1

For its part, Bell agreed to use $512,913.48 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

purchase of the jet aircraft. For the purposes of this transaction, the parties agreed that the

"equity property value" of the prop-driven aircraft was equal to the net proceeds of the sale

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

FILED

November 8, 1996

Cecil W. Crowson

Appellate Court Clerk

IN THE COURT OF APPEALS OF TENNESSEE

MIDDLE SECTION AT NASHVILLE

DAVID HUTTON, )

)

Plaintiff/Appellee, )

) Giles Chancery

) No. 8901

VS. )

) Appeal No.

) 01-A-01-9601-CH-00023

RUTH E. JOHNSON, Commissioner )

of Revenue, State of Tennessee, )

)

Defendant/Appellant )

DISSENTING OPINION

The majority has decided that Tenn. Code Ann. § 67-6-510 (1994) permits

the purchaser of a used jet aircraft to reduce his state tax liability by deducting the

value of a previously owned prop-driven aircraft from the purchase price of the

jet aircraft. I do not agree that Tenn. Code Ann. § 67-6-510 applies to the

purchase of the jet because the transaction does not involve a trade or series of

trades.

I.

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

Since he had not identified the particular aircraft he wished to purchase, he entered

into an “exchange agreement” in June 1993 with Bell Aviation, Inc. that embodied

a series of transactions structured as a deferred exchange of “like-kind” business

property under I.R.C. § 1031 (1988). In the first transaction, Mr. Hutton agreed

to sell his prop-driven aircraft to Bell for $1,142,000.1 In the second transaction,

Mr. Hutton agreed to “contract for the acquisition of” a replacement aircraft and
2

See Exchange Agreement ¶ SECOND (B). In another portion of the agreement, Bell

agreed to use its best efforts to “acquire” any replacement aircraft identified by Mr. Hutton. See

Exchange Agreement ¶ FOURTH (B). However, the exchange agreement also provided that

Bell had no obligation to “locate, negotiate for or acquire” a replacement aircraft. See Exchange

Agreement ¶ FIFTH (A).

3The exchange agreement did not require Bell to actually convey the replacement aircraft

to Mr. Hutton. It defined Bell’s “conveyance” to include “a direct conveyance from the third

party seller 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 order to obtain an exemption from

federal taxation, I.R.C. § 1031(a)(3) requires the property to be identified and the exchange

completed within 180 days.

5There is no evidence in the record that the deposit for the replacement aircraft came from

the proceeds of the sale of Mr. Hutton’s prop-driven aircraft 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 interest by name change or otherwise and then only upon the prior written consent

of Seller [Cessna]. . ..” See Used Aircraft Purchase Agreement § IV(7).

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to assign this contract to Bell.2

 In the third transaction, Mr. Hutton agreed to

assign his interest in the contract to purchase the replacement aircraft to Bell, and

Bell agreed to “convey” the replacement aircraft back to Mr. Hutton3

 and to apply

the $629,086.52 to the purchase price of the replacement aircraft. If Mr. Hutton

did not purchase a replacement aircraft within 180 days after selling his propdriven aircraft to Bell, the exchange agreement required the escrow agent to pay

the $629,086.52 over to Mr. Hutton.4 

The transaction occurred precisely as the parties envisioned. Mr. Hutton

conveyed his prop-driven aircraft to Bell in June 1993. Bell used $512,913.48 to

pay off the loan on the prop-driven aircraft and deposited the remaining

$629,086.52 with the designated escrow agent. Then Mr. Hutton, rather than Bell,

undertook to locate a replacement aircraft. In December 1993, he entered into a

used aircraft purchase agreement with Cessna Aircraft Company in which he

agreed to purchase a 1985 Citation S/II jet for $2,250,000. The agreement

reflected Mr. Hutton’s $112,500 deposit5 but also reflected that the purchase price

was not being reduced by a “trade allowance.” The agreement also specifically

stated that it was not assignable except on prior written consent of Cessna.6
7Mr. Hutton actually took possession of the Cessna Citation on January 20, 1994.

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On December 17, 1993, Mr. Hutton executed an “assignment” of his

interest in the contract with Cessna to Bell. On the same date, Bell directed the

escrow agent to pay over the proceeds of the sale of the prop-driven aircraft to

Cessna and also, by letter, “directed” Cessna to convey the Citation to Mr. Hutton.

The closing for the sale of the Cessna Citation occurred on December 20, 1993.

7

The record contains no evidence that Cessna ever received Bell’s “direction” or

that it ever agreed in writing to Mr. Hutton’s “assignment” of the contract to Bell.

The assignment was not a necessary ingredient for the closing between Cessna and

Mr. Hutton.

Mr. Hutton did not pay Tennessee use tax on the Cessna Citation. On

September 2, 1994, the Tennessee Department of Revenue sent Mr. Hutton a

notice of delinquency stating that he owed $178,866 in tax, penalty, and interest.

The amount of the tax was calculated on the Cessna Citation’s $2,250,000

purchase price. Mr. Hutton immediately paid $71,403, although he insisted that

he should not be required to pay additional tax because Tenn. Code Ann. § 67-6-

510 permitted him to deduct the value of the prop-driven aircraft ($1,142,000)

from the purchase price of the Cessna Citation ($2,250,000). When the

department disagreed, Mr. Hutton paid the remainder of the disputed tax, penalty,

and interest and filed suit in the Chancery Court for Giles County seeking a

refund. Although they disagree with regard to amount of the trade-in credit, both

the trial court and a majority of this panel agree that Mr. Hutton is entitled to a

trade-in credit under Tenn. Code Ann. § 67-6-510. I do not agree that Mr. Hutton

is entitled to a trade-in credit under the facts of this case.

II.

It is axiomatic that statutes imposing tax liability are construed against the

taxing authority and, conversely, that statutes providing exemptions from taxation

are construed against the taxpayer. AFG Indus., Inc. v. Cardwell, 835 S.W.2d

583, 584-85 (Tenn. 1992); Covington Pike Toyota, Inc. v. Cardwell, 829 S.W.2d

132, 135 (Tenn. 1992). Even though these statutes are construed strictly, the
-4-

courts must still give effect to their clearly expressed purpose, Stratton v. Jackson,

707 S.W.2d 865, 866 (Tenn. 1986), and must construe the words of the statute

using their ordinary sense, without any forced or subtle construction. Nashville

Golf & Athletic Club v. Huddleston, 837 S.W.2d 49, 53 (Tenn. 1992); Jersey

Miniere Zinc Co. v. Jackson, 774 S.W.2d 928, 930 (Tenn. 1989). 

Taxpayers have the burden of demonstrating that they are entitled to a tax

exemption. Tibbals Flooring Co. v. Huddleston, 891 S.W.2d 196, 198 (Tenn.

1994); American Cyanamid Co. v. Huddleston, 908 S.W.2d 396, 400 (Tenn. Ct.

App. 1995). This burden has been characterized as “heavy and exacting.” Pan

Am World Servs., Inc. v. Jackson, 754 S.W.2d 53, 55 (Tenn. 1988);Rogers Group,

Inc. v. Huddleston, 900 S.W.2d 34, 36 (Tenn. Ct. App. 1995). Thus, in order for

Mr. Hutton to be entitled to an exemption from the use tax under Tenn. Code Ann.

§ 67-6-510, he must demonstrate that his purchase of the Cessna Citation involved

a “trade” or “series of trades” in which “used articles are taken . . . as a credit or

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

Tenn. Code Ann. § 67-6-510 applies to trade-in allowances - that is the

value of property taken in lieu of money as full or part payment for the purchase

of other goods or property. The statute’s use of the phrase “series of trades”

indicates that it should not be limited to one-step transactions. However, each

transaction must still be a “trade” if Tenn. Code Ann. § 67-6-510 is to apply. A

“trade” connotes the exchange of 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 trades” in this case. Mr. Hutton’s sale of

his prop-driven aircraft to Bell did not involve a trade. It was simply the sale of

an aircraft for $1,142,000. Similarly, Mr. Hutton’s purchase of the Cessna

Citation, by the very terms 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 believe that the “step-transaction doctrine” should be

used to transform these transactions into one involving a “trade” or “series of

trades.” The “step-transaction doctrine” is a more precise way to apply the

established concept that substance should prevail over form. McDonald’s

Restaurants of Ill., Inc. v. Commissioner, 688 F.2d 520, 524 (7th Cir. 1982); Koch

v. Commissioner of Revenue, 605 N.E.2d 301, 306 (Mass. App. Ct. 1992). It

permits the courts to disregard intervening meaningless transactions undertaken

solely to obtain more favorable tax treatment. Penner v. County of Santa

Barbara, 44 Cal. Rptr. 2d 606, 610 (Ct. App. 1995). It does not permit the courts

to manufacture facts that never occurred. Greene v. United States, 13 F.3d 577,

583 (2d Cir. 1994). 

Mr. Hutton’s assignment of his interest in his contract with Cessna to Bell

and Bell’s return assignment to Mr. Hutton are without question meaningless

transactions undertaken solely to obtain more favorable tax treatment. As a matter

of law, these assignments had no effect on either party’s rights and obligations

under Mr. Hutton’s contract with Cessna because they were not the type permitted

by the contract. More importantly, the record contains no evidence that Cessna

ever agreed to, or even knew about, the assignment. When these assignments are

disregarded, all that remains are two separate contracts - the contract between Mr.

Hutton and Bell and the contract between Mr. Hutton and Cessna. 

The first contract could not have contemplated the second contract because

Mr. Hutton had not found a replacement aircraft when the first contract was

signed. Similarly, the contracts were not interdependent because legal

relationships created by the first contract did not depend on the completion of the

series of transactions. The first contract did not require Bell to find or acquire a

replacement aircraft. Had Mr. Hutton not purchased a replacement aircraft within

180 days, the escrow agent would simply have paid over to him the proceeds of

his contract with Bell. 
-6-

Accordingly, I would reverse the trial court because Mr. Hutton has not met

his burden of proving that he is entitled to an exemption under Tenn. Code Ann.

§ 67-6-510 for the value of the prop-driven aircraft he sold to Bell. For the

purposes of this particular transaction, his use tax should have been calculated on

the full $2,250,000 price of the Cessna Citation.

____________________________

WILLIAM C. KOCH, JR., JUDGE