1 For its part, Bell agreed to use $512,9 13.48 to pay off the loan secured by the propdriven aircraft and to hold the remaining $629, 086. 52 at interest to be applied toward the purchas e of the jet aircraft. For the purposes of this transaction, the par ties agreed that

th e "equi ty property va lue" of the prop-dr iven air craft w as equal

to the net

procee ds of the s ale available to be applied toward the purchase of the jet aircraft, that is $629,086.52. 

# FILED

Novemb er 8, 1996 Cecil W. Crowson Ap pellate Cou rt Clerk 

## IN THE COURT OF APPEALS OF TENNESSEE MIDDLE SECTION AT NASHVILLE

DAVID HUTTON, ) ) Plaintiff/Appellee, ) ) Giles Chancery ) No. 8901 VS. ) ) Appeal N o. ) 01-A-01- 9601-CH- 00023 RUTH E. JOH

NSON, Commissioner ) of Revenue, State of Tennessee, ) ) Defenda nt/Appella

nt )


## DISSEN TING OPIN ION

The majority has decided th at Tenn. Code Ann. § 67-6-510 ( 1994) perm its the purchase

r of a use d jet airc raft to reduce hi s state tax liability by deducting th e value of a previ ously owned prop-driven aircra

ft from t he purchas e price of

the jetaircra ft. I do n ot agree that Tenn. C ode Ann. § 67-6-510 a pplies to the purchase of the jet because t

he trans actio n does not invo lve a trade or seri es of trades.

I.

David Hutton decided to replace his prop-driven aircraft with a jet aircra

ft. Since he had not identified the particular aircraft he wished to purchase, he entered into an “excha

nge agreement” in June 1 993 with Bell Aviation, Inc. that embodied
aseries of transactions structured as adeferr ed exchang e of “like -kind” busin ess propertyunder I.R.C. § 1031 (1988). In the first transaction, Mr. Hutton agreed to sell his prop-driven aircraft to Bell fo r $1,142, 000. 1 In the sec ond transac tion, Mr. Hutton agr

eed to “co ntract f

or the acquisition of” a replacement aircraft and2 See Exchang e Agree ment ¶ SECO ND (B). I

n another porti on of the agreem

ent, Bell agreed to use its be st effor

ts to “acquire” any replace ment aircraft identified byMr. Hutton. See Exchange Agreement ¶ FOURTH (B). However, the exc hange agreement also provided that Bell hadno obligation to “locate, negotiate for or acquire” a replacement aircraft. See Exchange Agreement ¶ FIFTH (A).

3 The exchan ge agreement did not requi re Bell to actually convey the replacement aircraft to Mr. Hutton . It defin

ed Bell’s“conve

yance”to include

“a dire ct conveyance fr om the third partyseller

to . . . [Mr. Hutton], at the direction of, and in satisfaction of the obligations of Bell.” See Exchange Agreement ¶ THIRD (B).

4 See Exchange Agreement ¶ FOURTH (C)(3). In or der to obtainan exemption from federaltaxation, I.R.C. § 1031(a)(3) requires the property to be identified a nd the exchange complete d within 180

days.

5 There is no evide

nce in the record that thedeposit for the replacement aircraf t came from the proc eeds of t

he sale o f Mr. Hutt

on’s prop -driven

aircra ft to Bell.

6 Section IV(7) provided , in part: “This Agreement, including the rights of Purchaser [Mr. Hutton] hereunder, may not be assigned by Purchaser except to a wholly-owned subsidiary or successor in intere st

by name change or otherwise and then only upon the prior wr itten consent of Seller [Cessna]. . ..” See Used Aircraft Purchase Agree ment § IV(7). -2- to assign this c ontract toBell. 2 In the thir d transac tion, Mr. Hutton agr eed to assignhis intere st in the con tract to pu rchase the repla cement aircra ft to Bell , and Bell agreed to“convey” t

he replac ement air

craft ba ck to Mr. Hutton 3 and to apply the $629,086.52 to the purchase price of the re placeme ntaircra

ft. If Mr. Hut

ton did not purchas e a repla

cement a ir craf t within 180 days afte

r selling hi s propdriven aircra

ft to Bell , the excha

nge agree ment requi

red theescrow agent to pay the $629,086 .52 over t

o Mr. Hu tton. 4

The transact

ion occurr

ed precis ely as the p arties e nvisioned. Mr. Hu tton conveyed his prop-dr

iven airc raft to B ell in June 1 993. Bell used $512,9 13.48 to pay off the loan on the pro p-driven a ircraf t and deposit

ed the rem aining $629,086.5 2 with the designated escrow agent. Then Mr. Hutton, rather t han Bell, undertook

to locate a re placement aircraft. In Dece mber 1993, he entered i nto a used aircra

ft purcha se agree ment with Cessna Aircraf

t Company in

which h e agreed to purchas e a 1985 Cit ation S/II jet for $2 ,250,000 . The a gr eement reflectedMr. Hut

ton’s $112, 500 deposit 5 but also reflected thatthe purcha se price
was not being re duced by a “ trade all owance. ” The ag reement also specific ally stated that it was not assignable except on prior written consent of Cessna. 67 Mr. Hutton actually took possession of the Cessna Citation on January 20, 1994. -3- On Decemb er 17, 1993 , Mr. H utt on exe cuted an “ assignment” of his interest in the contract with Cessna to B ell. On the same d ate, Be ll dir ected t he
escrowagent to pa

y over the p roceeds o f the sale of the prop -driven a

ircraf t to Cessna and also, by letter, “directe d” Cessna to convey the Citation toMr. Hut

ton. The closing for

the sale of

the Cessna

Citation oc curred on

Decemb er 20, 1993

. 7 The rec ord contain s no evidence that Cessn a ever r

eceived B ell’s “dir

ection” or that it ever agreed in writing to Mr. Hut ton’s “ass ignment” of

the contra

ct to Bell

. The assignment

was not a necessar

y ingredien

t fo r the closi ng betwee n Cessna a nd Mr. Hut ton.

Mr. Hutton did no t pay Tenn e ssee use tax on th e Cessna Cit ation. On September

2, 199 4, the T ennessee Departm ent of Rev enue sent Mr. Hutton a notice of delinquency stating that he owed $178,866 in t ax, pena lty, and interest. The amount of the tax was calculated on the Cessna Citation ’s $2,250, 000 purchase price. Mr. Hut

ton immedia

tely paid $71 ,403, although he insisted that he should not be required to pay additio nal tax bec ause Tenn. Co de Ann. § 67-6- 510 permitte d him to deduc t the value of the prop -driven a

ir craf t ($1,142, 000) f rom the purcha se price of the Ces sna Citati on ($2,250, 000). When th e departme ntdisagree d, Mr. H utton paid the

remainde r of the disputed ta

x, penalt y, and interest and filed s uit i n the Chancer y Court for

Giles Cou nty seeking a refund. Although

they disagr

ee with r egard to amount of t

he trade- in credit, both the trial cou rt and a ma

jority of th

is panel ag ree that Mr. Hut ton is entitl ed to a trade-in credit und er Tenn. Code Ann. § 67- 6-510. I d o not agree that Mr. Hutton is entitled to a trade-in credit under the facts of this case.

II.

Itis axiomatic thatstatutes imposing tax liability a

re constr ued against

the taxing aut hority and, converse ly, that st atutes pro viding exem ptions from

taxation
are construe d against the taxpay er. AFG I ndus ., Inc. v. Cardw ell, 835 S.W. 2d 583, 584-85 (Tenn. 1992); CovingtonPike To yota, Inc . v. Ca rdwell, 829 S.W. 2d 132, 135 (Tenn . 1992). Even thoug h these statutes a re constr ued strict ly, the-4-

courts must

still give e ffect totheir

clearly exp ressed pu rpose, Stratton v. Jackson, 707 S.W.2 d 865, 866 (T enn. 1986) , and must construe t

he wor ds of

the statute using their ordinary sense, w ithout any forced o r subtle co nstructi on. Nashville Golf & Athletic Club v. Huddleston , 837 S.W. 2d 49, 53 (T enn. 1992) ; Jersey Miniere Z

inc Co. v . Jackso n, 774 S.W.2d 92 8, 930 (Tenn . 1989).
Taxpayers have the bu

rden of de monstratin g that they are entitled to a tax exemption. Tibbals Fl

ooring Co. v . Huddle ston, 891 S.W.2 d 196 , 198 (Tenn. 1994); Americ an Cyanamid Co. v. Huddleston , 908 S.W. 2d 396, 400 ( Tenn. C t. App. 1995). T

his burden h as been characterized as “heavy and exacting.” Pan Am World Servs., Inc. v. Jackson, 754 S.W.2d 53, 55 (Tenn. 1988); Rogers G roup, Inc. v. Huddleston, 900 S.W. 2d 34, 36 (T enn. Ct. App. 1995). Thus, in order for Mr. Hutton to be entitled to an exemption from the use tax under Te nn. Code A nn. § 67-6-510, he must

demonstrate thathis purchase of the Cessna Citation involved a “trade ” or “ser

ies of tra des” in which “used a

rticles a re taken . . . as a

credit or part payment on the sale of new or used articles.”

Tenn. Code Ann. § 67-6-510 a pplies to tr ade-in al lowance s - that is the value of proper

ty taken in lie

u of money as f

ull or part payment f

or the purc hase of other goods or property. The statute’s use of the phr ase “ser ies of tra des” indicates that it s hould not be limited to one-step transactions. However, each transact ion must stil l be a “tr ade” if T enn. Code Ann. § 67- 6-510 is to apply. A “trade” connotes the

exchange o f goods for

money. Seegle v. State Dep't of Insts., 198 So. 2d 154, 158 ( La. Ct. App. 1967 ).

I can find no “trade” or “series of trade s” in this ca se. Mr. Hutton’s s ale of his prop-driven aircraft to Bell did not involve a trade. It was si mply the sa le of
an aircraft for $1,142,000. Similarly, Mr. Hutton’s purchas e of the C essna Citation, by t he very ter ms of the sales agreement, did not involve a trade. Finally, Mr. Hutton’s attempted assignment of his contract with Cessna, whether effective or ineffective, did not involve a trade.-5- Likewise, I do not beli eve that th e “step-t ransacti on doctrine ” should be used to transform these transactions into one involving a “trad e” or “ser ies of trades.” The “ste

p-transa ction doctrine ” is a mor e precise way to app ly the established concept that substance should prevail over fo rm. McD onald’s Restaurant

s of Ill., I nc. v. Commiss ioner, 688 F.2d 520, 524 (7t

h Cir. 198 2); Koch

v. Commiss ioner of Re venu e, 605 N.E. 2d 301, 306 (Mass. App. Ct. 1992). It permits the courts to disregard interveni ng meaningl ess transactions undertaken solely to obtain mor

e favo rable tax treatment. Penner v . County o f Santa Barbara, 44 Cal. R

ptr. 2d 606, 610 (Ct. App. 1995). It does not permit the courts to manufac ture fac ts that neve r occurr ed. Greene v . United

States, 13 F.3d 577, 583 (2d Ci r. 1994).

Mr. Hutton’s a ssignment of his interest in his contra

ct with C essna to Be ll and Bell’s r

eturn ass ig nment to Mr . Hutton a re withou t question me aningless transact ions undertaken solely to obtain more favorable tax treatment. As a matter of law, these assignments had no effect on either par ty’s rig hts and obliga

tions underMr. Hut

ton’s contract with Cessna bec ause they were not the type permitted by the contract. More importantly, the reco rd contains no evidence that Cessn a
ever agreed to, or even knew abou t, theassignment. When these assignments are disregar ded, all that r

emains ar e two sepa

rate cont racts - t he contractbetween Mr. Hutton an d Bell and t he contract between Mr. Hut ton and Ce ssna.

The first contract

could not hav e contempl ated the se cond contra ct becaus e Mr. Hu t ton had not found a replacement aircraft when the first contract was signed. Similar

ly, the co ntracts w ere not int erde pende nt because legal relations hips create d by the fir st contrac t did not depe nd on the completion of the series of transactions. The first contract did not require Bell to fi nd or acquire a replace ment

aircra ft. Ha d Mr. Hu tton not purc hased a re placeme nt aircr aft within 180 days, the escr

ow agent w ould simply ha ve paid over to him

the proce eds of his cont ract with Bell

.-6- Accordi ngly, I would r

everse th e trial courtbecause Mr. Hutton has not met his burden of proving that he is entitled to an exemption u nder Tenn. Code Ann. § 67-6-510 fo r the value of the prop -driven a

ircraf t h e sold to Bell. F or the purposes of

this partic ular tra

nsaction, his use tax s hould have been calc ulated on the full $2, 250,000 pri ce of the Cessna Ci tation.

_________________

___________ WILLIAM C. KOCH, JR., JUDGE