Spotlight on Tennessee: Factoring Transactions Are Not Subject to Related Party Intangible Expense Add-Back Statute

by Baker Donelson

In 2012, Tennessee amended the excise tax statute to require prior approval before allowing intangible expenses to be deducted from net earnings for intangible expenses paid by one related party to another related party. In Letter Ruling #12-32, dated December 19, 2012, the Tennessee Department of Revenue (Department) has ruled that the discount or loss realized in a related party accounts receivable factoring transaction is not an "intangible expense" for purposes of determining the taxpayer's Tennessee net earnings or loss and, therefore, was not required to be added back to the taxpayer's net earnings.


Factoring of trade accounts receivable is a financing transaction used by companies to manage their accounts receivable and to obtain financing. A "factor" is a specialized financial intermediary that purchases accounts receivable from a taxpayer (or client) at a discount. Pursuant to a factoring agreement, the price paid by the factor for the receivables is discounted from their face amount to take into account the likelihood of collectability or credit risk of the receivables. The payment by the factor for the receivables may be treated as a cash advance, and the factor typically charges interest on the advance plus a commission. In addition, in some cases, the taxpayer and factor may be engaged in a financing arrangement involving securitizing the receivables. Factoring may be on a recourse (taxpayer bears the risk of nonpayment) or nonrecourse basis (factor bears the risk of nonpayment).

Letter Ruling #12-32

In Letter Ruling #12-32, the taxpayer's business generated accounts receivable from the sale of goods or services. The receivables served as collateral for a line of credit at a favorable interest rate for the taxpayer. The taxpayer established a subsidiary corporation to hold that collateral. The subsidiary was located outside Tennessee and was initially capitalized with a contribution of accounts receivable from the taxpayer in exchange for stock of the subsidiary. To maintain the loan collateral, the subsidiary periodically replenished its receivables using factoring transactions with the taxpayer by using the cash received from the collection of receivables to purchase at a discount new receivables from the taxpayer. The amount of the discount was determined to be an amount that was at arm's length. As a result of the discount, the factoring of the receivables generated a deduction for the taxpayer.

As noted above, Tennessee is now one of approximately 21 states that have enacted related party intangible expense "add-back statutes." Like most of these states, Tennessee defines an "intangible expense" as "an expense related to, or in connection with, the acquisition, use, maintenance, management, ownership, sale, exchange, license, or any other disposition of intangible property, …" While the factoring transaction between the taxpayer and the subsidiary in Letter Ruling #12-32 generated a loss or expense item between related parties, the Department ruled that the pre-approval application requirements did not apply because accounts receivable do not fit within the add-back statute's definition of "intangible property."


Letter Ruling #12-32 sets Tennessee apart from a majority of the other states that have enacted similar related party intangible expense add-back statutes. Remember, however, that Tennessee law provides that Letter Rulings (unlike Revenue Rulings) from the Department are applicable only to the individual taxpayer and facts being addressed.

If you would like to discuss Letter Ruling #12-32 or other Tennessee state or local tax issues, please contact one of the following attorneys in the Firm's Tax Department:

Nashville, Tennessee
Scott D. Smith 615.726.7391
Carolyn W. Schott 615.726.7312
Daniel A. Stephenson 615.726.5678
Memphis, Tennessee
William H.D. Fones 901.577.2247
Mary Ann Jackson 901.577.8113
Charles E. Pierce 901.577.2164
East Memphis, Tennessee
James "Josh" Hall  901.579.3126
Christopher J. Coats 901.579.3127
Chattanooga, Tennessee
Carl E. Hartley 423.756.2010
Virginia C. Love 423.209.4118
Sara E. McManus 423.209.4124
Knoxville, Tennessee
L. Eric Ebbert 865.971.5182
Washington, D.C.
James W. McBride 202.508.3467
New Orleans, Louisiana
Robert L. Wollfarth 504.566.8623
Baton Rouge, Louisiana
Alton "Biff" Bayard 225.381.7019

Birmingham, Alabama

Thomas J. Mahoney 205.250.8346
William R.Sylvester 205.250.8372
Adam S. Winger 205.250.8381
Atlanta, Georgia
Nedom A. Haley 404.221.6505
Michael M. Smith 404.589.3419
Michael S. Evans 404.221.6517
Jackson, Mississippi
Stacy E. Thomas 601.351.2484
Jon D. Seawright 601.351.8921
David P. Webb 601.969.4678
C. Tyler Ball 601.351.8959
Orlando, Florida
Donald Christopher 407.367.5402
Richard C. Swank 407.367.5404
Marty Hartley 407.367.5427

Houston, Texas

Brad Chambers 713.286.7193


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Baker Donelson | Attorney Advertising

Written by:

Baker Donelson

Baker Donelson on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.