S e c tio n s a p p lica b le to the c la im in this c a se ha v e sinc e b e e n re o rg a n iz e d a n d re p e a le d

. See 1999 T en n
. Pub. 1 A c ts c h a p te r 4 0 6 ; s ee al s o T e n n
. C o d e A n n
. § § 6 7 -4 -2 0 0 1 -2 1 1 6 (2 0 0 3 ). D isc u ssio n in t h is o p inio n w ill b e c o n fine d to t h os e s ec t i on s a ppl i ca bl e t o t h e t ax y ea r s i n qu es t i on , 1991 t h r ou g h 1996.



### IN THE COURT OF APP EALS OF TENNESS EE

AT NAS HVILLE Fe bruary17, 200 4 S es sio n AT&T CORP. v. RUTH JO HNSO N, ET AL 

### . Appeal f romthe Chancer y Court for Davidson Cou nty No. 99-206-I Ir vin H. Kilcrease , Jr., Chancellor

No. M2003- 00148-COA-R 3-CV - F iled April 8, 2004

This appea l conce rns a c halleng e to the C ommissi oner’ s fra nchise and excise tax assessment. On
c ro ss- mot ion s f

or su mma ry jud g me nt the c ha nc e llo r f ou ndfo r the Com mis sio ne r. We a ff ir m. Tenn. R. App . P . 3 Appeal as of Right; Judgme nt of th e Chancer y Court Aff irm ed and Rem anded

W I L L I AM B. C A IN , J ., delivere d the opi nion of t he court, in which W I L L I AM C. K O CH , J R ., P.J ., M.S., and P A T R IC IA J . C O T T RE LL , J ., joined.
Wil liam Robert Pope, J r., Jack W. R obinson, J r., Mary Tay lor Gallag her, Nashville, Tenne ssee, f or the appe llant, AT& T Corporation. Paul G. Summers, Attorney Gene ral a nd Reporter ; Michael E. Moore , S o l i cit or Ge nera l, M. Ty Pry or, Assistant Attorney Gene ral, for

the appe llee, Ruth E. J ohnson, Commi ssione r of Revenue, State of Tenne ssee.
OP IN ION

I n th is a pp e a l, A T& T c hal len ges the Com mis sio ne r’ s a sse ssm e nts of fr a nc his e a nde xcis e ta x fo r ta x y e ars 19 91 thr ou g h 1 99 6. I n it s a me nd e d a ndsu pp le me nte d c omp la int fi le d p ur su a nt t o Tenne ssee Code A nnotated sec tion 67-1-1801, AT& T cha lleng ed first the Commiss ioner’s r efusa l to allow cre dits for net oper ating losses and industrial machine cre dits sought pursuant to Te nnessee C o d e An n o tated sec tion 67-4-805, and se ction 67-4-808. Upon cr oss-motions for summary 1 judgme nt, the t rial court found i n favor of t he C ommissi oner. From that order AT& T appe als. The
app e lla nt r a ise s tw o iss ue s wh ic h thi s Cou rt fi nd s d isp os iti ve . T he fi rs t is su e on app e a l c on c e rn s th is Court’s opinion in Litt le Six Corp. v. Johnson , No. 01-A- 01-9806-CH-00285, 1999 WL 336308P urs uant t o t hi s C o urt ’ s d eci si o n i n AT& T v

. H uddl es t on , 8 8 0 S.W

. 2 d 6 8 2 (T enn. C t

. A p p
. 19 9 4 ), A T & T and 2 A T & T IS w e re re q u ire d to fi le se p a ra te re tur n s thr o u g h o u t t h e e x isten c e o f A T & T IS

. -2- (Tenn.Ct.App. May

28, 1999). The se cond issue o na p p e al conc erns the Commissioner’s application of Tenne ssee Code Annotated section 67-4-808 in declining to allow AT& T’s cla im for industrial machine cre dits. The fac ts a re not in dispute; the only challeng e on appe al is to the conclusions of law rea ched by the trial court. These conclusions enjoy no presumption of corr ectne ss on appea l and
are revie wed de n o vo pursuant to Tenne ssee Rule of A ppellate Proc edure 13(d). See Tenne ssee Farmers Mutual Ins. C o. v. American Mutual Liabil ity Ins. Co. , 840 S.W .2d 933, 936 (Tenn.Ct.App. 1992).

I

. NET OPERATING L OSS C ARRYOVER AND LITT LE SIX A

. A T & T a n d A T & T IS
This case involves two corpor ate e ntities, American T elephone and Te leg raph ( AT& T) and Am e ri c a n T e le ph on e a ndTe le g ra ph I nf orma tio n Sy ste ms ( AT & TI S) . A T& T f orme d AT & TI S in order to comply

with a Fe dera l Comm unications Commi ssion ruling orig inally issued in May

1980. The Commission determined that the provisi on of customer premises e quipment and ce rtain other “enhanced se rvice s” we re not ne cessa ry to communications service s, and thus wer e re quired to be pr ov ide d s e pa

rate a ndapa

rt fr om a te le ph on e c arrie r’ s ta

ri ff e d s e rv ic e s. AT & T cont estedthi s de c isi on thr ou g ho ut AT & TI S’ s e xiste nc e a nd me t wi th su c c e ss wh e n the Com mis sio n r e ve rs e d it s position i n 198 6

. Nonetheless, AT& T forme d the sepa rate entity

orig inally

under the name of Am e ri c a n B e ll, I nc . in19 82 fo r the pr ov isi on of the se se rv ic e s. Th e na me d w a s c ha ng e d in19 83 to AT& T I nformation Sy stems, I nc. AT& T was the s o le stockholder and financ ing sour ce f or AT& TI S. From i ts inception t hroug h its merg er w ith AT&T, A T& TI S sustained operating losses which it reported on its Ten n es s ee Franchise a nd Ex cise Ta x Returns. AT& T was the survivor 2 corpor ation in this corporate merg er and attempted to ca rry over and deduct the ne t operating losses incurre d by

AT& TI S prior to merg er. The Commi ssioner disallowed the deduction and AT& T filed suit. The chanc ellor’s orde r conta ins the following a ppropriate discussion:

A. AT& T contends that it is entitled to deduct fr om its franchise and excise tax lia bil ity , th e ne t op e ratin g los se s a c c ru e d b y I nf orma tio n Sy ste ms. The Commissioner d i s allowed AT &T ’s use of Information Sy stems’ net operating losses. The Comm i s s i oner’ s disallowance of Information Sy stems’ net op e ratin g los se s w a s b a se d o n th e pr ov isi on s o f T .C. A. § 6 7- 4- 80 5 a nd Re ve nu e Rul e 1320-6-1- .21(2)( d). T.C.A. § 67-4-805( b)(2) (c) (I ) provides in pe rtinent part c oncerning “ net operating losses” :

Any net oper ating loss incurred f or fisca l y ear s ending
on or a ft e r J anu ary

15 , 1 98 4, “ ne t op e ratin g los s” being define d as the e x cess of allowable de ductions over total income allocable to this state for the y ear of-3- the loss, and which may

be ca rried over and allowed in succe eding tax y ear s until fully[] utiliz ed i n the next s ucce eding taxable y ear or y ea rs i n which the taxpay er ha s net income, but in no case for more than fiftee n (15) y ear s afte r t he table y ear in which the net operating loss occ urs . . . (e mphasis added) T en n essee Depa

rtment of Reve nue Rule 1320-6- 1-.21(2) (d) pr ovides in pertinent pa rt : E a c h c o rp o r a t i o n i s c o n s i d e r e d a s e p ar a t e e n t i t y; there fore , in the case of merg ers, c onsolidations, etc., no loss carry overs i ncurr ed by the pre dece ssor corpor ation will be allowe d as a deduction from ne t ear nin g s o n th e tax r e tu r n o f th e s u c c e s s or corpor ation. (Emphasis adde d)

B. AT& T arg ues that the Commissioner’s adoption and application of Revenue Rule 1320-6-1- .21(2)( d) i s arbitra ry beca use the Rule excee ds the Commis sioner’s rule-ma king authority to pr escribe rules and reg ulations pur suant to T.C.A. § 67-1- 102. Additionally , AT& T arg ues that the Rule p l ac es unre asonableand ar bitrary restric tions on the use of the ne t operating losses whic h are not within the scope of T.C.A. § 67-4-805( b).
C. The Te nnessee Court of Ap p ea l s , in the case of Little Si x Corporation v. J ohnson, 1999 WL

336308 (Tenn.Ct.App.) held that the Revenue Depa rtment ac ted within its authority

in cre ating Rule 1320-6-1-.21( 2)(d) . See T.C.A. § 67-1- 102. Further, the Court of A ppeals opined that the leg islature’s use of the sing ular form in the phrase “in the next succee ding y ea r or y ear s in which the taxpay er ha s net income”, indicates that the leg islature “intende d that the entity enjoy ing the tax benef it flowing f

rom an operating loss be the same one that suffe red the loss.” See T.C.A. § 67-4-805( b)(2) (C)(I ).

D. Th is c ou rt fi nd s th a t A T& T a ndI nf

orma tio n Sy ste ms are c on sid e re d s e pa rate corpor ations for purpose s of Tenne ssee Fr anchise and Ex cise Ta x L aw. The ref ore, AT& T is not allowed to deduct f rom its ne t e arning s on its tax return ne t operating losses incurre d by

I nformation Sy stems, its predece ssor corpor ation. Acc ording ly , as to t h e “N et Oper ating L oss Carry over I ssue”, Commi ssioner’s motion for summary judgme nt is granted. AT& T’s mo t i o n for summary judgme nt is denied.-4-

On appe al AT& T arg ues that our holding in Litt le Six should be rec onsidered or , in the alternative, distinguished from the facts of t his case
. AT& T prese nts the s ame a rg uments advanc ed by the taxpay er in Litt le Six , without presenting any mandatory

or per suasive authority

requiring the abrog ation of our prior dec ision.

I n its arg ument that the fa cts in Litt le Six are d is ti ngui sh abl e f

r o m t he cas e atbar, AT&T urg es two points, first that t h e F CC had require d the formation of AT& TI S, and that the ac tual “taxpay er” for the pur

poses of T e n n e s see Code A nnotated sec tion 67-4-805 and Reve nue Rule 1320- 6-1-.21( 2)(d) , is in fact AT& T. We are unpersua ded by either a rg ument. The fa cts of this case seem surprising ly

simil ar to the f

acts in Litt le Six

. L itt le Six fi na nc e d mo st o f the sta rt -u p e xpe ns e s f

or Sho rt Mo un ta in w ith loans made f

rom profits g ener ated by its coal-mining ope ration. B ut as its coal
rese rves d wi n d l ed, the owners of Little Si x decide d to wind down the coa l-mining operation and to conce ntrate on silica. O n Dec ember 31, 1989, Little Si x merg ed with Short Mountain through a statutory merg er, with L ittle Si x being the surviving corpor ation. One advanta g e of the merg er was that it e nabled Little Si x to wipe $5.2 mil lio n inloans of

f i ts b oo ks

. Litt le Six Corp. v. Johnson , 1999 WL 336308, *1.
Whil e the re c or d d oe s not re ve a l the a dv a nta g e s of the me rg e r oth e r than to re g a in the abil ity to d ir e c tly

pr ov idee nh a nc e d s e rv ic e s, the sim ila ri ty in f a c ts r e qu ir e s th e sim ila

ri ty of re su lt:

L ittle Si x claims that the re g ulation is invalid, beca use i t enlar g es the scope
o f th e taxin g s tatu teb e y o n d th e man d a te o f th e le g is latu r e
. Se e C o vi n g ton Pike Toy ota v . Ca rd

we ll , 8 29 S.W. 2d 13 2 ( Te nn . 1 99 2) . H ow e ve r w e be lie ve that in
c re a tin g the re g ulatio n, the De pa rt me nt h a d a c te d wi thi n it s auth ority “ to p ro mul g a te rules and r eg ulations that a re not inc onsistent with the taxing statutes.” Te nn.Code Ann. § 67-1-102. In particula r, we ag ree with the Depa rtment that the leg islature’s use of the singular form in the phrase “in the nex t succe eding y ear or y ear s in which th e taxpaye r h as net income ,” (e mphasis added) indicates that it intended that the entity enjoy ing the tax benefit flowing from an operating loss be the same one that
su ff e re d th e los s.
Litt le Six , 1999 WL

336308, *2.

AT & T’ s arg ume nt that it is the “ ta xpa y e r” fo r the pu rp os e s of the statut e ig no re s t he we ll settled rule that a

corpor ation is an entity

separ ate a nd apart from the per sons or corpor ations who own the stock. The position asserte d by

AT& T assumes that the rights of the sovere ign a re subjec t to the
sa me ru le s a s a

re theri g hts of

its c iti zen s. Th e se e min g ly a ll i nc lus ive language of a c or po rate-5-

merg er statute de line at i n g t h e power s possessed by the survivor c orporation is i neff ective f or any purpose whe n applied to the taxi ng power of the sovere ign. Ge ne ra l Te le ph on e Co. of t

he So uth e as t v. Boy d , 343 S.W .2d 872 (Tenn. 1960) . Said t h e s u p re m e court in Gene ral Telephone Co. of the So uth e as t ;
S p ec i fi ca l l y , i n t h e l an gu age o f a p p el l an t ’s b ri ef , h er e i s i t s re as o n i n g:

“Words in a st atute are alway s to be given the meaning they ha ve in c omm on us e
. Us e of the wo rd s, ‘rig hts , p ri vil e g e s, po we rs , franchises and immunities as well of a public as of a

private nature’ in a merg er statute e vidence s a cle ar intention on the pa rt of the L eg islature to allow the mer g ee c orporation to continue operation of business without being subjec ted to additional g ross rec eipts tax based upon the sam e b u siness for the same taxing period. The privi le g e of

c on tin uin g op e ratio n o f the sa me bu sin e ss at th e same locations during the same period without additional gr oss rec eipts tax is a public privileg e within the ord i n ar y m eaning of the term and, there fore , under the expressed lang uag e of the merg er statute pa ssed from Southern C o ntinental Telephone Company to Gener al Telephone Company

of the Southeast.” Whil e there a so nin g in the fo re g oin g qu otatio n is log ic a l a ndapp e a ls s tr on g ly to one’s sense of justice under the facts of this case , nevertheless, the Court cannot esca pe the fac t that unde r the holdings of this Court Section 48-505, T

. C .A., here inbeforequoted does not apply to the rig hts of the sovere ign State of Tenne ssee.
343 S.W .2d 872, 875-76 (Te nn. 1960). While Gene ral Telephone Co. of the Sout heast v. Boy d de a lt with gr oss rec eipts tax and this c ase deals with f ranc hise and excise tax, the principles involved ar e ide nti c a l. T he tw o c or

po ratio ns are se pa

rate e nti tie s. Everythingd e p e n d s u pon the wording of the statute imposing the tax. Tennessee Depa rtment o f Re v e n u e ru le 1 3 2 0

- 6

- 1

- . 2 1 ( 2 ) ( d ) a ll o w s f o r e xa c tl y th e ru le a s stated in Ge neral Telephone Company of the Southeast v. Boy d

. AT & T doe s n ot h a ve thebe ne fi t of a c re dit pr ov iso in the statut e that is broader

in scope than the actua l tax imposing provision s u ch as wa s the ca se in United In te rm ou nta in Tel e

ph on e Com

pa ny v . M

oy e rs , 426 S.W .2d 177 (Tenn. 1968). We aff irm the trial court’s g rant of summary judgme nt to the Comm issioner and de nial of the same to AT& T. Since
our re fusal to abr og ate or

distinguish Litt le Six

determines the issues reg arding the disallowanc e of the cr edit for 1991 throug h 1996, it is unnecessary for us to addr ess the jurisdictional ar gu m ent raised by the appe llant or the statute of limitations arg ument raised by the appe llee.

II T H E IN D U S T R IA L M A C H IN E C R E D IT
AT& T also challeng es the ref usal of the Commi ssioner to allow the taxpay er an industrial
ma c hin e c re dit

fo r t a x y e ars 19 93 thr ou g h 1 99 6. AT & T argued tha t th e ind us tr ia l ma c hin e c re dit statut e a s it

e xiste d in tho se y e ars did no t re qu ir e qu a lif ic a tio n fo r the job ta x c re dit a s a pr e -r e qu isi te-6-

t o i n d u s tri al m ac h i n e c re d i tq u al i fi ca t i o n
. As gro u n d s fo r t h atar gu m en t , AT &T as s er t s t h ata c h an ge in the statut ory la ng ua g e in la te r ve rs ion s of the statut e e vid e nc e s a ne w i nte nt b y

thele g isl a tur e to condition the extension of a cre dit only to tax pay ers owning computer e quipment and qualifying f or th e jo b tax c r e d it

. A p p e ll a n t r e fer s to Nutt v. Champion Internat’l Corp. , 980 S.W .2d 365, 368 (T e nn . 1 99 8) a s auth ority fo r the pr e su mpt ion that a me nd me nts a ff e c t st a tut e s p ro sp e c tiv e ly

un le ss the l eg islature clearly indicates otherwise. The Appellant urg es t hat s ince the leg islature ame nded the industrial machine c redit statute in 1999 to clea rly condition the cre dits avai l ab ilityupon qu a lif ic a tio n f or the job ta x cre di t for

bu sin e sse s u sin g c omp ute r andc omp ute r e qu ipm e nt, thi s amendment sug g ests the abse nce of such intent in the statutes prior to 1999.
To the contra

ry , the state a

rg ues that the 1999 a mendment to the statute s i m p ly confirme d the m eaning of t he previous state of law and did not indi cate a chang e in leg islative intent. Se e City
o f Ch a t ta n oo ga v . D av is , 54 S.W .3d 248, 268 (Tenn.2001) . For the purpose of

the statutory arg ument it is nece ssary to note t hat t he indus trial machine cre dit was alway s available to “industrial machinery ” as that term is defined in 67-6-102. I n 1994, the leg islature passe d chapte r 762 of the Public L aws whic h, inte r a lia , provided an expansion to the definition of industrial machinery for the purposes of

the tax credit. That ac t provided the following chang e to Tenne ssee Code A nnotated section 67-4- 808:

(A ) On ea ch ex ci s e t ax re t u rn , a c re d i ts h al l b e a l l o we d fo r ap er ce n t age of the purc hase price of industrial machinery purcha sed during the tax period cover ed by the re turn and located in Tenne ssee. F or purpose s of this section, “industrial
ma c hin e ry ” me a ns :

(i) “Industrial machinery ” as de fined by section 67-6- 102; or (ii) “computer , ” “ c o mp u ter n e tw o r k , ” “ c o mp u ter

s o f tware ,” or “ computer sy stem” as de fined by

section 39-14- 601 and any periphe ral device s, including but not limi ted to, hardw are such as printers, plotters, external disc drives, modems, a nd te le ph on e un its pu rc ha se d in the pr oc e ss o f m akin g the “ re qu ir e d c apit a l in ve stm e nt” in T e nn e sse e de sc ri be d inse c tio n 6 7- 4- 90 8 to qu a lif y fo r the job ta x cr e dit

. 1994 Pub. Acts 762.
The e x pansion of the definition of industrial ma chinery alway s envisioned that in order for
c omp ute rs , n e tw or

ks a ndso ft wa

re a s d e fi ne d in§ 3 9- 14 -6 01 , a s we ll a s th e ir pe ri ph e ra l de vic e s, to qu a lif y the y ha d to be pu rc ha se d inthe pr oc e ss o f m akin g the“ re qu ir e d c apit a l in vest me nt” described in 67-4-908. Contrary to the arg ument of the taxpay er, this statute conta ins no a m b i guity . “Where a statute is plain and explicit i n its meaning , and it s enac tment within the l eg islative competenc y , the d u t y o f t h e c o u r t s i s s i m p l e a n d o b v i o u s , n a m e l y, t o s a y sic le xsc rip ta , and obey it.” Miller v. Chi ldre ss , 21 Tenn. 320, 321-22 ( 1841). We find that the consider ation of th e l egi slative history-7-

there fore is unnece ssary . L ikewise, c onsideration of the supplemental authorities submitted by the parties is unnec essary . The chance llor’s g rant of summary judgme nt to the state a nd denial of the same to AT& T is affirmed in all respe cts. The c ause is re manded f or the fina l ca l culation of the amounts due. Costs are a ssessed ag ainst AT& T.

___________________________________ WI LL I AM B. CAIN, J UDGE