When Tennessee corporations merge, does the surviving company keep the net operating loss carryforwards of the companies that merged into it for franchise and excise tax?

Plain-English summary

A family of affiliated S corporations under common ownership files Tennessee franchise and excise (F&E) tax returns, and several of them have built up substantial Tennessee net operating loss (NOL) carryforwards. To cut redundancy, they want to restructure by merging — collapsing many corporations into fewer. The question they asked: after the mergers, can the surviving company keep and use the NOL carryforwards of the corporations that merged into it?

The Department's answer turns on one narrow exception, and for most of the proposed structures the answer was the NOLs are lost.

The default rule: NOLs don't transfer in a merger. Tennessee lets a taxpayer deduct an NOL against its net earnings and carry it forward up to 15 years (§ 67-4-2006(c)(1)). But each taxpayer is a separate entity, and § 67-4-2006(c)(2) is explicit: in mergers, consolidations, and like transactions, a loss carryforward incurred by the predecessor is not allowed as a deduction on the successor's return — "a loss carryforward may be taken only by the taxpayer that generated it." Tennessee courts have enforced this (e.g., AT&T Corp. v. Johnson; Little Six Corp. v. Johnson).

The one exception — merging into an empty shell. Section 67-4-2006(c)(3) carves out a single situation: when a taxpayer merges out of existence into a successor that has no income, expenses, assets, liabilities, equity, or net worth, the predecessor's qualified Tennessee loss carryover survives and can be deducted by the surviving successor. In other words, an NOL can ride along only if the predecessor merges into a genuinely empty shell company.

Merger Transaction #1 — three operating companies into a new shell. Corporations 1, 2, and 3 (Corps 1 and 3 each have NOLs) merge into newly created Corporation 4, which starts as an empty shell. The Department ruled the exception doesn't apply to the multi-company merger as a whole — § 67-4-2006(c)(3) is written for a single taxpayer merging into a successor. The practical result: the exception applies to the first corporation to merge into Corp 4, so Corp 4 keeps that corporation's NOL — but once that first merger happens, Corp 4 is no longer an empty shell (it now has income, assets, etc.), so any corporation that merges in after that loses its NOL. Net effect: Corp 4 can use only the NOL of the first corporation to merge in; the others' NOLs are gone.

Merger Transaction #2 — companies into an existing operating company. Here Corporations 2 and 3 merge into Corporation 1, which already has its own NOL. Because Corporation 1 has an NOL, it necessarily has expenses (you can't generate a loss as an empty shell) — so Corporation 1 is not a shell with "no income, expenses, assets, liabilities, equity, or net worth." The exception doesn't apply, and the NOLs of the companies merging into Corporation 1 are lost.

The S election doesn't matter. The Department noted the corporations' federal Subchapter S election has no effect on the analysis — for Tennessee F&E purposes the S election is irrelevant. (This is the same principle the Department applies elsewhere: Tennessee taxes the corporation's own earnings and net worth and ignores federal pass-through for F&E.) The Department also cautioned that the outcome could differ for different entity types with different federal tax classifications.

What this means for you

Planning a Tennessee reorganization with valuable NOLs

If preserving Tennessee NOL carryforwards matters, structure deliberately. The only reliable way to carry an NOL through a merger is to have the loss company merge into a true empty shell successor — no income, expenses, assets, liabilities, equity, or net worth. Merging a loss company into an operating company (or into a shell that has already absorbed another company) forfeits the loss.

Don't stack multiple loss companies into one shell

A common instinct — collapse several loss corporations into one new entity — backfires here. Only the first company to merge into the new shell preserves its NOL; every company that merges in afterward loses its carryforward, because the shell is no longer empty. If multiple entities each hold significant NOLs, consolidating them into a single successor will sacrifice most of those losses.

S corporation status won't save (or sink) the analysis

For Tennessee F&E, the federal S election is irrelevant — don't assume pass-through treatment changes how NOLs move (or don't) in a merger. The F&E rules apply at the entity level regardless of the federal election.

Accountants and tax professionals

The NOL deduction and 15-year carryforward are at § 67-4-2006(c)(1); separate-entity treatment and the no-transfer-in-merger rule at § 67-4-2006(c)(2); the empty-shell survival exception at § 67-4-2006(c)(3). Excise tax (6.5% of net earnings) is § 67-4-2007(a); franchise tax (net worth) is §§ 67-4-2105(a), 67-4-2106(a); "persons" include corporations under § 67-4-2004(38). Supporting case law: AT&T Corp. v. Johnson, 148 S.W.3d 74 (Tenn. Ct. App. 2004); Little Six Corp. v. Johnson, 1999 WL 336308 (Tenn. Ct. App. 1999) (applying Tenn. Comp. R. & Regs. 1320-6-1-.21(2)(d)). Note the Department's caveat that different entity types/federal classifications may change the result.

Common questions

Q: We're merging two Tennessee corporations. Does the survivor keep the other's NOL carryforward?
A: Generally no. A predecessor's NOL is not deductible by the successor; an NOL can be taken only by the taxpayer that generated it. The lone exception is merging into a successor that is a true empty shell.

Q: What exactly is an "empty shell" successor?
A: A successor with no income, expenses, assets, liabilities, equity, or net worth before the merger. If the successor has any of those — including its own NOL, which implies it had expenses — it isn't a shell, and the exception doesn't apply.

Q: We want to merge three loss companies into one new entity. Do all three NOLs survive?
A: No. Only the NOL of the first company to merge into the new entity survives. After the first merger the entity is no longer empty, so the NOLs of the companies that merge in later are lost.

Q: Does our federal S election change any of this?
A: No. The Subchapter S election is irrelevant for Tennessee franchise and excise tax; the NOL/merger rules apply at the entity level.

Q: Can I rely on this ruling?
A: Not directly. A Tennessee letter ruling binds the Department only as to the taxpayer and exact facts it addressed and cannot be relied on by anyone else — and the Department warned the outcome may differ for other entity types. Confirm your own facts and structure with a tax professional.

Citations and references

Tennessee statutes (Tenn. Code Ann.):
- § 67-4-2006(c)(1) (NOL deduction; carryforward up to 15 years)
- § 67-4-2006(c)(2) (separate-entity treatment; predecessor's loss carryforward not deductible by successor; loss taken only by the taxpayer that generated it)
- § 67-4-2006(c)(3) (exception: predecessor's loss carryforward survives a merger into a successor with no income, expenses, assets, liabilities, equity, or net worth)
- § 67-4-2007(a) (6.5% excise tax on net earnings); §§ 67-4-2105(a), 67-4-2106(a) (franchise tax on net worth); § 67-4-2004(38) ("persons" include corporations)

Case law:
- AT&T Corp. v. Johnson, 148 S.W.3d 74 (Tenn. Ct. App. 2004) (taxpayer not entitled to use a predecessor's net operating loss)
- Little Six Corp. v. Johnson, No. 01-A-01-9806-CH00285, 1999 WL 336308 (Tenn. Ct. App. May 28, 1999) (no use of a predecessor's NOL under 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/20-06fe.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 20-06
Letter rulings are binding on the Department only with respect to the individual taxpayer being
addressed in the ruling. This ruling is based on the particular facts and circumstances
presented and is an interpretation of the law at a specific point in time. The law may have
changed since this ruling was issued, possibly rendering it obsolete. The presentation of this
ruling in a redacted form is provided solely for informational purposes and is not intended as
a statement of Departmental policy. Taxpayers should consult with a tax professional before
relying on any aspect of this ruling.
SUBJECT
The survival of a Tennessee net operating loss carryforward in merger transactions involving
corporations.
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.
FACTS

The [TAXPAYER] companies (collectively, the “Taxpayer companies”) are headquartered in [CITY,
STATE], and provide [SERVICES] related to the sale of [REDACTED]. The Taxpayer companies are
affiliates with common ownership.

1

The Taxpayer companies are structured as corporations that have elected Subchapter S status for
federal income tax purposes under I.R.C. §§ 1361-1363. There are over [NUMBER] Taxpayer
corporations that file Tennessee franchise and excise tax returns, and some of the corporations have
substantial Tennessee net operating loss (“NOL”) carryforwards.
The Taxpayer companies are contemplating a restructuring arrangement to eliminate redundancies
and administrative costs of maintaining such a large number of separate corporations. In the
proposed transaction, a new corporation would be created for each line of services provided (i.e.,
[REDACTED] services in one company, [REDACTED] services in another company, and so on). The
existing corporations would enter into federally tax-exempt mergers with the new corporations. The
end result would be the current corporations merging out of existence and into the newly created
corporations.
As an example (“Merger Transaction #1”), Corporation 1 has a Tennessee NOL carryforward.
Corporation 2 does not have a Tennessee NOL carryforward. Corporation 3 has a Tennessee NOL
carryforward. All three corporations are owned by a single shareholder. Corporations 1, 2, and 3
merge out of existence and into newly created Corporation 4, which is wholly owned by the same
shareholder. Immediately before Merger Transaction #1, Corporation 4 is a shell company with no
income, assets, expenses, liabilities, equity, or net worth. Immediately following Merger Transaction

1, Corporation 4 holds the assets, liabilities, and equity of Corporations 1, 2 and 3.

Alternatively (“Merger Transaction #2”), Corporation 1 has a Tennessee NOL carryforward.
Corporation 2 does not have a Tennessee NOL carryforward. Corporation 3 has a Tennessee NOL
carryforward. Corporation 2 and Corporation 3 merge out of existence and into Corporation 1.
Immediately following Merger Transaction #2, Corporation 1 holds the assets, liabilities, and equity of
Corporations 2 and 3.
RULINGS
1.

Does the exception under TENN. CODE ANN. § 67-4-2006(c)(3) (Supp. 2019) apply to Merger
Transaction #1?
Ruling: The exception under TENN. CODE ANN. § 67-4-2006(c)(3) (Supp. 2019) does not apply to
Merger Transaction #1 since the exception only applies to a single taxpayer that merges out
of existence and into a successor taxpayer.

2.

If the response to Question #1 is negative, would the Tennessee NOL carryforwards of
Corporation 1 and Corporation 3 be lost following Merger Transaction #1?
Ruling: The exception under TENN. CODE ANN. § 67-4-2006(c)(3) (Supp. 2019) will apply to the
first corporation to merge into Corporation 4. For the corporations that subsequently merge
into Corporation 4, any Tennessee NOL carryforwards will be lost.

3.

Does the exception under TENN. CODE ANN. § 67-4-2006(c)(3) (Supp. 2019) apply to Merger
Transaction #2?

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Ruling: No. The exception under TENN. CODE ANN. § 67-4-2006(c)(3) (Supp. 2019) will not apply
to Merger Transaction #2 because Corporation 1 is not a shell company with no income,
assets, expenses, liabilities, equity, or net worth.
ANALYSIS
Tennessee imposes an excise tax at the rate of 6.5% on the net earnings of all persons, as defined
under TENN. CODE ANN. § 67-4-2004(38) (Supp. 2019), doing business within Tennessee. 1 Tennessee
also imposes a franchise tax at the rate of $0.25 per $100, or major fraction thereof, on the net worth
of a person doing business in Tennessee, pursuant to TENN. CODE ANN. §§ 67-4-2105(a) (Supp. 2019)
and -2106(a) (2013). Persons subject to the Tennessee franchise and excise taxes include, but are not
limited to, entities such as corporations.
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 excise tax liability; qualified net operating losses may be carried
forward and deducted for up to fifteen years.
TENN. CODE ANN. § 67-4-2006(c)(2) provides that, except for unitary groups of financial institutions, each
taxpayer is considered a separate entity. In the case of mergers, consolidations, and like transactions,
no loss carryforward “incurred by the predecessor taxpayer shall be allowed as a deduction from net
earnings on the excise tax return filed by the successor taxpayer.” 2 TENN. CODE ANN. § 67-4-2006(c)(2)
further 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.
Questions 1 & 2
TENN. CODE ANN. § 67-4-2006(c)(3) applies only when a single taxpayer merges out of existence into a
successor taxpayer. Therefore, the exception under TENN. CODE ANN. § 67-4-2006(c)(3) does not apply
to Merger Transaction #1, which involves the merger of four companies. Instead, the exception under
TENN. CODE ANN. § 67-4-2006(c)(3) will apply only to the first corporation to merge into Corporation 4.
For the corporations that subsequently merge into Corporation 4, any Tennessee NOL carryforwards
will be lost.
Corporation 4 will have income, assets, expenses, liabilities, equity, or net worth following the first
merger. This will prevent any subsequent merger from coming under the exception. For tax periods

1

TENN. CODE ANN. § 67-4-2007(a) (Supp. 2019).

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-01-9806CH00285, 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).
2

3

following Merger Transaction #1, Corporation 4 may utilize only the Tennessee NOL carryforward
generated by the first corporation to merge into it.
Note that the corporations’ federal Subchapter S election does not affect the outcome; for purposes
of computing Tennessee franchise and excise tax liabilities, the election is irrelevant. 3
Question 3
The exception under TENN. CODE ANN. § 67-4-2006(c)(3) will not apply to Merger Transaction #2. The
facts indicate that Corporation 1 has a Tennessee NOL carryforward. To generate a net operating loss,
the taxpayer cannot be a shell; rather, it must have expenses. In that case, Corporation 1 is not a shell
company with no income, assets, expenses, liabilities, equity, or net worth. As a result, the exception
will not apply.

APPROVED:

David Gerregano
Commissioner of Revenue

DATE:

9/17/2020

Note that the outcomes discussed in this letter ruling could differ under other factual scenarios, including scenarios involving
different entity types with different federal tax classifications.

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