After a parent company absorbs its wholly owned, disregarded single-member LLC by merger, can it keep using the Tennessee franchise and excise tax credits the LLC earned?

Plain-English summary

A U.S. headquarters company (the "Taxpayer") is a corporation that owns and operates a Tennessee facility — but it holds and runs that facility through a wholly owned single-member LLC (SMLLC). Over several years the SMLLC invested in industrial machinery and created new jobs at the Tennessee facility, earning industrial-machinery tax credits, job tax credits, and "super" job tax credits (collectively, the "Credits") against Tennessee franchise and excise (F&E) tax. The Taxpayer claimed those Credits on its own F&E returns and still has a large unused balance to carry forward.

For business reasons, the Taxpayer wants to simplify its structure by merging the SMLLC into itself, with the Taxpayer surviving. Nothing about the Tennessee facility or its operations would change. The question: after the merger, can the Taxpayer keep using the unused carryover Credits against its future F&E tax?

The Department ruled yes. The reason turns on how Tennessee classifies entities. A single-member LLC is normally "disregarded" — but Tennessee law provides that a disregarded entity is not disregarded for F&E tax unless its single member is itself taxed as a corporation. Here the SMLLC's single member (the Taxpayer) is a corporation, so the SMLLC was disregarded into the Taxpayer for F&E purposes the entire time the Credits were earned. That means the law treats the SMLLC's activity — and the Credits it generated — as the Taxpayer's own.

That distinction is what makes this an easy "yes." Tennessee has a strict general rule that a credit carryforward "may be taken only by the taxpayer that generated it," and that in a merger "no tax credit incurred by a predecessor taxpayer shall be allowed" on the successor's return. But the Taxpayer here is not a successor to a predecessor — it is the very taxpayer that generated the Credits, because its disregarded SMLLC's activity was always its own. So merging the SMLLC in changes nothing, and the Credits keep flowing.

What this means for you

Businesses that operate in Tennessee through a disregarded SMLLC

If your single member is a corporation, your SMLLC is disregarded for Tennessee F&E tax, and the tax credits it earns are treated as yours. Collapsing that SMLLC into you by merger doesn't forfeit the unused credits, because there is no separate "predecessor" — you generated them all along. (Contrast a true predecessor-into-successor merger, where the credits are normally lost unless a narrow carryover exception applies — see Letter Ruling 24-09.)

Why the corporate-member detail matters

The result depends on the SMLLC being disregarded into a corporate member. Tennessee's rule is that disregarded entities are not disregarded for F&E except an LLC whose single member is a corporation. Had the member not been a corporation, the SMLLC would be a separate F&E taxpayer, and a merger could raise exactly the predecessor-credit problem this ruling avoids.

Tax value at stake

Industrial-machinery credits are capped at 50% of combined F&E liability per year, and any excess carries forward up to 25 years; job tax credits and "super" job tax credits also carry forward up to 25 years (the 25-year period was enacted in 2023 and applies to credits earned in tax years ending on or after December 31, 2008). Preserving a large unused balance through a restructuring can be worth a great deal.

Accountants and tax professionals

The disregarded-entity classification rule is in § 67-4-2007(d) and -2106(c); the credits are in § 67-4-2009(3) (industrial machinery) and § 67-4-2109(b) (job and super job credits); the predecessor-credit limits are in § 67-4-2009(6)(A). The Department distinguished this situation from a successor/predecessor merger: because the SMLLC was disregarded into the corporate Taxpayer when the Credits were generated, the Taxpayer is the generating taxpayer, so the carryforward-only-by-generator and no-predecessor-credit rules are never triggered.

Common questions

Q: We hold our Tennessee operations in a single-member LLC. Are its tax credits ours?
A: If the LLC's single member is a corporation, yes — for Tennessee franchise and excise tax the LLC is disregarded into you, and its activity (including the credits it earns) is treated as performed directly by you.

Q: If we merge that LLC into the parent, do we lose the unused credits?
A: Not under this ruling. Because the LLC was disregarded into the corporate parent when the credits were generated, the parent already is the taxpayer that generated them, so the merger doesn't trigger the rule against using a predecessor's credits.

Q: How is this different from Letter Ruling 24-09?
A: LR 24-09 involved a real predecessor corporation that merged out of existence into a newly formed successor, so it needed Tennessee's narrow "carryover exception" (which requires the successor to be an empty shell). Here there is no predecessor at all — the disregarded SMLLC's activity was always the parent's — so the exception isn't even needed.

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. Confirm your own structure with a tax professional.

Citations and references

Tennessee franchise & excise tax:
- Tenn. Code Ann. § 67-4-2105(a) (franchise tax on net worth) and § 67-4-2007(a) (excise tax on net earnings)
- Tenn. Code Ann. § 67-4-2004(36) ("person" includes corporations and limited liability companies)
- Tenn. Code Ann. §§ 67-4-2007(d), -2106(c) (entity classified as it is for federal income tax; a disregarded entity is not disregarded for F&E except an LLC whose single member is a corporation)

Credits:
- Tenn. Code Ann. § 67-4-2009(3)(A) (industrial-machinery credit), § 67-4-2009(3)(B), (C) (50% cap; 25-year carryforward)
- Tenn. Code Ann. § 67-4-2109(b)(1), (2) (job tax credit and "super" job tax credit; 25-year carryforward)
- Tenn. Code Ann. § 67-4-2009(6)(A) (in mergers, no credit incurred by a predecessor is allowed on the successor's return; a credit carryforward may be taken only by the taxpayer that generated it)

Related ruling:
- Tenn. Dep't of Revenue Letter Ruling 24-09 (carryover of NOLs and credits to a shell successor after an F reorganization)

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/23-09fe.pdf

Original ruling text

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.

Utilizing tax credits against future franchise and excise tax liabilities following a merger.

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.

[REDACTED] (the “Taxpayer”) is the United States operational headquarters for [REDACTED]. It is a
wholly owned subsidiary of [REDACTED], a publicly traded, [COMPANY] headquartered [OUTSIDE OF
TENNESSEE]. [REDACTED] and its subsidiaries own and manufacture [REDACTED].
The Taxpayer is a [STATE- NOT TENNESSEE] corporation headquartered in [STATE – NOT TENNESSEE].
The Taxpayer, either directly or through its wholly owned subsidiaries and disregarded entities
maintains [FACILITIES – SOME IN TENNESSEE]
The Taxpayer is and was for all periods relevant to this ruling including the periods of investment,
taxed as a corporation for U.S. federal income tax purposes. The Taxpayer wholly owns [REDACTED –
“SMLLC”]. [SMLLC] operates the [TENNESSEE FACILITY], and [SMLLC] is and was for all periods relevant
to this ruling, a single-member LLC that is disregarded for both U.S. federal income tax purposes and
Tennessee franchise and excise tax purposes. [REDACTED – SMLLC EMPLOYS PEOPLE AT ITS
TENNESSEE FACILITY]
From time to time during the tax years ending [TAX PERIODS], [SMLLC] made capital investments in
industrial machinery placed into service at the [TENNESSEE FACILITY] and created new jobs at the
[TENNESSEE FACILITY]. As a result of these investments and new jobs, industrial machinery tax credits,
job tax credits, and additional annual job tax credits (“super credits”) (collectively, the “Credits”) totaling
[AMOUNT] were claimed pursuant to TENN. CODE ANN. §§ 67-4-2009 and 2109(b) by the Taxpayer on its
[TAX PERIODS] Tennessee franchise and excise tax returns. At the close of its [TAX YEAR], the Taxpayer
estimates that it will still have [AMOUNT] of the Credits available for purposes of carryforward.
For various business reasons, the Taxpayer is considering creating a single entity by means of merging
[SMLLC] into the Taxpayer, with the Taxpayer being the survivor of the merger. Apart from the fact
the [TENNESSEE FACILITY] would be owned and operated directly by the Taxpayer (subject to the
terms of an agreement with the [REDACTED]), there are no changes anticipated in the [TENNESSEE
FACILITY] or its operations. [REDACTED] The assets that gave rise to the Credits will remain with the
[TENNESSEE FACILITY]

1.

Will the Taxpayer, as the franchise and excise tax filer that reported the activity of [SMLLC]
during the years the Credits were generated, continue to be able to utilize the unused
carryover Credits against its franchise and excise tax liabilities in future tax periods after the
merger of [SMLLC] into the Taxpayer?
Ruling: Yes. [SMLLC] was disregarded into the Taxpayer when it applied for and generated the
credits, thus the Taxpayer may continue to utilize the Credits after the merger.

2

Tennessee imposes a franchise tax on the net worth of persons doing business in Tennessee and
having substantial nexus in the state. 1 Tennessee also imposes an excise tax on the net earnings of
persons doing business in Tennessee and having substantial nexus in the state. 2 A “person” includes,
among other entities, every corporation and limited liability company.3
For purposes of the franchise and excise tax, a business entity is classified as a corporation,
partnership, or other type of business entity, consistent with the way the entity is classified for federal
income tax purposes.4 Tennessee law also provides that despite laws to the contrary, entities that are
disregarded for federal income tax purposes, except for limited liability companies whose single
member is a corporation, shall not be disregarded for Tennessee franchise and excise tax purposes.5
Accordingly, a single member LLC, whose single member is a person taxed as a corporation for federal
income tax purposes is disregarded for franchise and excise tax purposes, and its activities are taxed
as though they were performed directly by the corporate owner.
Tennessee provides that a qualified taxpayer may take a credit against its franchise and excise tax
liability for purchases or leases of industrial machinery located in Tennessee.6 The industrial
machinery credit is limited to fifty percent of the combined franchise and excise tax liability, and any
credit that cannot be fully applied due to the fifty percent limitation may be carried forward up to
twenty-five years.7
Tennessee also offers job tax credits and job tax “super credits” to be used against the franchise and
excise tax.8 Unused job tax credits may be carried forward up to twenty-five years.9
Tennessee provides that “in the case of mergers, consolidations, and like transactions, no tax credit
incurred by a predecessor taxpayer shall be allowed as a credit on the tax return filed by the successor
taxpayer.”10 The relevant statute also provides that “a credit carryforward may be taken only by the
taxpayer that generated it.”11

1

TENN. CODE ANN. § 67-4-2105(a) (2022).

2

TENN. CODE ANN. § 67-4-2007(a) (2022).

3

TENN. CODE ANN. § 67-4-2004(36) (2022).

4

TENN. CODE ANN. §§ 67-4-2007(d), -2106(c) (2022).

5

Id.

6

TENN. CODE ANN. § 67-4-2009(3)(A) (2022).

TENN. CODE ANN. § 67-4-2009(3)(B), (C). The twenty-five-year carryforward period was enacted by Pub. Ch. 377, H.B. 323 (2023
Sess. of the 113th Gen. Assemb.) and applies to credits earned in tax years ending on or after December 31, 2008.
7

TENN. CODE ANN. § 67-4-2109(b)(1) provides that a qualified business enterprise that makes the required capital investment
and creates a minimum number of new jobs, within an enhancement county, may obtain the standard job tax credit equal to
$4,500 for each qualified job created during the investment period. Additionally, under TENN. CODE ANN. § 67-4-2109(b)(2),
qualified business enterprises producing higher levels of investment and job creation are eligible for additional job tax credits,
sometimes referred to as job tax “super credits” or “super job tax credits.”
8

TENN. CODE ANN. § 67-4-2109(b)(1)(D). The twenty-five-year carryforward period was enacted by Pub. Ch. 377, H.B. 323 (2023
Sess. of the 113th Gen. Assemb.) and applies to credits earned in tax years ending on or after December 31, 2008.
9

10

TENN. CODE ANN. § 67-4-2009(6)(A).

11

Id.

3

The Taxpayer is not a successor entity to [SMLLC]. The Taxpayer is the corporate single member of
[SMLLC], which was disregarded to the Taxpayer both for federal income tax purposes and for
franchise and excise tax purposes when it applied for and earned the Credits. Accordingly, the
activities of [SMLLC] are considered the activities of the Taxpayer for franchise and excise tax
purposes. Thus, the Credits that are generated by [SMLLC] while it is a disregarded entity are
recognized as being generated by the Taxpayer. As such, the Taxpayer may continue to utilize the
Credits after the merger with [SMLLC].

APPROVED:

David Gerregano
Commissioner of Revenue

DATE:

November 3, 2023

4