When a corporate group emerges from Chapter 11 bankruptcy with discharged debt, does Tennessee follow the federal rules that exclude cancellation-of-debt income but also shrink the group's net operating losses, basis, and loss carryforwards after an ownership change?

Plain-English summary

A parent holding company formed by combining two previously unrelated public corporations filed Chapter 11 bankruptcy along with certain affiliates. Its reorganization plan was confirmed, its prepetition debts were discharged, and (because the plan issued new parent-company stock to creditors) the parent underwent a federal-tax-significant "ownership change." Only two members of this large group actually file Tennessee franchise and excise (F&E) tax returns. The group asked the Department to walk through four federal bankruptcy-tax concepts and confirm whether Tennessee follows them.

Federal tax law gives bankrupt companies a break: cancellation-of-debt ("discharge of indebtedness") income is normally taxable, but I.R.C. § 108(a) excludes it from gross income when the discharge happens in a bankruptcy case. The catch is that federal law then claws some of that benefit back by requiring the company to shrink other valuable tax attributes -- NOLs, then other attributes, then property basis -- dollar-for-dollar for the excluded amount (§ 108(b)), and separately, a big stock ownership change from the reorganization can trigger § 382's limits on using pre-change losses at all.

The Department's answers, one federal concept at a time:

1. Excluding discharge income from Tennessee net earnings: Tennessee follows the federal exclusion. Just like federally, discharge-of-indebtedness income excluded under I.R.C. § 108(a) doesn't get added back into Tennessee's excise-tax "net earnings" base -- so it isn't taxed in Tennessee either.
2. Reducing NOLs because of that exclusion: Tennessee does NOT follow the federal reduction rule. Federal § 108(b) requires shrinking NOLs (current year first, then carryforwards) to offset the excluded income. Tennessee has no equivalent provision. The Taxpayer's discharge-year Tennessee NOL is simply computed without counting the excluded discharge income as income in the first place (a mechanical consequence of answer #1) -- but NOL carryforwards from PRIOR years are left completely untouched, unlike the federal result.
3. Reducing asset basis because of the exclusion: Tennessee does NOT follow this either. Federal law (after NOLs and other attributes) can require reducing the basis of the company's remaining property. Tennessee's F&E statutes contain no comparable basis-reduction rule, so no basis reduction is required for Tennessee purposes even if one applies federally.
4. Limiting NOL use after the ownership change: Tennessee does NOT adopt anything like I.R.C. § 382. Tennessee's own NOL rule is entity-based, not ownership-based: a loss carryforward generally can only be used by the same taxpayer entity that generated it, with a narrow exception only when that entity merges out of existence into a successor with no pre-existing tax attributes of its own. A mere change in WHO OWNS an entity's stock, without the entity itself disappearing, doesn't cut off its NOL carryforwards under Tennessee law. Since the two group members that actually file Tennessee returns didn't change ownership or merge into anyone, their Tennessee NOL carryforwards remain fully intact and usable.

The overall picture: Tennessee cherry-picks only the taxpayer-favorable half of the federal bankruptcy-tax package (excluding the discharge income) while ignoring the taxpayer-unfavorable half (the attribute-reduction and ownership-change-limitation rules) -- because Tennessee's statutes simply don't reference or incorporate those federal provisions.

What this means for you

Corporate groups emerging from Chapter 11 with Tennessee tax filings

Tennessee's F&E tax treatment of a bankruptcy discharge can be meaningfully more favorable than the federal result: you get the exclusion of discharge income without the federal "cost" of shrinking your NOLs, basis, or losing pre-change losses to an ownership-change limitation -- as long as your Tennessee-filing entities themselves aren't the ones that merged out of existence. Track federal and Tennessee NOL balances separately post-bankruptcy, since they will likely diverge.

Accountants and tax professionals

This ruling is a clean illustration of Tennessee's general non-conformity posture on I.R.C. §§ 108(b) and 382 -- Tennessee's excise tax starts from federal taxable income (§ 67-4-2006(a)(1)) but only incorporates specific adjustments the Tennessee statute actually spells out; silence on a federal provision means Tennessee simply doesn't apply it, in either direction. Note the loss-carryforward-follows-the-entity rule (§ 67-4-2006(c)(2)-(3)) and its narrow successor exception, reinforced by AT&T Corp. v. Johnson and Little Six Corp. v. Johnson — useful for any Tennessee NOL question involving a merger or restructuring, bankruptcy or not.

Common questions

Q: Does Tennessee tax cancellation-of-debt income the same way the IRS does for a company in bankruptcy?
A: Tennessee follows the federal EXCLUSION -- discharge-of-indebtedness income excluded under I.R.C. § 108(a) in a bankruptcy case is also excluded from Tennessee's excise tax net earnings.

Q: If discharge income is excluded, does Tennessee still require shrinking my NOLs or asset basis the way federal law does?
A: No. Tennessee has no equivalent to I.R.C. § 108(b)'s attribute-reduction rules, so NOL carryforwards from prior years and property basis are unaffected for Tennessee purposes, even though they may be reduced federally.

Q: Does a big ownership change from a bankruptcy reorganization limit my Tennessee NOL carryforwards, the way I.R.C. § 382 does federally?
A: No. Tennessee's NOL rule only cuts off carryforwards when the loss-generating entity merges out of existence into a successor (with a narrow exception); a mere stock-ownership change, without the entity disappearing, doesn't limit Tennessee NOLs.

Q: Can another company going through bankruptcy rely on this ruling?
A: No. A Tennessee letter ruling binds the Department only as to the specific taxpayer and facts it was issued to, and it can be revoked or modified by the Commissioner. Confirm your own group's filing structure and reorganization terms with a tax professional.

Citations and references

Tennessee statutes (Tenn. Code Ann.):

• § 67-4-2006(a)(1), (b)(1) (Supp. 2010) ("net earnings" -- federal taxable income before NOL/special deductions, as adjusted; no addback for § 108(a)-excluded income)
• § 67-4-2006(c)(1)-(3), (5) (NOL deduction, 15-year carryforward, entity-based loss-follows-the-taxpayer rule with narrow successor exception, addback of certain excluded income to loss computation)
• § 67-4-2007(a) (Supp. 2010) (excise tax); §§ 67-4-2105(a), 67-4-2106(a) (Supp. 2010) (franchise tax)
• § 67-4-2004(37) ("person" definition)

Federal statutes cited by the ruling:

• I.R.C. § 61(a)(12) (discharge of indebtedness as gross income); § 108(a) (Title 11 bankruptcy exclusion); § 108(d)(2) ("title 11 case" definition)
• I.R.C. § 108(b)(2)(A), (E)(i), (3), (4)(A)-(B) (attribute reduction order and timing -- NOLs, other attributes, then basis)
• I.R.C. § 1017(a) (basis reduction timing)
• I.R.C. § 382 (ownership-change NOL limitation)

Tennessee cases cited by the ruling:

• AT&T Corp. v. Johnson, 148 S.W.3d 74 (Tenn. Ct. App. 2004) (taxpayer not entitled to use a predecessor's NOL)
• Little Six Corp. v. Johnson, 1999 WL 336308 (Tenn. Ct. App. 1999) (same, applying Tenn. Comp. R. & Regs. § 1320-6-1-.21(2)(d))

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/11-44fe.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 11-44

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
The application of the Tennessee franchise and excise taxes to certain tax attributes of a corporation
that has received a discharge of its prepetition debts under Chapter 11 of the United States
Bankruptcy Code.
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 the taxpayer’s
detriment.

.

1

FACTS
[PARENT CORPORATION] is a Delaware corporation formed on [DATE OF FORMATION] to
facilitate the combination of the following two previously unrelated, publicly traded corporations and
their subsidiaries: 1) [CORPORATION A], a [LOCATION] corporation; and 2) [CORPORATION
B], a [LOCATION] corporation. The combination occurred on [DATE OF COMBINATION], with
[CORPORATION A] and [CORPORATION B] each becoming wholly-owned subsidiaries of
[PARENT CORPORATION].1 Beginning with the taxable year ending [FINAL DAY OF YEAR OF
COMBINATION], and for each taxable year since, [PARENT CORPORATION] has filed a federal
consolidated income tax return with its subsidiaries.
On [DATE], the Taxpayer and certain of its United States affiliated debtors and debtors-inpossession filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy
Code, 11 U.S.C. § 101 et seq.2 The Taxpayer’s Plan of Reorganization was confirmed on [DATE OF
CONFIRMATION]; the bankruptcy court also discharged the Taxpayer’s prepetition debts on or
about that date.
Only two members of the Taxpayer’s federal consolidated group file Tennessee franchise and excise
tax returns: [CORPORATION B] and its wholly-owned subsidiary, [CORPORATION B
SUBSIDIARY]. [PARENT CORPORATION] and certain subsidiaries, including [CORPORATION
B] and [CORPORATION B SUBSIDIARY], recognized discharge of indebtedness income as a
result of the Chapter 11 discharge of prepetition debts. The Taxpayer filed an extension for its
[YEAR OF DISCHARGE] federal consolidated income tax return, which is due on [DATE]. For
federal income tax purposes, the Taxpayer will exclude the entire amount of discharge of
indebtedness income pursuant to I.R.C. § 108(a) when the federal return is filed. Additionally, the
Taxpayer expects that its federal net operating losses and capital losses will significantly exceed the
amount of excluded discharge of indebtedness income for federal income tax purposes; as a result,
the Taxpayer will likely not be required to reduce the basis in its property under I.R.C. § 108(b).
Because the Plan of Reorganization included the issuance of [PARENT CORPORATION] stock to
certain creditors, the group’s emergence from bankruptcy resulted in an ownership change for
[PARENT CORPORATION] on [DATE OF OWNERSHIP CHANGE]. For federal income tax
purposes, this stock ownership change triggered the limitation on the use of certain losses under
I.R.C. § 382. No change occurred in the direct ownership of [CORPORATION B] and
[CORPORATION B SUBSIDIARY].
QUESTIONS

1. For Tennessee excise tax purposes, does Tennessee conform to I.R.C. § 108(a) and thereby
   exclude discharge of indebtedness income from net earnings in the year in which the Taxpayer’s
   debts are discharged under Chapter 11 of the United States Bankruptcy Code?
2. For Tennessee excise tax purposes, does Tennessee follow the provisions outlined in I.R.C.
   § 108(b) and require the reduction of Tennessee net operating losses in the year of discharge
   under Chapter 11 of the United States Bankruptcy Code?

1

This letter ruling will collectively refer to [PARENT CORPORATION], [CORPORATION A], [CORPORATION
B], and any subsidiaries identified in this ruling as the “Taxpayer.”

2

The case was filed in the United States Bankruptcy Court in [JURISDICTION]. [REDACTED INFORMATION].

.

2

3. If the application of I.R.C. § 108(b) results in a reduction to the Taxpayer’s basis in certain assets
for federal income tax purposes, is the Taxpayer also required to reduce the basis of those same
assets following discharge under Chapter 11 of the United States Bankruptcy Code for Tennessee
franchise and excise tax purposes?

4. For Tennessee excise tax purposes, does Tennessee adopt I.R.C. § 382 or impose similar rules
   that limit the use of certain losses, including net operating losses, after undergoing a change in
   ownership where more than 50% of the taxpayer’s stock has changed owners within a three-year
   period?
   RULINGS
5. For Tennessee excise tax purposes, Tennessee neither conforms to nor disallows the exclusion
   from federal gross income of gain arising from the discharge of indebtedness, as set forth in
   I.R.C. § 108(a). TENN. CODE ANN. § 67-4-2006(b)(1) (Supp. 2010) does not require that the
   Taxpayer add to its Tennessee net earnings any income that is excluded from federal taxable
   income by operation of I.R.C. § 108(a). The Taxpayer’s net earnings will therefore not include
   any discharge of indebtedness income excluded from federal taxable income in the year in which
   the Taxpayer’s debts are discharged under Chapter 11 of the United States Bankruptcy Code.
6. For Tennessee excise tax purposes, Tennessee neither conforms to nor disallows the federal rules
   regarding the reduction of net operating losses as set forth in I.R.C. § 108(b). The Taxpayer’s
   Tennessee net operating loss for the year of discharge must be computed without taking into
   account any discharge of indebtedness income that is not included in net earnings in that year.
   The Taxpayer is not required to reduce any Tennessee net operating loss carryovers from prior
   years.
7. The Tennessee franchise and excise tax laws neither adopt nor disallow the federal rules
   regarding the reduction of the Taxpayer’s basis in its property under I.R.C. § 108(b). The
   Tennessee franchise and excise tax laws contain no provision requiring a reduction in the
   Taxpayer’s basis in its property as a result of the exclusion of discharge of indebtedness income
   from federal gross income. Accordingly, the Taxpayer is not required to make a corresponding
   reduction to the basis in its property for franchise and excise tax purposes.
8. For Tennessee excise tax purposes, Tennessee neither conforms to nor disallows the rules under
   I.R.C. § 382 limiting the use of certain losses, including net operating losses, after undergoing a
   change in ownership where more than 50% of the taxpayer’s stock has changed owners within a
   three-year period. TENN. CODE ANN. § 67-4-2006(c) contains no limitation on the use of net
   operating losses upon a mere change in stock ownership, where the entity that generated the
   losses remains in existence as a separate entity. The Taxpayer will therefore continue to be
   entitled to claim its net operating loss carryforwards for Tennessee excise tax purposes.
   ANALYSIS
   Tennessee imposes an excise tax on the net earnings of all persons, as defined under TENN. CODE
   ANN. § 67-4-2004(37) (Supp. 2010), doing business within Tennessee. TENN. CODE ANN. § 67-42007(a) (Supp. 2010). Tennessee also imposes a franchise tax at the rate of $0.25 per $100, or major
   fraction thereof, on the net worth of a taxpayer doing business in Tennessee, pursuant to TENN. CODE

.

3

ANN. §§ 67-4-2105(a) (Supp. 2010) and 67-4-2106(a) (Supp. 2010).3 Persons subject to the
Tennessee franchise and excise taxes include, but are not limited to, corporations such as the
Taxpayer and its subsidiaries. TENN. CODE ANN. § 67-4-2004(37).
1.

Computation of net earnings

For Tennessee excise tax purposes, Tennessee neither conforms to nor disallows the exclusion from
federal gross income of gain arising from the discharge of indebtedness, as set forth in I.R.C.
§ 108(a). TENN. CODE ANN. § 67-4-2006(b)(1) does not require that the Taxpayer add to its
Tennessee net earnings any income that is excluded from federal taxable income by operation of
I.R.C. § 108(a). The Taxpayer’s net earnings will therefore not include any discharge of indebtedness
income excluded from federal taxable income in the year in which the Taxpayer’s debts are
discharged under Chapter 11 of the United States Bankruptcy Code.
For federal income tax purposes, I.R.C. § 61(a)(12) defines “gross income” to include “income from
discharge of indebtedness.” However, I.R.C. § 108(a) provides that gross income “does not include
any amount which (but for this subsection) would be includible in gross income by reason of the
discharge (in whole or in part) of indebtedness of the taxpayer if-- (A) the discharge occurs in a title
11 case.” I.R.C. § 108(d)(2) defines the term “title 11 case” as “a case under title 11 of the United
States Code (relating to bankruptcy), but only if the taxpayer is under the jurisdiction of the court in
such case and the discharge of indebtedness is granted by the court or is pursuant to a plan approved
by the court.” Thus, in accordance with I.R.C. § 108(a), the Taxpayer will exclude from the
computation of its federal taxable income any gain arising from the discharge of indebtedness under
Chapter 11 of the United States Bankruptcy Code.4
The Tennessee excise tax laws neither adopt nor disallow the exclusion from federal gross income of
gain arising from the discharge of indebtedness, as set forth in I.R.C. § 108(a). Rather, each taxpayer
must calculate its individual Tennessee excise tax liability in accordance with the applicable excise
tax provisions.
Tennessee imposes the excise tax on the net earnings of all persons doing business within the state.
TENN. CODE ANN. § 67-4-2006(a)(1) provides in pertinent part that for a corporation, “net earnings”
or “net loss” is defined as “federal taxable income or loss before the operating loss deduction and
special deductions provided for in 26 U.S.C. §§ 241, 242 [repealed], 243-247” and as adjusted by
TENN. CODE ANN. § 67-4-2006(b) and (c). In particular, TENN. CODE ANN. § 67-4-2006(b)(1) does
not require that the Taxpayer add to its net earnings any income that is excluded from federal taxable
income by operation of I.R.C. § 108(a).
The Taxpayer has stated that the bankruptcy court approved its Plan of Reorganization on [DATE OF
CONFIRMATION], and discharged the Taxpayer’s prepetition debts. The Taxpayer accordingly will

3

However, under TENN. CODE ANN. § 67-4-2108(a)(1) (Supp. 2010), the franchise tax base “shall in no case be less
than the actual value of the real or tangible property owned or used in Tennessee, excluding exempt inventory and
exempt required capital investments.” For purposes of this section, “property” is to be “valued at cost less
accumulated depreciation in accordance with generally accepted accounting principles.” TENN. CODE ANN. § 67-42108(a)(3).

4

For federal income tax purposes, the taxpayer must first compute its gross income, which it then adjusts to arrive at
federal taxable income. An item excluded from gross income will therefore not be included in federal taxable
income.
.

4

exclude the resulting discharge of indebtedness income from its [YEAR OF DISCHARGE] federal
taxable income, pursuant to I.R.C. § 108(a).
Because TENN. CODE ANN. § 67-4-2006(b)(1) does not require that the Taxpayer add to its net
earnings any discharge of indebtedness income that is excluded from federal taxable income by
operation of I.R.C. § 108(a), the Taxpayer’s [YEAR OF DISCHARGE] net earnings will not include
any such discharge of indebtedness income.
2.

Reduction of net operating losses under I.R.C. § 108(b)

For Tennessee excise tax purposes, Tennessee neither conforms to nor disallows the federal rules
regarding the reduction of net operating losses in the year of discharge as set forth in I.R.C. § 108(b).
The Taxpayer’s Tennessee net operating loss for the year of discharge under Chapter 11 must be
computed without taking into account any discharge of indebtedness income that is not included in
net earnings in that year. The Taxpayer is not required to reduce any Tennessee net operating loss
carryovers from prior years.
For federal income tax purposes, I.R.C. § 108(b) requires that the amount excluded from gross
income under I.R.C. § 108(b) be applied to reduce various tax attributes of the taxpayer, including
net operating losses and loss carryovers. Pursuant to I.R.C. § 108(b)(3), such reductions “shall be one
dollar for each dollar excluded by” I.R.C. § 108(a). In particular, I.R.C. § 108(b)(2)(A) requires the
reduction of “[a]ny net operating loss for the taxable year of the discharge, and any net operating loss
carryover to such taxable year.” The reduction in tax attributes is made after the determination of the
tax imposed for the taxable year of the discharge, pursuant to I.R.C. § 108(b)(4)(A). Finally, I.R.C.
§ 108(b)(4)(B) provides that reductions to net operating losses “shall be made first in the loss for the
taxable year of the discharge and then in the carryovers to such taxable year in the order of the
taxable years from which each such carryover arose.”
Thus, for federal income tax purposes, the Taxpayer must first reduce its net operating loss of the
taxable year of the discharge. The Taxpayer must then reduce any net operating losses from prior
years that are carried forward to the year of discharge. The reduction in tax attributes is made after
the determination of the tax imposed for the taxable year of the discharge; in other words, with
respect to the year of discharge, the Taxpayer may utilize its net operating losses without taking into
account the required reduction.
The Tennessee excise tax laws neither adopt nor disallow the federal rules regarding the reduction of
net operating losses under I.R.C. § 108(b). Rather, each taxpayer must calculate its individual
Tennessee excise tax liability in accordance with the applicable excise tax provisions.
TENN. CODE ANN. § 67-4-2006(c)(1) permits a taxpayer to deduct a net operating loss from its net
earnings in the computation of its Tennessee excise tax liability; qualified net operating losses may
be carried forwarded and deducted for up to fifteen years. The term “net operating loss” is defined as
“the excess of allowable deductions over total income allocable to this state for the year of the loss.”5
Id.

5

Additionally, TENN. CODE ANN. § 67-4-2006(c)(5) provides that “[t]here shall be added to the net loss as
determined for excise tax purposes, all nonbusiness earnings, interest and dividends, excluded from net earnings
pursuant to [TENN. CODE ANN. § 67-4-2006], and any other income excluded from net earnings pursuant to” TENN.
CODE ANN. § 67-4-2006. In other words, the net operating loss is reduced by the amount of any income excluded
from net earnings by operation of TENN. CODE ANN. § 67-4-2006. This provision is not applicable in the Taxpayer’s
.

5

As explained in the response to Question #1, discharge of indebtedness income is not included in net
earnings for Tennessee excise tax purposes because it is excluded from federal taxable income under
I.R.C. § 108(a). Because such income is not included in net earnings, it does not constitute “income
allocable to this state” for purposes of determining the Taxpayer’s net operating loss under TENN.
CODE ANN. § 67-4-2006(c)(1). Thus, the Taxpayer’s Tennessee net operating loss for the year of
discharge must be computed without taking into account any discharge of indebtedness income that
is not included in net earnings in that year.
Because the Tennessee excise tax laws neither adopt nor disallow the federal rules regarding the
reduction of net operating losses under I.R.C. § 108(b), the Taxpayer is not required to reduce any
net operating loss carryovers from prior years for Tennessee excise tax purposes.
Accordingly, the Taxpayer’s Tennessee net operating loss for the year of discharge must be
computed without taking into account any discharge of indebtedness income that is not included in
net earnings in that year. The Taxpayer is not required to reduce any Tennessee net operating loss
carryovers from prior years.
3.

Reduction of basis under I.R.C. § 108(b)

The Tennessee franchise and excise tax laws neither adopt nor disallow the federal rules regarding
the reduction of the Taxpayer’s basis in its property under I.R.C. § 108(b). The Tennessee franchise
and excise tax laws contain no provision requiring a reduction in the Taxpayer’s basis in its property
as a result of the exclusion of discharge of indebtedness income from gross income under I.R.C.
§ 108(a). Accordingly, the Taxpayer is not required to make a corresponding reduction to the basis in
its property for franchise and excise tax purposes.
For federal income tax purposes, I.R.C. § 108(b) requires that the amount excluded from gross
income under I.R.C. § 108(b) be applied to reduce various tax attributes of the taxpayer. Pursuant to
I.R.C. § 108(b)(3), such reductions “shall be one dollar for each dollar excluded by” I.R.C. § 108(a).
In particular, I.R.C. § 108(b)(2)(E)(i) requires the reduction of the “basis of the property of the
taxpayer.”6 Under I.R.C. § 1017(a), this basis reduction shall apply “at the beginning of the taxable
year following the taxable year in which the discharge occurs.” Thus, for federal income tax
purposes, the Taxpayer must reduce the basis in its property at the beginning of the taxable year
following the taxable year in which the discharge occurs.
The Tennessee franchise and excise tax laws neither adopt nor disallow the federal rules regarding
the reduction of the Taxpayer’s basis in its property under I.R.C. § 108(b). Additionally, the
Tennessee franchise and excise tax laws contain no provision requiring a reduction in the Taxpayer’s
basis in its property as a result of the exclusion of discharge of indebtedness income from federal
gross income. Accordingly, the Taxpayer is not required to make a corresponding reduction to the
basis in its property for franchise and excise tax purposes.
4.

Limitation on use of net operating losses under I.R.C. § 382

case because, as explained in the response to Question #1, net earnings does not include discharge of indebtedness
income and TENN. CODE ANN. § 67-4-2006 does not operate to exclude such income from net earnings.
6

The reduction to basis occurs after the reduction of net operating losses and certain other tax attributes; thus, basis
will be reduced only if discharge of indebtedness income exceeds such other tax attributes. See I.R.C. § 108(b)(2).

.

6

For Tennessee excise tax purposes, Tennessee neither conforms to nor disallows the rules under
I.R.C. § 382 limiting the use of certain losses, including net operating losses, after undergoing a
change in ownership where more than 50% of the taxpayer’s stock has changed owners within a
three-year period. TENN. CODE ANN. § 67-4-2006(c) contains no limitation on the use of net
operating losses upon a mere change in stock ownership, where the entity that generated the losses
remains in existence as a separate entity. The Taxpayer will therefore continue to be entitled to claim
its net operating loss carryforwards for Tennessee excise tax purposes.
For federal income tax purposes, I.R.C. § 382 generally limits a taxpayer’s use of certain losses,
including net operating losses, after undergoing a change in ownership where more than 50% of the
taxpayer’s stock has changed owners within a three-year period. The Taxpayer has stated that the
Plan of Reorganization caused the issuance of [PARENT CORPORATION] stock to certain
creditors. This resulted in an ownership change for [PARENT CORPORATION] that triggered the
limitation under I.R.C. § 382. No change occurred in the direct ownership of [CORPORATION B]
and [CORPORATION B SUBSIDIARY].
Tennessee neither conforms to nor disallows the rules under I.R.C. § 382 regarding limitations on the
use of net operating losses following an ownership change where more than 50% of the taxpayer’s
stock has changed owners within a three-year period. Rather, each taxpayer must calculate its
individual Tennessee excise tax liability in accordance with the applicable and excise tax provisions.
TENN. CODE ANN. § 67-4-2006(c)(1) permits a taxpayer to deduct a net operating loss from its net
earnings in the computation of its Tennessee excise tax liability; qualified net operating losses may
be carried forwarded and deducted for up to fifteen years.
For Tennessee excise tax purposes, the use of net operating losses is generally limited to the taxpayer
that generated the loss.7 Specifically, TENN. CODE ANN. § 67-4-2006(c)(2) provides that “a loss
carryforward may be taken only by the taxpayer that generated it, with the exception set forth in
TENN. CODE ANN. § 67-4-2006(c)(3).” TENN. CODE ANN. § 67-4-2006(c)(3) provides that when a
taxpayer merges out of existence and into a successor taxpayer that has “no income, expenses, assets,
liabilities, equity or net worth,” any qualified Tennessee loss carryover of the predecessor that
merged out of existence shall be available for carryforward and deduction from the net earnings of
the surviving successor. Unless this exception applies, no loss carryforwards incurred “by the
predecessor taxpayer are allowed as a deduction from net earnings on the excise tax return filed by
the successor taxpayer.” See AT & T Corporation v. Johnson, 148 S.W.3d 74 (Tenn. Ct. App. 2004)
(holding that taxpayer was not entitled to use of net operating loss incurred by predecessor); Little Six
Corporation v. Johnson, 1999 WL 336308 (Tenn. Ct. App. No. 01-A-01-9806-CH00285, May 28,
1999) (holding that taxpayer was not entitled under TENN. COMP. R. & REGS. § 1320-6-1-.21(2)(d) to
use of net operating loss incurred by predecessor). Id.
Importantly, TENN. CODE ANN. § 67-4-2006(c) contains no limitation on the use of net operating
losses upon a mere change in stock ownership, where the entity that generated the losses remains in
existence as a separate entity.
In the Taxpayer’s case, the only entities that file Tennessee franchise and excise tax returns are
[CORPORATION B] and [CORPORATION B SUBSIDIARY]. No change has occurred in the
ownership of [CORPORATION B] and [CORPORATION B SUBSIDIARY] as a result of the Plan
7

TENN. CODE ANN. § 67-4-2006(c)(2) provides that, except for unitary groups of financial institutions, each
taxpayer is considered a separate entity.
.

7

of Reorganization; neither entity has merged or otherwise consolidated into another company. Thus,
in each case, [CORPORATION B] and [CORPORATION B SUBSIDIARY] will continue to be
entitled to claim their respective net operating loss carryforwards for Tennessee excise tax purposes.
Similarly, if [PARENT CORPORATION] were to file a franchise and excise tax return, it would not
be required to reduce its net operating losses as a result of the change in its stock ownership pursuant
to the Plan of Reorganization.

Kristin Husat
Senior Tax Counsel

.

APPROVED:

Richard H. Roberts
Commissioner of Revenue

DATE:

9/7/11

8