### IN THE COURT OF APPEALS OF TENNESSEE AT NASHVILLE August 16, 2005 Session FORD MOTOR CREDIT COMPANY v. RUTH E. JOHNSON, COMMISSIONER OF REVENUE, STATE OF TENNESSEE
Appeal from the Chancery Court for Davidson County No. 01-980-II Carol McCoy, Chancellor

No. M2004-00050-COA-R3-CV - Filed Septem ber 21, 2005

Ford vehicles leased by

its dealers are simultaneously purcha sed by For

d Credit, a wholly owned subsidiary

of the Ford Motor Co mpany . Ford Cr edit is subjec t to a fra

nchise ta x which is determined by the book value of its tangible personal property owned or used in Tennessee. If the leased vehicles are fin

ished go ods invent

ory , their value is excluded

from the c alculati on of fra nchise ta xes. The trial court ruled

that the leased vehicles were not held by Ford Credit for sale, and thus did not qualify as finished g oods inventory. Ford Cre dit appeals. The judgment is affirmed.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed

W IL LI AM H. I

NMAN , S R

. J., de liver

ed th e opi

nion o f the

cour t, in w hich W. F RANK C RAW FORD , P.J.,W.S., and D AVID R. F ARMER , J., joined.

Michael D. Sontag

and Christ

opher L . Haley

, Nashvill e, Tennes see, attorney s for appellant, Ford Mo to r C re di t C om pa ny.
Paul G. Summers, Attorney Gene ral & Reporter; Michael E. Moore, Solicitor Gener al; Mary Ellen Knack, Assistant Attorney , General for appellee, State of Tenne ssee.
OPINION

For the privilege of transacting business in Ten nessee, Ford Motor Credit Company [hereinafter

“Ford Credit”] was subject to a fra nchi se tax. Tenn. Code Ann. § 67-4-906. For the 1997 and 1998 tax years it duly filed tax returns using a method which determines the tax according to the book value of

Ford Credit’s real and tangible personal proper ty owned or used in Te

nnessee, including the value of leased vehicles. In April 2000, Ford Credit filed amended returns for 1997 and 1998 claiming a partial refund of the taxes paid for each of these y ears, claiming that the amount by which the book value of these leased vehicles exceeded, for 1997 and 1998, fifty million and fort

y million dollars, respectively , was exemptfrom franchise and excise taxes under the “finished goods”1 In ef fect duri ng 1997and 1998, an d si nce s upers eded.
-2- definition of Tenn. Code Ann. § 67-4-906(a)(9). 1 The facts were not disputed, and each party filed
a motion for

summary judgmen t on the issu

e of whether the

leased v ehicles

qualifie d as f

inished goods inventory

pursuant to Tenn. Code Ann. § 67-4-906(a)(9). The trial judg e granted the motion of the Commissioner and dismissed the case, reserv ing the a mount of attorney fe es. Tenn. Code Ann. § 67-1-18 03(d). F ord Cred it appea ls, and presents for review the issue of whether the leased vehicles are exempt finished goods inventory as that term

is statutor

ily defined. Appellate review is de novo with no presumption of correctness, Union Carbide Corp. v. Hu ddleston , 854 S.W.2d 91 (Tenn. 1993).

The facts are sti

pulated a s found by

the trial court:
Ford Credit is the largest provider of automotive

financi ng in the world. In 1959, Ford Motor Company [hereinafter “Ford”] created Ford Credit as a wholly -owne d subsi diary to provide F ord with financing services for its business of producing and

selling cars and trucks. As a

result, Ford Credit provides financing option to Ford customer, including

retail le ase plan s. If a customer choose s to lease
a vehicle, the customer enters into a retail lease contract with the dealer and Ford Credit, simultaneously with the c u stomer ’s lease execution, purchases the vehicle subject to thelease from the dealer. Ford Credit takes ownership of the lease and the title to the vehicle fromthe dealer. Generally , the dealer is under no further obligation and Ford Cre dit becom es respons ible for the management and servicing of the lease.

At the end of the lease term, Ford Credit continues to own the leased vehicle. Ford Cre dit gener ally disposes o f the lea sed vehic le inone of three way s. First, the customer has the option to pu rchase the vehicle from Ford Credit at the end of the lease term for t

h e residual value of the vehicle as set forth in the leas e agre ement. Second, the cus tomer may re turn the vehicle to the original dealer. The dealer

has an op tion to pur

chase th e vehicl e from For d Credit at its residual value. Third, if neither the customer nor the dealer desires to purchase the vehicle, Ford Credit sell the vehicle at a commercial auction.

At all times, the leas ed vehic le s owned by Ford Cre dit are fully functional vehicles that remain in the same state or fo rm in whichthey were

originally c

reated; at no time does Ford Credit show its ownership of the leased cars as “net investment in operating leases.” Ford Credit does not carry the vehicles at issue as “inventory ” on its books and record s.-3-

Ford Credit ca rries the se lease d vehicle s on it books as depre ciable a ssets. How ever, F ord Cred it never ho lds or has

phy sical pos session of

any vehicle s that it le ases.
Dur ing 1997 and 1998, Ford Credit acquired retail lea s e contracts for

Ford leased vehicles. The book value of those ve hicles totaled $597, 303,071 for the calendar y ear 1997 and $446,834,021 fo r the cale

ndar y ear 1998 . Using t

hose book

values, F ord Cred

it timely filed a Tennessee Franchi s e and Excise Tax Return for the 1997 and 1998 tax years. I n April, 2000, Ford C redi t filed an amended Tennessee Franchise and Excise Tax R eturn an

d sought a refund for a por tion of the

franch ise and excise taxes t

hat it p a id in 1997 an d 1998. Ford Credit claimed that $50,000,000 and $40,000,00 0 of

the vehicle book values at issue for tax y ears 1997 and 1998, respectively , were in exce ss of th e relevant statutory amounts and wer

e exempt fr

om franc hise and excise taxes under the provision of

Tenn. Code Ann. §67-4-2108(a)(6)(B) and (C). When the Dep artment o f Revenue did not a ct upon the se refu

nd claims within six months, the claims were deemed denied pursuant to Tenn. Code Ann. § 67-1-180 2(c)(1 ). Ford Credit fil ed this lawsuit seeking a refun d of the ta

xes.
Tennessee Code Annotated § 67-4-906(a)(8) authorized Ford to exclude exempt inventory in the computation of its minimum tax base. This statute defined “exempt inventory” as

that portion of a corporation’s finished good inventory in excess of fifty million dollars ($50,000 ,000) for

corpora te fiscal yea

rs beginning on or

after July 15, 1996, forty million dollars ($40,000,000) for co rporat e fiscal ye ars beginning on or after July 15, 1997, and thirt y million dollars ($30,000,000) for corporate fiscal y ears beginning on or after July 15, 199 8, that wou ld otherwise be included in the minimum measure of the corporation’s franchise tax base.

The statute further pro vided that “finished goods inventor y” meant tan gible pe rsonal pr operty that was (A) Owned by the ta

xpayer; (B) Shown on the taxpayer’s books and records kept in accordance with ge nerally accept ed acco unting pr inciples; (C) Held for wholesale or retail sale; and (D) Inneed of no further fabric ation or processi

ng by or for th e owner ; except, in the case of confi guring , testing

or packa ging o f compute

r produc ts.-4-

Tennessee Code Annotated § 67-4-906(a)(9) (1998). As we have noted the only issue f or review i n this case is wheth er vehicles t hat were owned b y Ford Credit and leas ed to Fo r d customers constituted “finished goods inventory ” under the statutory

definition.

Ford Credit is a wholly-owned subsidiar y of Ford Motor Company a

nd, during the Tax Year at issue, it was engaged

in the business of leasing automobiles to customers for spec ified lea se terms. At the end of the lease terms, which ty pically rang ed from two to four years in lengt h, Ford Cr

edit sold each of the leased vehicles in one of three way s: (1) to the lessee for the residual value of the vehicle as speci fied in the

lease a greement; (2) to the original dealer for the residual value; or (3) at a commercial auction.

The trial court ruled that the leased ve hicles di d not meet two of the

four re quireme

nts specified in Tenn. Cod e Ann. § 6 7-4-906(a)(9) because (1) the leased vehicles “were not held for wholesa le or reta il sale” by F ord Cred

it, and (2 ) they

were no t tangib le personal property shown on Ford Credit’s books and

record s kept in

accordance with gene

rally acc epted accounting principles [G.A. P.].

We think a resolution of

this case properl y r equires an inquir y in to the meaning of the third prong of the definition of “finished good inventory ”: were the vehicles owned by F ord Credit and leased by i t to whomev er held by F ord Cred it “for w holesale or reta il s al e” ? The trial court ruled that Ford Cre dit made no showing that it holds the vehicles for sale within the plain meaning of the statute, because “inventory ” implies thata taxpayer’s pr oducts, goods or tangible personal propert y is physically

kept or stored for later sale, and that neither the lea ses purchased by Ford Cre dit nor the leased vehicles acquired by

it comport w

ith the sta tutory require ment that t

angible persona l proper ty be held for sale. Ford Credit argue s that a lea se is a sa le, ci ting Dixie Rent s Inc. v. Ci

ty of Memphis , 594 S.W.2d 397 (Tenn. Ct. App. 1979) and that the vari ous taxing

schemes recog nize this principle. Tenn. Code Ann. § 67-4-702(a)(15); Tenn. Code Ann. § 67-6-102(a)(27)(A). I t further argues that the leased vehicles constitute inventories of tangible persona l property held fo

r sale. The pre cise issue – which cannot arise again owing to the superseding statute – is one of first impression.

The trial judge recognized the several decisions of the appella te court s that a le ase was

a “sale of the right to use a thing for an ag reed upon period,” and

that rental property

held for such a “sale” qualified as inventory, but ruled that no pr ovision in the Franchise Tax Act, as co ntrasted to the businessand sale s tax statute s, supports F ord Cred it’s arg uments be cause

“inventory” implies that tangible person al property is kept or stored for later sale. The trial judge r easoned that the leased vehicles purchas ed by

Ford Cre dit did

notcomport w

ith the sta tutory require ment that t

he tang ible personal property

be held for sale. We agree.

Tennessee C ode Anno tated § 67-4-906(a) authorized Ford Credit to exclude exempt inventory in the computation of its minimu m tax base. The leas ed vehic les were simply not held for “wholes ale or retail sale”; they were not shown on Ford Credit’s books as inventory, but rather as “net investment in operating leases” and as depre ciable assets. We agre e with the Commissioner that having shown the leased vehicles as net investmen

t in opera ting lea ses, and t

hus depre ciable a ssets,-5-

Ford Credit ca nnot late r claim th at the se leased vehicles were finished g oods inventory under the Franchise Tax Law. The judg ment is ac cording ly a

ffirmed at the co sts of the a

ppellant

.

___________________________________ WILL IAM H. I NMAN, SENIOR JUDGE