Sections applicable to the claim in this case have since been reorganized and repealed. See 1999 Tenn. Pub. 1

Acts chapter 406; see also Tenn. Code Ann. §§ 67-4-2001-2116 (2003). Discussion in this opinion will be confined to

those sections applicable to the tax years in question, 1991 through 1996.

IN THE COURT OF APPEALS OF TENNESSEE

AT NASHVILLE

February 17, 2004 Session

AT&T CORP. v. RUTH JOHNSON, ET AL.

 Appeal from the Chancery Court for Davidson County

No. 99-206-I Irvin H. Kilcrease, Jr., Chancellor

No. M2003-00148-COA-R3-CV - Filed April 8, 2004 

This appeal concerns a challenge to the Commissioner’s franchise and excise tax assessment. On

cross-motions for summary judgment the chancellor found for the Commissioner. We affirm.

Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court

Affirmed and Remanded

WILLIAM B.CAIN, J., delivered the opinion of the court, in which WILLIAM C. KOCH, JR., P.J., M.S.,

and PATRICIA J. COTTRELL, J., joined.

William Robert Pope, Jr., Jack W. Robinson, Jr., Mary Taylor Gallagher, Nashville, Tennessee, for

the appellant, AT&T Corporation.

Paul G. Summers, Attorney General and Reporter; Michael E. Moore, Solicitor General, M. Ty

Pryor, Assistant Attorney General, for the appellee, Ruth E. Johnson, Commissioner of Revenue,

State of Tennessee.

OPINION

In this appeal, AT&T challenges the Commissioner’s assessments of franchise and excise

tax for tax years 1991 through 1996. In its amended and supplemented complaint filed pursuant to

Tennessee Code Annotated section 67-1-1801, AT&T challenged first the Commissioner’s refusal

to allow credits for net operating losses and industrial machine credits sought pursuant to Tennessee

Code Annotated section 67-4-805, and section 67-4-808. Upon cross-motions for summary 1

judgment, the trial court found in favor of the Commissioner. From that order AT&T appeals. The

appellant raises two issues which this Courtfinds dispositive. The first issue on appeal concerns this

Court’s opinion in Little Six Corp. v. Johnson, No. 01-A-01-9806-CH-00285, 1999 WL 336308
 Pursuant to this Court’s decision in AT&T v. Huddleston, 880 S.W.2d 682 (Tenn.Ct.App. 1994), AT&T and 2

AT&TIS were required to file separate returns throughout the existence of AT&TIS. 

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(Tenn.Ct.App. May 28, 1999). The second issue on appeal concerns the Commissioner’s application

of Tennessee Code Annotated section 67-4-808 in declining to allow AT&T’s claim for industrial

machine credits. The facts are not in dispute; the only challenge on appeal is to the conclusions of

law reached by the trial court. These conclusions enjoy no presumption of correctness on appeal and

are reviewed de novo pursuant to Tennessee Rule of Appellate Procedure 13(d). See Tennessee

Farmers Mutual Ins. Co. v. American Mutual Liability Ins. Co., 840 S.W.2d 933, 936 (Tenn.Ct.App.

1992).

I. NET OPERATING LOSS CARRYOVER AND LITTLE SIX

A. AT&T and AT&TIS

This case involves two corporate entities, American Telephone and Telegraph (AT&T) and

American Telephone and Telegraph Information Systems (AT&TIS). AT&T formed AT&TIS in

order to comply with a Federal Communications Commission ruling originally issued in May 1980.

The Commission determined that the provision of customer premises equipment and certain other

“enhanced services” were not necessary to communications services, and thus were required to be

provided separate and apart from a telephone carrier’s tariffed services. AT&T contested this

decision throughout AT&TIS’s existence and met with success when the Commission reversed its

position in 1986. Nonetheless, AT&T formed the separate entity originally under the name of

American Bell, Inc. in 1982 for the provision of these services. The named was changed in 1983 to

AT&T Information Systems, Inc. AT&T was the sole stockholder and financing source for

AT&TIS. From its inception through its merger with AT&T, AT&TIS sustained operating losses

which it reported on its Tennessee Franchise and Excise Tax Returns. AT&T was the survivor 2

corporation in this corporate merger and attempted to carry over and deduct the net operating losses

incurred by AT&TIS prior to merger. The Commissioner disallowed the deduction and AT&T filed

suit. The chancellor’s order contains the following appropriate discussion:

A.

AT&T contends that it is entitled to deduct from its franchise and excise tax

liability, the net operating losses accrued by Information Systems.

The Commissioner disallowed AT&T’s use of Information Systems’ net

operating losses. The Commissioner’s disallowance of Information Systems’ net

operating losses was based on the provisions of T.C.A. § 67-4-805 and Revenue Rule

1320-6-1-.21(2)(d).

T.C.A. § 67-4-805(b)(2)(c)(I) provides in pertinent part concerning “net

operating losses”:

Any net operating loss incurred for fiscal years ending

on or after January 15, 1984, “net operating loss”

being defined as the excess of allowable deductions

over total income allocable to this state for the year of
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the loss, and which may be carried over and allowed

in succeeding tax years until fully [] utilized in the

next succeeding taxable year or years in which the

taxpayer has net income, but in no case for more than

fifteen (15) years after the table year in which the net

operating loss occurs . . . (emphasis added)

Tennessee Department of Revenue Rule 1320-6-1-.21(2)(d) provides in pertinent

part: 

Each corporation is considered a separate entity;

therefore, in the case of mergers, consolidations, etc.,

no loss carryovers incurred by the predecessor

corporation will be allowed as a deduction from net

earnings on the tax return of the successor

corporation. (Emphasis added)

B.

AT&T argues that the Commissioner’s adoption and application of Revenue

Rule 1320-6-1-.21(2)(d) is arbitrary because the Rule exceeds the Commissioner’s

rule-making authority to prescribe rules and regulations pursuant to T.C.A. § 67-1-

102. Additionally, AT&T argues that the Rule places unreasonable and arbitrary

restrictions on the use of the net operating losses which are not within the scope of

T.C.A. § 67-4-805(b).

C.

The Tennessee Court of Appeals, in the case of Little Six Corporation v.

Johnson, 1999 WL 336308 (Tenn.Ct.App.) held that the Revenue Department acted

within its authority in creating Rule 1320-6-1-.21(2)(d). See T.C.A. § 67-1-102.

Further, the Court of Appeals opined 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”, indicates that the legislature “intended that the entity enjoying the tax

benefit flowing from an operating loss be the same one that suffered the loss.” See

T.C.A. § 67-4-805(b)(2)(C)(I).

D.

This court finds that AT&T and Information Systems are considered separate

corporations for purposes of Tennessee Franchise and Excise Tax Law. Therefore,

AT&T is not allowed to deduct from its net earnings on its tax return net operating

losses incurred by Information Systems, its predecessor corporation.

Accordingly, as to the “Net Operating Loss Carryover Issue”,

Commissioner’s motion for summary judgment is granted. AT&T’s motion for

summary judgment is denied.
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On appeal AT&T argues that our holding in Little Six should be reconsidered or, in the

alternative, distinguished from the facts of this case. AT&T presents the same arguments advanced

by the taxpayer in Little Six, without presenting any mandatory or persuasive authority requiring the

abrogation of our prior decision.

In its argument that the facts in Little Six are distinguishable from the case at bar, AT&T

urges two points, first that the FCC had required the formation of AT&TIS, and that the actual

“taxpayer” for the purposes of Tennessee Code Annotated section 67-4-805 and Revenue Rule 1320-

6-1-.21(2)(d), is in fact AT&T. We are unpersuaded by either argument. The facts of this case seem

surprisingly similar to the facts in Little Six.

Little Six financed most of the start-up expenses for Short Mountain with

loans made from profits generated by its coal-mining operation. But as its coal

reserves dwindled, the owners of Little Six decided to wind down the coal-mining

operation and to concentrate on silica. On December 31, 1989, Little Six merged

with Short Mountain through a statutory merger, with Little Six being the surviving

corporation. One advantage of the merger was that it enabled Little Six to wipe $5.2

million in loans off its books.

Little Six Corp. v. Johnson, 1999 WL 336308, *1.

While the record does not reveal the advantages of the merger other than to regain the ability

to directly provide enhanced services, the similarity in facts requires the similarity of result:

Little Six claims that the regulation is invalid, because it enlarges the scope

of the taxing statute beyond the 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 not inconsistent with the 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) indicates that it intended that the

entity enjoying the tax benefit flowing from an operating loss be the same one that

suffered the loss.

Little Six, 1999 WL 336308, *2.

AT&T’s argument that it is the “taxpayer” for the purposes of the statute ignores the well

settled rule that a corporation is an entity separate and apart from the persons or corporations who

own the stock. 

The position asserted by AT&T assumes that the rights of the sovereign are subject to the

same rules as are the rights of its citizens. The seemingly all inclusive language of a corporate
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merger statute delineating the powers possessed by the survivor corporation is ineffective for any

purpose when applied to the taxing power of the sovereign. General Telephone Co. of the Southeast

v. Boyd, 343 S.W.2d 872 (Tenn. 1960). Said the supreme court in General Telephone Co. of the

Southeast;

Specifically, in the language of appellant’s brief, here is its reasoning:

“Words in a statute are always to be given the meaning they

have in common use. Use of the words, ‘rights, privileges, powers,

franchises and immunities as well of a public as of a private nature’

in a merger statute evidences a clear intention on the part of the

Legislature to allow the mergee corporation to continue operation of

business without being subjected to additional gross receipts tax

based upon the same business for the same taxing period. The

privilege of continuing operation of the same business at the same

locations during the same period without additional gross receipts tax

is a public privilege within the ordinary meaning of the term and,

therefore, under the expressed language of the merger statute passed

from Southern Continental Telephone Company to General

Telephone Company of the Southeast.” 

While the reasoning in the foregoing quotation is logical and appeals strongly

to one’s sense of justice under the facts of this case, nevertheless, the Court cannot

escape the fact that under the holdings of this Court Section 48-505, T.C.A.,

hereinbefore quoted does not apply to the rights of the sovereign State of Tennessee.

343 S.W.2d 872, 875-76 (Tenn. 1960). While General Telephone Co. of the Southeast v. Boyd dealt

with gross receipts tax and this case deals with franchise and excise tax, the principles involved are

identical. The two corporations are separate entities.

Everything depends upon the wording of the statute imposing the tax. Tennessee Department

of Revenue rule 1320-6-1-.21(2)(d) allows for exactly the rule as stated in General Telephone

Company of the Southeast v. Boyd. AT&T does not have the benefit of a credit proviso in the statute

that is broader in scope than the actual tax imposing provision such as was the case in United

Intermountain Telephone Company v. Moyers, 426 S.W.2d 177 (Tenn. 1968). We affirm the trial

court’s grant of summary judgment to the Commissioner and denial of the same to AT&T. Since

our refusal to abrogate or distinguish Little Six determines the issues regarding the disallowance of

the credit for 1991 through 1996, it is unnecessary for us to address the jurisdictional argument

raised by the appellant or the statute of limitations argument raised by the appellee. 

II THE INDUSTRIAL MACHINE CREDIT

AT&T also challenges the refusal of the Commissioner to allow the taxpayer an industrial

machine credit for tax years 1993 through 1996. AT&T argued that the industrial machine credit

statute as it existed in those years did not require qualification for the job tax credit as a pre-requisite
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to industrial machine credit qualification. As grounds for that argument, AT&T asserts that a change

in the statutory language in later versions of the statute evidences a new intent by the legislature to

condition the extension of a credit only to taxpayers owning computer equipment and qualifying for

the job tax credit. Appellant refers to Nutt v. Champion Internat’l Corp., 980 S.W.2d 365, 368

(Tenn. 1998) as authority for the presumption that amendments affect statutes prospectively unless

the legislature clearly indicates otherwise. The Appellant urges that since the legislature amended

the industrial machine credit statute in 1999 to clearly condition the credits availability upon

qualification for the job tax credit for businesses using computer and computer equipment, this

amendment suggests the absence of such intent in the statutes prior to 1999. 

To the contrary, the state argues that the 1999 amendment to the statute simply confirmed

the meaning of the previous state of law and did not indicate a change in legislative intent. See City

of Chattanooga v. Davis, 54 S.W.3d 248, 268 (Tenn.2001). For the purpose of the statutory

argument it is necessary to note that the industrial machine credit was always available to “industrial

machinery” as that term is defined in 67-6-102. In 1994, the legislature passed chapter 762 of the

Public Laws which, inter alia, provided an expansion to the definition of industrial machinery for

the purposes of the tax credit. That act provided the following change to Tennessee Code Annotated

section 67-4-808:

(A) On each excise tax return, a credit shall be allowed for a percentage

of the purchase price of industrial machinery purchased during the tax period covered

by the return and located in Tennessee. For purposes of this section, “industrial

machinery” means: 

(i) “Industrial machinery” as defined by section 67-6-102; or

(ii) “computer,” “computer network,” “computer software,” or “computer

system” as defined by section 39-14-601 and any peripheral devices, including but

not limited to, hardware such as printers, plotters, external disc drives, modems, and

telephone units purchased in the process of making the “required capital investment”

in Tennessee described in section 67-4-908 to qualify for the job tax credit.

1994 Pub. Acts 762.

The expansion of the definition of industrial machinery always envisioned that in order for

computers, networks and software as defined in § 39-14-601, as well as their peripheral devices, to

qualify they had to be purchased in the process of making the “required capital investment”

described in 67-4-908.

Contrary to the argument of the taxpayer, this statute contains no ambiguity. “Where a

statute is plain and explicit in its meaning, and its enactment within the legislative competency, the

duty of the courts is simple and obvious, namely, to say sic lex scripta, and obey it.” Miller v.

Childress, 21 Tenn. 320, 321-22 (1841). We find that the consideration of the legislative history
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therefore is unnecessary. Likewise, consideration of the supplemental authorities submitted by the

parties is unnecessary. The chancellor’s grant of summary judgment to the state and denial of the

same to AT&T is affirmed in all respects. The cause is remanded for the final calculation of the

amounts due. Costs are assessed against AT&T.

___________________________________ 

WILLIAM B. CAIN, JUDGE