             IN THE COURT OF APPEALS OF TENNESSEE
                         AT NASHVILLE
                                                       FILED
                                                         May 28, 1999
LITTLE SIX CORPORATION,      )
                             )                        Cecil Crowson, Jr.
     Plaintiff/Appellee,     )                       Appellate Court Clerk
                             )            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 CHANCERY COURT OF DAVIDSON COUNTY
                    AT NASHVILLE, TENNESSEE

              THE HONORABLE CAROL L. McCOY, CHANCELLOR



G. MICHAEL BURKE
148 Bristol East Road
Bristol, Virginia 24201

EVERETT B. GIBSON
1010 Cotton Exchange Building
65 Union Avenue
Memphis, Tennessee 38173-0351
      Attorneys for Plaintiff/Appellee

PAUL G. SUMMERS
Attorney General & Reporter

M. TY PRYOR
Assistant Attorney General
425 Fifth Avenue North
Nashville, Tennessee 37243
       Attorney for Defendant/Appellant


                   AFFIRMED IN PART; REVERSED IN PART;
                             AND REMANDED


                                          BEN H. CANTRELL,
                                          PRESIDING JUDGE, M.S.

CONCUR:
KOCH, J.
CAIN, J.
                                   OPINION


              The trial court ordered the Department of Revenue to refund $113,580

to the plaintiff corporation, holding that as the surviving entity in a corporate merger,

it was entitled to use tax deductions and tax credits that had been acquired prior to the

merger by the non-surviving 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 Corporate Merger



              Little Six Corporation (Little Six) is a privately-held company, 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 Hawkins County,

Tennessee. They incorporated the new business in this state under the name Short

Mountain Silica, and Little Six made a substantial investment in heavy equipment to

start the operation.



              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.



              After the merger, Short Mountain ceased to exist as a legal entity,

though its operations in Tennessee continued to use the same name. Little Six

stopped mining coal, and sold or leased all its coal mining equipment, for the most

part to sister companies owned by its shareholders. The last equipment lease

terminated in 1995, and the last piece of equipment was sold in 1996. Prior to the

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1989 merger, Short Mountain generated substantial net operating losses. The sand

mining business became profitable and self-supporting after the merger.



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

and excise tax return, and issued a deficiency assessment of $53,380. Little Six paid

the assessment, and filed a claim for a refund, which was denied. On October 18,

1995, Little Six filed suit in the Chancery Court for Davidson County 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

Six paid the assessment and filed a claim for a refund. The Commissioner did not act

on the 1995 claim for refund within six months of its submission, so on August 27,

1996, Little Six filed another suit. The two suits were consolidated, and went to trial

on February 19, 1998.



              At trial, Little Six argued that it was entitled to the loss carryovers and

industrial machinery credits that the Department of Revenue had disallowed. The

Chancellor agreed, and ordered the Department to make the required refunds. This

appeal followed.



                              II. The Loss Carryovers



              At the outset, we must note that there is no dispute as to the facts of this

case, but only as to the chancellor’s conclusions of law. Such conclusions are

reviewed de novo, and are not entitled to a presumption of correctness on appeal.

Tenn. R. App. Proc. 13(d). Tenn. Farmers Mutual Ins. Co. v. American Mutual

Liability Ins. Co., 840 S.W.2d 933 (Tenn. App. 1992).

              The State sought to tax the net earnings of the plaintiff corporation in

accordance with the Excise Tax Law, Tenn. Code Ann. § 67-4-801, et seq. The



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starting point for determining net earnings for purposes of the excise tax is federal

taxable income. This figure is then adjusted by several variables, including, where

appropriate, the deduction of net losses from previous years. The portion of the Act

that defines net income, including the provision for loss carryovers, is Tenn. Code

Ann. § 67-4-805 (Acts 1976, ch. 537, § 29), the current version of which reads in

pertinent part:

                     (b)(2) There shall be subtracted from the federal
              taxable income:

                     ...

                      (C)(I) 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 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 taxable year in which
              the net operating loss occurs...



              The Department of Revenue denied Little Six Corporation the use of the

losses incurred by Short Mountain Silica, relying upon its Revenue Rule 1320-6-1-

.21(2)(d), which had been promulgated in 1974:

              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.



              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




                                          -4-
enjoying the tax benefit flowing from an operating loss be the same one that suffered

the loss.



              The trial court reached behind the corporate structure that Little Six

chose to create, and explicitly adopted the “continuity of business enterprise” test, in

order to find that Little Six was entitled to offset its profits by Sand Mountain’s losses.

That test, first described in Lisbon Shops v. Koehler, 353 U.S. 382 (1957), allows the

loss-carryover deduction, regardless of corporate re-organization, if substantially the

same business is responsible for both the losses and the profits that it seeks to offset.



              However, rulings of the federal courts in regard 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 that the legislature

intended its adoption when it enacted 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 to the rule, it could have easily drafted the statute in such a way

as to render it inoperative, but it did not do so.



              The Chancellor additionally relies upon the statutes dealing with

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 surviving

corporation. However, putting aside for the moment the question of whether prior

losses are considered to be “property” under that statute, we must note that the

purposes of the franchise and excise tax statutes are distinct from those of the

corporate 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, Division of Taxation, 659 A.2d 1360 (N.J. 1995).




                                           -5-
              We acknowledge that if the situation had been reversed, that is, if Sand

Mountain had absorbed Little Six rather than the other way around, then there is no

doubt that Sand Mountain would have been entitled to the deduction. But we do not

agree with the argument 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 corporate 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 minimize their

impact on corporations that choose to do business in this state. Rather, it is for

corporations to conform their decisions to the tax code to the extent that they want

that code to work for their benefit.



                        III. The Industrial Machinery Credit



              Tennessee offers tax credits for the purchase of industrial machinery

that is located and used in this state. In an argument that follows its reasoning on the

question of loss carryovers, the Department contends that we should deny those

credits to Little Six, because Short Mountain was the original purchaser of the

equipment in question.



       Tenn. Code Ann. § 67-4-808 reads in pertinent part:

                     (4)(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 . . . .

                     ...

                     (C) Any unused credit incurred for fiscal years ending
              on or after March 15, 1982, may be carried forward in any tax
              period for fifteen (15) years or until such credit is taken.



              We do not believe that the statute contains any language from which we

can infer an intent to limit the use of the credit to the entity that was the original

purchaser. Nor has the Department promulgated a rule for the industrial tax credits

                                         -6-
analogous to its Revenue Rule 1320-6-1-.21(2)(d). We therefore conclude that Little

Six is entitled to the industrial machinery tax credits.



                                           IV.



              The judgment of the trial court is reversed in part and affirmed in part.

Remand this cause to the Chancery Court of Davidson County for further proceedings

consistent with this opinion. Tax 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




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