Tennessee Letter Ruling limits application of NOL carryforward

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September 2020


A September 17 Letter Ruling issued by the Tennessee Revenue Department concludes that the state’s exception allowing a Tennessee net operating loss (NOL) carryover to survive a merger applies only when the surviving entity, prior to the merger, is an entity with no income, expenses, assets, liabilities, equity, or net worth.

Accordingly, when several entities with Tennessee NOL carryforwards merge into a newly formed entity, under the Letter Ruling only the first merged entity qualifies for the exception because following the merger the surviving entity will no longer be a ‘shell.’ Additionally, the exception would not apply when entities merge into an entity that has income or expenses prior to the merger, the Ruling concludes.

The takeaway

The Letter Ruling notes that the conclusions are not impacted by the corporations’ S-election status, indicating that the conclusions also may be deemed applicable to C corporations. 

Although letter rulings are binding on the Department only with respect to the individual taxpayer being addressed in the ruling, this Ruling reflects the strict construction that the Department of Revenue has applied to this statutory exception to the general rule of non-survival of NOLs in Tennessee. Whether an NOL survives a merger or other consolidation of two persons in Tennessee depends upon the form and ordering of the transaction and the specifics of which entity merges into which other entity. 

Additionally, taxpayers should note that the exception applies only when the survivor was truly a shell corporation with no historic business activities. While it is not necessary that the survivor be a newly formed entity, it must have always been a shell entity (apart from whatever minimal capital was required by state law to form the entity.) A similar rule applies to credits.

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Peter Michalowski

State and Local Tax Leader, PwC US

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