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Franchise & Excise Taxes

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Questions relating to filing of a return and payment of taxes:

  1. Can franchise and excise taxes be filed electronically?
  2. Where do I send my tax payment?
  3. Do I have to file a franchise and excise tax return when my company did not have any activity during the year?
  4. How do I terminate or withdraw my corporation's charter?

Question related to loss carryovers:

  1. How long can a loss be used to offset income?
  2. Corporation A is a corporation that has assets and whose operations produce income. Corporation B is a corporation that has a net operating loss (NOL) carryover from prior years. As part of a plan of acquisition, Corporation A forms SMLLC, a single member limited liability company. At the time of its formation, SMLLC has no income, expenses, assets, liabilities, equity or net worth. SMLLC is treated as a disregarded entity for federal income tax purposes and for Tennessee franchise and excise tax purposes. Corporation B merges out of existence and into SMLLC. What is the impact of the merger on Corporation B's NOL carryover?
  3. Two individuals are the members of LLC1, a limited liability company. LLC1 and an unrelated entity are the members of LLC2, a limited liability company. LLC1 and LLC2 are treated as partnerships for federal income tax purposes and for Tennessee franchise and excise tax purposes. LLC1 has a net operating loss (NOL) carryover from prior years. LLC2 has a credit carryover from prior years.

    Pursuant to a plan of restructuring, the following steps take place simultaneously: (1) LLC1 purchases the membership interest of the other member of LLC2; (2) the members of LLC1 form Newco, a corporation, and contribute all of their membership interests in LLC1 to Newco in exchange for Newco stock. As a result, two individuals own the stock of Newco; Newco is the single member of LLC1; and LLC1 is the single member of LLC2. LLC1 and LLC2 will be treated as disregarded entities for federal income tax purposes and for Tennessee franchise and excise tax purposes.

    What is the impact of this transaction on LLC1's NOL carryover and LLC2's credit carryover?

Question related to proration of the franchise tax on a short period return:

  1. Is proration of the franchise tax permitted when the return covers a tax period of less than 12 months?
  2. When can the franchise tax be prorated?

Question related to the property measure of the franchise tax base reported on Schedule G of the return. See TCA Section 67-4-2108:

  1. When should you deduct construction in progress on Schedule G, determination of real and tangible property?

Question related to the treatment of treasury stock when computing net worth for franchise tax purposes:

  1. How is treasury stock treated when computing net worth for franchise tax purposes?

Questions related to the consolidated computation of the net worth franchise tax base:

  1. For purposes of computing the net worth franchise tax base on a consolidated basis, what is an "affiliated group?"
  2. How does an "affiliated group," as defined in Tenn. Code Ann. Section 67-4-2004(2), compute its net worth for franchise tax purposes on a consolidated basis after making an election to do so under the provisions of Tenn. Code Ann. Section 67-4-2103(g)?
  3. For purposes of computing the net worth franchise tax base on a consolidated basis, what is a "financial institution affiliated group?"
  4. How does a "financial institution affiliated group," as defined in Tenn. Code Ann. Section 67-4-2004(12), compute its net worth for franchise tax purposes on a consolidated basis after making an election to do so under the provisions of Tenn. Code Ann. Section 67-4-2103(g)?
  5. Can an "affiliated group" or a "financial institution affiliated group" elect to compute its net worth on a consolidated basis for franchise tax purposes if all members of the group do not close their taxable year on the same date?
  6. How does an "affiliated group" or a "financial institution affiliated group" elect to compute its net worth on a consolidated basis for franchise tax purposes?
  7. Once an election to compute net worth on a consolidated basis is made, how long does it remain in effect?
  8. Are late elections, or late election revocations, to compute net worth on a consolidated basis allowed?
  9. If a taxpayer elects to calculate its net worth on a consolidated basis, which members of the affiliated group are subject to franchise and excise tax?

Questions related to the definition of "taxpayer" or "person," that is or is not, subject to taxation. Tenn. Code Ann. Section 67-4-2004(27):

  1. Are trusts, other than business trusts, and decedents' estates subject to the tax?
  2. Is a limited liability company, whose single member is an individual or a general partnership, subject to the tax?
  3. Is a limited partnership established for estate planning purposes or merely to own a life insurance policy subject to tax?

Question relating to "doing business" (nexus):

  1. The law eliminates the "doing business" safe harbors for mere ownership of a limited type interest in a limited partnership or limited liability company. (See Tenn. Code Ann. Section 67-4-2004(14).) What is the effect of this elimination?

Questions relating to the determination of "net earnings" for the excise tax (Tenn. Code Ann. Section 67-4-2006):

  1. Is there any limitation on the deduction, under Tenn. Code Ann. Section 67-4-2006(a)(4 and 5), for amounts subject to self-employment taxes and paid or distributable to partners or members?
  2. Are capital gains of a limited partnership or other entity treated as a partnership for federal tax purposes included in net earnings?
  3. What types of plans fall within the phrase "qualified pension or benefit plans" in Tenn. Code Ann. Section 67-4-2006(a)(4)(C)?
  4. If a contribution to a qualified plan is made in one year but designated for federal purposes as being the contribution for the prior year, to which year does the deduction for net earnings apply?
  5. In an entity's first year subject to the tax, will it be able to use net operating losses carried forward from prior years?
  6. How does an individual calculate net earnings if he/she has one business operating as a single member limited liability company and another that he/she operates outside of the limited liability company?
  7. How will Tenn. Code Ann. Sections 2006(b)(1)(I) and (b)(2)(K) operate if the asset distributed is disposed of in some manner other than a traditional sale for cash?
  8. Are federal deductions allowed under IRC Section 199 with regard to qualified production activities allowable as deductions in determining the net earnings subject to excise tax?
  9. Who can take the deduction for qualified charitable deductions, and what is required to qualify for the deduction?
  10. What should be included on Lines 2 and 13 on Schedule J for the depreciation?

Question relating to quarterly payments:

  1. If a taxpayer makes four equal quarterly payments, each of which equals or exceeds the current year's franchise, excise tax liability, will it be penalized if each payment was less than 25% of the prior year's liability?

Questions relating to current franchise and excise tax rules:

  1. What is the status of the current franchise and excise tax rules and regulations in light of franchise, excise tax law changes enacted since such rules and regulations were promulgated?
  2. Is Tenn. Comp. R. & Regs. 1320-6-1-.16, relating to reserves, still valid?

Question relating to Tenn. Code Ann. Sections 674-2007(d) and 67-4-2106(c) and their application to limited liability companies that are 100% owned by a real estate investment trust:

  1. Tenn. Code Ann. Sections 67-4-2007(d) and 67-4-2006(c) state, "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 [franchise] tax purposes." Does this mean that a limited liability company (LLC) that is 100% owned by a corporation that is a real estate investment trust (REIT) or S corporation, and is thus disregarded for federal purposes, is to be disregarded for franchise, excise tax purposes notwithstanding other statutory provisions that require such entities to file separately?

Questions relating to the exemption for obligated member entities under Tenn. Code Ann. Section 67-4-2008(a)(9):

  1. What is an "obligated member entity?"
  2. What is an "obligated member?"
  3. Can obligated members be fully liable for the debts, obligations, and liabilities of an obligated member entity?
  4. Does the exemption provided for a limited liability company, limited partnership, or limited liability partnership (obligated member entities) provided in Tenn. Code Ann. Section 67-4-2008(a)(9) require that the election by obligated members to assume joint and several liability be done each year for which the exemption is sought?
  5. In order to qualify for the exemption provided under Tenn. Code Ann. Section 67-4-2008(a)(9), must all obligated members assume liability for the obligated member entity's obligations, or does the exemption apply so long as some obligated members assume liability?
  6. May a limited liability company, limited partnership or limited liability partnership (obligated member entities) qualify for the exemption if its members or partners(obligated members), who are assuming liability for the entire debt of the obligated member entity, are themselves LLCs, LPs, LLPs or trusts?
  7. Explain the procedure for claiming exemption under Tenn. Code Ann. Section 67-4-2008(a)(9).

Questions relating to Tenn. Code Ann. Section 67-4-2008(a)(11) family-owned entities:

  1. When Tenn. Code Ann. Section 67-4-2008(a)(11)(B)(i) defines the term "family-owned," the word "individual" is used with regard to determining whether the owners are "members of the family." Does the "individual" to whom the owners must be related also have to be an owner of the entity?
  2. Must there be more than one owner for an entity to qualify for the "family-owned," exemption in Tenn. Code. Ann. Section 67-4-2008(a)(11)?
  3. Does an entity which is more than 5% owned by a trust satisfy the family-owned test?
  4. How does the department determine that "substantially all" of the activity of a "family-owned" entity is the production of passive investment income or the combination of passive investment income and farming, as is required by Tenn. Code Ann. Section 67-4-2008(a)(11)(A)?"
  5. Do gains from the sale of real or tangible personal property qualify as passive investment income?
  6. Does the department construe "rents" as always passive investment income, or are there exceptions as under federal law?
  7. Assume two Tennessee based limited partnerships (LPs) each own a 50% interest in a Tennessee based general partnership (GP) whose income is 100% passive investment income. Each LP's only income is that resulting from its ownership interest in GP. The individual owners of each limited partnership are members of the same family, but the individual owners of one limited partnership are not related to the individual owners of the other limited partnership. Are the limited partnerships exempt from franchise, excise taxation under the "family owned" exemption in Tenn. Code Ann. Section 67-4-2008(a)(11)?
  8. Assume that a man and his wife and children own 100% of a Tennessee based limited partnership (LP #1). LP #1's only income is that which results from its 95% ownership interest in another Tennessee based limited partnership (LP #2). LP #2 earns only passive investment income. Can LP #1 qualify for the "family owned" exemption in Tenn. Code Ann. Section 67-4-2008(a)(11)?
  9. Assume that a man and his wife and children own 100% of a Tennessee based limited partnership (LP #1). LP #1's only income is that which results from its 95% ownership interest in another limited partnership (LP #2) based in another state and having no tax nexus in Tennessee. LP #2 earns only passive investment income. Can LP #1 qualify for the "family owned" exemption in Tenn. Code Ann. Section 67-4-2008(a)(11)?
  10. Assume that a man and his wife and children own 100% of a Tennessee based limited partnership (LP #1) that owns an interest in another limited partnership (LP #2) that is based in another state and has no tax nexus in Tennessee. LP #2 earns 100% of its income from operating a retail business. Such income is passed through to LP #1 as ordinary income. Can LP #1 qualify for the "family owned" exemption in Tenn. Code Ann. Section 67-4-2008(a)(11)?
  11. How does an entity claim the family-owned exemption?

Questions related to returns required by corporate owners of single-member limited liability companies (SMLLCs):

  1. A corporation has a single-member interest in five SMLLCs, only one of which has business operations in Tennessee. For federal tax purposes, the five LLCs are all disregarded and only one federal return form 1120 is filed by the corporation to include its operations and the operations of the five LLCs. For Tennessee franchise, excise tax purposes, how are the entities required to file?
  2. A Tennessee limited partnership (LP) has a single-member interest in a Tennessee limited liability company (SMLLC). For federal tax purposes, the LLC is disregarded and only one federal return form 1065 is filed by the LP to include its operations and the operations of the LLC. For Tennessee franchise, excise tax purposes, how are the entities required to file?
  3. A corporation is the single-member owner of a limited liability company (SMLLC) that also is the single-member owner of another SMLLC. For federal income tax purposes, both SMLLCs are disregarded and only one federal form 1120 if filed by the corporation to include the operations of both SMLLCs. For franchise, excise tax purposes, how are the entities required to file?

Questions related to S Corporations:

  1. Is a corporation that has elected Sub Chapter S status (S corporation) for federal income tax purposes subject to Tennessee?
  2. Is a qualified Sub Chapter S subsidiary (QSSS) that is disregarded for federal income tax purposes and included in the federal return filed by its S corporation owner also disregarded for Tennessee franchise, excise tax purposes?
  3. Can an S corporation take credit against its excise tax for the Tennessee individual income tax, also known as the Hall income tax, paid by its shareholders on distributions from the S corporation?

Questions related to refund claims:

  1. Does a claim for refund, unaccompanied by documentation supporting the claim, toll your statute of limitations?
  2. Do you require a taxpayer's supporting documentation to be filed with the refund claim?

Question related to venture capital funds:

  1. What change did Public Chapter 1019 (2006) have on the venture capital fund exemption in Tenn. Code Ann. Section 67-4-2008(a)(5)?

Question related to industrial machinery credits:

  1. Public Chapter 1019 (2006) allows the Industrial Machinery Credit (IMC) to be applied to both franchise and excise tax. Previously, the IMC applied only to the excise tax. Since my corporation has had losses and has not incurred any excise tax on which to apply IMC in prior tax years, will my IMC carryovers be able to offset franchise tax on my 2006 return?


Questions relating to filing of a return and payment of taxes:

  1. Can franchise and excise taxes be filed electronically?
    Yes, by logging on to https://apps.tn.gov/fnetax/.
  2. Where do I send my tax payment?
    Mail your payment to:

    Tennessee Department of Revenue
    Andrew Jackson Building
    500 Deaderick St.
    Nashville, TN 37242
  3. Do I have to file a franchise and excise tax return when my company did not have any activity during the year?
    Yes, the minimum franchise tax of $100 is payable if you are chartered through the Secretary of State to do business in Tennessee, regardless of whether the company is active or inactive. The minimum tax is due even if your charter or qualification has been forfeited, revoked or suspended without being properly dissolved, surrendered, withdrawn or otherwise properly terminated.
  4. How do I terminate or withdraw my corporation's charter?
    File a final franchise and excise tax return and mark the "Final Return" box located at the top right of the tax return. The final return should include a schedule of liquidation, distribution or disposition of all assets. The department will review the corporate account for release of liability. Once all liabilities are satisfied, a tax clearance certificate is issued by the Department of Revenue. The tax clearance certificate, along with a letter of dissolution from the corporation, must be submitted to the Tennessee Secretary of State.

Question related to loss carryovers:

  1. How long can a loss be used to offset income?
    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 no more than 15 years.
  2. Corporation A is a corporation that has assets and whose operations produce income. Corporation B is a corporation that has a net operating loss (NOL) carryover from prior years. As part of a plan of acquisition, Corporation A forms SMLLC, a single member limited liability company. At the time of its formation, SMLLC has no income, expenses, assets, liabilities, equity or net worth. SMLLC is treated as a disregarded entity for federal income tax purposes and for Tennessee franchise and excise tax purposes. Corporation B merges out of existence and into SMLLC. What is the impact of the merger on Corporation B's NOL carryover?
    Corporation B's NOL carryover will not survive the merger. Normally, no NOL carryover is allowed in the case of a merger, consolidation or like transaction. Tenn. Code Ann. Section 67-4-2006(c)(3) provides an exception to this rule; when a taxpayer merges out of existence and into a shell entity that has no income, expenses, assets, liabilities, equity or net worth, the NOL carryover of the predecessor taxpayer survives and becomes available to the successor taxpayer. In this case, SMLLC is a disregarded entity that is treated as a division of Corporation A. Corporation B is accordingly treated for Tennessee franchise and excise tax purposes as having merged out of existence and into Corporation A. The exception is not available because Corporation A has assets and income. Corporation B's NOL carryover therefore does not survive the merger.
  3. Two individuals are the members of LLC1, a limited liability company. LLC1 and an unrelated entity are the members of LLC2, a limited liability company. LLC1 and LLC2 are treated as partnerships for federal income tax purposes and for Tennessee franchise and excise tax purposes. LLC1 has a net operating loss (NOL) carryover from prior years. LLC2 has a credit carryover from prior years.

    Pursuant to a plan of restructuring, the following steps take place simultaneously: (1) LLC1 purchases the membership interest of the other member of LLC2; (2) the members of LLC1 form Newco, a corporation, and contribute all of their membership interests in LLC1 to Newco in exchange for Newco stock. As a result, two individuals own the stock of Newco; Newco is the single member of LLC1; and LLC1 is the single member of LLC2. LLC1 and LLC2 will be treated as disregarded entities for federal income tax purposes and for Tennessee franchise and excise tax purposes.

    What is the impact of this transaction on LLC1's NOL carryover and LLC2's credit carryover?

    LLC1's NOL carryover will survive the restructuring transaction and will transfer to Newco. Before the restructuring, LLC1 was treated as a partnership. After the restructuring, LLC1 becomes a disregarded entity and is treated as a division of Newco. For franchise and excise tax purposes, this change is tantamount to LLC1 having undergone a merger, consolidation or like transaction. Normally, no NOL carryover is allowed in the case of a merger, consolidation or like transaction. However, Tenn. Code Ann. Section 67-4-2006(c)(3) provides an exception to this rule. When a taxpayer merges out of existence and into a shell entity that has no income, expenses, assets, liabilities, equity or net worth, the NOL carryover of the predecessor taxpayer (here, LLC1) survives and becomes available to the successor taxpayer (here, Newco). Newco was a shell entity when LLC1 became a disregarded entity that is treated as a division of Newco. LLC1's NOL carryover therefore survives and becomes the NOL of Newco.

    LLC2's credit carryover will not survive the restructuring transaction. Before the restructuring, LLC2 was treated as a partnership. After the restructuring, LLC2 becomes a disregarded entity and is treated as a division of Newco (LLC2 is not treated as a division of LLC1, because LLC1 is disregarded and is itself treated as a division of Newco). For franchise and excise tax purposes, this change is tantamount to LLC2 having undergone a merger, consolidation or like transaction. No credit carryover is allowed in the case of a merger, consolidation or like transaction. Tenn. Code Ann. Section 67-4-2009(7)(B) provides an exception to this rule when a taxpayer merges out of existence and into a shell entity that has no income, expenses, assets, liabilities, equity or net worth. However, Newco is no longer a shell entity because it possesses the assets, liabilities and net worth of LLC1. LLC2's credit carryover therefore does not survive.

Question related to proration of the franchise tax on a short period return:

  1. Is proration of the franchise tax permitted when the return covers a tax period of less than 12 months?
    Tenn. Code Ann. Section 67-4-2115 (82 of Chapter 499 of the Public Acts of 2005), which the department will apply to tax years ended on or after July 1, 2005, provides that the franchise tax may be prorated only for short period returns resulting from first year filings and accounting period changes.

    The franchise tax may be prorated only in the following situations:
    • A domestic taxpayer that closes its taxable year within less than 12 months from Tennessee incorporation, or other type entity formation, is permitted to prorate the franchise tax on its short period return. The franchise tax is prorated to cover the proportionate part of the year since its date of incorporation, or other type of entity formation in Tennessee, or the date the taxpayer commenced business in Tennessee, whichever occurred first. Rent for property used that is included in the franchise tax minimum measure must be annualized.
    • A foreign taxpayer may prorate its franchise tax to cover the proportionate part of the year since it began business in Tennessee; provided rent for property used that is included in the franchise tax minimum measure is annualized.
    • A taxpayer that changes its accounting period for federal tax purposes so that a return covering a taxable year of less than 12 months is required will be permitted to prorate its franchise tax to cover the proportionate part of the year covered by the short period return. Rent for property used that is included in the franchise tax minimum measure must be annualized.
    The franchise tax cannot be prorated below $100 because Tenn. Code Ann. Section 67-4-2119 provides that $100 is the minimum franchise tax payable.

    The franchise tax on the following short period returns cannot be prorated:
    • Short period returns resulting from a taxpayer merging out of existence into another entity.
    • Short period returns resulting from dissolutions.
  2. When can the franchise tax be prorated?
    Proration of the franchise tax will be allowed only in two instances:
    • If the tax year closes within less than 12 months since incorporation, domestication, or commencement of doing business in Tennessee, or
    • If the taxpayer changes its accounting period covered by the federal return.
    No other proration of franchise tax will be allowed.

Question related to the to the property measure of the franchise tax base reported on Schedule G of the return. See Section 67-4-2108:

  1. When should you deduct construction in progress on Schedule G, determination of real and tangible property?
    Construction in progress is not included in the minimum tax base if the property is not being used by the taxpayer in whole or in part. If a company is expanding and building additional facilities, this property is not included until it is used by the taxpayer. However, if a company builds houses for others, the property must be included in Schedule G. In that case, the company shows this property on its balance sheet as inventory, and the property is being used by the company.

Question related to the treatment of treasury stock when computing net worth for franchise tax purposes:

  1. How is treasury stock treated when computing net worth for franchise tax purposes?
    Prior to a 1999 change in the franchise tax law, treasury stock was not included in the computation of net worth for franchise tax purposes. Tenn. Code Ann. Section 67-4-2106(b) computes net worth for franchise tax purposes by deducting total balance sheet liabilities from total balance sheet assets. Although treasury stock is not specifically mention in the statute, the computation of net worth by deducting total liabilities from total assets has the effect of excluding treasury stock from the franchise tax base and results in a computation of same net worth value both before and after the 1999 law change.

Questions related to the consolidated computation of the net worth franchise tax base:

  1. For purposes of computing the net worth franchise tax base on a consolidated basis, what is an "affiliated group?"
    An affiliated group is comprised of the following:
    • A taxpayer that, standing alone, is subject to Tennessee franchise tax;
    • all other domestic persons in which the taxpayer, directly or indirectly, have more than 50% ownership interest;
    • all other domestic persons that, directly or indirectly, have more than 50% ownership interest in the taxpayer; and
    • all other domestic persons which a person described in (3) above, directly or indirectly, have more than 50% ownership interest regardless of whether such persons do business in Tennessee.
  2. How does an "affiliated group," as defined in Tenn. Code Ann. Section 67-4-2004(2), compute its net worth for franchise tax purposes on a consolidated basis after making an election to do so under the provisions of Tenn. Code Ann. Section 67-4-2103(g)?
    Each affiliated group member that is doing business in Tennessee so as to be subject to franchise tax must take the following steps:
    • Using the balance sheets of each of its affiliated group members, a pro forma consolidated balance sheet will be prepared in accordance with generally accepted accounting principles wherein transactions and holdings between members of the group have been eliminated. The assets, liabilities and equity of any non-domestic persons are excluded from the consolidated balance sheet, but all other affiliated group members, regardless of whether doing business in Tennessee or whether subject to franchise tax, will be included in the consolidated balance sheet.
    • The consolidated net worth of the affiliated group will be calculated by subtracting total consolidated balance sheet liabilities from total consolidated balance sheet assets. Each group member doing business in Tennessee so as to be subject to the franchise tax will then enter the net worth of the affiliated group on line 1, Schedule F2 of its franchise tax return. The consolidated net worth used by each group member will be the same. (Schedule F1 is only for taxpayers that have not elected to compute their net worth for franchise tax purposes on a consolidated basis.)
    • Each group member doing business in Tennessee so as to be subject to franchise tax will then compute its consolidated franchise tax apportionment formula using schedule NC. The consolidated column includes all entities within the affiliated group. The single-entity column includes only the single-entity group member that is filing the return. The numerators of the franchise tax apportionment formula of each affiliated group member doing business in Tennessee so as to be subject to franchise tax will consist of such member's Tennessee property, payroll and receipts values computed in accordance with applicable statutes. The denominators of each such member's franchise tax apportionment formula will consist of the entire group's consolidated property, payroll and receipts values computed in accordance with applicable statutes. The ratios of the property, payroll and double weighted receipts factors of the each member's apportionment formula will then be added together and divided by 4 to obtain the franchise tax apportionment ratio of each group member.
    • Each affiliated group member doing business in Tennessee so as to be subject to franchise tax will then apportion its net worth to Tennessee by multiplying the affiliated group's net worth as computed in item 2 above by the individual member's own apportionment ratio computed in accordance with item 3 above.
    • Each affiliated group member doing business in Tennessee so as to be subject to franchise tax will then enter on line 1, schedule A of its return the apportioned consolidated net worth from line 3, Schedule F2 computed in accordance with items 1 through 4 above. The book value of its real and tangible personal property owned or used in Tennessee computed in Schedule G, line 15, will be entered on line 2, Schedule A of the return. The property shown in Schedule G will be only the property owned or used by the group member filing the return.
    • Each affiliated group member doing business in Tennessee so as to be subject to franchise tax will then compute its franchise tax based the consolidated net worth entered on line 1, Schedule A, or the book value of its Tennessee real and tangible personal property owned or used entered on line 2, Schedule A, whichever is greater.
    • Each affiliated group member doing business in Tennessee so as to be subject to franchise tax will then file its own franchise, excise tax return with the franchise tax being computed as described in items 1 through 6 above.
  3. For purposes of computing the net worth franchise tax base on a consolidated basis, what is a "financial institution affiliated group?"
    A financial institution affiliated group is any affiliated group in which more than 50% of the group's aggregate gross income (excluding dividends and receipts resulting from transactions between members) is derived from conducting the business of a financial institution as defined in Tenn. Code. Ann. Section 67-4-2004(2)(A).
  4. How does a "financial institution affiliated group," as defined in Tenn. Code Ann. Section 67-4-2004(12), compute its net worth for franchise tax purposes on a consolidated basis after making an election to do under the provisions of Tenn. Code Ann. Section 67-4-2103(q)?
    A member of a financial institution affiliated group that is subject to the Tennessee franchise tax will compute its franchise tax using the following method:
    • Using the balance sheets of each of its affiliated group members, the group will prepare a pro forma consolidated balance sheet in accordance with generally accepted accounting principles wherein transactions and holdings between members of the group have been eliminated. The assets, liabilities and equity of any non-domestic persons are excluded from the consolidated balance sheet.
    • The consolidated net worth of the financial institution affiliated group will be calculated by subtracting the sum of (a) total consolidated balance sheet liabilities and (b) 25% of the financial institution affiliated group's securities classified as held to maturity or available for sale at the close of business on the last day of the tax year, from total consolidated balance sheet assets.
    • Each group member will apportion its net worth to Tennessee by multiplying the net worth of the entire group, as computed under (2) above, by a fraction, the numerator of which is the total gross receipts of the member attributable to Tennessee and the denominator of which is the gross receipts of all members of the group. For this purpose, receipts from transactions between group members are excluded. Group members that are financial institutions will compute apportionment formula numerator receipts in accordance with Tenn. Code Ann. Section 67-4-2118(d). Group members that are not financial institutions will compute apportionment formula numerator receipts in accordance with Tenn. Code Ann. Section 67-4-2111(h) through (k). The denominator of each member's franchise tax apportionment formula will consist of the entire unitary group's total gross receipts derived from the activities enumerated in Tenn. Code Ann. Section 67-4-2118(d). Non unitary group members will determine denominator total gross receipts in accordance with Tenn. Code Ann. Section 67-4-2111(g)(1) and (2).
    • The unitary group will compute and pay franchise tax on the greater of the group's combined apportioned equity computed in accordance with items 2 and 3 above, or the unitary group's combined minimum franchise tax base, calculated in accordance with Tenn. Code Ann. Section 67-4-2108. Each non-unitary group member will file a separate entity franchise, excise tax return and will compare its apportioned net worth calculated on a consolidated basis to the book value of its real and tangible personal property owned or used in Tennessee and remit franchise tax on whichever amount is greater.
  5. Can an "affiliated group" or a "financial institution affiliated group" elect to compute its net worth on a consolidated basis for franchise tax purposes if all members of the group do not close their taxable year on the same date?
    No. Section 80 of Chapter 499 of the Public Acts of 2005, which the department will apply to tax years ended on or after July 1, 2005, amended Tenn. Code Ann. Section 67-4-2103(d) to make it clear that an "affiliated group" or a "financial institution affiliated group" is not allowed to elect to compute its net worth on a consolidated basis for franchise tax purposes unless each member of the group closes its taxable year on the same date. The election will be allowed when a member exits the group during the taxable year due to a change in ownership, merger or liquidation of the member. In such a case, the member exiting the group will be excluded from the group and will compute its net worth on a non-consolidated basis as otherwise provided by law.
  6. How does an "affiliated group" or a "financial institution affiliated group" elect to compute its net worth on a consolidated basis for franchise tax purposes?
    Tenn. Code Ann. Section 67-4-2103(g) requires taxpayers making the election to file, on or before the due date of the return for the tax period for which the election is to take effect, a group registration form with the department and provide information necessary to establish the affiliated group or financial institution affiliated group.

    If a member enters or leaves the group at any time during the tax year, an amended group registration form must be filed with the department on or before the due date of the return for the period in which the event occurs.
  7. Once an election to compute net worth on a consolidated basis is made, how long does it remain in effect?
    Tenn. Code Ann. Section 67-4-2103(h) provides that an election to compute net worth on a consolidated basis shall remain in effect for a minimum of five years and thereafter until revoked by filing a group registration revocation form with the department on or before the due date of the return for the tax period for which the election is to be revoked.
  8. Are late elections, or late election revocations, to compute net worth on a consolidated basis allowed?
    Tenn. Code Ann. Section 67-4-2103(i) authorizes the commissioner to accept a late election, a late revocation of an election or to permit an early revocation of an election to compute net worth on a consolidated basis if the commissioner determines that there is a good and reasonable cause for such action.

    For tax returns filed for periods beginning January 1, 2004, and ending on or before December 31, 2006, net worth may be computed on a consolidated basis if the affiliated group or financial institution affiliated group files an amended return along with a group registration form.
  9. If a taxpayer elects to calculate its net worth on a consolidated basis, which members of the affiliated group are subject to franchise and excise tax?
    Only the entities that are doing business in Tennessee or exercising the corporate franchise are subject to the franchise and excise tax. The election to compute net worth on a consolidated basis does not affect the entity's nexus in the state. Only the method of calculating the franchise tax is different for that entity and the other taxpayers in the group with nexus in the state. Taxpayers who are subject to the franchise tax before electing to calculate their net worth on a consolidated basis are still required to file their own franchise and excise tax returns.

Questions related to the definition of "taxpayer" or "person," that is, who is or is not, subject to taxation. Tenn. Code Ann. Section 67-4-2004(27).

  1. Are trusts, other than business trusts, and decedents' estates subject to the tax?
    The department does not believe it was the intent of the legislature to tax ordinary trusts, used for traditional purposes and not in business, nor to tax decedents' estates which are administered and closed under normal circumstances. Accordingly, the department, working with tax practitioners and industry, is developing a notice setting out a safe harbor from taxation for trusts and estates.
  2. Is a limited liability company, whose single member is an individual or a general partnership, subject to the tax?
    Yes, even if the limited liability company chooses to be ignored as an entity for federal tax purposes and treated as an individual taxpayer or as a "division" of the general partnership. The law specifically provides that limited liability companies are subject to tax, by including them in the definition of "taxpayer" or "person." Therefore, unless a particular limited liability company falls within an exemption contained in Tenn. Code Ann. Section 67-4-2008, it is taxable.
  3. Is a limited partnership established for estate planning purposes or merely to own a life insurance policy subject to tax?
    Yes. The law specifically provides that limited partnerships are subject to tax, by including them in the definition of "taxpayer" or "person." Therefore, unless a particular limited partnership falls within an exemption contained in Tenn. Code Ann. Section 67-4-2008, it is taxable.

Question relating to "doing business" (nexus):

  1. The law eliminates the "doing business" safe harbors for mere ownership of a limited type interest in a limited partnership or limited liability company. (See Tenn. Code Ann. Section 67-4-2004(14).) What is the effect of this elimination?
    The department will continue to follow its long-standing policy not to attribute franchise and excise tax nexus to a limited partner or the limited partner equivalent limited liability company member in a partnership or limited liability company doing business in Tennessee, where that is its only contact with this state.

    In addition, when a limited partnership or limited liability company is subject to franchise and excise taxes, the department does not believe that it was the intent of Chapter 406 of the Public Acts of 1999 to attribute Tennessee franchise and excise tax nexus to a partner or limited liability company member solely because of its interest in the taxable entity.

Questions relating to the determination of "net earnings" for the excise tax ( Tenn. Code Ann. Section 67-4-2006):

  1. Is there any limitation on the deduction, under Tenn. Code Ann. Section 67-4-2006(a)(4 and 5), for amounts subject to self-employment taxes and paid or distributable to partners or members?
    The full amount paid or distributable to partners or members for personal services may be deducted, provided it does not create or increase any net loss. This is the amount which is required to be reported and identified for federal tax purposes as net earnings from self-employment. For example, on Schedule K-1 of Form 1065, on schedule C of Form 1040 (net profit), or on Schedule F of form 1040 (net farm profit). This amount is not limited by the maximum amount subject to the social security tax nor reduced by 7.650% as is done for purposes of calculating the federal self-employment tax. (See Section 11 of 2000 Public Chapter 982.)
  2. Are capital gains of a limited partnership or other entity treated as a partnership for federal tax purposes included in net earnings?
    Yes. Tenn. Code Ann. Section 67-4-2006(a)(4) provides that items specifically allocated to partners or members under IRC Sections 701-761 must be added to ordinary income. IRC Section 702 requires that capital gains be allocated to partners. (See Section 10 of 2000 Public Chapter 982.)
  3. What types of plans fall within the phrase "qualified pension or benefit plans" in Tenn. Code Ann. Section 67-4-2006(a)(4)(C)?
    Any plan that is qualified under the Internal Revenue Code.
  4. If a contribution to a qualified plan is made in one year but designated for federal purposes as being the contribution for the prior year, to which year does the deduction from net earnings apply?
    The deduction will apply to the prior year, that is, the year designated for federal purposes as the year to which the contribution applies.
  5. In an entity's first year subject to the tax, will it be able to use net operating losses carried forward from prior years?
    No. Since the earnings from prior years were not subject to tax, losses from those years may not be used to offset earnings which are subject to the tax. Furthermore, an entity which was not subject to tax under prior law may not file a return for a period before it becomes subject to the new tax for the purpose of generating loss carryforwards.
  6. How does an individual calculate net earnings if he/she has one business operating as a single member limited liability company and another that he/she operates outside of the limited liability company?
    The business which is subject to the tax is the business operated by the limited liability company. Therefore, only its earnings and net worth are subject to tax; however, the taxpayer will have the burden of showing that the other business activities were conducted outside of the limited liability company.
  7. How will Tenn. Code Ann. Sections 2006(b)(1)(I) and (b)(2)(K) operate if the asset distributed is disposed of in some manner other than a traditional sale for cash?
    These provisions do not apply unless a gain or loss is recognized for federal tax purposes.
  8. Are federal deductions allowed under IRC Section 199 (26 U.S.C. Section 199) with regard to qualified production activities allowable as deductions in determining net earnings subject to excise tax?
    No. Section 64 of Chapter 499 of the Public Acts of 2005, which the department will apply to tax years ended on or after July 1, 2005, amends Tenn. Code Ann. Section 67-6-2006(b)(1) by adding a new subdivision (M) which requires and deduction made pursuant to 26 U.S.C. 199 to be added back to federal net earnings when computing net earnings for excise tax purposes.
  9. Who can take the deduction for qualified charitable deductions, and what is required to qualify for the deduction?
    Taxpayers that donate to nonprofit organizations that are exempt from federal tax under sections 501(c)(3), (4), or (5) of the Internal Revenue Code can deduct 75% of the amount donated when computing their excise tax base. The donations must be monetary. The exempt organization must certify to the taxpayer that the donation was spent to purchase goods or services subject to Tennessee sales and use tax and that the sales and use tax was actually paid. The nonprofit entity must provide to the taxpayer a certification form once the donation is spent. This certification form is available at www.state.tn.us/revenue/forms/fae/excisededuction.pdf. This will be used to determine the available deduction.
  10. What should be included on Lines 2 and 13 on Schedule J for the depreciation?
    Line 2 is an add-back of only the amount of federal depreciation that has been taken on assets using the bonus method of depreciation provided for in IRC Section 168. Line 13 is a deduction of the state basis depreciation on assets under the bonus method. The depreciation represented on these lines should only be depreciation involved with assets under the federal bonus method.

Question relating to quarterly payments:

  1. If a taxpayer makes four equal quarterly payments, each of which equals or exceeds the current year's franchise, excise tax liability, will it be penalized if each payment was less than 25% of the prior year's liability?
    No. Under Tenn. Code Ann. Section 67-4-2015(b) and (d), if each quarterly payment is the lesser of 25% of the prior year's combined franchise and excise tax liability, or 25% of the current year's combined liability, then there will be no penalty. If the taxpayer's franchise and excise tax liability for the current year is less than $5,000, then no quarterly payments are required even if the prior year's liability was greater than $5,000.

Questions relating to current franchise and excise tax rules:

  1. What is the status of the current franchise and excise tax rules and regulations in light of franchise, excise tax law changes enacted since such rules and regulations were promulgated?
    The department's position is that the current rules and regulations, found in Tenn. Comp. R & Regs. 1320-6-1, remain in effect to the extent they are not inconsistent with new franchise and excise tax laws.
  2. Is Tenn. Comp. R. & Regs. 1320-6-1-.16, relating to reserves, still valid?
    No. Under Tenn. Code Ann. Section 67-4-2106(b), a taxpayer's net worth for franchise tax purposes is defined as assets less liabilities under generally accepted accounting principles. Under this clear definition, contingent liabilities as described in Tenn. Comp. R. & Regs. 1320-6-1-.16 cannot be added to net worth so computed for franchise tax purposes.

Question relating to Tenn. Code Ann. Sections 67-4-2007(d) and 67-4-2106(c) and their application to limited liability companies that are 100% owned by a real estate investment trust:

  1. Tenn. Code Ann. Sections 67-4-2007(d) and 67-4-2106(c) state, "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 [franchise] tax purposes." Does this mean that a limited liability company (LLC) that is 100% owned by a corporation that is a real estate investment trust (REIT) or S corporation, and is thus disregarded for federal purposes, is to be disregarded for franchise, excise tax purposes notwithstanding other statutory provisions that require such entities to file separately?
    No. When a REIT corporation is the single owner of an LLC, the REIT and the LLC are required to file separately for franchise, excise tax purposes even though the LLC may be disregarded for federal income tax purposes. Likewise, an S corporation and its qualified Sub Chapter S subsidiary (QSSS) are required to file separately for franchise, excise tax purposes.

    The department is taking the position described above based on the legislative history of Chapter 982 of the Public Acts of 2000. Sections 45 through 52 of the act were added to the original bill by a conference committee during the last days of the legislative session. The apparent intent of the committee was to give tax relief to pass-through business entities directly or indirectly owned by REITs. This was done by requiring these REIT-owned entities to file separately from the REIT, by exempting them from the franchise tax, and by, in effect, allocating their net income to the REIT, to be taxed at the REIT level. The effect of this last provision is to give REITs the benefit of the dividends paid deduction.

    Presumably the conference committee overlooked the "notwithstanding" language that was already in Sections 17 and 31 (now codified as Tenn. Code Ann. Sections 67-4-2007(d) and 67-4-2106(c) of the Act. If a REIT-owned LLC is disregarded and files with its parent, it will be subject to franchise tax on its property. Section 50 was enacted to avoid this result. The position taken by the department is consistent with the apparent legislative intent of the act and avoids many of the problems what would result from taking a different position.

Questions relating to the exemption for obligated member entities under Tenn. Code Ann. Section 67-4-2005(a)(9).

  1. What is an "obligated member entity?"
    Section 86 of Chapter 499 of the Public Acts of 2005, applicable to tax years ending on or after July 1, 2005, amends Tenn. Code Ann. Section 67-4-2004 to define an "obligated member entity" as follows:
    Obligated member entity" means a limited liability company, limited partnership or limited liability partnership, all of whose members or partners are fully liable for the debts, obligations and liabilities of the entity, as provided in Section 67-4-2008(b), (c) and (d), and have filed appropriate documentation to that effect with the secretary of state[.]
  2. What is an "obligated member?"
    Section 86 of Chapter 499 of the Public Acts of 2005, applicable to tax years ending on or after July 1, 2005, amends Tenn. Code Ann. Section 67-4-2004 to define an "obligated member" as follows:
    Obligated member" means a member or partner of an obligated member entity that is fully liable for the debts, obligations and liabilities of the entity, as provided in Section 67-4-2008(b), (c) and (d), and that has filed appropriate documentation to that effect with the secretary of state[.]
  3. Can obligated members be fully liable for the debts, obligations, and liabilities of an obligated member entity?
    Yes. Even though one or more entities or individuals dealing with the obligated member entity have by contract agreed to limit their claims against one or more obligated members or against the obligated member entity.
  4. Does the exemption for a limited liability company, limited partnership, or limited liability partnership (obligated member entities) provided Tenn. Code Ann. Section 67-4-2008(a)(9) require that the election by obligated members to assume joint and several liability be done each year for which the exemption is sought?
    No. Once the proper documentation has been filed with the secretary of state, it remains in effect until any obligated member's election to assume joint and several liability is revoked. If there is a revocation, the obligated member entity is liable for franchise and excise taxes for tax years ending on or after the date of the revocation.

    Section 87 of Chapter 499 of the Public Acts of 2005, applicable to tax years ending on or after July 1, 2005, amends Tenn. Code Ann. Section 67-4-2008(a)(9) to require appropriate documentation for a member or partner to become an obligated member of an obligated member entity by assuming full liability for its debts, obligations and liabilities as required in Tenn. Code Ann. Section 67-4-2008(b), (c), and (d) to be filed with the Tennessee Secretary of State as follows:

    • For tax years beginning before January 2, 2000, the appropriate documentation must have been filed on or before September 15, 2000.
    • For tax years beginning on or after July 2, 2004, but before August 1, 2005, the appropriate documentation must have been filed on or before August 1, 2005.
    • For tax years beginning on or after July 1, 2008, but before October 1, 2009, the appropriate documentation must be filed on or before October 1, 2009.
    • For all other tax years, the appropriate documentation must be filed on or before the first day of the taxable year for which a return is filed.
    If an additional obligated member is admitted to an obligated member entity, the obligated member must file the appropriate documentation within 60 days of his or her admission.
  5. In order to qualify for the exemption provided under Tenn. Code Ann. Section 67-4-2008(a)(9), must all obligated members assume liability for the obligated member entity's obligations, or does the exemption apply so long as some obligated members assume liability?
    An entity does not qualify for the exemption unless all of its partners or members agree to be fully liable for the entity's debts, obligations and liabilities.
  6. May a limited liability company, limited partnership or limited liability partnership (obligated member entities) qualify for the exemption if its members or partners(obligated members), who are assuming liability for the entire debt of the obligated member entity, are themselves LLCs, LPs, LLPs or trusts?
    Yes. So long as the obligated member entity seeking the exemption is not owned in whole or in part, directly or indirectly, by a corporation other than a not-for-profit corporation, it does not matter whether the obligated members are other entities or natural persons.

    However, Section 87 of Chapter 499 of the Public Acts of 2005, applicable to tax years ending on or after July 1, 2005, amends Tenn. Code Ann. Section 67-4-2008(a)(9) to provide that, to the extent that any obligated member or any owner thereof provides limited liability protection, the obligated member entity will owe franchise, excise tax on the portion of income and equity attributable to such obligated member. For this purpose, ownership includes any form of ownership, whether in whole, in part, direct or indirect. Estates, trusts that are not taxpayers, not-for-profit entities, or other entities that are exempt under Tenn. Code Ann. Section 67-4-2008 are not deemed to provide limited liability protection.
  7. Explain the procedure for claiming exemption under Tenn. Code Ann. Section 67-4-2008(a)(9).
    In order to claim this exemption, articles of amendment must be filed with the Secretary of State's office. The obligated member entity should provide a copy of this document to the department, and the F&E account will be coded as exempt.

Questions relating to Tenn. Code Ann. Section 67-4-2008(a)(11) family-owned entities:

  1. When Tenn. Code Ann. Section 67-4-2008(a)(11)(B)(i) defines the term "family-owned," the word "individual" is used with regard to determining whether the owners are "members of the family." Does the "individual" to whom the owners must be related also have to be an owner of the entity?
    No. The statute has no requirement that the "individual," as used in Tenn. Code Ann. Section 67-4-2008(a)(11)(B)(i), also be an owner. Accordingly, an entity owned entirely by siblings would satisfy the "family-owned" test.
  2. Must there be more than one owner for an entity to qualify for the "family-owned" exemption in Tenn. Code Ann. Section 6704-2008(a)(11)?
    No. An entity owned by one person may qualify. Also, an entity owned 95% by one person and the remaining 5% by unrelated persons satisfies the "family-owned" test.
  3. Does an entity which is more than 5% owned by a trust satisfy the family-owned test?
    The only trust that is within the "family-owned" definition is a "trust of a deceased individual ... " The department construes this to refer to a testamentary trust, the beneficiary of which must be a person who would fall within one of the categories listed in Tenn. Code Ann. Section 6704-2008(a)(11)(B)(i), that is, an ancestor, spouse, etc.
  4. How does the department determine that "substantially all" of the activity of a "family-owned" entity is from the production of passive investment income or the combination of passive investment income and farming as is required by Tenn. Code Ann. Section 67-4-2008(a)(11)(A)?
    "Substantially all" means that at least 66.67% of the gross receipts of the entity must be from passive investment income or the combination of passive investment income and farming. The test is applied on a year-to-year basis, so that a family-owned entity may be subject to tax some years and exempt other years. If there is no income in any given year, the income test is not satisfied. If the 66.67% test is not met, then the entity is subject to tax on all of its income unless some other exemption applies.

    The department bases its interpretation of "substantially all" to mean 66.67% on Tenn. Code Ann. Section 67-4-2008(a)(6)(A) which replaced "substantially all" as it previously appeared in the statute with the phrase "at least 66.67%."

    In applying the test, gross receipts - receipts without reduction for expenses - should be used in both the numerator and denominator of the formula, except in the case of the sale or exchange of stock, securities, and other capital assets, where net gains should be used.
  5. Do gains from the sale of real or tangible personal property qualify as passive investment income?
    No. The definition in Tenn. Code Ann. Section 67-4-2008(a)(11)(B)(ii) of "passive investment income" does not include gains from the sale or exchange of any asset other than "stock or securities."
  6. Does the department construe "rents" as always passive investment income, or are there exceptions as under federal law?
    Franchise and excise tax law does not contain a definition of "rents," and therefore the term must be given its ordinary and commonly understood meaning. Although income may be reported as rent, it may legally represent a license or service fee, such as hotel or motel charges. The department does not consider hotel and motel room charges to be "rent."
  7. Assume two Tennessee based limited partnerships (LPs) each own a 50% interest in a Tennessee based general partnership (GP) whose income is 100% passive investment income. Each LP's only income is that resulting from its ownership interest in GP. The individual owners of each limited partnership are members of the same family, but the individual owners of one limited partnership are not related to the individual owners of the other limited partnership. Are the limited partnerships exempt from franchise, excise taxation under the "family owned" exemption in Tenn. Code Ann. Section 67-4-2008(a)(11)?
    Yes. The GP is not subject to Tennessee excise taxation. Thus, GP's income is passed through 50% to each LP (See Tenn. Code Ann. Sections 67-4-2006(b)(1)(J) and (b)(2)(L)) and retains its identity as passive investment income in their hands. At least 95% of the ownership units of each LP are owned by members of the same family and at least 66.67% of each LP's income qualifies as passive investment income.
  8. Assume that a man and his wife and children own 100% of a Tennessee based limited partnership (LP #1). LP #1's only income is that which results from its 95% ownership interest in another Tennessee based limited partnership (LP #2). LP #2 earns only passive investment income. Can LP #1 qualify for the "family owned" exemption in Tenn. Code Ann. Section 67-4-2008(a)(11)?
    No. Since it is based in Tennessee and is 95% owned by another LP rather than by family members, LP #2 is subject to the Tennessee excise tax. The income that it passes through to LP #1 for federal income tax purposes is not passed through to LP #1 for Tennessee excise tax purposes (See Tenn. Code Ann. Sections 67-4-2006(b)(1)(J) and (b)(2)(L)). Thus, although LP #1 is at least 95% owned by family members, it has no passive investment income and thus does not meet the requirement that at least 66.67% of its income must qualify as passive investment income.
  9. Assume that a man and his wife and children own 100% of a Tennessee based limited partnership (LP #1). LP #1's only income is that which results from its 95% ownership interest in another limited partnership (LP #2) based in another state and having no tax nexus in Tennessee. LP #2 earns only passive investment income. Can LP #1 qualify for the "family owned" exemption in Tenn. Code Ann. Section 67-4-2008(a)(11)?
    Yes. Since it has no tax nexus in Tennessee, LP #2 is not subject to Tennessee excise tax. The income that it passes through to LP #1 for federal income tax purposes is also passed through to LP #1 for Tennessee excise tax purposes (See Tenn. Code Ann. Sections 67-4-2006(b)(1)(J) and (b)(2)(L).) and retains its identity in the hands of LP #1. LP #1 is at least 95% owned by family members and at least 66.67% of its income is passive investment income.
  10. Assume that a man and his wife and children own 100% of a Tennessee based limited partnership (LP #1) that owns an interest in another limited partnership (LP #2) that is based in another state and has no tax nexus in Tennessee. LP #2 earns 100% of its income from operating a retail business. Such income is passed through to LP #1 as ordinary income. Can LP #1 qualify for the "family owned" exemption in Tenn. Code Ann. Section 67-4-2008(a)(11)?
    No. Since LP #2 has no tax nexus in Tennessee, it is not subject to Tennessee excise tax. The income that it passes through to LP #1 for federal income tax purposes is also passed through to LP #1 for Tennessee excise tax purposes (See Tenn. Code Ann. Sections 67-4-2006(b)(1)(J) and (b)(2)(L)) and retains its identity as ordinary income in the hands of LP #1. Although LP #1 is at least 95% owned by family members, it has no passive investment income and thus does not meet the requirement that at least 66.67% of its income must qualify as passive investment income.
  11. How does an entity claim the family-owned exemption?
    A non-corporate entity which believes that it qualifies as a family-owned entity with substantially all of its income from passive investments and/or farming so as to be exempt from franchise, excise taxes under Tenn. Code Ann. Section 67-4-2008(a)(11) must initially file an Application for Exemption form with the Department of Revenue's Taxpayer Services Division. The form, with instructions is available on the Department's website at www.tn.gov/revenue/forms.

    The form must be signed by an owner, member or partner of the entity claiming the exemption. In order to maintain the exemption, the entity must file a renewal application annually by the 15th day of the fourth month following the close of the entity's tax year. The completed form should be mailed to:
    Tennessee Department of Revenue
    Attn: Taxpayer Services Division
    500 Deaderick Street
    Nashville, TN 37242.

    Two criteria must be met in order to qualify for the family-owned non-corporate exemption:
    1. At least 95% of entity's ownership must be held by family members, and
    2. Substantially all (66.67%) of the activity of the entity is either:
      • The production of passive investment income, or
      • The combination of the production of passive investment income and farming.
    For this purpose, "Passive investment income" is defined as gross receipts derived from royalties, rents, dividends, interest annuities, and sales or exchanges of stock or securities.

    "Farming" is defined as the growing of crops, nursery products, timber or fibers, such as cotton, for human or animal use or consumption; the keeping of horses, cattle, sheep, goats, chickens or other animals for human or animal use or consumption; or the keeping of animals that produce products, such as milk, eggs, wool or hides for human or animal use or consumption; or the leasing of the land to be used for the purposes herein described.

Questions relating to returns required by corporate owners of single-member limited liability companies (SMLLCs):

  1. A corporation has a single-member interest in five SMLLCs, only one of which has business operations in Tennessee. For federal tax purposes, the five LLCs are all disregarded and only one federal return form 1120 is filed by the corporation to include its operations and the operations of the five LLCs. For Tennessee franchise, excise tax purposes, how are the entities required to file?
    Tenn. Code Ann. Sections 67-4-2007(d) and 67-4-2106(c) require the five SMLLCs to be disregarded and their operations to be included in a single franchise, excise tax return filed by the corporation.
  2. A Tennessee limited partnership (LP) has a single-member interest in a Tennessee limited liability company (SMLLC). For federal tax purposes, the LLC is disregarded and only one federal return form 1065 is filed by the LP to include its operations and the operations of the LLC. For Tennessee franchise, excise tax purposes, how are the entities required to file?
    SMLLCs are disregarded for franchise, excise tax purposes under Tenn. Code Ann. Sections 67-4-2007(d) and 67-4-2106(c) only when the single member is a corporation. Therefore, the LP and the SMLLC will each have to file their own separate entity franchise, excise tax return. Each entity should prepare its franchise, excise tax return based on a pro-forma federal return that it would have been required to file for federal income tax purposes if the SMLLC had not been disregarded for federal purposes.
  3. A corporation is the single-member owner of a limited liability company (SMLLC) that also is the single-member owner of another SMLLC. For federal income tax purposes, both SMLLCs are disregarded and only one federal form 1120 if filed by the corporation to include the operations of both SMLLCs. For franchise, excise tax purposes, how are the entities required to file?
    Tenn. Code Ann. Sections 67-4-2007(d) and 67-4-2106(c) disregards SMLLCs for franchise, excise tax purposes when the single member is a corporation. Therefore, both SMLLCs will be disregarded and their operations will be included in a single franchise, excise tax return filed by the corporation. Although the bottom tier SMLLC is owned by an LLC, the middle tier SMLLC is disregarded because its single member is a corporation. The corporation is thus considered the single member of the bottom tier SMLLC's single member.

Questions related to S Corporations:

  1. Is a corporation that has elected Sub Chapter S status (S corporation) for federal income tax purposes subject to Tennessee?
    Yes. Tenn. Code Ann. Section 67-4-2006(a)(3) does not recognize the federal S status election and requires all S corporations subject to franchise, excise tax to file a franchise, excise tax return and calculate federal taxable income thereon as if they had not elected S status.
  2. Is a qualified Sub Chapter S subsidiary (QSSS) that is disregarded for federal income tax purposes and included in the federal return filed by its S corporation owner also disregarded for Tennessee franchise, excise tax purposes?
    No. An S Corporation doing business in Tennessee must file its franchise, excise tax return as though it were a C Corporation and Tenn. Code Ann. Section 67-4-2006(a)(3) requires it to compute its excise tax base as though it had not elected S status. A QSSS doing business in Tennessee must file its own separate entity franchise, excise tax return without regard to its federal classification and treatment, (See Tenn. Code Ann. Sections 67-4-2007(e) and 67-4-2106(c).
  3. Can an S corporation take credit against its excise tax for the Tennessee individual income tax, also known as the Hall income tax, paid by its shareholders on distributions from the S corporation?
    No. The S corporation and each of its shareholders are separate entities. Tenn. Code Ann. Section 67-4-2009(8) permits an entity that has paid both the Tennessee income tax and the Tennessee excise tax to take credit for the Tennessee income tax paid. But, in the question presented, the S corporation has not paid the Tennessee income tax, so no credit for such tax is allowed.

Questions related to refund claims:

  1. Does a claim for refund, unaccompanied by documentation supporting the claim, toll your statute of limitations?
    Yes. Generally, a claim for refund must be filed in Tennessee within three years from Dec. 31 of the year in which the payment was made. For an excise tax refund resulting from a decrease in net income as determined by an IRS examination, a claim for refund must be filed within three years from the date of such redetermination of net income by the IRS.
  2. Do you require a taxpayer's supporting documentation to be filed with the refund claim?
    No. Tennessee code provides that a claim must "set forth each ground upon which a refund is claimed, the amount of such refund, the tax period, the tax type, and information reasonably sufficient to apprise the commissioner of the general basis for the claim." As long as the claim includes these required items, we will accept additional supporting documentation after the initial filing of the claim.

    Although we will accept additional documentation, it is important for taxpayers to remember that interest does not begin to accrue on a refund until 45 days from the date the department receives proper proof to verify that the refund or credit is due and payable.

Question related to venture capital funds:

  1. What change did Public Chapter 1019 (2006) have on the venture capital fund exemption in Tenn. Code Ann. Section 67-4-2008(a)(5)?
    Public Chapter 1019 provides that the capital of the fund can also include investments by one or more affiliates, if such affiliates also qualify as venture capital funds under this exemption. This change is effective for all tax years beginning on or after Jan. 1, 2006. Otherwise, there was no change to the original definition other than this clarification.

Question related to industrial machinery credits:

  1. Public Chapter 1019 (2006) allows the Industrial Machinery Credit (IMC) to be applied to both franchise and excise tax. Previously, the IMC applied only to the excise tax. Since my corporation has had losses and has not incurred any excise tax on which to apply IMC in prior tax years, will my IMC carryovers be able to offset franchise tax on my 2006 return?
    Yes. For any tax year beginning on or after Jan. 1, 2006, all IMC available to be applied on that return, whether originating in that tax year or by a carryover from any prior tax year, will be used to offset both the franchise and excise tax. The 50% limitation will still apply, but it will be based on the total tax liability of both the franchise and excise tax.