# FILED
May 28, 1999 Cecil Crowson, Jr. Appellate Cou rt Clerk 

### IN THE COURT OF APPEALS OF TENN ESSEE

AT NASHVILLE

LITTLE SIX CORPORATION, ) ) Plaintiff/Appellee, ) ) Appeal No. VS. ) 01-A-01-9806-CH-00285 ) RUTH JOHNSON, COMMISSIONER ) Davidson Chancery OF REVENUE OF THE STATE OF ) No. 95-2556-II TENNESSEE, AND THE ) DEPARTMENT OF REVENUE OF THE ) STATE OF TENNESSEE, ) ) Defendant/Appellant. )
APPEALED FROM THE CHAN CERY COUR T OF DAVIDSO N COUNTY AT NASHVILLE, TENNESSEE THE HONORABLE CAROL L. Mc COY, CHANCELLOR

G. MICHAEL BURKE 148 Bristol East Road Bristol, Virginia 24201 EVERETT B. GIBSON 1010 Cotton Exchange Build ing 65 Union Avenue Memphis, Tennessee 38173-0351 Attorneys for Plaintiff/Appellee PAUL G. SUMMERS Attorney General & Repor ter M. TY PRYOR Assistant Attorney Gener al 425 Fifth Avenue North Nashville, Tennessee 37243 Attorney for Defendant/Appellant

AFFIRMED IN PART; REV ERSED IN PA RT;

AND REMANDED

BEN H. CANTRELL, PRESIDING JUDGE, M.S. CONCUR: KOCH, J. CAIN, J.- 2 - 

## O P I N I O N

The trial court ordered the Department of Revenue to refund $113,580 to the plaintiff corporation, holdi ng thatas the surviving entity in a corporate

merger, it was entitled to use tax deductions and tax credit s that had been acquired prior to the merger by the non-surviv

ing corporation. We reverse the court’s order in regard to the loss carryover deductions, and affirm its order on the industrial tax credits.
I. A Corpor

ate Merger

Little Six Corporation (Little Six) is a privatel y-held com pany, chartered in Virginia for

the purpose of mining coal in that state. In 1987, the six shareholders in Little Six began a new business to mine and process silica in H awkins Cou nty, Tennessee. They incorporated the new business in this state under the name Short Mountain Silica, and Little Six made a substantial in vestment in heavy eq uipment to start the operation.

Little Six financed most of the start- up expensesforShort Mountain with loans made from profits generated by it s coal-mining operation.But as its coal
reserve s dwindled, the owners of Little Six decided to wind down the coal-m inin g operation and to concentrate on silica.On December 31, 1989, Little Si x merged with Short Mountain through a statutory merger, with Little Six bein g t he surviving corporation. One advantage of the merger was that

it enabled Little Six to wipe $5.2 million in loans off its books.

After the merger, Short Mountai n ceased t o exist as a legal enti ty, though its operations in Tennessee c ontinue d to us e the same name. Little Six stopped mining coal, and so ld or leased all its coal mining equipment, for the most part to sister companies own ed by its shareholders.The last e quipment lease terminated in 1995, and the last piece of eq uipment was sold in 1996. P rior to the- 3 -

1989 merger, Short Mountain generated substantial net operating losses. The sand mining business became profitabl e and self-supporting after the mer ger.

In 1994, the Department of Revenue audited Little Six’s 1993 franchise and excise tax

return, and issued a deficienc y assessment of $53,380. Little Six paid the assessment, and filed a claim for a refund, w hich was den ied. On October 18, 1995, Lit tle Six f iled suit in the Chancery Court for Davidson Count y asking for the refund on its 1993 taxes

In 1995, the Department of Revenue audited Little Six’s 1994 franchise and excise tax return, and issued a deficiency assessment of $60,200. Again, Little Sixpaid the assessment and filed a claim for a refund. The Commissioner did not act
on the 1995 claim for refund withi n six months of its submissi on, s o on August 27, 1996, Little Sixfiled an other sui t. The two suits were consoli dated, and went to trial on February 19, 1998.

At trial, Little Six

argued that it was entitled to the loss carry overs and industrial machinery credits that the Depar

tm ent of Revenue had disallow ed. The Chancellor

agreed, and ordered the Depar tment to make therequired refunds. This appeal followed.
II. The Loss Carry overs

At the outset, we must notethat there is no dispute as to the facts of this
cas e, but only as to the chancellor’s conclusions of law. Such concl usions ar e reviewedde novo, and are not entitled to a presumption of correctness on appeal. Tenn. R. App. Proc. 13(d). Tenn. Far me rs Mutual Ins. Co. v. Americ

an Mutual Liability Ins. Co.,

840 S.W.2d 933 (Ten n. App. 1992). The State sought to tax the net earning s of the plain tiff corporation in accordance with the Excise Tax Law, Tenn. Code An n. § 67-4-80 1, et seq. The- 4 -

starting point for determining net ear nings for purposes of the excise tax is federal taxable income. This figure is the n ad justed by several variables, including, where appropriate, the deduction of net losses from prev ious years. The portion of the Act that defines net in com e, including the prov ision for loss carry

overs, is Tenn. Code Ann. § 67-4-805 (Acts 1976, ch . 537, § 29), t he current version of which reads in pertinent part: (b)(2) Ther e shall be subtracted from the federal

taxable income:

. . . (C)(I) Any net operating los s incur red for fiscal years ending on or after January 15, 1984, "ne t operat in g loss" being defined as th e excess of allowable de ductions over total income allocable to t his state for the year of the loss, and which may be carri ed over and allowed in succeeding tax years until fully utiliz

ed in the next succeeding taxable year or years in which the taxpaye r h as net income, but in no case formore than fifteen (15) years after the taxable year in which the net operating loss occurs...

The Department

of Revenue denied Little Six Corporation the us e of the lossesincurred by Short Mo untain Silica, relying upon its R evenue Rule 1320-6-1- .21(2)(d), which had been promulgated in 1974:

Each corporation is consider ed a separate entity; therefore, in the case ofmergers, consolidations , etc. no loss carryovers incurred by

the predecessor corporati on will be allowed as a deduction from net ear nings on the tax retur n of the successor corporation.

Little Six claims that the r egulatio n is invalid, because i t enlarges the scope of the taxing stat ute beyond t he mandate of the legislature. See Covington Pike Toyota v. Cardwell , 829 S.W.2d 132 (Tenn. 1992). However we believe that in creating the regulation, the Department had acted within its authority “to promulgate rules and regulations that are no t inconsistent with th e taxing statutes.” Tenn. Code Ann. § 67-1-102. In particular, we agree with the Department that the legislature’s use of the singular form in the phrase “in the next succeeding year or years in which the taxpayer has net income,” (emphasis added) indicatesthat it intended that the entity- 5 -

enjoying the tax benefit flowing fr om an operating loss be the same one that suffered the loss.

The trial court reached behi nd th e cor porate structure that Little Six chose to create, and explicitly adopted the “continuity of business enterprise” test, in order to find that Little Six w

as entitled to offset its profits by Sand Mountain’s losses. That test, first described in Lisbon Shops v. Koehler , 353 U.S. 382 (1957), allow s the loss-carryover

deduction, regardless of corporate re-organization, if substantially the
same business is responsible for both the losses and the profits th at it seeks to offset.

However, rulings of the federal courts in regar

d to federal tax laws are not binding on Tennessee courts when they are called upon to interpret Tennessee tax laws. See Tidwell v. Berke , 532 S.W .2d 254 (Tenn. 1975). Some state courts have adopted the continuity of business test, but to the best of our knowledge it has never before been followed in this state, and there is no evidence tha t the legislature intended its adoption when it enac ted the Excise Tax Law. Revenue Rule 1320-6-1- .21(2)(d) was in effect prior to the enactment of Tenn. Code Ann. § 67-4-805. If the legislature objected tothe rule, it could have easily drafted the statute in such a way as to render it inoperativ e, but it did not do so.

The Chancellor ad d itionally relies upon the statutes dealing w ith corporate mergers, specifically Tenn. Code Ann. § 48-21-108, which states that the property and the liabilities of each party to a merger are vested in the su rvi ving corporation. However, putting aside for the moment the questi on of wh ether prior lossesare considered to be “proper ty” under that statute , we must note that the purposes of the franchise and excise tax statut es are distinct from those of the
c orporat e merger statutes, and they should not be interpreted in pari materia. See Parkridge Hospital v. Woods , 561 S.W.2d 754 (Tenn. 1978) . Richard’s Auto City v. Director, Divisi

on of Taxation , 659 A.2d 1360 (N.J. 1995).- 6 - We acknowledge that if the s ituation had been reversed, that is, if Sand Mountain had absorbed Little Si x rather than the

other way around, then there is no doubt that Sand Mountain would hav e been entitled to the deduction.But we do not agree with theargument that Little Six is thus being penalized because of a relatively minor technical distinction. The shareholders of Little Six chose to merge it with Sand Mountain, and to terminate Sand Mountain’s c orporate existence. No doubt they had sound business reasons for wanting to structure the merger as they did. But we are not obligated to interpret Tennessee’s tax laws in such a way as to minim ize their impact on corporati ons that choose to do business i n this state. Rather, it is for corporations

to conform the ir decisions to the tax code to the extent that they w ant that code to work for their benefit.

III. The Industrial Machinery Credit

Tennessee offers ta

x credi ts for th e purcha

se of indu strial machinery that is located and used in this state. In an argument that follo ws its reasoning on

the question of loss carryovers, the De partment c ontends that we should deny those creditsto Little Six, because Short Mo un tain was the origin al purchaser of the equipment in question.
Tenn. Code Ann. § 67-4-808 reads i n pertinent part:

(4) (A) On each excise tax r eturn, a credit shall be allo wed f or a percentage of the purchase p rice of industrial machinery purchased during the tax peri od cov ered by the return and located in Tennessee .

. . .

. . . (C) Any unused credit incur red for fiscal years ending on or after March 15, 1982, may be carried forwar d in any tax period for fifteen (15) years o r until such credit is taken.

We do not believe that

the statute contains

any langua ge from wh ich we
can infer an intent to limit the us e of the credit to the entity that was the original purchaser. Nor has the Department promulgated a rule for the industrial

tax credits- 7 -

analogousto its Revenue Ru le 1320 -6 -1 -. 21 (2 )(d) . We therefore conclude that Little Six is entitled to the industrial machinery tax credits.

IV.
The judgmentof the trial court is rev ersed in part and affirmed in part. Remand this cause to

the Chancery Court of Davidson County fo r further proce edings consistent

with this opinion. T

ax the costs on appeal equally between the appellee and the appellant.

____________________________ BEN H. CANTRELL, PRESIDING JUDGE, M.S. CONCUR:

_____________________________ WILLIAM C. KOCH, JR., JUDGE

_____________________________ WILLIAM B. CAIN, JUDGE