WILLIAM E. CHERRY ET AL. v. REAGAN FARR, COMMISSIONER OF THE DEPARTMENT OF REVENUE FOR THE STATE OF TENNESSEE - Articles

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WILLIAM E. CHERRY ET AL. v. REAGAN FARR, COMMISSIONER OF THE DEPARTMENT OF REVENUE FOR THE STATE OF TENNESSEE

Posted by: Stacey Shrader Joslin on Apr 16, 2014

Court: TN Court of Appeals

Attorneys 1:

Robert E. Cooper, Jr., Attorney General and Reporter, William E. Young, Solicitor General, and Brad H. Buchanan, Senior Counsel, Nashville, Tennessee, for the appellant, Reagan Farr, Commissioner of the Department of Revenue for the State of Tennessee.

Attorneys 2:

David J. Callahan, III, Nashville, Tennessee, for the appellees, William E. Cherry and Anne. W. Cherry.

Judge(s): CLEMENT

Plaintiffs filed suit to recover income taxes paid under protest pursuant to Tennessee’s Hall Income Tax. At issue is a “Special Dividend” Plaintiffs received that was classified by the corporation for income tax purposes as a return of “paid-in capital.” Plaintiffs contend the Special Dividend was exempt because the Hall Income Tax states, in pertinent part, that “no distribution of capital shall be taxed as income under this chapter, and no distribution of surplus by way of stock dividend shall be taxable in the year such distribution is made; but all other distributions out of earned surplus shall be taxed as income when and in whatever manner made, regardless of when such surplus was earned[.]” Tenn. Code Ann. § 67-2-104(e)(7) (2011). The trial court ruled in favor of Plaintiffs based upon a finding that “[t]he Special Dividend was not a leveraged dividend and as such the reduction in book value could have only come through a return of capital distribution.” We have determined the mere fact the dividend was not a leveraged dividend is not sufficient to prove the dividend was exempt from the Tennessee Hall Income Tax. To qualify for the exemption, Plaintiffs had the burden to prove the Special Dividend was paid out of capital. See Tenn. Code Ann. § 67-2-104(e)(7). We, therefore, reverse and remand for entry of judgment in favor of the Department of Revenue and for other proceedings consistent with this opinion.

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