vastly superior
to its predecessor system in approaching the objective of equality and uniformity
throughout the state within the classifications provided. Perfection in the taxation of
real property is neither required nor attainable.
Snow v. City of Memphis, 527 S.W.2d 55, 65-66 (Tenn. 1975).
Despite the 1975 optimism of the Tennessee Supreme Court, the problem of unequal
assessments was not resolved by the 1973 amendments to Article II, Section 28 of the Tennessee
Constitution.
In 1978, L & N Railroad Company, along with five other railroads, filed suit again in the
United States District Court for the Middle District of Tennessee on equal protection allegations
relative to 1977 assessments. Again, the District Court found such a disparity between locally
assessed properties and utility properties that the utilities were entitled to have their assessments
reduced in order to more nearly conform those assessments to local assessments.
Honorable William R. Snodgrass, the Comptroller of the Treasury of Tennessee from 1955
until his retirement in 1998, described the practical problems inherent in trying to get counties to do
what the law required them to do noting that counties, which do not attempt to comply with the law,
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benefit because the low level of appraisal requires higher tax rates applicable to utility values. Said
the comptroller:
Somehow we’ve got to do something that makes it desirable for counties to do what
the law requires of them to do. . . . In the past those who don’t make the effort gain.
Those who do make the effort are penalized, because what they do by having a low
level of assessment, they have a high tax rate, and that applies to utility values.
Those that make the change and try to update voluntarily automatically lose in the
situation as it relates to local taxpayers as it relates to the utilities.
That being the case, we have been continuing a situation that makes it
politically difficult for the local officials and in fact it makes it evidently almost
impossible.
Louisville and Nashville R.R. Co. v. Public Serv. Comm’n of Tenn., 493 F.Supp. 162, 167 (M.D.
Tenn. 1978) aff’d., 631 F.2d 426 (6th Cir. 1980), cert. denied, 450 U.S. 959 (1981) (“L & N II”).
Once again, the decision of the United States District Court for the Middle District of Tennessee was
affirmed by the Sixth Circuit Court of Appeals.
Thus, the core problem predating the 1973 amendments to Article II, Section 28 of the
Constitution of Tennessee continued unabated thereafter, with the equal protection violation
observed by Judge William E. Miller still in place.
Since the Fourteenth Amendment clearly prohibits unequal treatment within a class,
the substantially and systematically higher assessment percentages for railroad and
utility property, as opposed to other properties, is a violation of the equal protection
clause of the Fourteenth Amendment, and entitles the plaintiff to relief. Sioux City
Bridge Co. v. Dakota County, 260 U.S. 441, 446, 43 S.Ct. 190, 192, 67 L.Ed. 340
(1923):
This court holds that the right of the taxpayer whose property alone is taxed
at 100 per cent. of its true value is to have his assessment reduced to the percentage
of that value at which others are taxed even though this is a departure from the
requirement of the statute. The conclusion is based on the principle that where it is
impossible to secure both the standard of the true value, and the uniformity and
equality required by law, the latter requirement is to be preferred as the just and
ultimate purpose of the law.
In Sunday Lake Iron Co. v. Township of Wakefield, 247 U.S. 350, 352-353,
38 S.Ct. 495, 62 L.Ed. 1154 (1918), the Court ruled:
The purpose of the equal protection clause of the Fourteenth Amendment is
to secure every person within the state’s jurisdiction against intentional and arbitrary
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discrimination, whether occasioned by express terms of a statute or by its improper
execution though duly constituted agents. And it must be regarded as settled that
intentional systematic undervaluation by state officials of other taxable property in
the same class contravenes the constitutional right of one taxed upon the full value
of his property.
L & N I, 249 F.Supp. at 902-903.
THE CONSTITUTIONALITY OF TENNESSEE CODE ANNOTATED SECTION 67-5-903(f).
The attack on the constitutionality of the application of the specific depreciation schedules
contained in Tennessee Code Annotated section 67-5-903(f) to locally assessed tangible personal
property must stand or fall on the assertion by Appellants that Article II, Section 28 of the
Constitution of Tennessee, as it now reads subsequent to the 1973 amendments thereto, still requires
that all property be assessed at 100% of its market value.
The statements by Judge Miller in L & N I that the Tennessee Constitution pre-1973 required
all property to be assessed at 100% of actual value was correct, though unnecessary to the
determination of the Fourteenth Amendment equal protection issue which was the only issue that
was before the Court. The observations by Judge Morton to the effect that the post-1973
amendments to Article II, Section 28 of the Tennessee Constitution still required property to be
valued at 100% of actual value were also unnecessary to the determination of the equal protection
issue, which was again the only issue before the federal court in L & N II.
This truth is made clear by the opinion of Judge Harry Phillips on the appeal of Judge
Morton’s 1978 opinion.
The term “value” in Article 2 § 28 prior to the amendment was defined by
T.C.A. § 67-605, since repealed, as actual cash value. For the purposes of post
amendment definition, T.C.A. s 67-606 provides:
67-606. Basis of valuation.- The value of all property shall be
ascertained from the evidences of its sound, intrinsic and immediate
value, for purposes of sale between a willing seller and a willing
buyer without consideration of speculative values, and when
appropriate subject to the provision of the Agricultural, Forest, and
Open Space Land Act of 1976, codified in §§ 67-650-67-658.
The willing buyer/willing seller concept, if correctly applied, would result in
valuation at full market value or fair market value, in theory an appraisal figure of
100 per cent of the property’s “sound, intrinsic and immediate value.”
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However, for the purposes of an equal protection attack, whether all property
is appraised at 100 per cent or 50 per cent of the full worth is not material. The issue
on this appeal is quality of the standard of assessment among the properties.
As amended in 1972, Art. 2 § 28 classifies properties for assessment
purposes. In all cases, the assessment for each classification/subclassification is a
percentage of “its value.” Tennessee has chosen to classify properties for assessment
purposes, not valuation purposes.
L & N Railroad Co. v. Public Service Comm’n, 631 F.2d 426, 429 (6th Cir. 1980) (emphasis added).
In L & N I, jurisdiction was asserted by the plaintiffs under both diversity of citizenship and
the Equal Protection Clause of the Fourteenth Amendment. The federal court accepted jurisdiction
under the Equal Protection Clause but, as to the diversity of citizenship allegation, observed:
[I]t is not necessary to determine whether or not relief could be granted if diversity
were the sole basis of jurisdiction. The Court notes, however, that such relief might
well be barred by the holding in Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817,
82 L.Ed. 1188 (1938) and subsequent cases.
....
Cases like * * * are obsolete insofar as they are based on a view of diversity
jurisdiction which came to an end with Erie Railroad Co. v. Tompkins, 304 U.S. 64
(58 S.Ct. 817). That decision drastically limited the power of federal district courts
to entertain suits in diversity cases that could not be brought in the respective State
courts or were barred by defenses controlling in the State courts. (pp. 191-192, 67
S.Ct. p. 662).
. . . It is admitted that if the plaintiff brought suit in a Tennessee state court,
relief would be barred by the Tennessee rule that a taxpayer cannot sue to have his
own taxes reduced; he may sue only to have the taxes of his neighbors increased, and
then, only if he can first show that his property is assessed in excess of actual cash
value. See e.g., Carroll v. Alsup, 107 Tenn. 257, 284, 64 S.W. 193, 200 (1901);
McCord v. Nashville.Chattanooga & St. L. Ry., 187 Tenn. 277, 213 S.W.2d 196
(1948); Mayor and Aldermen of the Town of Morristown v. Burke, 207 Tenn. 180,
338 S.W.2d 593 (1960); and Biltmore Hotel Court v. City of Berry Hill, Tenn., 390
S.W.2d 223 (1965). A citizen of Tennessee, then, could not win this action in a state
court under existing state law, and he could not, because of lack of diversity, bring
the action in a federal court. No sufficient reason appears why a non-citizen of this
state should be able to invoke diversity jurisdiction in a federal court to reach a result
on a state question which state citizens could not reach.
L & N I, 249 F.Supp. at 896.
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L & N II asserted federal jurisdiction only on the basis of the Equal Protection Clause of the
Fourteenth Amendment to the Constitution of the United States. The holding in this case that article
II, section 28, post 1973 amendments, still requires property to be valued, under the Tennessee
Constitution, at 100% of market value is reduced to obiter dicta by the holding of the Sixth Circuit
Court of Appeals that “for the purposes of equal protection attack, whether all property is appraised
at 100 per cent or 50 per cent of the full worth is not material. The issue on this appeal is quality of
the standard of assessment among the properties.” L & N II, 631 F.2d at 429 (emphasis added).
No federal questions other than equal protection were involved in either the L & N I or L &
N II. Such being the case, Tennessee courts are not bound by the obiter dicta of these federal cases.
A state court is not bound to follow any federal court’s decision construing the state constitution.
Glenn v. Field Packing Co., 290 U.S. 177 (1933); Quality Oil Co. v. E.I. Du Pont Nemours & Co.,
322 P.2d 731 (Kan. 1958).
The vitality of this bedrock of federalism was reaffirmed by a unanimous United States
Supreme Court in 1997.
We can easily dispense with petitioners’ first contention that Idaho must
follow the federal construction of a “final decision.” Even if the Idaho and federal
statutes contained identical language – and they do not – the interpretation of the
Idaho statute by the Idaho Supreme Court would be binding on federal courts.
Neither this Court nor any other federal tribunal has any authority to place a
construction on a state statute different from the one rendered by the highest court of
the State. See, e.g., New York v. Ferber, 458 US 747, 767, 102 S Ct 3348, 3359-
3360, 73 L.Ed.2d 1113 (1982); Exxon Corp. v. Department of Revenue of Wis., 447
US 207, 226, n. 9, 100 S Ct 2109, 2121, n. 9, 65 L.Ed.2d 66 (1980); Commissioner
v. Estate of Bosch, 387 US 456, 465, 87 S Ct. 1776, 1782-1783, 18 L.Ed.2d 886
(1967). This proposition, fundamental to our system of federalism, is applicable to
procedural as well as substantive rules. See Wardius v. Oregon, 412 US 470, 477,
93 S Ct 2208, 2213, 37 L.Ed.2d 82 (1973).
The definition of the term “final decision” that we adopted in Mitchell was
an application of the “collateral order” doctrine first recognized in Cohen v.
Beneficial Industrial Loan Corp., 337 US 541, 69 S Ct 1221, 93 L.Ed. 1528 (1949).
In that case, as in all of our cases following it, we were construing the federal
statutory language of 28 USC § 1291. While some States have adopted a similar
“collateral order” exception when construing their jurisdictional statutes, we have
never suggested that federal law compelled them to do so. Indeed, a number of
States employ collateral order doctrines that reject the limitations this Court has
placed on § 1291. Idaho could, of course, place the same construction on its
Appellate Rule 11 (a)(1) as we have placed on § 1291. But that is clearly a choice
for that court to make, not one that we have any authority to command.
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Johnson v. Fankell, 520 U.S. 911, 916, 117 S.Ct. 1800, 1803-04 (1997). A parallel rule holds that
no state court is bound, even in the interpretation of the United States Constitution, by the decisions
of federal district and circuit courts.
While these decisions are persuasive authority, only the decisions of the United States
Supreme Court on issues of federal law are bound to be followed. State v. McKay, 680 S.W.2d 447,
450 (Tenn. 1984); State v. Carruthers, 35 S.W.3d 516, 561 (Tenn. 2000). Thus, we look to the
appellate decisions of the Tennessee courts to determine the meaning of Article II, Section 28 of the
Constitution of Tennessee and, more particularly, to determine whether or not the “full market value”
constitutional requirement was abrogated by the 1973 amendments to article II, section 28. The
answer is in the affirmative.
First, in Marion County v. State Board of Equalization, 710 S.W.2d 521 (Tenn. Ct. App.
1986), this Court held:
[T]here are many different definitions of value. The constitution does not give any
clue as to how value is to be determined; instead it leaves the method of determining
value to the legislature. Article 2, § 28, Constitution of Tennessee. In T.C.A. 67-5-
601, the legislature said:
(a) The value of all property shall be ascertained from the evidence of
its sound, intrinsic and immediate value, for purposes of sale between
a willing seller and a willing buyer without consideration of
speculative values, and when appropriate subject to the provisions of
the Agricultural, Forest, and Open Space Land Act of 1976, codified
in Part 10 of this chapter.
. . . The State in its brief in this case contends that the definition in T.C.A. §
67-5-601 is of ‘fair market value.’ We are of the opinion that the correct name for
this value which the legislature has described is irrelevant; what is important is the
same standards be used in all cases in arriving at the value to be used for assessment
purposes.
Marion County, 710 S.W.2d at 523.4
In 1987, the Supreme Court of Tennessee upheld, against constitutional attack, Chapter 337
of the Public Acts of 1977 finding correct the action of the General Assembly in declaring that all
4
This last observation is the same observation made by Judge Harry Phillips for the Sixth Circuit Court
of Appeals in L & N II. Said Judge Phillips: “As amended in 1972, Art. 2, s 28 classifies properties for assessment
purposes: In all cases, the assessment for each classification/subclassification is a percentage of ‘its value.’ Tennessee
has chosen to classify properties for assessment purposes, not valuation purposes.” L & N II, 631 F.2d at 429.
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tangible personal property, other than tangible property owned by public utilities and industrial and
commercial property, had no value for the purposes of taxation. Said the supreme court:
The Chancellor concluded that the General Assembly had acted within the
authority granted to it in Art. 2, § 28,
“. . . the value and definition of property in each class or subclass to
be ascertained in such manner as the Legislature shall direct.”
We are of the opinion that this conclusion was correct. The General
Assembly concluded that no appreciable revenue could be obtained by an attempt to
tax household goods and chattels or other nonbusiness tangible personal property.
Such property often does not generate revenue while industrial and commercial
business property does so.
Given the fact that the 1972 amendment exempted the entire amount of
individual “personal or family checking or savings accounts” and substantial amounts
of tangible personal property, the attempt to levy ad valorem taxes upon private
assets of individuals not used in commerce or industry proved futile and self-
defeating. In our opinion the General Assembly was not constitutionally required to
attempt to administer and maintain an impractical system of taxation, and it was
given very broad discretion with respect to determining the value and definition of
property in each of the authorized classifications or subclassifications.
As previously stated, the earlier constitutional mandate that all property be
taxed was repealed by this amendment. Instead all property was made subject to the
taxing power, but the amendment did not compel or mandate that the General
Assembly exhaust that power. It gave general directions concerning classifications
and assessment ratios, and if the General Assembly exercised its taxing power
through the use of these classifications, the ratios of assessment to value were
required to be used. The method of valuation and the determination of whether there
was any practical value for tax purposes were left to the General Assembly.
Sherwood Co. v. Clary, 734 S.W.2d 318, 321-22 (Tenn. 1987).
Under Sherwood and Marion County, section 67-5-903(f) of the Code and the depreciation
schedules forming a part thereof survive constitutional attack. Under the provisions of Article II,
Section 28 of the Constitution of Tennessee, the value and definition of property is “to be ascertained
in such manner as the legislature shall direct.”
All parties at bar agree that all sub-constitutional issues as to section 67-5-903 have been
foreclosed by the opinion of the Supreme Court of Tennessee in the In Re All Assessments 1998 case.
THE CONSTITUTIONALITY OF T.C.A. 67-5-1302(b)(1).
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Tennessee Code Annotated section 67-5-1302(b)(1) provides:
(b)(1) The assessments of public utility property, as set by the comptroller of the
treasury in accordance with subsection (a), shall be adjusted, when necessary, on the
basis of appropriate ratios, as are determined by the board of equalization for
purposes of equalizing the values of public utility property to the prevailing level of
value of property in each jurisdiction.
Tenn. Code Ann. § 67-5-1302(b)(1)(Supp. 2000). Once again the counties and cities urge that
Article II, Section 28 of the Tennessee Constitution, post 1973, still requires property assessments
based upon 100% of fair market value.5 However, under Marion County and Sherwood, the fair
market value basis is not constitutionally mandated, and the legislature is free to determine the
method and means of valuing property. We are dealing, in this case, with personal property as
opposed to real property, and practical problems of assessment result in a considerably less than
perfect system.
“Appraisal ratios” or “appraisal ratio studies” are required to be conducted by the division
of property assessments under Tennessee Code Annotated section 67-5-1604, 1605. The purpose
of these appraisal ratio studies is “to assist the board through the division of property assessments
to effect the assessment of all property throughout the state in accordance with the constitution and
laws of Tennessee,” and to “carry out the reappraisal and equalization programs in each county of
the state.” Tennessee Code Annotated § 67-5-1604(b), (c) (1998). Pursuant to this authority the real
property ratios for each county are determined.
A sales ratio study for real property is simplified by recorded deeds indicating the value or
consideration for a transfer of property. For personal property, however, accomplishing a
satisfactory sales ratio study is much more difficult. In discussing sales ratio studies, the court in
Clinchfield R.R. Co. v. Lynch, 527 F.Supp. 784, 787 (E.D. N.C. 1981), aff’d 700 F.2d 126 (4th Cir.
1983), observed:
[T]he recognized means of conducting such a study is to include only locally-
assessed real estate. Such a study is reliable because it calculates from arms-length
market transactions which are matters of public records. Real estate transactions may
be sampled and analyzed objectively and expeditiously. In contrast, there is no
objective method for determining the level of assessment of personal property. The
property would have to be appraised piece by piece since there is no public record of
arms-length transactions which could be sampled and analyzed.
5
The irony of this situation cannot escape even the casual observer. The refusal of counties and cities
for more than a century pre-1973 amendments to article II, section 28 to base local assessments on just such a premise
is the alpha and omega of all ensuing problems. Had this constitutionally mandated basis of evaluation been applied by
local governm ents there would never have been an L & N I or an L & N II. The 19 73 constitutio nal amend ments wou ld
not have been necessary, and the elaborate provisions for equalization provided in Title 67, Chapter 5 of Tennessee Code
Annotated would hav e been of v ery limited ap plicability.
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Courts in other jurisdictions have applied the real property ratio study to personal property. See
Clinchfield R.R. Co. v. Lynch, 527 F.Supp. 784; Clinchfield R.R. Co. v. Lynch, 784 F.2d 545, 551
(4th Cir. 1986); Southern Ry. Co. v. State Bd. of Equalization, 712 F.Supp. 1557, 1568 (N.D. Ga.
1988).
Use of such sales ratios may provide the least unsatisfactory method of appraising tangible
personal property, but such is a legislative decision unshackled by constitutional prohibition. Section
67-5-1509(a) of the Code mandates that locally assessed industrial and commercial personal property
be adjusted by the sales ratio in each county. It necessarily follows that, to achieve equalization,
public utility personal property must likewise be adjusted under section 67-5-1302(b)(1). It is not
the prerogative of this Court, or of the State Board of Equalization, to question the reasonableness
of a statute or second guess the policy judgments of the legislature. BellSouth Telecomm., Inc. v.
Greer, 972 S.W.2d 663, 673 (Tenn. Ct. App. 1997).
In the final analysis, it is the legislature that is authorized to act in the matter of assessments
of personal property and equalization of such assessments, with “the value and definition of property
in each class or sub-class to be ascertained in such manner as the legislature shall direct.” Tenn.
Const. art. II, § 28 (amended 1973).
The constitutional challenge to section 67-5-1302(b)(1) of the Tennessee Code must fail.
Once again, all parties agree that all sub-constitutional questions relative to section 67-5-
1302(b)(1) are foreclosed by the November 16, 2000 decision of the Supreme Court of Tennessee
relative to ad valorem assessments of public utilities company for the tax year 1998. See In Re All
Assessments 1998, 2000 WL 1710174.
The February 10, 2000 order of the Tennessee State Board of Equalization relative to the tax
year 1999 and the final order of the Tennessee State Board of Equalization as to assessments for the
tax year 2000 are in all respects affirmed.
Costs of this cause are assessed against Appellants.
___________________________________
WILLIAM B. CAIN, JUDGE
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