# F I L E D
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/Appella

nt, ) ) 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 DAV IDSON COUNTY CHANCE RY 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 Wil

liams Co. 101 Prospect Avenue, N.W. Cleveland, Ohio 44 115 ATTORNEYS FOR PLAINTIFF/APPELLANT

JOHN KNOX WALKUP Attorney General and Reporter JOE C. PEEL Cordell Hull Buildin

g, Second Floor 425 Fifth Avenue No

rth Nashville, Tennessee 37243-0489 ATTORNEYS FOR DEFENDANT/APPELLEE

AFFIRMED AND REMANDED WILLIAM B. CAIN, JUDGE 

## O P I N I O N2 

### P lain t if f S h e r w i n - W illiam 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 se 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 tt o t a x y e a rs 19 8 7 , 1988, 1989 and 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 ap ita l fr o m c a s h in v e s t m e n t s in c l u d ab 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 the co mmi 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 the 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 illiam s ' re f u n d c l a i m fo r th e y e ar

1987 ba rr 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 ti s codi

f i ed i n T enne s s e e

C ode A nnot a t ed se c t i on 67- 4 - 801 et s eq. T h e r e is littlefa 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 and the pr obl e m i n ques t i on num ber one i s bes

ts t a t ed i n the 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 case i n v o l ves the d e t e rm i nat i o n of t he p r o p e r c a l cula t i o n of t he d eno m i nat or of

the sal e s f

a c t o r i n the st a t u t o ry 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 ti n 1987 th 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 earn i n g s " as def

i ned i n T . C
. A
. § 67- 4 - 805. C o rpor a t i ons doi ng bus i nes s both w ith i n and w i th o u t T enn ess ee are perm i t t ed t o al l ocat e and app ort i o n thei r t axa b l e i n com e unde r the pr ovi s i ons f ound i n T . C
. A
. §§ 67- 4 - 809 th r ough 67- 4 - 816. T hese a

pport 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 mb 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 io n of I

nco m e f or Tax P urposes Ac t ( U D I T P A ). S i n c e S herw i n W illiam s w a s

enga ged i n bus i nes s both w i th i n an d w i th o u t t he S t a t e o f T enn ess ee du r i n g t he yearsi n q uest i o n , i tw a s r equi r ed by T. C
. A
. § 67- 4 - 809 t o appor ti on i t s bus i nes s ea

r n i ngs i n ac

cor danc e w i th the a pport i onm e n t f o r mu l a f ound i n T . C
. A
. § 67- 4 - 811. T . C . A
. § 67- 4 - 811 def

i nes the st 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 rt y , payrol l and sal e s f a c t o r s of each t axp ayeras def i ned i n t he st a t

u t e a nd th e den o m i nat or i s t

hree ( 3 ) . T he st a tu 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 th 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 tar 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 shal l be ap p o rt i o n e dto th i s st a t e by m u ltip l yi n g the 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 the pa

y r o l l f a c t o r pl u s th e sal

es f act or, and t he de nom i nat o r of w h i ch i s th 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 , the nu m e r a t or of w h i c h i s the 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 dand us ed i

n th 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 the a

ver age val u e o f al l the 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 ountpaid i n th i s s t a t

e dur i ng the 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 paid eve

ry wher e dur i ng the 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 , the 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 th i s s t a t

e dur i n g the t ax pe r i od, and th e d e n o m i n ator of w h i c h i s th e total sales of th e t axp ayer eve ry wher e dur i ng the 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

the t axp ayerno t a l l ocat ed u n d e r

th i s chapt e r . I n t he p r esent

case, the P l a i n t i f

f deri ved i nco m e f

r o m the sho rt - t e rm i nvest m ent

of i t s exce s s w o rk i n g capi t a l
. T hese t r ansacti o n s we 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 easury dep a rt m ent pers o n nel
. O n a d a i l y basi s ,t he t r easury personnel con sol i dat e d t he ba nk ac count s of the Pl a i n t i f f' s vari ous l o cati o n s i n t h e states 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 th e ca s hp o s i t i o n o f

th e P lain t i f f and i t s f u tu r e f undi ng needs
. A ny e

xces s cash w a s in v e ste din sh o rt-t e r m i n t erest bea r i

n g secu r i t i es w i th v ar i o u s m a t u r i tie s . ... F o r exa mp l e ,Sher w i n - W illiam s w i r e t

r ansf e r r ed $11, 000, 000 f

o r a one da y depos i tt o the Si gnet

B ank o n J anua ry 3, 1990.
. . . T he n

ext day, J anua

ry 4, 1990, Si gnet

B ank w i r e tran sfe rre dt he p ri n cipal am o u n to 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 tr ansacti 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 ar i n g s e c u r i tie s . S h e r w i n - W illiam s w ill u s u a lly h o l d the 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 th i s cas e , the p a rt i es ar e agreed t

hat the 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 the 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

, that the pr i nci pal am ount s of the wo rk i n g capi t a l i n v est

ed w h i c har e r e turned t o S herw i n-W i l l i a m s w hen the securi

t i e s m a t u r e and ar e r edeem ed o r sol d are also 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 the sal es f

act or of the st a tu t ory appo rt 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 mt he w orki n g capi t a l tr ansacti 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 the 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 si o n e r det e rm i ned that

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 dan y g ains(l o sses)]4 fro mthe wo rk i ng ca

p i t a l i nvest m ent

s s houl d be i ncl u d e di n t he co 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 dn o tth e returne dam o u n t s o f pr i nci p a l i n v est e di n the wo rk i ng ca

p i t a l i nvest 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 llywh a tit s a y s w h e n c a l c u l a tin g "
. . . tot a l sale 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 se 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 codi 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 illiam s artic 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 arity :

T h e st a tu t e cl earl y

cont e m p l ates t h e inclusion i n th e sales factor of g ross r e c e i p t s fro mthe 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

, the st a tu 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 rt han sal

es of t ang i b l e perso n a l propert y" occur i n t he S t a t e of T enn essee. 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 , that if th e m a j o rity of t

he "ear n i n g s pr o d uci n g acti v i t i es" w i th 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 ther t han i ncl u d i n g the g r oss r ecei p t s f r o m the sal e of t

hese i n v est

m ent s i n t he d eno m i nat or of

the 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 dnet gai n ( l o s s ) fr o mth 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 the 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 the t axp ayerno tal l ocat ed u n d e r the ex c i se t

a x l a w ) ca nnotbe r e conci l ed w i th t he pla i

n l angua ge of t h o se s ecti o n s . C o u rt s ar

e r equ i r e dt o gi ve e

f f e c tt o the i n t ent i on or purpos e of

the l egi s l a ture as

exp r ess e d i n a stat u t e , an dth e "legisl ati

v e intent or p u rpo se is t

o be ascer t a i ned pri m a ri l y fro mthe n a tural

and ordi nary m

ean i ng of the langua

ge used,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 thoutany f

o r c e d or s u b tlec o n s tru c tio n to lim i t o r ext end t h e imp 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 me 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 ry wher e dur i ng the t ax pe r i od be i ncl u d e di n t he de

nom i nat o r of the s a l e s f a c t o r . T enn. C ode A

nn. § 67- 4 - 804( a ) ( 12) defi

nes the t e rm"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 notot herw

i se al l ocat ed u n d e r

the E xci se Tax 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 the t o t a l or g r o s s pr oce eds fro mt he O h i o T r ansacti o n s ( that i s ; the i nco m e and the r e t u r n o f pri nci pal / capi t a l ) b e includ e d i n th e sales factor. C ert ainly th e term "g ross r e c e i p t s " c a n n o tbe co nstrued 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 the sal e of s

h o rt - t e rmi n v est

m e n ts. In f

a c t, S h e r w i n - W illiam s r e s p e c tfu lly

subm i t s t

hat the t e rm s " gross " and "net " ar e mu t ual l y exclusi

ve:5 W ebst e r ' s T h ird N e w I n t e rnat i o n a l D i c t i o n a rydefi nes the t e rm"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 mp h asi s added )
. T he st a tu t e i s notamb 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 si o n e r

m ay c ont end that 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 ignor ed.


### T h e ef f o rt s by t axpa

y er 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 under t h e U n ifor 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 resu l ti 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 Telephone and T

e l egr aph C o . v. D ir e c

to 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 er 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 hundred ni

net y - s i x m i l l i o n ni ne hun

d r ed si 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 pape r to t a l s i x b illio n e i g h t h u n d r e d fift e e n millio n seven hundre d

ni net y - t w o thous and t

h r e e hundred 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 millio n d o llar 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 mm e r c i a l pap e r , and banke

r s ' a c c e p t a n c e s . D u r i ng th 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 pts 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 the N

e w J e r s e y s t a t u t e t he courthel

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 mth e sale or m aturi

t y o f i n v estm e n tp 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 th i n and w i th o u t N e w Jersey to al l ocat e t o t he n u m e r a t or or the de nom i nat o r of th e r e c e i p t s f r a c t i on t he f u l l am ountof m oney r e t u r ned t o A T & T upon the s a l

e or r ede mp t i o nof i nvest m ent

p a p er. T o i n clud e su c h receipts i n the f r a c t i on w oul d b e com parabl e t o m easuri n g bu s i ness act i v i t y by the 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 thdr e w

f r o mi t s ow n bank a

c count . 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 mp l y i t s o w n m oney. W hat ever ot her j ust i f i cati o n there i s f

or excl u d i n g such revenu e s fro mthe recei

p t s f r acti o n , it i s s u fficie n t t

o sa y tha 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 atio n o f § 6 ( B ). " It is a x i o m a tic th a t a s t at u t e w ill n o t b e con s t rued t o l e a

d t o abs u r d r e s u l t s . A l l ru l es of

con s t ruct i o n ar e s ubor d i nat

e t o that ob v i o u s pr o p osi t i o n . [ E ven the rul e of s tr i c t con s t ruct i o n ] do es not m ean6 that 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 ngenio u s pat h m ay be f oundt o th 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 ax a ti o n , 476 A
. 2d 800, 802 ( N . J . 1984)
. 

### I n 1996, t he I

ndi ana t ax courtd e a lt w ith as 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 tt 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 er 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 courtobs e r

ved: T h e cen trald e b ate i n th 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 purpos e of

the d eno m i nat or of

t he sal es f

act or. T he D epart

m ent con s iders

onl y t h e i n t e r est

earned on the i n v est

m ent securi t i es t

o b e gross r ecei p t s . S herw

i n - W illiam s , on t he o ther hand , ar g ues t hat gr o s s r e c

e i p t s equa l s the a m ount r ecei ved on th e s a l

e ,w h i ch i ncl udes both th e i n t e r est

earned and the p r i nci pal
. T h e D epa rt m ent r e s ponds that

i ncl u s i on of pr i nci pal i n the de nom i nat o r di s t o rt s t h e app o r t i onm ent f o rm u l a by

gi v i ng ex tr a

w e i g h tt 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 Sherw i n - W i lliam s coul du se the sa m e p r i

n cipal m a n y tim es as it

re-i n v ests in sh o rt-t e r msecu r i

t i es, r o l l i ng [ *7] over

the pr i nci pal of the pr evious l y s o l d i nvest 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 d849, 851 ( I nd. T ax Ct . 1996)
. 

### R e l y i n g on A T

& T v. D irect 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 ennes s e e of i ncl udi ng r e t u r n of pri nci pal i n t h e "sales f

a c t o r",o n e m u s tr e m e mber t hat t he pr i nci pal bus i nes s of

Sherw i n - W illiam 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 an 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 sue 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, 8537 

### 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 tand r e la 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 pri nci pal am ount s i n det

e r mi n i ng th e denom i nat o r i n the " s a l

e s f a c t o r " , an a ver age of 55. 169% of

t he co 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 pri 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 the 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

tf 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 rtthe 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 tdo e s bus i nes s and de f e a tthe i n t ent and purpos e o f th e s t a t

u t e ( T . C
. A
. 67- 4 - 811)
. A c co r d i ngl y , the courtfin d s th a t th e a m ounto 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 illiam s o n t he s a l e or r ede mp 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 rk i n g ca

p i t a l i nvest m ent

s s houl d not be i ncl u d ed i n t he d eno m i nat or of the sal es f

act or. [ s ic ] 

### T h i s hol d i ng by t

h e chan cel l or i s lo 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 mit o f i tby r e a s onabl e cons truct

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

ti 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 me 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 st a t

u t e pla i n l y m e a n one t h i ng they

ca nnot be gi ven a nother m eani n g by j udi c i a l

cons truct 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 truing 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 ourtof T

enn ess ee ob ser

ved : "W e do no tbel i eve t h a tth 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 as8



### 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 ar 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 ap p l y th e sam e “ab s u rd resu l tst

and a r d”. A n ab sur d resu l ti 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 se c t i on 67- 4 - 811( g ) ( 1 ) , th e com mi s s i o n e r

m ay o p t f

or a di f f e r e n tschem e of as ses s m ent w hen ever t

h e r e s u ltin g appor

t i onment does no tf a i r l y repr esentt he t axp ayer’ s busi ness in th i s s t a t e . T he v e r y ab sur d i t y o f t he resu l tsoug h t by S herw i n-W i l l i a m s ,l aysas 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 se c t i on 67- 4 - 812( a )
. The trial court found thatapplying the statutory scheme w

ould "distort the exten

t of Sherwin-Williams' business in Tennessee . . . ," and applied t he alternative method. The alternative statute is clear upon its face: (a) If the allocation and appor tionment 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 t

o a ll or any part of th

e taxpayer’s bu

siness activity, if reasonable:

. . . (4) The employment of any othe r method to effec tuate an equitabl

e allocation and apportionment of the t axpayer ’s earnings. Tenn. Code Ann. § 67-4-812(a)(4) (1994). emphasis added 

### The real question to be a nswered is whether, as a matter of law, the variation in this case amounts

to an abuse of discre

tion. Using the

terminology of the statute, the commissioner has abused his discretion wher e thealternative computation reache s an inequitable res ult as to the apport ionment.
In utilizing the

variation, the Com

missioner found, as didthe Chancellor, thatby including the gross r eceipts from the sa

les of short t

er m securities, Sherwin-Williams did not fairly and accurately repre sen t the total amount of property, payroll and sal e s subject to state tax ation (the denominato

r), and therefore did not fairly represent the amount of pro perty subject to taxation in this state, (the ratio constructed usin g the above denomin ator).9 

### Sherwin-Williams argues that absent a “grossly disproportionate” ratio as described by this court in AT&T v. Huddl eston , 880 S.W.2d 682 a t 692 (Tenn.Ct. App. 1994), the alterna tive statute, Ten

nessee Code Anotat

ed section 67-4-812( a)(4), cannot be used. Both parties as well a s the trial court hav

e acknowledged that the situation at bar re presen ts a case of first i mpression insofaras it con cerns a Commissione r who seeks a varia

nce rather than a taxpayer. The two Tennessee cases that come closest to addressing this situation, AT&T v. Huddleston , 880 S.W.2d 682 (T enn. Ct. App. 199

4) and Peter

so n Mfg. Co. v. State , 779 S.W.2d 784 (Tenn. 1989), concern tax payers seeking a variance. There is, however, much gui dance to be drawn f rom these authorita

tive sources. Contrary to Sherw in-Williams asser

tion in its brief, this courtin AT&T found that:

States are given wide latitude under the Federal Constitution to adopt v arious m ethods 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 impose s no single formula on the States...” Containe r Corp., 463 U.S. at 1 64, 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).


### I ndeed the court in AT&T cited Peterson for the proposition that th e burden is on a taxpayer to esta blish that “its own uniq

ue facts and circumstances justify a departure from thestandard apportio nment formula.” AT&T v. Huddleston , 880 S.W.2d 682 at 691 . It can well be said that under the ab ove authorities the statutory appor tionm ent scheme is presum ptively correct. However what can a state do whenfaced with a statutory scheme which does not fairlyrepresent the taxpayer’s income attributable to that state? The

three factor apportionmentfor mula applied is clea rly set out in Tennes see’s version of the UniformDistribution of Inc ome for Tax Purposes Act (UDIT PA). The goal of the UDITPA is not pinpoint mathematical accuracybut fair apportion ment. See Tenn . Cod e Ann. § 67-4-804(b) (1998). The discretion ac

corded the Commissioneras 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 Commi ssioner acted well with in his discretion
. At this point,1 These items appear in Exhibit 8 to the Record on Appeal and represent o

nly a portion of "The Sherwin-Wil

liams Company Busine ss Receipts G

e nerated By Investment Transactions 12/31/90." 10 

### this court must examine t he nature of the tra

nsactions which t

he taxpayer claimed were “sales” be

low. The court’ s attention i s drawn s pecifically 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 f ound , as this court does, a very high probability

that the same investment basis may be used in th ese admittedly efficient short-termpurchases and sales to barely increase the company’s overa

ll networth, while pro

foundly i ncreasing the out-of -state portion of the

ir “gross receipts”for

UDITPA purposes. In such a situat ion, the above transactions d

o not fairly represent the taxpay er’s income connec

tion to Ohio. The r

esulting transactionsdo not amount to $35,046, 069.45 of ta xable income in that state. Considerthe logical result, if these transactions had Tennessee as their situs. If the Commissionerwere toapply the statutory sc heme, then the taxpayer would be on the steps of the cour thouse cla

iming an abu se of discretion. U nder the authorities cited above this cour t would be bound

to assess the Commissioner’s a ct ions with regard to whe ther such an arran

gement fairly rep

resented the company’s business in

thi s state. It strains the bounds of good sense to assert thatthe taxpayer is attempting to fairly and completely repres ent his b usiness connection

to this state, when, a s fortu ne would have it, O hio statutes do not require inclusion of the “gros s receipts” in it’s r eceipt factor. The action of the chancellor

in applying the altern

ative provisions of

Tennessee Code Annotated section 67-4-812(a) (4) is affirmed.
In view of thi s court’s affirma tion of the Chancery

Court’s ruling regardingthe Commissioner’s use of an alternate scheme, the issue regard ing the11



### limitation of an action for refund f or 1987 is moot. How

ever, thiscourt agrees withthe chancellor that

Appellant’s refu

nd claim for 1987taxes paid was barred by the Refund Statute , Tenn. Code Ann . § 67-1-1802. The statuteis clear upon its face. The c

laim for refund was filed well aft er the statutory per

iod 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 app ellant. The cause is remanded f

or such further proc

eedings as are deem

ed necessary.

_____________

____________________________ ___ _ WILLIAM B. CAIN, JUDGE

CONCUR:

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

_________________________________________ WILLIAM C. KOCH, JR., JUDGE