Does a corporate group that owns home-care-organization subsidiaries and is affiliated with one hospital qualify as a Tennessee 'hospital company' entitled to combined-return franchise and excise tax credits?

Subject

Whether a home-care-organization group qualifies as a "hospital company" for Tennessee franchise and excise tax purposes.

Plain-English summary

The Tennessee Department of Revenue ruled that a corporate taxpayer group did not qualify as a "hospital company" for franchise and excise (F&E) tax purposes. That label matters because a qualifying hospital company filing a combined return with its affiliates can claim two valuable credits: one that caps the group's combined F&E tax at the greater of the franchise or excise tax (instead of paying both in full), and another equal to 4% of the cost of medical supplies and equipment placed in service in Tennessee — together capped at $9 million.

The taxpayer and its subsidiaries were licensed as "home care organizations" (providing home health, home medical equipment, professional support, or hospice services), and the group was affiliated with one fully accredited hospital. To qualify as a "hospital company" under the pre-1999 definition that current law still incorporates, an entity must show it either owns and manages ten or more hospitals, or performs health care services for ten or more hospitals owned by a company in its own IRS-defined controlled group. Owning subsidiaries licensed only as home care organizations — not hospitals — and being affiliated with just one hospital fell far short of that ten-hospital threshold, so the Department denied hospital-company status.

What this means for you

Health care and home-care company owners

Being affiliated with a hospital, or providing hospital-adjacent services, is not enough to claim Tennessee's "hospital company" F&E tax credits. The statute requires a bright-line count: your group (or entities in your IRS controlled group) must own/manage or serve ten or more separately licensed hospitals. Home care organizations, hospice providers, and similar licensed entities do not count as hospitals themselves, no matter how closely affiliated with an actual hospital.

Accountants and tax professionals

This ruling is a useful illustration of how Tennessee's post-1999 F&E statute (Tenn. Code Ann. § 67-4-2004(17)) still incorporates the pre-1999 definition of "hospital company" and "hospital" by reference to entities that qualified before January 1, 1999. When advising a health care combined group on the hospital-company credits under § 67-4-2009(5)-(6), confirm licensure status of every entity in the group (hospital vs. home care organization vs. hospice) and count actual licensed hospitals, not affiliated entities generally.

Common questions

Q: Does affiliation with one hospital qualify a corporate group as a "hospital company"?
A: No. The Department requires ownership/management of, or services performed for, ten or more hospitals — one affiliated hospital is not close to enough.

Q: Do home care organization subsidiaries count toward the ten-hospital requirement?
A: No. Entities licensed as "home care organizations" under Tenn. Code Ann. § 68-11-201(18) are not licensed as hospitals, so they don't count toward the threshold even if they provide health-related services.

Q: Does this ruling apply to my company?
A: No. A Tennessee letter ruling binds the Department only as to the specific taxpayer and facts addressed, and cannot be relied on by any other taxpayer. It shows how the Department applies the hospital-company definition, but your facts may differ.

Citations and references

Statutes:

• Tenn. Code Ann. § 67-4-2004(17) (post-1999 "hospital company" definition, incorporating pre-1999 qualification)
• Tenn. Code Ann. § 67-4-804(11)(A) (1998) (prior-law "hospital company" definition: 10+ hospitals owned/managed or served)
• Tenn. Code Ann. § 67-4-804(10) (1998) and § 68-11-201(21) (1998)/(27) (2006) (definition of "hospital")
• Tenn. Code Ann. § 68-11-201(18), § 68-11-202 ("home care organization" definition and licensure)
• Tenn. Code Ann. § 67-4-2009(5)-(6) (hospital company combined-return tax credits, capped at $9 million)
• 26 U.S.C. § 267(f)(1) (controlled group definition)

Source

• Landing page: https://www.tn.gov/revenue/tax-resources/legal-resources/tax-rulings.html
• Original PDF: https://www.tn.gov/content/dam/tn/revenue/documents/rulings/fae/07-09fe.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 07-09

WARNING
Letter rulings are binding on the Department only with respect to the individual taxpayer
being addressed in the ruling. This presentation of the ruling in a redacted form is
informational only. Rulings are made in response to particular facts presented and are not
intended necessarily as statements of Department policy.
SUBJECT
Whether the taxpayer qualifies as a “hospital company” for Tennessee franchise and excise tax
purposes.
SCOPE
This letter ruling is an interpretation and application of the tax law as it relates to a specific set of
existing facts furnished to the Department by the taxpayer. The rulings herein are binding upon
the Department, and are applicable only to the individual taxpayer being addressed.
This letter ruling may be revoked or modified by the Commissioner at any time. Such revocation
or modification shall be effective retroactively unless the following conditions are met, in which
case the revocation shall be prospective only:
(A) The taxpayer must not have misstated or omitted material facts involved in
the transaction;
(B) Facts that develop later must not be materially different from the facts upon
which the ruling was based;
(C) The applicable law must not have been changed or amended;
(D) The ruling must have been issued originally with respect to a prospective or
proposed transaction; and
(E) The taxpayer directly involved must have acted in good faith in relying upon
the ruling and a retroactive revocation of the ruling must inure to his detriment.
FACTS
[“TAXPAYER”] and its [NUMBER OF] subsidiary entities operate in Tennessee as “home care
organizations” as defined under Tenn. Code Ann. § 68-11-201(18). 1 The Taxpayer and its
1

A “home care organization” is defined as an entity that “provides home health services, home medical equipment
services, professional support services or hospice services to patients on an outpatient basis in either their regular or
temporary place of residence.” Tenn. Code Ann. § 68-11-201(18)(A).

subsidiaries are licensed as such under Tenn. Code Ann. § 68-11-202. Additionally, the
Taxpayer and its related entities are affiliates of [HOSPITAL], which operates as a fully
accredited hospital.
The Taxpayer filed an amended 2001 Form FAE 170 (Tennessee franchise and excise tax return)
(the “Amended Return”) in conjunction with its letter ruling request. The Taxpayer prepared the
Amended Return as a hospital company combined group, claiming credits under Tenn. Code
Ann. §§ 67-4-2009(5) and 67-4-2009(6). 2 According to the Department’s records, the Taxpayer
began filing Tennessee franchise and excise tax returns beginning with the taxable year 2001.
QUESTION
Does the Taxpayer qualify as a “hospital company” for Tennessee franchise and excise tax
purposes?
RULING
No. The Taxpayer does not qualify as a “hospital company” for Tennessee franchise and excise
tax purposes.
ANALYSIS
The Taxpayer does not come within the definition of a “hospital company” for Tennessee
franchise and excise tax purposes.
Tenn. Code Ann. § 67-4-2004(17), which applies to all taxable years after 1998, defines a
“hospital company” as a corporation or other entity that “qualified before January 1, 1999, with
the department as a hospital company as defined under prior law.” 3 The term “hospital
company” was defined under prior law at Tenn. Code Ann. § 67-4-804(11)(A) (1998) 4 as “a
corporation or other entity” subject to Tennessee franchise and excise taxation, “substantially all
of the activities of which during the taxable year constitute the performance of health care
services and which either (1) owns and manages ten or more hospitals; or (2) performs health
care services for ten or more hospitals owned and managed by a corporation or other entity
which is in its same controlled group as defined by § 267(f)(1) of the Internal Revenue Code of
1986, as amended.”
2

Tenn. Code Ann. § 67-4-2009(5) provides that a hospital company and its affiliates filing a franchise and excise
tax return on a combined basis shall be allowed as a credit an amount equal to the lesser of the franchise tax or
excise tax. The effect of this provision is that the combined annual franchise and excise tax of the combined group is
limited to the greater of the franchise or the excise tax. Tenn. Code Ann. § 67-4-2009(6) provides that a hospital
company filing a franchise and excise tax return on a combined basis shall be allowed as a further credit an amount
equal to four percent of the cost of medical supplies and medical equipment used by or placed in service by the
members of the controlled group in Tennessee during the tax year. The aggregate amount of credits available under
subsections (5) and (6) cannot exceed $9 million.

3

The Tennessee franchise and excise tax statutes were recodified in 1999. The term “prior law” means the franchise
and excise tax statutes under former Tenn. Code Ann. §§ 67-4-801 et seq. and former Tenn. Code Ann. §§ 67-4-901
et seq., which were in effect until December 31, 1998.

4

The definition of “hospital company” under Tenn. Code Ann. § 67-4-804 was in effect from 1995 through 1998.

2

The term “hospital” was defined under prior law at Tenn. Code Ann. § 67-4-804(10) (1998) as
having the definition provided at Tenn. Code Ann. § 68-11-201. Tenn. Code Ann. § 68-11201(21) (1998) defined the term “hospital” as “any institution, place, building or agency
represented and held out to the general public as ready, willing and able to furnish care,
accommodations, facilities and equipment for the use, in connection with the services of a
physician or dentist, of one (1) or more nonrelated persons who may be suffering from
deformity, injury or disease or from any other condition for which nursing, medical or surgical
services would be appropriate for care, diagnosis or treatment.” 5
Thus, to come within the definition of “hospital company” under Tenn. Code Ann. § 67-42004(17), the Taxpayer must satisfy a number of requirements. First, the Taxpayer must have
qualified as a hospital company under Tenn. Code Ann. § 67-4-804(11)(A) (1998). To do so, the
Taxpayer (1) must have been in existence before January 1, 1999; and (2) must have been
subject to Tennessee franchise and excise taxation before January 1, 1999. Second, the Taxpayer
must show that substantially all of its activities during the taxable year were the performance of
health care services, as that term is defined under Tenn. Code Ann. § 67-4-804(11)(C) (1998).
Third, the Taxpayer must either (1) own and manage ten or more hospitals, or (2) perform health
care services for ten or more hospitals owned and managed by a corporation or other entity that
is in the Taxpayer’s same controlled group, as defined by 26 U.S.C. § 267(f)(1).
It is unclear whether the Taxpayer satisfies the initial requirements set forth under Tenn. Code
Ann. § 67-4-2004(17) and described above. From the facts presented by the Taxpayer, it cannot
be ascertained whether the Taxpayer was in existence before January 1, 1999, or whether it was
subject to Tennessee franchise and excise taxation before that date. Additionally, assuming that
the Taxpayer was in existence at that time, it is unclear whether substantially all of the
Taxpayer’s activities were the performance of health care services.
The Taxpayer has indicated that it owns at least [NUMBER] subsidiaries, each of which
provides health-related services. However, the Taxpayer has indicated that the subsidiaries come
within the definition of “home care organizations” as defined under Tenn. Code Ann. § 68-11201(18) and are licensed to do business as such. Significantly, these entities are not licensed as
hospitals, as the term is defined for franchise and excise tax purposes. Thus, the Taxpayer does
not satisfy the requirement set forth under Tenn. Code Ann. § 67-4-804(11)(A)(i)-(ii) (1998) that
it (1) own and manage ten or more hospitals, or (2) perform health care services for ten or more
hospitals owned and managed by a corporation or other entity that is in the Taxpayer’s same
controlled group. While the Taxpayer has indicated that it is affiliated with a licensed hospital,
the ownership and management of, or the performance of services for, this one hospital alone
would not satisfy the requirement that services be provided to ten or more hospitals.
Accordingly, the Taxpayer does not come with the definition of a “hospital company” for
Tennessee franchise and excise tax purposes.

5

This definition of the term “hospital” is still in effect. See Tenn. Code Ann. § 68-11-201(27) (2006).

3

Kristin E. Husat
Tax Counsel

APPROVED:

Reagan Farr
Commissioner of Revenue

DATE:

03/29/07

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