F IL ED

O c t o b e r 21, 1998

C e c i l W . C r o w son

A p p e l l a t e C o u r t C l e r k

THE SHERWIN-WILLIAMS COMPANY, )

)

Plaintiff/Appellant, )

)

v. ) Appeal No.

) 01-A-01-9711-CH-00651

RUTH E. JOHNSON, Commissioner of ) 

Revenue, State of Tennessee, ) Davidson Chancery

) No. 93-2721-I

Defendant/Appellee. )

COURT OF APPEALS OF TENNESSEE

APPEAL FROM THE DAVIDSON COUNTY CHANCERY COURT

AT NASHVILLE, TENNESSEE

THE HONORABLE IRVIN H. KILCREASE, JR., CHANCELLOR

MICHAEL D. SONTAG

BRYAN W. METCALF

Bass, Berry & Sims

2700 First American Center

Nashville, Tennessee 37238-2700

MICHAEL T. CUMMINS

JOSEPH F. TIMMONS

The Sherwin Williams Co.

101 Prospect Avenue, N.W.

Cleveland, Ohio 44115

ATTORNEYS FOR PLAINTIFF/APPELLANT

JOHN KNOX WALKUP

Attorney General and Reporter

JOE C. PEEL

Cordell Hull Building, Second Floor

425 Fifth Avenue North

Nashville, Tennessee 37243-0489

ATTORNEYS FOR DEFENDANT/APPELLEE

AFFIRMED AND REMANDED

WILLIAM B. CAIN, JUDGE

O P I N I O N
2

P lain t i f f S h e r w i n - W illia m s C o m p a n y file d s u it p u r s u a n t to T e n n ess e e

C ode A nnot a t ed s e c t i on 67- 1 - 1802 s e e k i ng a r e f und of cor por a t e e xci s e t axe s

w ith resp e c t t o t a x y e a rs 19 8 7 , 1988, 1989 a nd 1990. T he ap peal pres ent s t hree

q u e s tio n s , to - w it:

1 . I s r e t u r n o f c a p ita l fr o m c a s h in v e s t m e n t s in c l u d a b l e in th e

denom i nat o r under T . C . A . 67- 4 - 811( g ) ( 1 ) ?

2 . I f t he a n s w e r t o ques t i on 1 i s af f irm a t i ve, di d t he c o m m i s s i oner

p r oper l y exer cise h i s d i s c r e tio n und e r T . C . A . 67- 4 - 812( a ) i n var y i ng t he s t a t u t o r y

f o r m u l a ?

3 . I s S h e r w i n - W illia m s ' re f u n d c l a i m fo r th e y e a r 1987 ba r r ed by t h e

s t a t u t e o f lim ita tio n s ?

T enn ess e e adopt ed t he U n i f o r m D i v i s i on of I ncom e f o r T a x Pur pos e s A c t

( UDI T P A ) i n 1976 a nd i t i s codi f i ed i n T enne s s e e C ode A nnot a t ed s e c t i on 67- 4 -

801 et s eq.

T h e r e is little fa c t u a l d i s p u t e b e t w e e n th e p a r t i es an d t he pr obl e m i n

ques t i on num ber one i s bes t s t a t ed i n t he br i e f of t he a ppel l e e .

T h e cent r a l i s s ue i n t h i s cas e i n v o l ves t he d e t e r m i nat i o n of t he p r o p e r

c a l cul a t i o n of t he d eno m i nat or of t he sal e s f a c t o r i n t he s t a t u t o r y appor t i onm ent

f o r m u l a . T he T e n n e s s e e E xci s e Tax l a w i n ef f e c t i n 1987 t h r ough 1990

r equ i r ed t he P l a i n t i f f t o p ay an exci se t ax eq ual t o si x p e r cent ( 6 % ) of i t s " net

ear n i n g s " as def i ned i n T . C . A . § 67- 4 - 805. C o r por a t i ons doi ng bus i nes s bot h

w ith i n and w i t h o u t T enn ess ee ar e perm i t t ed t o al l ocat e and app ort i o n t hei r

t axa b l e i n com e unde r t he pr ovi s i ons f ound i n T . C . A . §§ 67- 4 - 809 t h r ough 67- 4 -

816. T hes e a ppor t i onm ent pr ovi s i ons w e r e a dopt ed by th e T enn ess ee G eneral

A s s e m b l y in 1976 i n C hap t e r 53 7 , P u b l i c A c t s of 19 7 6 w h i ch w as based up o n

t h e U n i f orm D i v i s i o n of I nco m e f or T ax P urposes Ac t ( U D I T P A ). S i n c e

S herw i n W illia m s w a s enga ged i n bus i nes s bot h w i t h i n an d w i t h o u t t he S t a t e

o f T enn ess ee du r i n g t he years i n q uest i o n , i t w a s r equi r ed by T. C . A . § 67- 4 - 809

t o appor t i on i t s bus i nes s ea r n i ngs i n ac cor danc e w i t h t he a ppor t i onm e n t f o r m u l a

f ound i n T . C . A . § 67- 4 - 811.

T . C . A . § 67- 4 - 811 def i nes t he s t anda r d appor t i o n m ent f orm u l a as a

f r a c tio n , t he n u m e r a t or of w h i ch i s t he sum of t he p r o p e r t y , payrol l and sal e s

f a c t o r s of each t axp ayer as def i ned i n t he s t a t u t e a nd t h e den o m i nat or i s t hree

( 3 ) . T he st a t u t e defi nes each f a c t o r as a f r a c t i on i n w h i ch t he num e r a t o r i s th e

t axp ayer ' s r e s pect i ve pr oper t y , payr o l l or s a l es val ues i n T enn ess ee and t h e

denom i nat o r i s t he t axpayer ' s r e s pect i ve pr oper t y , payr o l l or s a l es val ues i n al l

j u ris d i c tio n s .

T h e pr ovi s i ons of T . C . A . § 67- 4 - 811 r e a d i n per t i nent par t ar e a s f o l l o w s :
3

( a ) A l l bu s i ness ear n i n g s s hal l be ap p o r t i o n e d to th i s st a t e by

m u ltip l y i n g t he e a r n i ngs by a f r a c t i on, t he n u m e r a t or of w h i c h

i s t he pr oper t y f a c t o r pl u s t he pa y r o l l f a c t o r pl u s t h e sal es f act or,

and t he de nom i nat o r of w h i ch i s t h r e e ( 3 ) ; . . .

( b )(1 ) T h e pr oper t y f a c t o r i s a fr a c tio n , th e nu m e r a t or of w h i c h

i s t he av e r age value o f th e t axpa yer ' s r e a l and t angi b l e a n d

pers o n a l propert y ow ned or r ent e d and us ed i n t h i s s t a t e dur i n g

t h e t ax pe r i od and t he de nom i nat o r of w h i ch i s t he a ver age val u e

o f al l t he t axpayer ' s r eal and t angi b l e pr oper t y .

* * *

( e )(1 ) T h e payr o l l f a c t o r i s a f r a c t i on, t he num e r a t o r of w h i c h

i s t he t o t a l am ount pai d i n t h i s s t a t e dur i ng t he t ax pe r i od by t h e

t axp ayer fo r com pens a t i on, and t he de nom i nat o r of w h i ch i s t h e

t o t a l com pens a t i on pai d eve r y w her e dur i ng t he t ax pe r i od.

* * *

( g )(1 ) T h e s a l e s fa c t o r is a fr a c tio n , th e n u m e r a t o r o f w h i c h is

t h e to t a l s a l e s o f th e t axpa yer i n t h i s s t a t e dur i n g t he t ax pe r i od,

and t h e d e n o m i n ator of w h i c h i s t h e total sales of th e t axp ayer

eve r y w her e dur i ng t he t ax pe r i od.

T . C . A . § 67- 4 - 80[ 4 ] ( a ) ( 12) def i nes " s a l e s " as f o l l o w s :

" S ales" m eans al l g r o s s r ecei p t s of t he t axp ayer no t

a l l ocat ed u n d e r t h i s chapt e r .

I n t he p r esent case, t he P l a i n t i f f deri ved i nco m e f r o m t he sho r t - t e r m

i nves t m ent of i t s exc e s s w o r k i n g capi t a l . T hese t r ansact i o n s w e r e han d l ed i n

t h e Pl a i n t i f f ' s C l eve l and of f i c e by i t s t r easur y dep a r t m ent pers o n nel . O n a d a i l y

basi s , t he t r easur y personnel con sol i dat e d t he ba nk ac count s of t he Pl a i n t i f f ' s

vari ous l o cati o n s i n t h e stat es w h ere S h erw i n - W i l l i a m s co n d u cts i t s b u s i n ess

oper a t i ons . T h e tr easu ry p erson n el determ i n e d t h e ca s h p o s i t i o n o f th e P lain t i f f

and i t s f u t u r e f undi ng ne eds . A ny e xce s s cash w a s in v e ste d in sh o rt-t e r m

i n t erest bea r i n g secu r i t i es w i t h v a r i o u s m a t u r i tie s . ... F o r exa m p l e , Sher w i n -

W illia m s w i r e t r ans f e r r ed $11, 000, 000 f o r a one da y depos i t t o t he Si gnet B ank

o n J anua r y 3, 1990. . . . T he n ext day, J anua r y 4, 1990, Si gnet B ank w i r e

tran sfe rre d t he p r i n cipal am o u n t o f $1 1 , 0 0 0 , 0 0 0 b ack t o S h erw i n - W i l l i a m s p l u s

i n tere s t i n t he am o u n t of $2, 5 3 9 . 9 3 . G eneral l y , al l w orki n g capi t a l t r ansact i o n s

i nvol v e i n v est m ent s i n w h i ch S herw i n-W i l l i a m s m akes an i n v est m ent of f unds

i n s h o r t - t e r m in t e r e s t b e a r i n g s e c u r i tie s . S h e r w i n - W illia m s w ill u s u a lly h o l d

t he s e c u r i t i e s t o m a t u r i t y but i f necessar y t o m eet cash r equ i r e m ent , S herw i n -

W i l l i a m s m a y sell su c h secu r i t i es. 

I n t h i s cas e , t he p a r t i es ar e agreed t hat t he i n t e r est i nco m e and any

gai ns( l osses ) s houl d be i ncl uded i n t he d enom i nat o r of t he s a l e s f a c t o r .

S h e r w i n - W illia m s cont ends , h o w e v e r , t hat t he pr i nci pal am ount s of t he w o r k i n g

capi t a l i n v est ed w h i c h ar e r e t urned t o S herw i n-W i l l i a m s w hen t he securi t i e s

m a t u r e and ar e r edeem ed o r sol d are al so r equ i r ed t o b e i ncl u d ed i n th e

denom i nat o r of t he s a l e s f a c t o r . T he Pl a i n t i f f cont ends th a t th e te r m " t o t a l

sales" i n t he d eno m i nat or of t he sal es f act or of t he st a t u t ory appo r t i o n m ent

f o r m u l a r equ i r es t he i ncl usi o n of not on l y t he i n t e r est i nco m e and any g a i n s

fro m t he w orki n g capi t a l t r ansact i o n s but al so t he a m ount s o f th e re t u r n e d

pri nci pal f r o m t he w orki n g capi t a l i n v est m ent op e r a t i o n s . T he C o m m i s s i o n e r

det e r m i ned t hat onl y t he t o t al i n c o m e [i n t erest i n c o m e an d an y g ains(l o sses)]
4

fro m t he w o r k i ng ca p i t a l i nves t m ent s s houl d be i ncl u d e d i n t he c o m put a t i on of

t h e d e n o m i n ator of t h e sales factor an d n o t t h e returne d am o u n t s o f pr i nci p a l

i n v est e d i n t he w o r k i ng ca p i t a l i nves t m ent s . T h u s , t he k ey qu est i o n i s w het her

t h e r e t u r ned pr i nci pal am ount s ar e pr oper l y i ncl uded i n " t o t a l sal es ever y w here"

u n d er t h e p rop er ap p l i cati o n o f t h e ab o v e referen ced st atutes.

T h e pos i t i on of She r w i n - W i l l i a m s i s t hat T enn ess ee C o d e A n n o t a t e d

sect i o n 6 7 - 4 - 8 0 4 ( a ) ( 1 2 ) m e a n s lite r a lly wh a t it s a y s w h e n c a l c u l a tin g " . . . to t a l

sal e s of t he t axp ayer ever y w here . . . " per T enn ess ee C o d e A nnot a t ed s e c t i on 67-

4 - 811( g ) ( 1 ) . Th e f o r m e r s e c t i o n read s : "S ales - A l l g ross rece i p t s o f t h e

t axp ayer not al l oca t ed und e r t h i s cha p t e r . " Te n n . C ode A nn. § 67- 4 -

804( a ) ( 1 2 ) ( 1997 ) . ( T h i s s ubs e c t i on has bee n r e c odi f i ed a s T enn. C ode A nn. §

67- 4 - 804( a ) ( 15) ( 1998) ) .

S h e r w i n - W illia m s a rtic u l a t e s its p o s itio n o n th i s is s u e i n its re p l y b rie f

w ith c l a rity :

T h e st a t u t e cl ear l y cont e m p l ates t h e inclusion i n t h e sales factor of g ross

r e c e i p t s fro m t he sal e of i n t ang i b l e propert y as w e l l as f r o m t he sal e of t ang i b l e

p r oper t y . I n fact , t he st a t u t e det a i l s a s pec i f i c m e t hod of det e r m i n i ng w het her

"sales, ot h e r t han sal es of t ang i b l e pers o n a l propert y" occur i n t he S t a t e of

T enn ess ee. S e e T enn . C o d e A n n . § 6 7-4- 8 1 1(I ) ( provi d i n g , gen e r a l l y , t hat if th e

m a j o rity of t he "ear n i n g s pr o d uci n g act i v i t i es" w i t h res pect t o t he sal e of

i n t ang i b l e s occ u r i n T enn ess ee, t hen t he sal e i s deem ed t o o ccur i n T enn ess ee) .

R a t her t han i ncl u d i n g t he g r oss r ecei p t s f r o m t he sal e of t hese i n v est m ent s

i n t he d eno m i nat or of t he sal es f act or, t he C o m m i s s i oner i ncl uded onl y t h e

i n tere s t i ncom e a n d net gai n ( l o s s ) fr o m t h e O h i o T ransa cti o n s i n v estm e n t s i n

t h e den o m i nat or w hen she r e c o m p u t ed t he am o u n t of Sh e r w i n-W i l l i a m ' s

i ncom e appor t i oned t o T enne s s e e . T h i s i n t e r p r e t a t i on of T enn. C ode A nn. § 67-

4 - 811( g ) ( 1 ) ( des c r i b i ng t he s a l e s f a c t o r ) and 67 - 4-804 ( a ) ( 1 2 ) ( defi n i n g "s a l es"

a s m eani n g al l g r o s s r e c e i p t s of t he t axp ayer no t al l ocat ed u n d e r t he ex c i se t a x

l a w ) ca nnot be r e c onci l ed w i t h t he pl a i n l angua ge of t h o se s ect i o n s . C o u r t s ar e

r equ i r e d t o gi ve e f f e c t t o t he i n t ent i on or pur pos e of t he l egi s l a t ure as exp r ess e d

i n a stat u t e , an d t h e "legisl ati v e intent or p u rpo se is t o be ascer t a i ned pri m a r i l y

fro m t he n a t ural and ordi nary m ean i ng of t he l angua ge us ed, w hen r e a d i n

con t ext w i t h th e e n t i r e s t a t u t e , w i t hout any f o r c e d or s u b tle c o n s tru c tio n to lim i t

o r ext end t h e im p o rt o f th e l ang uag e . " W o rra l l v . K r o g e r C o . , 545 S. W . 2d 736,

738 ( T enn. 1977) .

T h e nat u r a l and or d i nar y m e a n i n g of T enn. C ode A nn. § 67- 4 - 811( g ) ( 1 )

r equ i r e s t hat t he t o t a l sal e s of t he t axpa yer eve r y w her e dur i ng t he t ax pe r i od be

i ncl u d e d i n t he de nom i nat o r of t he s a l e s f a c t o r . T enn. C ode A nn. § 67- 4 -

804( a ) ( 12) defi nes t he t e r m "s a l es" t o i ncl u d e a ll g r o s s r e c e i p t s o f th e t axp ayer

not ot herw i se al l ocat ed u n d e r t he E xci se T ax L a w . T he nat ural and ordi nary

m e a n i n g o f th e t erm "g ross rece i p t s " m and a t es t hat t he t o t a l or g r o s s pr oce eds

fro m t he O h i o T r ansact i o n s ( t hat i s ; t he i nco m e and t he r e t u r n o f

pri nci pal / capi t a l ) b e includ e d i n t h e sales factor. C ert ainly t h e term "g ross

r e c e i p t s " c a n n o t be co nst r ued t o i ncl u d e on l y t he net i ncom e a nd net gai n

deri ved f r o m t he sal e of s h o r t - t e r m i n v est m e n ts. In f a c t, S h e r w i n - W illia m s

r e s p e c tfu lly subm i t s t hat t he t e r m s " gross " and "net " ar e m u t ual l y exclusi ve:
5

W ebst e r ' s T h ird N e w I n t e r nat i o n a l D i c t i o n a r y defi nes t he t e r m "gr oss" as

"co n s i s t i n g of an ov e r a l l t o t al exc l u s i v e o f ded u cti o n s (~e arning s)( ~ p rod u c t i o n )(~ ann ual p r o fit ) -- o p p o sed t o n e t . " ( e m p h asi s added ) . T he st a t u t e i s

not am b i g u o u s and l eaves no basi s f or w h i ch t he C o m m i s s i o n e r m ay c ont end

t hat th e nat u r a l and ordi nary m eani n g of " gross r ecei p t s " as used i n t he sal e s

f a c t o r s houl d s o m ehow be i gnor ed. 

T h e ef f o r t s by t axpa y e r s t o i ncl ude r e t u r n of w o r k i ng ca p i t a l i nves t e d in

t h e denom i nat o r of t he s a l e s f a c t o r i s not new t o s t a t e s oper a t i ng unde r t h e

U n ifo r m Di v i s i on of I ncom e f o r T ax Pur pos e s A c t or under com par abl e

l e g i s l a tiv e ena c t m ent s . T he res u l t i n each i nst ance i s a hyp e r - i nfl a t ed sal e s

f a c t o r .

I n A m e r i can Tel ephone and T e l egr aph C o . v. D i r e c t o r , D i v i s i on of

T axat i o n , 476 A . 2d 800 ( N . J . 1984 ) th e t axpa y e r i ncl uded i n i t s 1972

c o r p o r a tio n b u s i n e s s ta x re t u r n s to t a l re c e i p t s in th e denom i nat o r of ei ght b illio n

seven hundr ed ni net y - s i x m i l l i o n ni ne hun d r ed s i x t y - one t hous and on e hund r e d

fift y -se v e n d o lla r s . O f th i s a m o u n t, p r o c e e d s re c e i v e d fro m t he sal e or

r e d e m p tio n of i nves t m ent pap e r to t a l s i x b illio n e i g h t h u n d r e d fif t e e n m illio n

seven hundr e d ni net y - t w o t hous and t h r e e hundr ed t h r e e dol l a r s , of w h i c h mo r e

t h a n fiv e b illio n e i g h t h u n d r e d m illio n d o lla r s re p r e s e n t e d m oney f l o w i ng bac k

t o A T & T fr o m c e r tif i c a t e s o f d e p o s it, c o m m e r c i a l pap e r , and b anke r s '

a c c e p t a n c e s . D u r i ng t h i s s a m e y e a r , 1972, t he t o t a l aggr egat e r e c e i p ts fro m

A T & T ' s bus i n e ss o f r end e r i n g t e l ecom m u n i cat i o n s s e r v i ce nat i o n a l l y an d

i n t e r nat i onal l y w a s appr oxi m a t e l y one bi l l i on ni ne hun d r ed m i l l i on dol l a r s .

A ppl y i ng t he N e w J e r s e y s t a t u t e t he c our t hel d :

[ 1 ] W e up h o l d as a g e n eral m att er t h e ex clusion o f gross r even ues r ecei ved

b y p l aint i f f fr o m t h e sale or m aturi t y o f i n v estm e n t p a p er. A s Jud g e C r a b tree

obs e r ved, i d l e cash can be t urned o ver r epeat edl y by i n v est m ent i n sh o rt t e r m

secu r i t i es. It is n o tru e re fle c tio n o f th e s c o p e o f A T & T ' s bus i nes s done w i t h i n

and w i t h o u t N e w Jer sey t o al l ocat e t o t he n u m e r a t or or t he de nom i nat o r of t h e

r e c e i p t s f r a c t i on t he f u l l am ount of m oney r e t u r ned t o A T & T upon t he s a l e or

r ede m p t i o n of i nves t m ent p a p er. T o i n clud e su c h receipts i n t he f r a c t i on w oul d

b e com parabl e t o m easur i n g bu s i ness act i v i t y by t he a m o u n t of m o n ey t hat a

t axp ayer r epe a t edl y de p o s i t ed a nd w i t hdr e w f r o m i t s ow n bank a c c ount . T h e

bul k of f unds f l o w i ng bac k t o AT & T f r o m i nvest m ent paper w a s si m p l y i t s

o w n m oney. W hat ever ot her j ust i f i cat i o n t here i s f or excl u d i n g such revenu e s

fro m t he recei p t s f r act i o n , it i s s u fficie n t t o sa y th a t t o d o o t h e r w ise p r o d u c e s

a n abs u r d i n t e r p r e t a tio n o f § 6 ( B ). " It is a x i o m a tic th a t a s t a t u t e w ill n o t b e

con s t r ued t o l e a d t o abs u r d r e s u l t s . A l l r u l es of con s t r uct i o n ar e s ubor d i nat e t o

t hat ob v i o u s pr o p osi t i o n . [ E ven t he rul e of s t r i c t con s t r uct i o n ] do es not m ean
6

t hat a ri d i c u l o u s result sh all b e reac h e d b eca u se so m e i ngeni o u s pat h m ay be

f ound t o t h at end . " S t ate v. Pro v e n zan o , 3 4 N . J . 3 1 8 , 3 22, 169 A . 2d 135

( 1961) .

 A m erican T eleph o n e a n d T elegra p h C o . v. D i rector D i visi o n o f T a x a t i o n , 476 A . 2d 800,

 802 ( N . J . 1984) .

I n 1996, t he I ndi ana t ax c our t d e a lt w ith a s t a t u t e a l m o s t id e n tic a l to th a t

o f T e n n esse e w h erei n S h erw i n - W i l l i a m s so u g h t t o i ncl ude r e t u r n of p rin c i p a l in

t h e denom i nat o r of t h e sa l es factor w h ere "sa l es" w as d efi n e d as " . . . all g ross

r ecei p t s of t he t axpa y e r not al l oca t ed und e r i . c . 6- 3 - 2 - 2 ( g ) t h r ough 1c 6 - 3 - 2 - 2 ( k ) . "

T he c our t obs e r ved:

T h e cen t ral d e b ate i n t h i s case i s h o w t o d e f i n e "g ross receipts" f o r t h e

pur pos e of t he d eno m i nat or of t he sal es f act or. T he D epart m ent con s i ders onl y

t h e i n t e r est ear ned on t he i n v est m ent secur i t i es t o b e gross r ecei p t s . S herw i n -

W illia m s , on t he o t her hand , ar g ues t hat gr o s s r e c e i p t s equa l s t he a m ount

r ecei ved on t h e s a l e , w h i ch i ncl udes bot h t h e i n t e r est ear ned and t he p r i nci pal .

T h e D epa r t m ent r e s ponds t hat i ncl u s i on of pr i nci pal i n t he de nom i nat o r di s t o r t s

t h e app o r t i onm ent f o r m u l a by gi v i ng e x t r a w e i g h t t o o u t - of- s t a t e sal es. T here

i s a great po t ent i a l f or abuse, ar g u es t he D epart m ent , beca u s e Sher w i n - W i llia m s

coul d u se the sa m e p r i n cipal m a n y ti m es as it re-i n v ests in sh o rt-t e r m secu r i t i es,

r o l l i ng [ *7] over t he pr i nci pal of t he pr evi ous l y s o l d i nves t m ent .

 T h e S h e r w i n - W illia m s C o . v . In d i a n a D e p 't o f S t a t e R e v e n u e , 673 N . E . 2 d 849, 851 

 ( I nd. T ax C t . 1996) .

R e l y i n g on A T & T v. D i rect o r , 476 A . 2d 800 ( N . J . 1984) , t he I ndi ana

c o u r t h e l d th a t " g r o s s re c e i p t s " d i d n o t in c l u d e re t u r n o f p r i n c i p a l. 

T u r n i n g now t o th e e f f e c t in T enne s s e e of i ncl udi ng r e t u r n of pr i nci pal i n

t h e "sales f a c t o r", o n e m u s t r e m e m ber t hat t he pr i nci pal bus i nes s of Sher w i n -

W illia m s n a tio n w i d e is th e m a n u f a c t u r e a n d s a l e o f p a i n t a n d re l a t e d p r o d u c t s .

N a tio n w i d e g ross rece i p t s fr o m t h ese o p erat i o n s for each o f t h e years i n i s s ue are

a s fo llo w s :

1987 $1, 751, 029, 652

1988 $1, 908, 933, 782

1989 $2, 016, 485, 025

1990 $2, 190, 709, 853
7

D u r i n g t h o se sa m e y e a rs, ret u rn o f pri n cipa l w as:

1987 $2, 008, 053, 464

1988 $1, 595, 783, 455

1989 $3, 320, 585, 868

1990 $3, 098, 033, 766

I f t he g r oss r ecei p t s f r o m m anu f act u r i ng and s a l e of pai n t and r e l a t e d

p r oduct s ar e t hen c o m b i ned w i t h r e t u r n of pr i nci pal am ount s i n det e r m i n i ng t h e

denom i nat o r i n t he " s a l e s f a c t o r " , an a ver age of 55. 169% of t he c o m b i ned t o t a l

f o r ea ch y e a r w oul d be r e t u r n of pr i nci pal .

T hus , t he sam e abs u r d i t y e x i s t i ng i n N e w J e r s e y and I ndi ana w oul d exi s t

i n T enn ess ee.

Fol l o w i ng t he l e a d of N e w J e r s e y and I ndi ana , t he c hanc e l l o r hel d : 

T h i s cour t f i nds t hat t o i ncl ude r e t u r n of pr i nci pal i n t he sal es f a c t o r

denom i nat o r w oul d di s t o r t t he ex t ent of Sh e r w i n-W i l l i a m s ' bu s i ness act i v i t i e s

i n T enn ess e e and ot her s t a t es i n w h i ch i t do e s bus i nes s and de f e a t t he i n t ent and

pur pos e o f th e s t a t u t e ( T . C . A . 67- 4 - 811) . A c c o r d i ngl y , t he c our t fin d s th a t th e

a m ount o f r e t u r n o f p rin c i p a l to S h e r w i n - W illia m s o n t he s a l e or r ede m p t i on of

i n tere s t b earing secu r i t i es relat e d t o i t s , w o r k i n g ca p i t a l i nves t m ent s s houl d not

be i ncl u d ed i n t he d eno m i nat or of t he sal es f act or. [ s i c ] 

T h i s hol d i ng by t h e chan cel l or i s l o g i cal and app eal i n g , part i cul a r l y si nce;

"It i s pr esum ed t hat t he l egi s l a t ure enact i n g a st a t u t e di d not i n t end an a bsur d i t y ,

and such a re s u lt w ill b e a v o i d e d b y th i s c o u rt if th e te r m s o f th e s t a t u t e a d m it o f

i t by r e a s onabl e c ons t r uct i on. " E p s t e i n v . S t a t e , 211 T enn. 633, 366 S. W . 2 d 914

( 1963) ; L o f t i n v. L angsdo n , 813 S. W . 2d 475, 480 ( T enn. A pp. 1991) .

T h i s s ound r u l e , how eve r , i s m e t by t h e e q u a l l y w e l l se t t led ru le th a t : "If

t h e w o r d s of a s t a t u t e pl a i n l y m e a n one t h i ng t hey ca nnot be gi ven a not her

m eani n g by j udi c i a l cons t r uct i on. " H e n ry v. W h ite , 194 T enn. 192, 198, 250

S . W . 2d 70, 72 ( 1952) .

I n co n s t ruing t h e ter m "g ross rece i p t s " un der T enn ess ee C o d e A nnot a t e d

sect i o n 67- 4 - 301, t he Supr e m e C our t of T enn ess ee ob ser ved : "W e do no t bel i eve

t h a t th e d e fin itio n o f ' g ross rece i p t s ' under T . C . A . 67- 4 - 301 i s am b i guous s o as
8

t o re q u ire re s o rt to ru l e s d e a l i n g w ith th e c o n s t r u c tio n o f u n c l e a r s t a t u t e s . "

S o u t h C e n t r a l B e ll T e l e . C o . v . O l s o n , 669 S. W . 2d 650, 652 ( T enn. 1984) .

W ith de f e r e n c e to s i s t e r ju ris d i c tio n s , th i s c o u rt is re l u c t a n t to a p p l y th e

sam e “ab s u rd resu l t st and a r d”. A n ab sur d res u l t i s not necessar y for , i n spi t e of

t h e pl a i n l angua ge of T enne s s e e C ode A nnot a t ed s e c t i on 67- 4 - 811( g ) ( 1 ) , t h e

com m i s s i o n e r m ay o p t f or a di f f e r e n t schem e of as ses s m ent w hen ever t h e

r e s u ltin g appor t i onm ent does no t f a i r l y repr esent t he t axp ayer’ s busi ness i n th i s

s t a t e . T he v e r y ab sur d i t y o f t he res u l t soug h t by S herw i n-W i l l i a m s , l ays a s ound

b asis fo r th e i m p l e m ent a t i on of T enne s s e e C ode A nnot a t ed s e c t i on 67- 4 - 812( a ) .

The trial court found that applying the statutory scheme would "distort the extent

of Sherwin-Williams' business in Tennessee . . . ," and applied the alternative

method.

The alternative statute is clear upon its face:

(a) If the allocation and apportionment provisions of this part do not

fairly represent the extent of the taxpayer’s business activity in this

state, the taxpayer may petition for or the commissioner may require,

in respect to all or any part of the taxpayer’s business activity, if

reasonable:

. . . 

(4) The employment of any other method to effectuate an equitable

allocation and apportionment of the taxpayer’s earnings. Tenn. Code

Ann. § 67-4-812(a)(4) (1994).emphasis added

The real question to be answered is whether, as a matter of law, the

variation in this case amounts to an abuse of discretion. Using the terminology

of the statute, the commissioner has abused his discretion where the alternative

computation reaches an inequitable result as to the apportionment. 

In utilizing the variation, the Commissioner found, as did the Chancellor,

that by including the gross receipts from the sales of short term securities,

Sherwin-Williams did not fairly and accurately represent the total amount of

property, payroll and sales subject to state taxation (the denominator), and

therefore did not fairly represent the amount of property subject to taxation in

this state, (the ratio constructed using the above denominator). 
9

Sherwin-Williams argues that absent a “grossly disproportionate” ratio as

described by this court in AT&T v. Huddleston, 880 S.W.2d 682 at 692

(Tenn.Ct. App. 1994), the alternative statute, Tennessee Code Anotated section

67-4-812 (a)(4), cannot be used. Both parties as well as the trial court have

acknowledged that the situation at bar represents a case of first impression

insofar as it concerns a Commissioner who seeks a variance rather than a

taxpayer. The two Tennessee cases that come closest to addressing this situation,

AT&T v. Huddleston, 880 S.W.2d 682 (Tenn. Ct. App. 1994) and Peterson

Mfg. Co. v. State, 779 S.W.2d 784 (Tenn. 1989), concern taxpayers seeking a

variance.

There is, however, much guidance to be drawn from these authoritative

sources. Contrary to Sherwin-Williams assertion in its brief, this court in AT&T

found that: 

States are given wide latitude under the Federal Constitution to adopt

various methods for attributing earnings to a taxing state. See

Moorman Mfg. Co. v. Bair, 437 U.S. 267, 279, 98 S.Ct. 2340, 2347-48,

57 L.Ed.2d 197, 208 (1978). “[T]he Constitution imposes no single

formula on the States...” Container Corp., 463 U.S. at 164, 103 S.Ct.

at 2939, 77 L.Ed.2d at 552.

 AT&T v. Huddleston, 880 S.W.2d 682, 689 (Tenn.Ct.App. 1994).

Indeed the court in AT&T cited Peterson for the proposition that the

burden is on a taxpayer to establish that “its own unique facts and circumstances

justify a departure from the standard apportionment formula.” AT&T v.

Huddleston, 880 S.W.2d 682 at 691. It can well be said that under the above

authorities the statutory apportionment scheme is presumptively correct.

However what can a state do when faced with a statutory scheme which does not

fairly represent the taxpayer’s income attributable to that state? The three factor

apportionment formula applied is clearly set out in Tennessee’s version of the

Uniform Distribution of Income for Tax Purposes Act (UDITPA). The goal of

the UDITPA is not pinpoint mathematical accuracy but fair apportionment. See

Tenn. Code Ann. § 67-4-804(b) (1998). The discretion accorded the

Commissioner as well as the bilateral ability to request a variance evidence this

goal. See Tenn. Code Ann. § 67-4-812 (1998). It is clear from the record before

this court that the Commissioner acted well within his discretion. At this point,
1

 These items appear in Exhibit 8 to the Record on Appeal and represent only a portion

of "The Sherwin-Williams Company Business Receipts Generated By Investment

Transactions 12/31/90."

10

this court must examine the nature of the transactions which the taxpayer

claimed were “sales” below. The court’s attention is drawn specifically to the

following series of transactions:

DESCRIPTION DATE

ACQUIRED

DATE

SOLD

GROSS SALES

PRICE

COST OR

OTHER BASIS

GAIN OR

LOSS

FNC ETD MATURITY 1/3/90 1/4/90 $10,002,309.03 $10,000,000.00 $2,309.03

AMERITRUST ETD

MATURITY

1/3/90 1/4/90 $5,501,260.42 $5,500,000.00 $1,260.42

CONTINETNAL ETD

MATURITY 1

1/4/90 1/5/90 $10,042,500.00 $10,000,000.00 $42,500.00

In essence, the Commissioner found, as this court does, a very high

probability that the same investment basis may be used in these admittedly

efficient short-term purchases and sales to barely increase the company’s overall

net worth, while profoundly increasing the out-of-state portion of their “gross

receipts” for UDITPA purposes. In such a situation, the above transactions do

not fairly represent the taxpayer’s income connection to Ohio. The resulting

transactions do not amount to $35,046,069.45 of taxable income in that state.

Consider the logical result, if these transactions had Tennessee as their situs. If

the Commissioner were to apply the statutory scheme, then the taxpayer would

be on the steps of the courthouse claiming an abuse of discretion. Under the

authorities cited above this court would be bound to assess the Commissioner’s

actions with regard to whether such an arrangement fairly represented the

company’s business in this state. It strains the bounds of good sense to assert

that the taxpayer is attempting to fairly and completely represent his business

connection to this state, when, as fortune would have it, Ohio statutes do not

require inclusion of the “gross receipts” in it’s receipt factor. The action of the

chancellor in applying the alternative provisions of Tennessee Code Annotated

section 67-4-812(a)(4) is affirmed.

In view of this court’s affirmation of the Chancery Court’s ruling

regarding the Commissioner’s use of an alternate scheme, the issue regarding the
11

limitation of an action for refund for 1987 is moot. However, this court agrees

with the chancellor that Appellant’s refund claim for 1987 taxes paid was barred

by the Refund Statute, Tenn. Code Ann. § 67-1-1802. The statute is clear upon

its face. The claim for refund was filed well after the statutory period had run.

Under the authorities cited herein, and upon the record, the judgment of

the Chancellor is affirmed. Costs on appeal are taxed against the appellant. The

cause is remanded for such further proceedings as are deemed necessary.

_____________________________________________

WILLIAM B. CAIN, JUDGE

CONCUR:

_________________________________________

BEN H. CANTRELL, PRESIDING JUDGE, M.S.

_________________________________________

WILLIAM C. KOCH, JR., JUDGE