# FILED

June 1, 1998 Cecil Crowson, Jr. Appellate Court Clerk FOR PUBLICATION 1 2 IN THE SUPREME COURT OF TENNESSEE 3 4 AT KNOXVILLE 5 6 CASTLEWOOD, INC., ( 7 8 9 ( 10 Plaintiff-Appellant, ( 11 ( 12 ( Anderson County 13 v . ( 14 ( Hon. William E. Lantrip, 15 ( Chancellor 16 ANDERSON COUNTY, TENNESSEE; PATSY ( 17 STAIR, TRUSTEE; OWEN K. RICHARDSON,( S. Ct. No. 03S01-9705-CH-00053 18 TAX ASSESSOR; CITY OF OAK RIDGE, ( 19 TENNESSEE; AND THE TENNESSEE STATE ( 20 BOARD OF EQUALIZATION, ( 21 ( 22 Defendants-Appellees. ( 23 24 For Plaintiff-Appellant: For Defendants-Appellees: 25 26 Bernard E. Bernstein David A. Stuart 27 Knoxville Clinton 28 29 Doris C. Allen Robert W. Wilkinson 30 Knoxville Oak Ridge 31 32 John Knox Walkup 33 Attorney General & Reporter 34 Nashville 35 36 Michael E. Moore 37 Solicitor General 38 Nashville 39 40 Christine Lapps 41 Assistant Attorney General 42 Nashville 43 44 45 46 O P I N I O N 47 48 49 50 51 JUDGMENT OF COURT OF 52 APPEALS AFFIRMED. REID, SP. J. 53 541 SeeU.S. Const. Amend. XIV, § 1. The Court of Appeals did not consider

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

2The 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.

3Tenn. Code Ann. § 66-27-101 e t seq(1993).

-2- This case presents for review the Court of Appeals’ 1 decision that the classification as industrial and commercial of two 2 or more condominium units rented by the owner to others for their use 3 as residences does not violate Article II, Section 28 of the 4 Tennessee Constitution. Nor does the statute violate the equal 5 protection clause of the United States Constitution.1That decision 6 is affirmed.2 7 8

I 9 10 The essential facts were stipulated. Pursuant to the 11 Horizontal Property Act,3the plaintiff, Castlewood, Inc., developed 12 in Oak Ridge a real estate condominium project consisting of 86 two13 bedroom units situated in 19 separate buildings containing from four 14 to six units or apartments each. The units were offered for sale as 15 separate residences. 16 17 Six units that had been sold to individual owners were 18-3-

classified by the county property assessor as residential property 1 and assessed for county and city taxes at 25 percent of value, while 2 the remaining 80 units, which were held by Castlewood to be rented to 3 separate occupants, were classified as industrial and commercial 4 property and assessed at 40 percent of value. 5 6 The trial court found that the units owned by Castlewood 7 should be classified as residential property. The Court of Appeals 8 reversed, holding that the rental units are industrial and commercial 9 property within the meaning of Article II, Section 28 of the 10 Tennessee Constitution. 11 12

I 13 14 Article II, Section 28 classifies real property into four 15 categories: public utility, industrial and commercial, residential, 16 and farm. The constitution does not further define the classes of 17 property other than to state, “residential property containing two 18 (2) or more rental units is hereby defined as industrial and 19 commercial property.” The distinction between industrial and 20 commercial and residential is set forth in the statute: 21 22 “Industrial and commercial property” includes 23 all property of every kind used, directly or 24 indirectly, or held for use, for any commercial, 25 mining, industrial, manufacturing, trade, 26 professional, club (whether public or private), 27 nonexempt lodge, business, or similar purpose, 28 whether conducted for profit or not. All real 29 property which is used, or held for use, for 30 dwelling purposes which contains two (2) or more 31 rental units is hereby defined and shall be 32-4- classified as “industrial and commercial 1 property.” 2 3 4 Tenn. Code Ann. § 67-5-501(4)(1994). 5 6 “Residential property” includes all real 7 property which is used, or held for use, for 8 dwelling purposes and which contains not more 9 than one (1) rental unit. All real property 10 which is used, or held for use, for dwelling 11 purposes but which contains two (2) or more 12 rental units is hereby defined and shall be 13 classified as “industrial and commercial 14 property.” 15 16 17 Tenn. Code Ann. § 67-5-501(10)(1994). 18 19 Neither the constitution, these statutes, nor the 20 Horizontal Property Act makes any specific reference to the 21 classification of condominium property for taxation purposes. The 22 Horizontal Property Act provides that taxes on condominiums “shall be 23 assessed against and collected on each individual apartment, each of 24 which shall be carried on the tax books as a separate and distinct 25 entity for that purpose, and not on the building or property as a 26 whole.” Tenn. Code Ann. § 66-27-120(a) (1993). Castlewood insists 27 that because the Horizontal Property Act deems each condominium unit 28 to be a separate parcel for ownership and taxation purposes, its 80 29 condominium units are separate residential dwellings rather than “two 30 or more rental units.” The provisions of the Horizontal Property Act 31 do not support the taxpayer’s position. 32 33 There is no mistaking the meaning of the constitutional 34-5-

provision or the statute. The buildings owned by Castlewood contain 1 two or more rental units held for dwelling purposes. Neither the 2 constitution nor the statute suggests that condominiums should be 3 classified for assessment purposes differently than other residential 4 property. Consequently, the appropriate classification of the 5 plaintiff’s multiple condominium units is industrial and commercial. 6 7

I I 8 9

In Snow v. City of Memphis, 527 S.W.2d 55 (Tenn. 1975), 10 the taxpayer claimed that the constitutional amendment defining 11 residential property containing two or more rental units as 12 commercial property violates the equal protection clause of the 13 Fourteenth Amendment of the United States Constitution. In that 14 case, the Court first noted the latitude given the states in matters 15 of governance: 16 17 “The States have a very wide discretion in the 18 laying of their taxes. . . . the States have 19 the attribute of sovereign powers in devising 20 their fiscal systems to ensure revenue and 21 foster their local interests. Of course, the 22 States, in the exercise of their taxing power, 23 are subject to the requirements of the Equal 24 Protection Clause of the Fourteenth Amendment. 25 But that clause imposes no iron rule of 26 equality, prohibiting the flexibility and 27 variety that are appropriate to reasonable 28 schemes of state taxation.” 29 30 31 I d at 64 (quoting Allied Stores of Ohio, Inc. v. Bowers, 358 U.S. 32 522, 79 S. Ct. 437 (1959)). 33 34-6- The Court then held that the State’s action will be 1 sustained if there is a “rational basis” for the classification: 2 3 “But there is a point beyond which the State 4 cannot go without violating the Equal Protection 5 Clause. The State must proceed upon a rational 6 basis and may not resort to a classification 7 that is palpably arbitrary. The rule often has 8 been stated to be that the classification ‘must 9 rest upon some ground of difference having a 10 fair and substantial relation to the object of 11 the legislation.’ (Citations omitted.) ‘If the 12 selection or classification is neither 13 capricious nor arbitrary, and rests upon some 14 reasonable consideration of difference or 15 policy, there is no denial of the equal 16 protection of the law.’ Brown-Forman Co. v. 17 Commonwealth of Kentucky, 217 U.S. 563, 573, 30 18 S. Ct. 578, 580 [(1910)] State Board of Tax 19 Com’rs of Indiana v. Jackson, 283 U.S. 527, 537, 20 51 S. Ct. 540, 543 [(1931)]. That a statute may 21 discriminate in favor of a certain class does 22 not render it arbitrary if the discrimination is 23 founded upon a reasonable distinction, or 24 difference in state policy.” 25 26 27 Id.at 64-65. It concluded that the test of whether a classification 28 which discriminates will survive an equal protection challenge of 29 arbitrariness, is whether “any state of facts reasonably can be 30 conceived that would sustain it.” Id.at 65. 31 32 The Court in Snow v. City of Memphis, found that “[t]he 33 purpose and objective of the [amendment to Article II, Section 28] is 34 to tax income-producing property at a higher rate than owner-occupied 35 residences and farms.” I d. at 66. 36 37 . . . [I]t is clear that there is discrimination 38 in favor of the real property owner who lives in 39-7- one-half of a duplex and rents the other half 1 and in favor of the real property owner who 2 rents one or more single-family residences. 3 There is substantial proof in the Nashville case 4 that single-family residences for rental 5 purposes make a poor investment. The cost of 6 land on the one hand and the savings to be 7 effected in the construction and operation of 8 multi-unit apartments render it inconceivable 9 that any investor would be in the business of 10 renting single-family residences. It is obvious 11 that the Convention and the people deemed it 12 reasonable to embrace within the favored 13 classification of a owner-occupied residence, 14 owners of additional single-family residences 15 and the owner who lives in one-half of his 16 duplex. 17 18 19 I dat 66. This favored classification does not extend to the owner 20 of the 80 condominium rental units which are, to the owner-taxpayer, 21 income producing property. 22 23 The decision of the Court of Appeals is affirmed, and 24 costs are taxed against Castlewood, Inc. 25 26

_____________________________ 27 Lyle Reid, Special Justice 28 29 Concur: 30 31 Drowota, Birch, and Holder, JJ. 32 33 Anderson, C.J. - Not participating. 34