IN THE COURT OF APPEALS OF TENNESSEE

AT NASHVILLE

May 23, 2018 Session

POPULARCATEGORIES.COM, INC. v. DAVID GERREGANO, 

COMMISSIONER OF REVENUE, STATE OF TENNESSEE

Appeal from the Chancery Court for Davidson County

No. 09-781-I Claudia Bonnyman, Chancellor

___________________________________

No. M2017-01382-COA-R3-CV

___________________________________

This appeal involves the Appellant’s liability for franchise and excise taxes assessed 

against it by the Tennessee Department of Revenue. The trial court determined that the 

Appellant’s incorporation in the State of Florida did not afford it the right to 

apportionment for tax purposes, and entered a judgment against it in an amount over 

$2,000,000.00. The trial court also determined that the Commissioner of Revenue was 

entitled to an award of attorneys’ fees and litigation expenses as the prevailing party 

under Tennessee Code Annotated section 67-1-1803(d). For the reasons stated herein, we 

reverse the trial court’s ruling on apportionment, vacate the monetary judgment and 

award of attorneys’ fees, and remand for further proceedings consistent with this 

Opinion.

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

in Part, Vacated in Part and Remanded

ARNOLD B. GOLDIN, J., delivered the opinion of the Court, in which J. STEVEN 

STAFFORD, P.J., W.S., and KENNY ARMSTRONG, J., joined.

Charles A. Trost, G. Michael Yopp, and Christopher A. Wilson, Nashville, Tennessee,

and John A. Lucas, Knoxville, Tennessee for the appellant, PopularCategories.Com,Inc.

Herbert H. Slatery III, Attorney General and Reporter, Andrée Sophia Blumstein, 

Solicitor General, and Mary Ellen Knack, Senior Counsel, for the appellee, David 

Gerregano,1Commissioner of Revenue, State of Tennessee.

 

1

In accordance with Tenn. R. App. P. 19(c), David Gerregano, the current Commissioner of 

Revenue, has been substituted for his predecessors.

12/20/2018
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OPINION

BACKGROUND AND PROCEDURAL HISTORY2

The Appellant, popularcategories.com, Inc. (“Popular Categories”), was 

incorporated under the laws of the State of Florida in October of 2000. The corporation 

was originally formed by Blake Bookstaff and William Marquez for the operational 

purpose of reserving domain names and receiving income from advertising conducted 

thereon. Although Popular Categories filed a Florida tax return and paid Florida tax for

the 2000 tax year, it elected Subchapter S status for federal tax purposes effective January 

1, 2001. It is undisputed that this election resulted in Popular Categories owing no 

Florida tax liability. On its 2001 Florida return, Popular Categories reported its federal 

taxable income as “0” and showed its tax due as “0,” and its 2002 Florida intangible 

property tax return also showed no liability for the corporation. Popular Categories did 

not file any further tax returns in Florida, nor did it file any tax returns in Tennessee.3 

In March 2001, Popular Categories and Compatible Technologies of Orlando 

(“Compatible Technologies”) formed Popular Enterprises, LLC (“Popular Enterprises”), 

a Florida limited liability company. Both Popular Categories and Compatible 

Technologies transferred their respective domain names to the newly-formed entity. 

Whereas Popular Categories received a two-thirds member interest in Popular 

Enterprises, Compatible Technologies received a one-third interest. After the transfer of 

its domain names to Popular Enterprises, Popular Categories ceased its direct operations 

as a domain name aggregator. From 2002 forward, Popular Categories engaged in the 

business of monitoring its investment in Popular Enterprises. 

When Popular Categories failed to file its 2002 Florida annual report, the Florida 

Secretary of State administratively dissolved its charter. By the time that Popular 

Categories filed to have its charter reinstated in February 2006, its report indicated that its 

officers were Mr. Bookstaff, President, and John Brook, Secretary. This report also 

showed that Popular Categories’ principal office address was in Knoxville, Tennessee. 

The present controversy, which concerns tax assessments issued to Popular 

Categories by the Tennessee Department of Revenue, arose out of Popular Categories’ 

perceived presence in this state. It is undisputed that the accounting and administrative 

activities of both Popular Categories and Popular Enterprises were conducted in 

 

2 As the substantive tax liability questions at issue in this case were resolved at the summary 

judgment stage of litigation, our overview of the precipitating facts in this matter derives in large part 

from those facts which were undisputed for purposes of ruling on the parties’ respective motions for 

summary judgment.

3 At summary judgment, Popular Categories argued that it did not file any returns in Tennessee 

because it allegedly “was not doing business” there. 
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Tennessee, and on its federal corporate tax returns for the years 2000 through 2007, 

Popular Categories showed its office address as Knoxville, Tennessee. 

Although Mr. Bookstaff and Mr. Marquez each originally held 100 shares in 

Popular Categories, Mr. Bookstaff eventually became the sole shareholder effective 

January 26, 2005. While Mr. Marquez entered into an agreement with Popular 

Categories to provide consulting services and serve as an officer, the agreement was 

terminated in August 2005. Subsequently, in February 2006, Popular Categories’ 

member interest in Popular Enterprises was sold to Internet REIT following a number of 

solicitation efforts. 

In 2008, the Tennessee Department of Revenue (“the Department”) conducted an 

audit of Popular Categories after learning of its business activity in Tennessee from an 

audit of Popular Enterprises. The Department determined that Popular Categories was 

doing business in Tennessee and was, therefore, subject to Tennessee franchise and 

excise taxes in the 2006 and 2007 tax years. The Department further determined that 

Popular Categories was not doing business outside of Tennessee and thus not entitled to 

apportion its net earnings and net worth. As a result of the audit and the Department’s 

awareness that Popular Categories had received payments stemming from the sale of its 

membership interest in Popular Enterprises, tax assessments subsequently issued.4

Regarding the 2006 tax year, the Department issued a notice of assessment on 

June 6, 2008 in the amount of $899,288.78. This consisted of franchise and excise taxes 

of $642,694.77, penalty of $160,673.69, and interest of $95,920.32. Although Popular 

Categories requested an informal conference, a hearing officer issued a letter upholding 

the assessment on January 22, 2009. Regarding the 2007 tax year, the Department issued 

a notice of assessment on February 14, 2009 in the amount of $630,515.23. This 

consisted of franchise and excise taxes of $473,341.00, penalty of $118,335.00, and 

interest of $38,839.23. Although Popular Categories again requested an informal 

conference, the assessment was not altered; on July 30, 2009, a hearing officer issued a 

letter upholding the assessment. 

Litigation ensued when Popular Categories filed complaints against the 

Commissioner of Revenue (“the Commissioner”) challenging the above assessments 

pursuant to Tennessee Code Annotated section 67-1-1801. See Tenn. Code Ann. § 67-1-

1801(a)(1)(B) (2013) (providing that “[t]he taxpayer may file suit against the 

commissioner in chancery court in the appropriate county in this state, challenging all or 

any portion of the assessment of such tax”).5 The first complaint, filed in the Davidson 

 

4 As would later be evidenced by letters upholding the assessments, the Department had 

determined that the proceeds from the sale of Popular Categories’ interest in Popular Enterprises 

constituted “business earnings.” 

5

Pursuant to a 2014 amendment, effective January 1, 2015, the phrase “the final assessment” was 

substituted for “the assessment” in the cited provision. See Tenn. Code Ann. § 67-1-1801(a)(1)(B) (Supp. 
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County Chancery Court in April 2009, challenged the tax assessment for the 2006 tax 

year. The second complaint, filed in the Davidson County Chancery Court in October 

2009, challenged the tax assessment for the 2007 tax year. Both complaints alleged that 

Popular Categories was entitled to apportion its net worth and net earnings due to its 

engagement in “multi-state business.” In July 2010, after the Commissioner had filed 

answers to Popular Categories’ complaints and asserted counterclaims seeking judgments 

for the amounts of the Department’s assessments, the trial court entered an order 

consolidating the separate actions. 

On February 23, 2014, the Commissioner filed a motion for partial summary 

judgment regarding the counts in Popular Categories’ complaints that specifically dealt 

with the claimed right to apportionment. According to the Commissioner, the 

Department had correctly determined that Popular Categories was “not entitled to 

apportion.” Popular Categories disagreed and later filed a counter-motion for partial 

summary judgment, arguing that it was entitled to apportionment. In support of its 

position, Popular Categories maintained that it had contacts with other states which 

would subject [it] to franchise and excise taxation, if such contacts were conducted within 

Tennessee. Further, it alleged that it had the “right to apportion due to the formation of a 

multi-state partnership between [Popular Categories] and Internet REIT in 2006.” 

According to Popular Categories, the claimed partnership resulted from an “earnout” 

provision included in the Membership Interest Purchase Agreement accompanying the 

sale of its interest in Popular Enterprises to Internet REIT. 

The cross-motions for partial summary judgment were heard by the trial court on 

August 8, 2014, and it took the matter under advisement at the conclusion of the hearing. 

Several months later, on April 8, 2015, the parties returned to the trial court, and an oral

ruling was delivered granting partial summary judgment in favor of the Commissioner. 

This oral ruling was, thereafter, incorporated into a written order entered by the trial court 

on May 11, 2015. In addressing the issues raised by the parties’ cross-motions for partial 

summary judgment, the May 11 order concluded in pertinent part as follows:

1. The Plaintiff was not entitled to apportionment for franchise and excise 

tax purposes during the tax years 2006 and 2007 because the Plaintiff 

was doing business in Tennessee and was not doing business in any 

other state during those years.

2. The Plaintiff was not entitled to apportionment merely because it was 

incorporated in Florida.

3. The Tennessee franchise and excise tax statutes regarding 

apportionment, both as written and applied, meet the Due Process and 

 

2018) (“The taxpayer may file suit against the commissioner in chancery court in the appropriate county 

in this state, challenging all or any portion of the final assessment of such tax[.]”). 
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Commerce Clause requirements of the United States Constitution and 

are constitutional.

4. The Plaintiff is not entitled to apportionment based on its claim under 

the earnout provision in the Sales Agreement because that agreement 

did not create a partnership under Tennessee law. 

Following the trial court’s resolution of the asserted apportionment issues, the 

issue of Popular Categories’ ultimate tax liability began to be actively litigated. On 

November 18, 2016, the Commissioner moved for final summary judgment, contending 

that there was no genuine issue of material fact as to the tax amounts owed to the 

Commissioner relative to the 2006 and 2007 tax years. The motion was supported, in 

part, by the affidavit of tax audit supervisor Terri McAllister, wherein Ms. McAllister 

attested that Popular Categories’ franchise and excise tax liability totaled over 

$2,000,000.00, including interest. 

The Commissioner’s request for summary judgment did not go unchallenged. On 

December 29, 2016, Popular Categories filed a motion to strike Ms. McAllister’s 

affidavit, and on January 9, 2017, it filed a brief in opposition to the Commissioner’s 

motion for final summary judgment. These matters were eventually addressed by the 

trial court in an order entered on March 22, 2017. Pursuant to that order, the trial court 

not only denied Popular Categories’ motion to strike Ms. McAllister’s affidavit, but also 

held that the Commissioner’s summary judgment materials demonstrated that he was 

entitled to a judgment “in the amount of $2,107,691.54.” According to the trial court, 

this amount included the taxes, penalties, and interest that had accrued as of the end of 

the previous year. 

The trial court’s order, however, did not adjudicate every issue in the case. The 

trial court held that the determination of attorneys’ fees and expenses under Tennessee 

Code Annotated section 67-1-1803(d) should await the outcome of any appeal, and 

accordingly, it certified its judgment as final pursuant to Rule 54.02 of the Tennessee 

Rules of Civil Procedure. Popular Categories thereafter filed a motion to alter or amend, 

which motion was denied, leading to the initiation of the present appeal. 

Upon our initial review of the record on appeal, we sua sponte raised the question 

of whether subject matter jurisdiction existed in light of the unresolved issue of attorneys’ 

fees. Although the parties represented that tax cases such as this are typically certified as 

final in the manner employed by the trial court, we questioned the validity of such 

practice. In a per curiam order entered May 29, 2018, we concluded that, because the 

matter “certified as final . . . is inextricably linked with the unresolved issue of attorneys’ 

fees and expenses,” the Rule 54.02 certification was improvidently granted. Instead of 

dismissing the appeal outright, our May 29 order allowed the parties an opportunity to 

obtain a final judgment. On July 6, 2018, the trial court entered a “Final Judgment” and 

awarded the Commissioner “a judgment for his attorneys’ fees and litigation expenses in 
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the amount of $237,976.44.” Because a final judgment has now been entered, we 

proceed to review the issues raised in this appeal.

ISSUES PRESENTED

As to the substantive tax issues surrounding this case, Popular Categories raises 

three primary issues in its principal appellate brief, which we have rephrased as follows:

1. Whether the trial court erred in granting the Commissioner partial summary 

judgment by denying Popular Categories the right to apportionment. 

2. Whether the trial court erred in not striking the affidavit of Terri McAllister 

submitted by the Commissioner in support of his final motion for summary 

judgment.

3. Whether the trial court erroneously granted summary judgment in the 

Commissioner’s favor regarding the amount of tax and interest at issue.

As to the matter of attorneys’ fees, Popular Categories also raises the following two 

issues in this appeal:

1. Whether the trial court erroneously ruled that the Commissioner constituted a 

prevailing party entitled to an award of attorneys’ fees and expenses under 

Tennessee Code Annotated section 67-1-1803(d).

2. Whether the Commissioner’s attorneys’ fees and expenses were reasonable.

STANDARD OF REVIEW

At issue in this appeal is the trial court’s resolution of matters following requests 

for summary judgment. A motion for summary judgment should be granted only if “the 

pleadings, depositions, answers to interrogatories, and admissions on file, together with 

the affidavits, if any, show that there is no genuine issue as to any material fact and that 

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

Ultimately, the moving party has the “burden of persuading the court that there are no 

genuine issues of material fact and that the moving party is entitled to judgment as a 

matter of law.” Martin v. Norfolk S. Ry. Co., 271 S.W.3d 76, 83 (Tenn. 2008) (citation 

omitted). Because the resolution of a motion for summary judgment involves a question 

of law, we review the trial court’s disposition on the issue de novo without a presumption 

of correctness. Id. at 84 (citation omitted).

DISCUSSION

We begin our discussion by focusing on perhaps the most contentious issue on 

appeal: whether Popular Categories is entitled to apportion its tax liability for the 2006 
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and 2007 tax years. The trial court answered this question in the negative. As discussed 

below, we are of the opinion that the trial court’s holding on this issue was in error.

The taxes at issue in this case, Tennessee’s franchise and excise taxes, are imposed 

upon corporations for the privilege of doing business in the state. BellSouth Adver. & 

Publ’g Corp. v. Chumley, 308 S.W.3d 350, 352 (Tenn. Ct. App. 2009) (citations 

omitted). “The excise tax is based on the taxpayer’s ‘net earnings,’ while the franchise 

tax is based on the taxpayer’s ‘net worth.’” Vodafone Americas Holdings, Inc. & 

Subsidiaries v. Roberts, 486 S.W.3d 496, 514 (Tenn. 2016) (citations omitted). 

Nevertheless, the taxes have “been consistently construed together as one coordinate 

scheme of taxation.” First Am. Nat’l Bank of Knoxville v. Olsen, 751 S.W.2d 417, 421 

(Tenn. 1987) (citation omitted).

With respect to franchise and excise taxation in this state, apportionment is 

permitted pursuant to the following statutory provisions:

(a) Any taxpayer having business activities that are taxable both inside and 

outside the state of Tennessee shall allocate or apportion its net earnings or 

losses as provided in this part. A taxpayer is considered taxable in another 

state only if the taxpayer is conducting activities in that state that, if 

conducted in Tennessee, would constitute doing business in Tennessee and 

would subject the taxpayer to either Tennessee’s franchise tax or excise tax.

Tenn. Code Ann. § 67-4-2010.

(a) Any taxpayer having business activities that are taxable both inside and 

outside the state of Tennessee shall allocate or apportion its net worth as 

provided in this part. A taxpayer is considered taxable in another state only 

if the taxpayer is conducting activities in that state that, if conducted in 

Tennessee, would constitute doing business in Tennessee and would subject 

the taxpayer to either Tennessee’s franchise tax or excise tax.

Tenn. Code Ann. § 67-4-2110.

As both parties acknowledge, doing business in this state means “any activity 

purposefully engaged in within Tennessee, by a person with the object of gain, benefit, or 

advantage, consistent with the intent of the general assembly to subject such persons to 

the Tennessee franchise/excise tax to the extent permitted by the United States

Constitution and the Constitution of Tennessee.” See Tenn. Code Ann. § 67-4-

2004(14)(A).6 

 

6 This citation references the definition’s numbering and placement within the current version of 

the Code.
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In this case, Popular Categories maintains that it is entitled to apportionment based 

on its incorporation in Florida and its activities in other states. The denial of its right to 

apportionment, it argues, unconstitutionally subjects it to the risk of multiple taxation. In 

furtherance of its position that it is entitled to apportionment, Popular Categories assails 

the trial court for concluding that “the business activities required for apportionment are 

greater than the contacts necessary to obtain nexus for jurisdiction purposes.” Although 

we ultimately agree with Popular Categories that it is entitled to apportionment, we find 

its concern in this particular respect to be misguided. 

The Commerce and Due Process Clauses “each pose distinct limits on the taxing 

power of the States.” J.C. Penney Nat’l Bank v. Johnson, 19 S.W.3d 831, 836 (Tenn. Ct. 

App. 1999) (citation omitted). “The due process analysis in the area of state taxation of 

interstate commerce derives from the rules for in personam jurisdiction.” Id. (citation 

omitted). At a basic level, the Due Process Clause “requires some definite link, some 

minimum connection, between a state and the person, property or transaction it seeks to 

tax.” Miller Bros. Co. v. State of Md., 347 U.S. 340, 344-45 (1954). The connection 

required under the Commerce Clause between a taxpayer and state is not the same as the 

minimum contacts under the Due Process Clause, as the Commerce Clause imposes a 

“greater limitation” on the right to tax. J.C. Penney Nat’l Bank, 19 S.W.3d at 838 

(citation omitted). Indeed, “a tax may be consistent with the Due Process Clause but be 

prohibited under the Commerce Clause.” Scholastic Book Clubs, Inc. v. Farr, 373 

S.W.3d 558, 563 (Tenn. Ct. App. 2012) (citation omitted). Although Popular Categories 

criticizes the trial court for concluding that the “activities required for apportionment are 

greater than the contacts necessary to obtain nexus for jurisdiction purposes,” the trial 

court’s conclusion is consistent with the understanding in the law that the Commerce 

Clause imposes a greater limitation on the right to tax than does the Due Process Clause. 

Although we have no quarrel with Popular Categories’ characterization of the “doing 

business” definition as a broad one, the engraftment of a constitutional standard into the 

definition reveals that, insofar as the Commerce Clause is concerned, the power to tax 

requires more than a minimum connection. In order for a taxpayer’s connection to a state 

to subject that taxpayer to taxation, the dictates of the Commerce Clause must necessarily 

be satisfied. 

Although the Commerce Clause expressly authorizes Congress to “regulate 

Commerce with foreign Nations, and among the several States,” U.S. Const. art. 1, § 8, 

cl. 3, the United States Supreme Court has “consistently held this language to contain a 

further, negative command, known as the dormant Commerce Clause, prohibiting certain 

state taxation even when Congress has failed to legislate on the subject.” Okla. Tax 

Comm’n v. Jefferson Lines, Inc., 514 U.S. 175, 179 (1995) (citations omitted). The 

negative implication under the dormant Commerce Clause is that the states may not act to 

interfere with interstate commerce. J.C. Penney Nat’l Bank, 19 S.W.3d at 838. The 

contemporary understanding of what is demanded by the Commerce Clause largely stems 

from the United States Supreme Court’s decision in Complete Auto Transit, Inc. v. Brady. 
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See Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977). Under the standard 

established in that opinion, a state tax will sustain a Commerce Clause challenge when 

the tax “is applied to an activity with a substantial nexus with the taxing State, is fairly 

apportioned, does not discriminate against interstate commerce, and is fairly related to the 

services provided by the State.” Id. at 279. In this case, the looming question is whether 

Popular Categories had a “substantial nexus” with some other state such that it would be 

at risk of taxation in that jurisdiction consistent with the demands of the Commerce 

Clause. Unlike the Due Process clause’s “minimum contacts” requirement, which is a 

proxy for notice, the “substantial nexus” requirement is a “means for limiting state 

burdens on interstate commerce.” Quill Corp. v. North Dakota By and Through 

Heitkamp, 504 U.S. 298, 313 (1992), overruled on other grounds by South Dakota v. 

Wayfair, Inc., 138 S. Ct. 2080 (2018).

As indicated earlier, Popular Categories contends that it is entitled to apportion its 

tax liability as a result of its connections to Florida and other states. Notwithstanding our 

conclusion that Popular Categories’ connections to Florida establishes its right to 

apportionment, which we will detail shortly, we do not find merit in several of its 

arguments. 

According to Popular Categories, it is entitled to apportion its liability, in part, 

because of alleged undisputed facts regarding its travel to states such as California and 

New York. With regard to the corporate travel activities engaged in by Popular 

Categories, we observe that they largely involved isolated solicitation efforts and, in any 

event, these cited contacts with non-Tennessee states, with one principal exception, 

occurred before the tax years in question. Although it is true that one “out-of-state” visit 

took place in Telluride, Colorado during the 2006 tax year, the event relied upon 

consisted of Popular Categories signing paperwork related to the sale of its interest in 

Popular Enterprises while Mr. Bookstaff was in Colorado for a ski trip. We conclude 

that none of the cited travel activities by Popular Categories establishes a “substantial 

nexus” with another taxing jurisdiction during the tax years at issue.

Notwithstanding this conclusion, Popular Categories argues that even if its 

undisputed contacts with other states do not entitle it to apportionment, a number of 

disputed issues material to the question of apportionment remain to be resolved. It is true 

that a number of facts proffered pursuant to Rule 56 of the Tennessee Rules of Civil 

Procedure remained in dispute at the summary judgment stage. For example, in one 

response to Popular Categories’ statement of undisputed material facts, the 

Commissioner disputed the assertion that one “Vincent Claude was responsible for all 

technical operations at Popular Enterprises . . . and would do work from his computers in 

Florida.” However, on appeal, the Commissioner has argued that this proffered fact and 

other “so-called ‘disputed’ facts either are not really disputed or are not material to the 

issue [of] whether [Popular Categories] was doing business in any state besides 
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Tennessee.” For instance, with regard to the aforementioned fact concerning Vincent 

Claude, the Commissioner argues as follows in his brief:

The Commissioner does not dispute that Vincent Claude, an owner and 

officer of Compatible Technologies, was involved in the technical 

operations of Popular Enterprises (but not the Plaintiff) and sometimes used 

his computers in Florida to access information. As a matter of law, 

however, these activities cannot be attributed to the Plaintiff. Claude was 

not an owner or officer of the Plaintiff, and he did not purport to act on 

behalf of the Plaintiff. Moreover, the activities cited by the Plaintiff 

occurred in 2004, well before the tax years at issue. 

(internal citations from brief omitted).

In addition to agreeing with the Commissioner’s argument on this point, we 

conclude that certain other additional facts cited by Popular Categories are unavailing and 

simply do not establish that it had a “substantial nexus” to another jurisdiction in the 

applicable tax years. In addition to the travel activities mentioned earlier, Popular 

Categories has cited to certain travel activities by Mr. Bookstaff in 2006 to support its 

claim for apportionment. Although the Commissioner admits in his appellate brief that 

such travel occurred, he notes that Mr. Bookstaff’s travel outside of Tennessee was 

pursuant to a consulting agreement that he had individually with Internet REIT. As a 

result of this fact, the Commissioner reasons that such travel contacts are insufficient to 

show that Popular Categories was doing business outside of Tennessee. We agree with 

the Commissioner that the personal travel activities taken by Mr. Bookstaff concerning

his consulting agreement should not be attributed to Popular Categories. As such, we 

conclude that this does not show a substantial nexus with another jurisdiction in the 

relevant tax years.7

Popular Categories further argues on appeal that it is entitled to apportionment

because of an alleged multi-state partnership between it and Internet REIT. As we 

understand its argument, a state may assert taxing nexus over a taxpayer who has a 

partnership interest in a partnership with state taxing nexus. Here, Internet REIT 

allegedly established out-of-state nexus for the claimed partnership through multiple 

activities outside of Tennessee. According to Popular Categories, a partnership with 

Internet REIT resulted from an “earnout” provision included in the agreement that 

accompanied the sale of its interest in Popular Enterprises. Specifically, Popular 

Categories claims that a partnership resulted, “as the term . . . is defined by Tenn. Code 

 

7 Given our agreement with the Commissioner that Mr. Bookstaff’s actions with regard to the 

consulting agreement should not be attributed to Popular Categories, we need not opine on whether the 

character of his consulting travel would create a substantial nexus in the event it were somehow 

attributable to Popular Categories.
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Ann. § 61-1-202, because the earnout provision granted [it] an ownership interest in a 

share of Popular Enterprises’ profits.” 

The “earnout” provision in question provided, in part, that “Buyer shall pay to 

Sellers an amount . . . in proportion to the excess, if any, the Net Revenue for the assets 

owned by the Acquired Companies as of the Closing Date . . . during the fiscal year 

ending on December 31, 2006 . . . exceeds $8,900,000 . . . up to a maximum Net Revenue 

of $11,250,000.” This calculated earnout payment, which was outlined in Section 2.4 of 

the Membership Interest Purchase Agreement, formed part of the “total consideration for 

the Membership Interests,” which was detailed in Section 2.3 of the purchase agreement. 

In rejecting Popular Categories’ argument that the “earnout” provision legally 

created a partnership, the trial court held as follows in its order on the parties’ crossmotions for summary judgment:8

[T]he Taxpayer argues that TCA 61-1-202 defines partnership to include an 

ownership interest in a share of profits.

. . . .

 While profit sharing may be an indication of a partnership, it is not a 

bright line rule. In this case, the Taxpayer’s earnout provision does not 

amount to profit sharing. The Taxpayer . . . points to TCA Section 61-

202[(a)] which states that a partnership is when two persons carry on as coowners of a business and subsection c(3) states a person who receives a 

share of the profits is presumed a partner[.]

. . . .

 [T]he taxpayer does not cite to the later portion of Section 61-1-

202(c)(3) which states . . . profit sharing results . . . unless the profits were 

received in payment . . . [o]f a debt by installments or otherwise[.] . . . 

[C]lose examination of the earnout provision issue reveals that the last 

portion of remuneration to be paid to the taxpayer from the sale was 

payment of debt by installments. The earnout provision merely determined 

the amount of debt to be paid. It did not establish profit sharing.

 Accordingly, there was no presumption of a partnership, rather there 

is the absence of any written document describing the partnership or joint 

venture and there is testimony from Mr. Bookstaff that there was no 

 

8 The cited holding comes from the trial court’s oral bench ruling, which was incorporated by 

reference into the trial court’s May 11, 2015 order.
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partnership. There is no evidence of any books or records kept concerning 

a partnership, and significantly, no federal partnership tax returns were 

filed[.] 

We agree with the trial court that no partnership legally resulted from the earnout 

provision. That provision was directed at calculating part of the consideration owed 

under the Membership Interest Purchase Agreement. Therefore, even assuming this 

calculation was considered to involve a sharing of “profits,” no presumption of a 

partnership between Internet REIT and Popular Categories legally arises. See Tenn. 

Code Ann. § 61-1-202(c)(3) (providing that a person who receives a share of profits 

should not be presumed to be a partner when the profits were received in payment “[o]f a 

debt by installments or otherwise” or “[f]or the sale of the goodwill of a business or other 

property by installments or otherwise”). 

Having addressed the foregoing arguments offered by Popular Categories in 

support of its claim for apportionment, we now turn to its connections to Florida. At the 

outset, we note that Popular Categories’ very existence is grounded in Florida. Indeed, as 

mentioned earlier, it was incorporated under the laws of Florida in the fall of 2000. 

Popular Categories contends that this fact alone establishes a substantial nexus with 

Florida such that Florida could constitutionally impose its taxing jurisdiction. Popular 

Categories also argues that, beyond mere incorporation, there are other connections to 

Florida. For example, in addition to noting that it had designated a Florida agent for 

accepting service of process, Popular Categories details that it maintained a bank account 

in Florida, that it facilitated transactions from that account, and that the proceeds from the 

sale of its membership interest in Popular Enterprises were deposited there. Although the 

debate over these connections appears to be limited to their legal significance,9there also 

appears to be a factual dispute regarding another alleged connection to Florida, namely 

whether Popular Categories maintained a corporate office in Florida during a portion of 

the 2006 tax year. At summary judgment, the Commissioner disputed the assertion that 

an office was maintained in Florida in 2006, and in his brief on appeal, he submits that 

“the record contains no evidence that the Plaintiff still maintained a corporate office in 

Florida during the 2006 or 2007 tax years.” A careful review of the record, however, 

belies the Commissioner’s claim that no such evidence can be found. Indeed, an affidavit 

exists in the record in which Mr. Bookstaff attests to the fact that Popular Categories 

maintained a corporate office in Florida during a portion of the 2006 tax year.10 

 

9 We would note again that, as with certain other proffered facts, the Commissioner disputed 

certain connections to Florida at the summary judgment stage of litigation, although ultimately 

acknowledging them (and dismissing their materiality) on appeal. For instance, although the 

Commissioner previously disputed the assertion that Popular Categories received the proceeds from the 

sale of its membership interest in Popular Enterprises in its Florida bank account, he expressly stated in 

his appellate brief that he “does not dispute . . . that funds from the sale . . . were deposited into that 

account.” 

10 Without a doubt, there is evidence in the record that, at least on the surface, raises questions 
- 13 -

Although this specific factual issue appears to remain an open one, we are of the opinion 

that a conclusion concerning Popular Categories’ right to apportionment is not dependent 

on its resolution. In our view, the undisputed connection to Florida, namely Popular 

Categories’ incorporation in the state, affords a substantial nexus for purposes of taxation.

The fact that Popular Categories was incorporated in Florida is not without 

significance. After all, its corporate life and existence was owed to the state. See State 

Tax Comm’n of Utah v. Aldrich, 316 U.S. 174, 180 (1942) (“The corporation owes its 

existence to Utah. Utah law defines the nature and extent of the interest of the 

shareholders in the corporation. Utah law affords protection for those rights.”). In our 

opinion, Popular Categories’ legal domicile in Florida necessarily affords it a substantial 

nexus such that it is subject to Florida’s taxing jurisdiction. A residence-grounded basis 

for a state’s taxing jurisdiction is well-settled. As one commentator has observed:

With regard to residence, the Supreme Court has observed “that the receipt 

of income by a resident of the territory of a taxing sovereignty is a taxable 

event is universally recognized. Domicil itself affords a basis for such 

taxation.” Accordingly, “as to residents a state may, and does, exert its 

taxing power over their income from all sources, whether within or without 

the state . . . .” The rationale for allowing states to tax residents upon their 

income without regard to source, a rationale that courts have applied to 

corporate as well as to individual residents, is “founded upon the protection 

afforded to the recipient of the income by the state, in his person, in his 

right to receive the income, and in his enjoyment of it when received” as 

well as his “enjoyment of privileges of residence in the state and the 

attendant right to invoke the protection of its laws . . . .” Indeed, it is the 

residence principle of taxation that underlies the United States’ undisputed 

power to tax its resident individuals and corporations (that is, domestic 

corporations) on all of their income regardless of source.

Walter Hellerstein, State Taxation of Corporate Income from Intangibles: Allied-Signal 

and Beyond, 48 Tax L. Rev. 739, 809-10 (1993) (internal footnotes omitted).

Moreover, as another commentator has noted regarding franchise taxation:

 

surrounding Mr. Bookstaff’s assertion. For example, the address for the putative office in the 2006 tax 

year corresponds to the residence of Mr. Marquez, and it is undisputed that, although Mr. Marquez had 

entered into an agreement with Popular Categories to provide consulting services and serve as an officer, 

the agreement was terminated in August 2005. We will refrain from trying to speculate whether any 

coherence or harmony can be found among these facts and Mr. Bookstaff’s assertion. As it is, there is 

simply a technical dispute as to whether an office was maintained in Florida for a portion of the 2006 tax 

year. Of course, as we have noted elsewhere, we are of the opinion that Popular Categories’ undisputed 

connections to Florida establish a right to apportionment regardless of whether an office was maintained 

in Florida in 2006. 
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[T]he power of the State to impose franchise taxes for the privilege of being 

incorporated within the State is well settled. The State has power to tax a 

domestic corporation for the privilege of being a corporation, and such a 

tax does not necessarily run afoul of the commerce clause because 

measured by the total capital stock, although the corporation engages in 

interstate commerce.

Charles A. Trost, Federal Limitations on State and Local Taxation § 12:4.

It is unnecessary to speculate in this appeal, the extent to which some hypothetical 

Florida taxation scheme could have survived constitutional muster. Our inquiry is 

essentially limited to the blanket question of whether Popular Categories was subject to 

Florida’s taxing jurisdiction. We do not, however, altogether dismiss the 

Commissioner’s articulated concern over whether Florida would have been able to tax all 

of Popular Categories’ income. Notwithstanding some authorities suggesting to the 

contrary, “modern opinions sustain[] a state’s right to tax an apportioned share of a 

nondomiciliary corporation’s income or property while rejecting the claim that the state 

of the corporation’s domicile had the exclusive power to tax all such income or 

property.” Walter Hellerstein, Is ‘Internal Consistency’ Foolish?: Reflections on an 

Emerging Commerce Clause Restraint on State Taxation, 87 Mich. L. Rev. 138, 163 

n.136 (1988). Although this concern, which is grounded in the Commerce Clause, may 

rightfully restrict the extent to which Florida may exercise its taxing jurisdiction as a 

result of Popular Categories’ connections to other states, such a restriction does not mean 

that a substantial nexus or taxing jurisdiction is absent in Florida. As some commentators 

have opined:

We believe that a state claiming to tax on the basis of residence may satisfy 

its obligation to accommodate its taxing rights to the state with the stronger 

claim to tax the same value by providing a credit for any tax imposed by 

the latter and does not have to refrain from taxing altogether. In other 

words, we believe the Commerce Clause does not deprive the state of all

power to tax value to which another state may lay a competing and stronger 

claim. Rather, the state retains the authority to exercise its well-established 

residence-based taxing rights, except to the extent that the exercise of such 

power in fact creates a risk of multiple taxation. A properly designed credit 

fully satisfies that obligation, and the Commerce Clause demands no more. 

Hellerstein & Hellerstein, State Taxation ¶ 8.02[1][a][i].

In a recent appeal, the United States Supreme Court reviewed a Maryland tax 

scheme that had the effect of subjecting a portion of its residents’ income earned outside 

the state to double taxation. Comptroller of the Treasury of Md. v. Wynne, —U.S.—, 135 

S.Ct. 1787, 1792, 191 L.Ed.2d. 813 (2015). While the dormant Commerce Clause was 
- 15 -

deemed to present an impediment to Maryland’s raw power to tax its residents’ out-ofstate income, the Court explained that the state’s current scheme of taxation could be 

cured “by granting a credit for taxes paid to other States.” Id. at 1806. The Court also 

did not foreclose that compliance with the Commerce Clause could be achieved in some 

other way. Id. 

Although the Commissioner’s concern regarding the extent to which Florida could 

have taxed Popular Categories is not unfounded, his concern does not ultimately militate 

against a conclusion that Florida, as the taxpayer’s legal domicile, had constitutional 

taxing power. Again, for the reasons expressed above, we are of the opinion that Popular 

Categories’ incorporation in Florida constitutes a sufficient substantial nexus for taxation 

jurisdiction. 

Although the Commissioner cites to the Tennessee Supreme Court’s statement in 

Broadmoor-Kingsport Apartments, Inc. v. State, 686 S.W.2d 70, 72 (Tenn. 1985), that 

“the mere filing of a corporate charter . . . is insufficient” to establish that a corporation is 

doing business for purposes of franchise and excise taxation, we are of the opinion that 

the Broadmoor decision is not controlling of this matter. The decision in Broadmoor, 

which was concerned with whether Tennessee could impose its taxing jurisdiction, 

involved inquiry into the concept of “doing business” that was, at the time, not statutorily 

defined. The Supreme Court specifically noted in Broadmoor that the term “doing 

business” was not uniformly defined by case law. Id.; see also Tidwell v. Gaines Mfg. 

Co., 526 S.W.2d 460, 463 (Tenn. 1975) (“[T]he phrase ‘doing business in Tennessee and 

elsewhere’ as used in the Tennessee statutes, is not defined at any point in the 

legislation.”). Inasmuch as the General Assembly has since given shape to this area by 

providing a definition for what “doing business in Tennessee” means, our understanding 

should be informed by a construction and application of the language that is now enacted 

law.

Indeed, as we have previously discussed, the concept of “doing business” 

essentially has a constitutional standard engrafted into it by statute, with the Tennessee 

Code defining “doing business in Tennessee” and “doing business within this state” as 

“any activity purposefully engaged in within Tennessee, by a person with the object of 

gain, benefit, or advantage, consistent with the intent of the general assembly to subject 

such persons to the Tennessee franchise/excise tax to the extent permitted by the United 

State Constitution and the Constitution of Tennessee.” See Tenn. Code Ann. 67-4-

2004(14)(A).11 Because apportionment is, by statute, dependent on whether there are 

connections to other states that would constitute “doing business” in Tennessee, see

Tenn. Code Ann. § 67-4-2010; Tenn. Code Ann. § 67-4-2110, the constitutional standard 

behind “doing business” requires us to look to see whether the nature of the claimed 

 

11 Again, this citation references the definition’s numbering and placement with the current

version of the Code.
- 16 -

extraterritorial connections could constitutionally subject the taxpayer to taxation. For 

the reasons already discussed, we are of the opinion that Popular Categories’ 

incorporation in Florida satisfies this test. Although it appears from the record that

Florida did not actually tax Popular Categories in the tax years at issue, this is of no 

moment. Florida had constitutional nexus to tax, and the accompanying risk of taxation 

can fuel a Commerce Clause challenge with respect to Tennessee’s assessments. See 

Mobil Oil Corp. v. Comm’r of Taxes of Vermont, 445 U.S. 425, 444 (1980) (“We agree 

with Mobil that the constitutionality of a Vermont tax should not depend on the vagaries 

of New York tax policy.”). 

We note that our understanding that incorporation can afford constitutional 

“substantial nexus” is one that appears to be currently embraced by portions of both 

Tennessee and Florida law. Pursuant to the Revenue Modernization Act of 2015, for 

example, the following provision was passed by our General Assembly:

“Substantial nexus in this state” means any direct or indirect connection of 

the taxpayer to this state such that the taxpayer can be required under the 

Constitution of the United States to remit the tax imposed under this part 

and part 21 of this chapter. Such connection includes, but is not limited to, 

the following:

(i) The taxpayer is organized or commercially domiciled in this 

state[.]

Tenn. Code Ann. § 67-4-2004(49)(A) (emphasis added). Moreover, we observe that the 

Florida Administrative Code provides as follows:

(1) For taxable years beginning on or after January 1, 1991, corporations 

will apportion their adjusted federal income in accordance with Section 

220.15, F.S., only if they are doing business within and without Florida. A

taxpayer will be considered doing business within and without this state if it 

has income from business activity which is taxable both within and without 

Florida.

(a) In determining whether or not a taxpayer is doing business within 

and without Florida, a taxpayer will be considered doing business 

without this state if the corporation is taxable in another state, provided:

1. That state subjects the business to a net income tax, a franchise tax 

measured by net income, a franchise tax for the privilege of doing 

business, or a corporate stock tax, or,

2. That state has jurisdiction to subject the taxpayer to a net income 

tax regardless of whether, in fact, the state does or does not.
- 17 -

(b)1. States have the jurisdiction to impose an income tax on any 

corporation that incorporates within their state. This is true 

regardless of whether the corporation exists or conducts business 

within their state. Therefore, corporations that have incorporated 

outside Florida may apportion income in accordance with Section 

220.15, F.S.

Fla. Admin. Code Ann. r. 12C-1.015 (emphasis added).

In view of the foregoing discussion and having reached the conclusion that 

Popular Categories is entitled to apportionment, we reverse the trial court’s May 11, 2015 

order on partial summary judgment, vacate its March 22, 2017 monetary judgment and its 

July 6, 2018 judgment awarding the Commissioner his attorneys’ fees, and remand for 

such further proceedings as may be necessary and consistent with this Opinion. Given 

this disposition, the issues raised on appeal in connection with the vacated orders are 

hereby pretermitted. 

CONCLUSION

For the reasons stated in this Opinion, we reverse the trial court’s entry of partial 

summary judgment and vacate its subsequent entry of a final judgment in favor of the 

Commissioner. 

_________________________________

ARNOLD B. GOLDIN, JUDGE