Does a subsidiary's Tennessee net operating loss carryforward survive when it either (1) converts under state law into a single-member LLC wholly owned by its corporate parent, or (2) merges out of existence into a newly formed LLC that later becomes a disregarded entity?

Subject

Whether a subsidiary's net operating loss survives conversion or merger into a disregarded single-member LLC owned by its parent.

Plain-English summary

The Tennessee Department of Revenue ruled that a subsidiary's unused Tennessee net operating loss (NOL) does not survive either of two common restructuring paths into a single-member LLC (SMLLC) owned by its corporate parent — a direct state-law conversion, or a merger out of existence into a newly formed LLC.

The subsidiary had its own separate Tennessee franchise and excise tax reporting history and an accumulated NOL. Under Delaware law, it converted into an LLC wholly owned by the corporate parent; because the parent is a corporation, Tennessee's disregarded-entity rule (Tenn. Code Ann. §§ 67-4-2007(d), 67-4-2106(c)) automatically treats that LLC as a "division" of the parent for franchise and excise tax purposes, even though the LLC remains a distinct legal entity under state law. That disregarded treatment is exactly why the NOL doesn't transfer: Tennessee's NOL rule only allows a loss to carry over to a successor if that successor is a true empty shell — no income, expenses, assets, liabilities, equity, or net worth of its own. Because the disregarded LLC is legally just a division of the parent, and the parent is an actively operating corporation with its own substantial assets and operations, the "successor" here fails the empty-shell test completely. The Department reached the identical conclusion for the second scenario — the subsidiary merging out of existence into a brand-new LLC that later defaults to disregarded status — because the end result is functionally the same: the loss-generating entity disappears and its Tennessee tax attributes land inside an operating corporate parent, not an empty shell.

What this means for you

Corporate groups converting subsidiaries to single-member LLCs

Neither the mechanism of your restructuring (direct entity conversion vs. formal merger) nor how recently the SMLLC was formed changes the outcome — what matters is whether the ultimate tax "successor," looking through any disregarded entity, is truly an empty shell. If your parent corporation is an active operating business (as virtually all are), converting or merging a loss-carrying subsidiary into a disregarded SMLLC it owns will forfeit that subsidiary's Tennessee NOL, full stop.

Accountants and tax professionals

This ruling is a close companion to TN Letter Ruling 06-26 (same-year, same reasoning applied to a slightly different fact pattern — merging a loss-subsidiary into an uncapitalized SMLLC owned by a sister corporation) and the broader NOL-succession framework in TN Revenue Ruling 07-14. All three apply the identical "empty shell successor" gate under Tenn. Code Ann. § 67-4-2006(c)(2)-(3): looking through a disregarded entity to its corporate owner, and asking whether that owner has zero income, expenses, assets, liabilities, equity, or net worth. An active operating parent never clears that bar, regardless of the specific restructuring mechanics used to get there.

Common questions

Q: Does converting a subsidiary directly into an LLC (rather than merging it) preserve its Tennessee NOL?
A: No. The Department reaches the same result either way — direct conversion or formal merger into a new LLC — because both result in the loss-generating entity's tax attributes landing inside a disregarded LLC treated as a division of an active operating parent.

Q: Does it matter that the LLC remains a separate legal entity under state law even though it's disregarded for tax purposes?
A: No. For Tennessee franchise and excise tax purposes, the disregarded LLC is treated as a division of its corporate owner regardless of its continued separate legal existence — that tax treatment is what drives the NOL analysis.

Q: Is there any way to preserve the NOL through a conversion or merger into an SMLLC?
A: Only if the true successor (the SMLLC's corporate owner, since the SMLLC itself is disregarded) has no income, expenses, assets, liabilities, equity, or net worth of its own — which an actively operating parent corporation will never satisfy.

Q: Does this ruling apply to other corporate groups restructuring subsidiaries into LLCs?
A: No. A Tennessee revenue ruling is advisory only and not binding on the Department, even for the taxpayer who requested it, though the empty-shell-successor test it applies is of general application under the statute.

Citations and references

Statutes:

• Tenn. Code Ann. § 67-4-2007(d) (disregarded-entity classification for SMLLCs owned by a corporation, excise tax)
• Tenn. Code Ann. § 67-4-2106(c) (parallel provision for franchise tax)
• Tenn. Code Ann. § 67-4-2006(c)(1) (15-year NOL carryforward)
• Tenn. Code Ann. § 67-4-2006(c)(2) (separate-entity rule; no NOL transfer on merger/consolidation)
• Tenn. Code Ann. § 67-4-2006(c)(3) (NOL transfer allowed only when the successor has no income, expenses, assets, liabilities, equity, or net worth)

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/06-20fe.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
REVENUE RULING # 06-20
WARNING
Revenue rulings are not binding on the Department. This presentation of the
ruling in a redacted form is information only. Rulings are made in response to
particular facts presented and are not intended necessarily as statements of
Departmental policy.

SUBJECT
Whether a parent corporation’s wholly owned corporate subsidiary will lose its net
operating loss carryovers by converting into a limited liability company or merging out of
existence into a newly formed limited liability company.
SCOPE
Revenue Rulings are statements regarding the substantive application of law and
statements of procedure that affect the rights and duties of taxpayers and other
members of the public. Revenue Rulings are advisory in nature and are not binding on
the Department.
FACTS
Parent is a corporation organized under the laws of a state other than Tennessee that
holds interests in several first-tier operating subsidiaries. One of these subsidiaries (the
“Subsidiary”) is a former Delaware corporation that was converted to a limited liability
company (the “LLC”) pursuant to Delaware law. Parent is the sole member of the LLC.
The Subsidiary/LLC conducts business activities both within and without Tennessee.
Prior to the conversion, the Subsidiary maintained a separate Tennessee franchise,
excise tax reporting obligation and incurred a net operating loss carryforward (“NOL”).
Subsequent to the conversion, the LLC defaulted to disregarded entity status for federal
income tax purposes and is treated as a disregarded entity for Tennessee excise tax
purposes pursuant to Tenn. Code Ann. § 67-4-2007(d). As such, all of the LLC’s
operating results are attributed to the Parent when determining the total Tennessee
excise tax liability for both entities. However, the LLC remains a legal entity, separate
and distinct from the Parent.
QUESTIONS PRESENTED

1. For Tennessee excise tax purposes, will the Subsidiary’s NOL carryforward survive
   its conversion into an LLC with the corporate Parent as its single member and be

available to offset the net income ultimately reported by the Parent and the disregarded
LLC for Tennessee excise tax purposes?

2. Would the answer to question one above be the same if the Subsidiary had merged
   out of existence and into a newly formed LLC that subsequently defaulted to
   disregarded status for federal tax purposes?
   RULINGS
3. No.
4. Yes, the answer would be the same as in question one.
   ANALYSIS
   Applicable Statutes
   Tenn. Code Ann. § 67-4-2007(d) makes the following provisions concerning limited
   liability companies for Tennessee excise tax purposes. Similar provisions are made by
   Tenn. Code Ann. § 67-4-2106(c) for franchise tax purposes.
   For purposes of the excise tax levied by this part, a business entity shall be
   classified as a corporation, partnership, or other type business entity consistent with
   the way the entity is classified for federal income tax purposes, and subject to tax in
   accordance with this part. Notwithstanding any provision of law to the contrary,
   entities that are disregarded for federal income tax purposes, except for limited
   liability companies whose single member is a corporation, shall not be disregarded
   for Tennessee excise tax purposes.
   Because Parent, the single member of the LLC, is a corporation, Tenn. Code Ann. §§
   67-4-2007(d) and § 67-4-2106(c) require the LLC to be disregarded and to be included
   as a division of the Parent in its franchise, excise tax return.
   Tenn. Code Ann. § 67-4-2006(c)(1), set forth in pertinent part below, permits a qualified
   NOL to be carried forward for up to 15 years from the year in which the NOL occurred.
   Qualified net operating losses may be carried forward and deducted in the next
   succeeding tax year or years in which the taxpayer has net income until fully utilized,
   but in no case for more than fifteen (15) years after the taxable year in which the net
   operating loss occurs.
   A NOL may be taken only by the entity that generated it. The successor of the entity
   that generated an NOL has no right to its predecessor’s NOL or any carryover thereof.
   Tenn. Code Ann. § 67-4-2006(c)(2) makes this clear:

2

Except for unitary groups of financial institutions, each taxpayer is considered a
separate entity; therefore, in the case of mergers, consolidations, and like
transactions, no loss carryovers incurred by the predecessor taxpayer shall be
allowed as a deduction from net earnings on the excise tax return filed by the
successor taxpayer. With the exception set forth in subdivision (c)(3), a loss
carryforward may be taken only by the taxpayer that generated it.
Tenn. Code Ann. § 67-4-2006(c)(3) makes an exception when, for purposes of
changing its state of incorporation or for other reasons, a taxpayer merges out of
existence and into a shell entity that has no income, expenses, assets, liabilities, equity
or net worth. In such a situation, the entity that generated the credit is exactly the same
after the merger as it was before the merger, except that it may be a different type of
entity, have a different name or a different state of incorporation.
Notwithstanding the provisions contained in subdivision (c)(2), when a taxpayer
merges out of existence and into a successor taxpayer that has no income,
expenses, assets, liabilities, equity or net worth, any qualified Tennessee loss
carryover of the predecessor that merged out of existence shall be available for
carryover and deduction from the net earnings of the surviving successor in
accordance with the provisions of this subsection (c).
Application of Tax Statutes to Facts Presented
1.

The Subsidiary’s NOL Carryforward Will Not Survive Its Conversion
Into An LLC with the Corporate Parent as Its Single Member

In the context of the facts presented, the conversion results in the Subsidiary ceasing to
exist as a corporation for franchise, excise tax purposes and becoming a division of the
Parent. Prior to the transaction, Subsidiary was treated as a separate entity corporation
for franchise, excise tax purposes. After the transaction, the LLC is disregarded and
treated as a division of the corporate Parent. For franchise, excise tax purposes, this is
tantamount to the Subsidiary having undergone a merger, consolidation or like
transaction.
However, the Subsidiary has not undergone a merger, consolidation or like transaction
with a shell entity that has no income, expenses, assets, liabilities, equity or net worth.
After the transaction, the Subsidiary no longer exists. The LLC is disregarded and
considered a division of the Parent, a corporation that already has its own assets,
liabilities and net worth. Thus, Tenn. Code Ann. § 67-4-2006(c)(3) does not apply and
the Subsidiary/LLC loses its NOL carryovers as a result of the transaction.

2.

The Subsidiary’s NOL Carryforward Will Not Survive Merger
Out of Existence and Into a Newly Formed LLC with the Corporate Parent as
Its Single Member

3

In this transaction, the Parent forms a new single member LLC and the Subsidiary
merges out of existence and into the LLC.
After the transaction, the LLC is disregarded and treated as a division of the corporate
Parent. The Subsidiary has not merged out of existence and into a shell entity that has
no income, expenses, assets, liabilities, equity or net worth. For franchise, excise tax
purposes, the newly formed LLC is disregarded and treated as a division of the Parent,
a corporation that already has its own assets, liabilities and net worth. Thus, Tenn.
Code Ann. § 67-4-2006(c)(3) does not apply and the Subsidiary loses its NOL
carryovers as a result of the transaction.

Arnold B. Clapp
Special Counsel to the Commissioner

APPROVED: Loren L. Chumley, Commissioner

DATE: 6-20-06

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