FILED

June 1, 1998

Cecil Crowson, Jr.

Appellate C ourt Clerk

1 FOR PUBLICATION

2

3 IN THE SUPREME COURT OF TENNESSEE

4

5 AT KNOXVILLE

6

7 CASTLEWOOD, INC., (

8

9

10 (

11 Plaintiff-Appellant, (

12 (

13 ( Anderson County

14 v . (

15 ( Hon. William E. Lantrip,

16 ( Chancellor

17 ANDERSON COUNTY, TENNESSEE; PATSY (

18 STAIR, TRUSTEE; OWEN K. RICHARDSON,( S. Ct. No. 03S01-9705-CH-00053 

19 TAX ASSESSOR; CITY OF OAK RIDGE, (

20 TENNESSEE; AND THE TENNESSEE STATE (

21 BOARD OF EQUALIZATION, (

22 (

23 Defendants-Appellees. (

24

For Plaintiff-Appellant 25 : For Defendants-Appellees :

26

27 Bernard E. Bernstein David A. Stuart

28 Knoxville Clinton

29

30 Doris C. Allen Robert W. Wilkinson

31 Knoxville Oak Ridge

32

33 John Knox Walkup

34 Attorney General & Reporter

35 Nashville

36

37 Michael E. Moore

38 Solicitor General

39 Nashville

40

41 Christine Lapps

42 Assistant Attorney General

43 Nashville

44

45

46

47 O P I N I O N

48

49

50

51

52 JUDGMENT OF COURT OF

53 APPEALS AFFIRMED. REID, SP. J.

54
1

See U.S. Const. Amend. XIV, § 1. The Court of Appeals did not consider

the federal constitutional issue but it is asserted on this appeal.

2

 The record is insufficiently developed to address the procedural

issues raised by the defendants - whether Castlewood failed to pay the

disputed taxes under protest, whether failing to pay the taxes under protest

prohibits an appeal of the assessment, and whether a taxpayer must appeal an

assessment to the State Board of Equalization before proceeding to Chancery

Court. Furthermore, the parties stipulated as follows: 

Castlewood appealed the action taken to the appropriate

governmental agencies. The appeal ultimately reached the

Assessment Appeals Commission which affirmed the Anderson County

Board of Equalization and issued its official certificate on May

4th, 1993. . . . As provided for in the certificate, a

dissatisfied party is entitled to judicial review by filing a

petition in Chancery Court within sixty days of the date of the

certificate.

3

 Tenn. Code Ann. § 66-27-101 e t seq (1993).

-2-

1 This case presents for review the Court of Appeals’

2 decision that the classification as industrial and commercial of two

3 or more condominium units rented by the owner to others for their use

4 as residences does not violate Article II, Section 28 of the

5 Tennessee Constitution. Nor does the statute violate the equal

protection clause of the United States Constitution. 16 That decision

is affirmed. 27 

8

9 I

10

11 The essential facts were stipulated. Pursuant to the

Horizontal Property Act, 312 the plaintiff, Castlewood, Inc., developed

13 in Oak Ridge a real estate condominium project consisting of 86 two14 bedroom units situated in 19 separate buildings containing from four

15 to six units or apartments each. The units were offered for sale as

16 separate residences.

17

18 Six units that had been sold to individual owners were
-3-

1 classified by the county property assessor as residential property

2 and assessed for county and city taxes at 25 percent of value, while

3 the remaining 80 units, which were held by Castlewood to be rented to

4 separate occupants, were classified as industrial and commercial

5 property and assessed at 40 percent of value. 

6

7 The trial court found that the units owned by Castlewood

8 should be classified as residential property. The Court of Appeals

9 reversed, holding that the rental units are industrial and commercial

10 property within the meaning of Article II, Section 28 of the

11 Tennessee Constitution. 

12

13 I

14

15 Article II, Section 28 classifies real property into four

16 categories: public utility, industrial and commercial, residential,

17 and farm. The constitution does not further define the classes of

18 property other than to state, “residential property containing two

19 (2) or more rental units is hereby defined as industrial and

20 commercial property.” The distinction between industrial and

21 commercial and residential is set forth in the statute:

22

23 “Industrial and commercial property” includes

24 all property of every kind used, directly or

25 indirectly, or held for use, for any commercial,

26 mining, industrial, manufacturing, trade,

27 professional, club (whether public or private),

28 nonexempt lodge, business, or similar purpose,

29 whether conducted for profit or not. All real

30 property which is used, or held for use, for

31 dwelling purposes which contains two (2) or more

32 rental units is hereby defined and shall be
-4-

1 classified as “industrial and commercial

2 property.”

3

4

5 Tenn. Code Ann. § 67-5-501(4)(1994).

6

7 “Residential property” includes all real

8 property which is used, or held for use, for

9 dwelling purposes and which contains not more

10 than one (1) rental unit. All real property

11 which is used, or held for use, for dwelling

12 purposes but which contains two (2) or more

13 rental units is hereby defined and shall be

14 classified as “industrial and commercial

15 property.”

16

17

18 Tenn. Code Ann. § 67-5-501(10)(1994). 

19

20 Neither the constitution, these statutes, nor the

21 Horizontal Property Act makes any specific reference to the

22 classification of condominium property for taxation purposes. The

23 Horizontal Property Act provides that taxes on condominiums “shall be

24 assessed against and collected on each individual apartment, each of

25 which shall be carried on the tax books as a separate and distinct

26 entity for that purpose, and not on the building or property as a

27 whole.” Tenn. Code Ann. § 66-27-120(a) (1993). Castlewood insists

28 that because the Horizontal Property Act deems each condominium unit

29 to be a separate parcel for ownership and taxation purposes, its 80

30 condominium units are separate residential dwellings rather than “two

31 or more rental units.” The provisions of the Horizontal Property Act

32 do not support the taxpayer’s position. 

33

34 There is no mistaking the meaning of the constitutional
-5-

1 provision or the statute. The buildings owned by Castlewood contain

2 two or more rental units held for dwelling purposes. Neither the

3 constitution nor the statute suggests that condominiums should be

4 classified for assessment purposes differently than other residential

5 property. Consequently, the appropriate classification of the

6 plaintiff’s multiple condominium units is industrial and commercial. 

7

8 I I

9

In Snow v. City of Memphis 10 , 527 S.W.2d 55 (Tenn. 1975), 

11 the taxpayer claimed that the constitutional amendment defining

12 residential property containing two or more rental units as

13 commercial property violates the equal protection clause of the

14 Fourteenth Amendment of the United States Constitution. In that

15 case, the Court first noted the latitude given the states in matters

16 of governance:

17

18 “The States have a very wide discretion in the

19 laying of their taxes. . . . the States have

20 the attribute of sovereign powers in devising

21 their fiscal systems to ensure revenue and

22 foster their local interests. Of course, the

23 States, in the exercise of their taxing power,

24 are subject to the requirements of the Equal

25 Protection Clause of the Fourteenth Amendment. 

26 But that clause imposes no iron rule of

27 equality, prohibiting the flexibility and

28 variety that are appropriate to reasonable

29 schemes of state taxation.”

30

31

I d 32 at 64 (quoting Allied Stores of Ohio, Inc. v. Bowers , 358 U.S.

33 522, 79 S. Ct. 437 (1959)).

34
-6-

1 The Court then held that the State’s action will be

2 sustained if there is a “rational basis” for the classification:

3

4 “But there is a point beyond which the State

5 cannot go without violating the Equal Protection

6 Clause. The State must proceed upon a rational

7 basis and may not resort to a classification

8 that is palpably arbitrary. The rule often has

9 been stated to be that the classification ‘must

10 rest upon some ground of difference having a

11 fair and substantial relation to the object of

12 the legislation.’ (Citations omitted.) ‘If the

13 selection or classification is neither

14 capricious nor arbitrary, and rests upon some

15 reasonable consideration of difference or

16 policy, there is no denial of the equal

17 protection of the law.’ Brown-Forman Co. v.

18 Commonwealth of Kentucky , 217 U.S. 563, 573, 30

19 S. Ct. 578, 580 [(1910)] State Board of Tax

20 Com’rs of Indiana v. Jackson , 283 U.S. 527, 537,

21 51 S. Ct. 540, 543 [(1931)]. That a statute may

22 discriminate in favor of a certain class does

23 not render it arbitrary if the discrimination is

24 founded upon a reasonable distinction, or

25 difference in state policy.”

26

27

28 Id. at 64-65. It concluded that the test of whether a classification

29 which discriminates will survive an equal protection challenge of

30 arbitrariness, is whether “any state of facts reasonably can be

31 conceived that would sustain it.” Id. at 65.

32

33 The Court in Snow v. City of Memphis , found that “[t]he

34 purpose and objective of the [amendment to Article II, Section 28] is

35 to tax income-producing property at a higher rate than owner-occupied

36 residences and farms.” I d . at 66.

37

38 . . . [I]t is clear that there is discrimination

39 in favor of the real property owner who lives in
-7-

1 one-half of a duplex and rents the other half

2 and in favor of the real property owner who

3 rents one or more single-family residences. 

4 There is substantial proof in the Nashville case

5 that single-family residences for rental

6 purposes make a poor investment. The cost of

7 land on the one hand and the savings to be

8 effected in the construction and operation of

9 multi-unit apartments render it inconceivable

10 that any investor would be in the business of

11 renting single-family residences. It is obvious

12 that the Convention and the people deemed it

13 reasonable to embrace within the favored

14 classification of a owner-occupied residence,

15 owners of additional single-family residences

16 and the owner who lives in one-half of his

17 duplex.

18

19

I d 20 at 66. This favored classification does not extend to the owner

21 of the 80 condominium rental units which are, to the owner-taxpayer,

22 income producing property. 

23

24 The decision of the Court of Appeals is affirmed, and

25 costs are taxed against Castlewood, Inc.

26

27 _____________________________

28 Lyle Reid, Special Justice

29

30 Concur:

31

32 Drowota, Birch, and Holder, JJ.

33

34 Anderson, C.J. - Not participating.