After a corporate 'F reorganization,' can the new successor company use the predecessor's Tennessee net operating losses and tax credits against its future franchise and excise tax?
Plain-English summary
A manufacturer reorganized its U.S. business. The old "Operating Company" had operated in Tennessee for years, filing franchise and excise (F&E) tax returns and building up valuable Tennessee tax attributes: unused net operating losses (NOLs) and tax credits (industrial-machinery, R&D-equipment, and standard job tax credits). To shed certain legacy liabilities, the company carried out an "F reorganization" under IRC § 368(a)(1)(F) — a transaction the tax law treats as a "mere change in identity, form, or place of organization" of one corporation. A brand-new corporation (the "Taxpayer") was formed as an empty shell, the old Operating Company was contributed into it and converted to a disregarded LLC (merging out of existence as a corporation), and the new Taxpayer stepped into its shoes.
The question: can the new successor company use the old company's Tennessee NOLs and tax credits against its own future Tennessee F&E tax?
The Department ruled yes. The general rule is strict — NOLs and credits can be used only by the company that generated them, and they are normally lost in a merger or similar transaction. But Tennessee has a "carryover exception": when a predecessor merges out of existence into a successor that has no income, expenses, assets, liabilities, equity, or net worth of its own, the predecessor's NOLs and credits carry over to the successor's F&E return. The exception's whole point is to let a company restructure its form without losing these attributes — while still blocking taxpayers from dumping the attributes into an already-operating company.
Here the new Taxpayer was a true shell at the moment of the merger: it was formed solely for the reorganization and had nothing other than $100 of paid-in capital and the contributed stock, both held only to carry out the reorganization itself — not as a pre-existing business. So the carryover exception applied, and the successor may use the old company's Tennessee NOLs and credits going forward.
What this means for you
Companies planning an F reorganization or restructuring
If you reorganize under IRC § 368(a)(1)(F) by merging an operating company out of existence and into a newly formed shell, Tennessee will generally let the successor keep the predecessor's NOLs and tax credits — provided the successor really was an empty shell (no income, expenses, assets, liabilities, equity, or net worth) right up to the merger. Capital and stock held only to effect the reorganization don't disqualify the shell.
What can break the exception
The attributes do not carry over if the predecessor merges into a company that already has its own business, income, or net worth. The exception is built to prevent loading old losses and credits onto an existing operating company. Watch the timing and the order of the steps so the receiving entity is still a bare shell when the predecessor merges in.
Tax value at stake
Tennessee NOLs carry forward up to 15 years; industrial-machinery credits (capped at 50% of combined F&E liability per year) and job tax credits carry forward up to 25 years. Preserving them through a restructuring can be worth a great deal, so the form of the deal matters.
Accountants and tax professionals
The carryover exception lives in § 67-4-2006(c)(4) (NOLs), § 67-4-2009(6)(B) (industrial-machinery credit), and § 67-4-2109(e)(2) (job tax credit); the underlying attributes and carryforwards are in § 67-4-2006(c) and § 67-4-2009(3)(A). The Department treats an F reorganization (IRC § 368(a)(1)(F); Treas. Reg. § 1.368-2(m)) as a merger/consolidation/"like transaction," consistent with prior Ruling 07-14, and distinguishes the no-carryover results in AT&T Corp. v. Johnson and Little Six Corp. v. Johnson.
Common questions
Q: Do Tennessee NOLs and tax credits survive a corporate reorganization?
A: They can. Normally only the company that generated them can use them, and they're lost in a merger. But Tennessee's carryover exception preserves them when the predecessor merges out of existence into a successor that was an empty shell with no income, assets, liabilities, equity, or net worth of its own.
Q: What counts as a "shell" successor?
A: A company formed solely for the reorganization that has no income, expenses, assets, liabilities, equity, or net worth right up until the predecessor merges in. Holding a nominal amount of capital and the contributed stock purely to carry out the reorganization is fine.
Q: What would cause the NOLs and credits to be lost?
A: Merging the predecessor into a company that already operates or has its own assets and net worth. The exception exists precisely to stop old attributes from being shifted onto an existing business.
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. It also assumes the transaction genuinely qualified as an F reorganization. Confirm your own structure and timing with a tax professional.
Citations and references
Tennessee statutes:
- Tenn. Code Ann. § 67-4-2006(c) (deduction and 15-year carryforward of Tennessee NOLs) and § 67-4-2006(c)(4) (carryover exception for NOLs)
- Tenn. Code Ann. § 67-4-2009(3)(A) (industrial-machinery tax credit; 25-year carryforward) and § 67-4-2009(6)(B) (carryover exception)
- Tenn. Code Ann. § 67-4-2109(b)(1) (job tax credit carryforward) and § 67-4-2109(e)(2) (carryover exception)
Federal authorities:
- IRC § 368(a)(1)(F) ("F reorganization" — mere change in identity, form, or place of organization)
- Treas. Reg. § 1.368-2(m) (requirements for an F reorganization)
Cases and rulings:
- AT&T Corp. v. Johnson, 148 S.W.3d 74 (Tenn. Ct. App. 2004) (successor not entitled to predecessor's NOL)
- Little Six Corp. v. Johnson, No. 01-A-01-9806-CH-00285, 1999 WL 336308 (Tenn. Ct. App. May 28, 1999) (same)
- Tenn. Dep't of Revenue Ruling 07-14 (F reorganization treated as a merger / like transaction for carryover purposes)
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/24-09fe.pdf
Original ruling text
TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 24-09
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
Utilizing Tennessee net operating losses and tax credits against future Tennessee franchise and excise
tax liabilities following a reorganization under IRC 8 368(a)(1)(F).
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
[REDACTED] (the “Parent”), is a [STATE] corporation headquartered in [CITY, STATE]. The Parent and
its United States (“U.S.”) based subsidiaries conduct the U.S. operations of the global [REDACTED]
manufacturing and distribution business.
Prior to the transactions discussed below that are the subject of this ruling request, [REDACTED] (the
“Operating Company”), as a [STATE] corporation and wholly owned subsidiary of the Parent,
performed manufacturing and distribution activities at facilities throughout the U.S., including
[REDACTED]in Tennessee, as part of the U.S. operations of the [REDACTED] business. As a result of its
business activities in Tennessee, the Operating Company has historically filed Tennessee franchise
and excise tax returns and has generated Tennessee net operating losses (“NOLs”) in a number of tax
periods prior and leading up to the transaction discussed below. Additionally, through its
manufacturing activities in the state, the Operating Company has generated Tennessee tax credits—
including Industrial Machinery and Research and Development Equipment Tax Credits and Standard
Job Tax Credits—in a number of tax periods prior and leading up to the transactions discussed below.
The unused Tennessee NOLs and Tennessee tax credits generated by the Operating Company prior
to [DATE], are hereinafter referred to collectively as the “Tennessee Attributes.”
Through the transactions discussed below, the Parent seeks to divest itself and the [REDACTED]
business operated in the U.S. of certain legacy liabilities and obligations (the “Legacy Liabilities”), both
present and future, including the insurance policies that provide coverage applicable to such liabilities
and receivables related to such insurance (the “Insurance Policies”), all of which are attributable to the
Operating Company or legal entities that were merged into it, but unrelated to its current business
activities. To successfully divest the Legacy Liabilities and Insurance Policies (i.e., to preclude the
attribution of the actual and potential Legacy Liabilities to the Parent or any of its subsidiaries other
than the Operating Company), it has been determined that the Legacy Liabilities and Insurance
Policies must remain with the Operating Company and that the Operating Company, with only the
Legacy Liabilities and Insurance Policies, must be sold to a third-party buyer.
[REDACTED] (the “Taxpayer”), a newly formed corporation wholly owned by the Parent, as further
discussed below, is intended to assume the Operating Company's place—with the exception that the
Taxpayer will not retain the Operating Company's Legacy Liabilities and Insurance Policies—in the U.S.
operations of the [REDACTED] business, including succeeding to the Operating Company's federal
employer identification number (“FEIN”) and federal income tax attributes.
The IRC § 368(a)(1)(F) reorganization
For the purposes provided above, the Operating Company underwent a non-taxable reorganization
under IRC 8 368(a)(1)(F) (a “F Reorg”), effected through the combination of the following transactions
(collectively, the “OpCo Reorganization”):
-
On [DATE], the Parent formed the Taxpayer as a [STATE] corporation and wholly owned
subsidiary of the Parent authorized to issue a total of one hundred shares of common stock,
each with a par value of $10, of which ten shares were issued by the Taxpayer to the Parent
in exchange for a $100 capital contribution by the Parent to the Taxpayer. -
On [DATE]:
a. The Parent contributed one hundred percent of the common stock of the Operating
Company to the Taxpayer, where such contribution was classified as paid-in capital
from the Parent to the Taxpayer on the previously issued shares of the Taxpayer's
common stock.
b. Immediately thereafter, the Operating Company converted from a corporation into a
single member limited liability company (an “SMLLC"”) under [STATE] law, thereby
becoming [REDACTED] (the “Operating LLC”), and it was classified by default as an
entity that is disregarded under its sole member, the Taxpayer, for U.S. federal income
tax purposes. See Treas. Reg. 8 301.7701-3(b)(ii).
Additionally, while the transactions above are listed in chronological order, the transactions are part
of a plan of reorganization in which the Parent contributed all of the Operating Company’s issued and
outstanding common stock to the Taxpayer, and the Taxpayer received such contribution of common
stock, with the mutual understanding and expectation that the Operating Company would
immediately thereafter convert in the Operating LLC and be classified by default as disregarded for
U.S. federal income tax purposes.
On [DATE], the Operating LLC distributed one hundred percent of its assets and liabilities, excluding
the Legacy Liabilities and Insurance Policies and a promissory note, to the Taxpayer. Such asset and
liability distribution from the Operating LLC to the Taxpayer is disregarded for U.S. federal income tax
purposes as a transfer from a disregarded entity (i.e., the Operating LLC) to the C corporation that is
the disregarded entity's sole owner (i.e., the Taxpayer).
From the time the Taxpayer was formed on [DATE], until [DATE], the Taxpayer had no income,
expenses, assets, liabilities, equity, or net worth other than the ten shares of common stock, each with
a par value of $10, that it issued upon its formation.
Finally, on [DATE], the Taxpayer formed [REDACTED] (the “Holding Company”), as a [STATE]
corporation and wholly owned subsidiary of the Taxpayer and contributed one hundred percent of
its equity interest in the Operating LLC to the Holding Company. The Taxpayer ultimately intends to
sell the Holding Company to a third-party buyer. The Taxpayer's sales of the Holding Company to a
third party will conclude the series of transactions by which the Parent divests itself and the
[REDACTED] business operated in the U.S. of the Legacy Liabilities and Insurance Policies that
originally arose in the Operating Company or its predecessors.
RULING
- Will the Taxpayer be able to use the Tennessee Attributes against its applicable future
Tennessee franchise and excise tax liabilities?
Ruling: Yes. The Taxpayer may utilize Operating Company's Tennessee Attributes.
ANALYSIS
Pursuant to TENN. CODE ANN. 8 67-4-2006(c) (Supp. 2023), a taxpayer may deduct its Tennessee NOLs
from its net earnings when calculating its Tennessee excise tax liability. Qualified Tennessee NOLs
may be carried forward and deducted for up to fifteen years. '
Pursuant to TENN. CODE ANN. 8 67-4-2009(3)(A) (Supp. 2023), a qualified taxpayer may take a credit
against its Tennessee franchise and excise tax liability for purchases or leases of industrial machinery
"TENN. CODE ANN. 8 67-4-2006(c)(2) (Supp. 2023).
made during the period covered by the return and located in Tennessee. The industrial machinery
credit is limited to fifty percent of a taxpayer's combined Tennessee 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.” Similarly, job tax credits may be used against Tennessee franchise and excise
tax, and any such tax credits, to the extent unused, may be carried forward up to twenty-five years.?
Generally, NOLs and tax credits may be carried forward and utilized only by the taxpayer that
generated them.’ In the case of mergers, consolidations, and like transactions, qualified NOLs and tax
credits incurred by a predecessor taxpayer are usually not allowed to be carried over and utilized on
the successor taxpayer's franchise and excise tax return.°
An IRC 8 368(a)(1)(F) reorganization may be effected through a series of transactions that together
result in the “mere change in identity, form, or place of organization of one corporation,” so long as
the aggregate transactions meet the requirements under Treas. Reg. 8 1.368-2(m).° For purposes of
this ruling, the Department assumes that the Taxpayer has met all of the requirements for an F
Reorganization.
The Tennessee Carryover Exception
? TENN. CODE ANN. 88 67-4-2009(3)(B), (C) (Supp. 2023). The twenty-five-year carryforward period applies to credits earned in tax
years ending on or after December 31, 2008.
3 TENN. CODE ANN. 88 67-4-2109(b)(1), (2) (Supp. 2023).
4 See TENN. CODE ANN. 88 67-4-2006(c)(3), -2009(6)(A), -2109(e)(1).
5 Id. See also 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, No. 01-A-01-9806-CH00285, 1999 WL 336308 (Tenn.
Ct. App. May 28, 1999) (holding that taxpayer was not entitled under TENN. Comp. R. & REGS. 8 1320-06-01-.21(2)(d) to use of net
operating loss incurred by predecessor).
6
-
Immediately before the potential F Reorganization, the “resulting corporation may not hold any property or have
any tax attributes” (the “shell entity requirement”). Treas. Reg. 8 1.368-2(m)(1)(iii). However, the applicable U.S.
federal regulations provide that the resulting corporation may hold a de minimis amount of assets (and related
tax attributes) to facilitate its organization or maintain its legal existence. Treas. Reg. § 1.368-2(m)(1)(iii). -
Similarly, immediately after the potential F Reorganization, the entire stock of the resulting corporation—
including any issued before the mere change transaction—must have been distributed, or be deemed as being
distributed, in exchange for stock of the transferor corporation. The applicable U.S. federal regulations provide,
however, that a de minimis amount of the resulting corporation's stock issued to facilitate its organization or
maintain its legal existence is disregarded. -
Immediately after the potential F Reorganization, the same person(s) must own, in identical proportions, the
entire stock of the resulting corporation as owned the entire stock of the transferor corporation immediately
before the mere change transaction. -
Immediately after the potential F Reorganization, the resulting corporation must hold all of the property that the
transferor corporation held immediately before the mere change transaction such that the resulting corporation
succeeds to and takes into account all items of the transferor corporation described in IRC 8 381(c).Conversely,
immediately after the potential F Reorganization, the resulting corporation must not hold property from any
corporation other than the transferor corporation that would cause the resulting corporation to succeed to and
take into account any item described in IRC 8 381(c). -
Asaresult of the potential F Reorganization, the transferor corporation must have completely liquidated, or be
deemed to have done so, for U.S. federal income tax purposes.
Under certain circumstances, a taxpayer may wish to restructure itself, which may result in the
formation of a separate successor entity. Under the general rule, a taxpayer undergoing a change in
form would not be able to restructure itself and preserve its NOLs and tax credits. To accommodate
such restructuring, TENN. CODE ANN. 88 67-4-2006(c)(4), -2009(6)(B), and -2109(e)(2) (collectively, the
“Tennessee Carryover Exception”), provide that when a predecessor taxpayer merges out of existence
and into a successor taxpayer that has no income, expenses, assets, liabilities, equity, or net worth,
the predecessor's qualified NOLs and Tennessee tax credits may be carried over and utilized on the
successor’s franchise and excise tax return. By requiring the predecessor to merge into a “shell
company,” this provision accounts for the restructuring while also preventing the NOLs and tax credits
from merging into an already existing company. Thus, the shell company provision allows for a
taxpayer to restructure itself and maintain its NOLs and tax credits while also preventing the taxpayer
from working around the requirement that NOLs and tax credits may be utilized only by the taxpayer
that generated them.
The Taxpayer May Utilize the NOLs and Tax Credits after the F Reorganization
On [DATE], Operating Company converted from a C-corporation to an SMLLC that disregarded into
Taxpayer. After this conversion, Operating Company no longer existed (i.e., it merged out of
existence). When Operating Company merged out of existence and into the Taxpayer, the Taxpayer
was a shell company. First, the Taxpayer was not engaged in any operations prior to the F
Reorganization. And second, the Taxpayer was formed specifically for the OpCo Reorganization and
did not have any income, expenses, assets, liabilities, equity, or net worth immediately up until the
merger, consolidation, or like transaction in which the Operating Company merged out of existence
and into the Taxpayer.
The $100 of paid-in capital that the Taxpayer held for one week between its formation and the
Operating Company converting into the Operating LLC is held by the Taxpayer during and for the sole
purpose of effecting the OpCo Reorganization. Likewise, the Parent's contribution of all of the
Operating Company's common stock to the Taxpayer immediately before the Operating Company
converting into the Operating LLC constitutes assets held by the Taxpayer during, and for the purpose
of effecting, the OpCo Reorganization. Importantly, the assets and equity described are not held
before the OpCo Reorganization.
In light of the above, the Tennessee Carryover Exception applies to the Taxpayer because the Taxpayer
is asuccessor company that had no income, assets, liabilities, equity or net worth when the Operating
Company merged into the Taxpayer and out of existence through the mechanisms of an F
Reorganization.’ Accordingly, the Taxpayer may utilize the NOLs and tax credits generated by the
Operating Company.
APPROVED: David Gerregano
Commissioner of Revenue
7 In Tenn. Dept. of Rev. Ruling 07-14 (“Ruling 07-14”), the Department analyzed how the Tennessee Carryover Exception applies
to federal F Reorganizations. The Department recognized that an F Reorganization amounts to a merger, consolidation, or like
transaction for carrying over NOLs. Ruling 07-14 also stated that an affiliate that has undergone an F Reorganization by merging
out of existence and into a shell corporation would likely be able to use NOLs generated by the predecessor.
DATE: November 5, 2024