If a corporate parent moves its Tennessee operating LLCs under an out-of-state business trust instead of holding them directly, do the LLCs and the trust stay disregarded for Tennessee franchise and excise tax purposes the way they are for federal income tax?

Subject

Whether a business trust and its LLCs are disregarded entities for franchise and excise tax after a corporate restructuring.

Plain-English summary

The Tennessee Department of Revenue ruled that a business trust and the Tennessee limited liability companies (LLCs) it would come to own must each file separate Tennessee franchise and excise (F&E) tax returns — none of them can be disregarded, even though every entity in the chain is disregarded for federal income tax purposes.

A national radio broadcasting parent corporation held its Tennessee-operating LLCs indirectly through an intermediate LLC. It planned to transfer those interests into an existing out-of-state business trust, which would then own the Tennessee LLCs. The parent asked whether, after the move, the business trust or the Tennessee LLCs could be disregarded for Tennessee F&E purposes the same way they're disregarded federally. The answer was no on both counts. Tennessee's disregarded-entity rule has a narrow carve-out: an entity is disregarded for F&E purposes only if it is (1) a single-member LLC, (2) disregarded federally, and (3) wholly owned by a corporation. A business trust is not a single-member LLC at all, so it flunks the first requirement regardless of its federal treatment. And once the Tennessee LLCs are owned by the business trust rather than a corporation, they flunk the third requirement — even though they're still single-member LLCs disregarded federally.

What this means for you

Multi-state groups restructuring through trusts or LLCs

Tennessee's disregarded-entity exception for F&E tax is much narrower than the federal check-the-box rules: it only reaches single-member LLCs owned directly by a corporation. Inserting any other kind of entity — a business trust, a partnership, another LLC — between the corporate parent and the operating LLC breaks the chain and forces separate-entity filing for every entity below that point, even if every layer remains disregarded federally.

Accountants and tax professionals

Before advising on an ownership restructuring that inserts a trust, partnership, or non-corporate holding entity above an operating LLC, check Tenn. Code Ann. §§ 67-4-2007(d) and 67-4-2106(c) — the corporation-ownership requirement is strict and doesn't extend to trusts, even single-member business trusts disregarded for federal tax purposes. Each affected entity then must file its own separate F&E return under § 67-4-2007(e)(1), reflecting only its own business activity.

Common questions

Q: Is a business trust ever disregarded for Tennessee franchise and excise tax?
A: Not under this exception. The disregarded-entity rule applies only to single-member LLCs wholly owned by a corporation; a business trust doesn't qualify no matter its federal tax classification.

Q: If an LLC is disregarded federally and wholly owned by another LLC (not a corporation), is it disregarded for Tennessee F&E tax?
A: No. Tennessee requires the sole member to be a corporation specifically — ownership by a business trust, partnership, or another LLC does not qualify.

Q: Does inserting a business trust into an ownership chain change Tennessee tax liability?
A: In this case the taxpayer estimated total F&E liability would stay about the same post-restructuring, since the operating LLCs still file returns — just as separate entities rather than disregarded ones.

Q: Does this ruling apply to my company's restructuring?
A: No. A Tennessee letter ruling binds the Department only for the specific taxpayer and facts addressed and cannot be relied on by others. It illustrates the Department's disregarded-entity analysis, but your ownership structure may differ.

Citations and references

Statutes:

• Tenn. Code Ann. § 67-4-2007(a) (2007) (6.5% excise tax on net earnings)
• Tenn. Code Ann. §§ 67-4-2105(a), 67-4-2106(a) (2007) ($0.25 per $100 franchise tax on net worth)
• Tenn. Code Ann. § 67-4-2004(30) (2007) (corporations, business trusts, and LLCs subject to F&E tax)
• Tenn. Code Ann. §§ 67-4-2007(d), 67-4-2106(c) (2007) (disregarded-entity exception: single-member LLC, disregarded federally, wholly owned by a corporation)
• Tenn. Code Ann. § 67-4-2007(e)(1) (2007) (separate-entity return filing requirement)

Source

• Landing page: https://www.tn.gov/revenue/tax-resources/legal-resources/tax-rulings.html
• Original PDF: https://www.tn.gov/content/dam/tn/revenue/documents/rulings/fae/08-14fe.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 08-14
WARNING
Letter rulings are binding on the Department only with respect to the individual taxpayer
being addressed in the ruling. This presentation of the ruling in a redacted form is
informational only. Rulings are made in response to particular facts presented and are not
intended necessarily as statements of Department policy.
SUBJECT
Whether a business trust and its wholly-owned limited liability companies will be disregarded
for Tennessee franchise and excise tax purposes, where each of these entities is disregarded for
federal income tax purposes as an entity separate from its ultimate corporate parent.
SCOPE
This letter ruling is an interpretation and application of the tax law as it relates to a specific set of
existing facts furnished to the Department by the taxpayer. The rulings herein are binding upon
the Department, and are applicable only to the individual taxpayer being addressed.
This letter ruling may be revoked or modified by the Commissioner at any time. Such revocation
or modification shall be effective retroactively unless the following conditions are met, in which
case the revocation shall be prospective only:
(A) The taxpayer must not have misstated or omitted material facts involved in
the transaction;
(B) Facts that develop later must not be materially different from the facts upon
which the ruling was based;
(C) The applicable law must not have been changed or amended;
(D) The ruling must have been issued originally with respect to a prospective or
proposed transaction; and
(E) The taxpayer directly involved must have acted in good faith in relying upon
the ruling and a retroactive revocation of the ruling must inure to his detriment.
FACTS
[PARENT CORPORATION], owns and operates radio broadcasting stations throughout the
United States. The actual operations and Federal Communications Commission licenses are held
in a number of Delaware single member limited liability companies. Two of these companies,
[TN LLC 1, TN LLC 2 AND TN LLC 3] (collectively, the “TENNESSEE LLCs”), have
operations in Tennessee. The [TENNESSEE LLCs] are wholly owned by [INTERMEDIATE

LLC], a Delaware limited liability company, and are disregarded for federal income tax
purposes. Intermediate LLC is in turn wholly owned by Parent Corporation, and is disregarded
for federal income tax purposes.
Parent Corporation is considering transferring the interests held by Intermediate LLC in the
[TENNESSEE LLCs] to the [BUSINESS TRUST], an existing unincorporated [STATE-NOT
TENNESSEE] business trust that was formed in [YEAR]. A [STATE-NOT TENNESSEE]
business trust is a trust with transferable shares, formed pursuant to a Declaration of Trust filed
with the [STATE-NOT TENNESSEE’S] Secretary of State’s office. The Business Trust is
wholly owned by Intermediate LLC, and is disregarded for federal income tax purposes. As part
of the contemplated transfer, Parent Corporation would make a tax-free contribution of the
interests in the [TENNESSEE LLCs] to the Business Trust.
Both before and after the transaction contemplated above, the [TENNESSEE LLCs] are the only
entities that have Tennessee operations and, consequently, direct nexus with Tennessee. None of
the other limited liability companies owned by Intermediate LLC, which were established to
segregate the operations by radio market, FCC license and by state, carry on business activities
in Tennessee. Additionally, Parent Corporation maintains operations in [STATE – NOT
TENNESSEE] and is considered to have nexus for state income tax purposes in all states in
which its subsidiary limited liability companies operate, including Tennessee. Intermediate LLC
and the Business Trust merely hold or will hold the investment in the [TENNESSEE LLCs], and
do not carry on any activities that would create direct nexus in Tennessee or any other
jurisdiction.
Parent Corporation currently files a Tennessee franchise and excise tax return. The current and
post-transaction Tennessee franchise and excise tax liability of Parent Corporation is estimated to
remain relatively unchanged.
QUESTIONS
Under the given facts, and after the contemplated transfer of the interests in the [TENNESSEE
LLCs] to the Business Trust, a disregarded entity for federal tax purposes:

1. Will the Business Trust be treated as a disregarded entity or as a separate entity for
   Tennessee franchise and excise tax purposes?
2. Will the [TENNESSEE LLCs] be treated as disregarded entities for Tennessee franchise and
   excise tax purposes?
3. If the answer to Question #2 is affirmative, will the [TENNESSEE LLCs’] items of income,
   expense, balance sheets and state apportionment factors flow up to the Business Trust and be
   included and reported on the Business Trust’s Tennessee franchise and excise tax return?
   RULINGS
4. The Business Trust will be treated as a separate entity for Tennessee franchise and excise tax
   purposes.

2

2. No. The [TENNESSEE LLCs] will be treated as separate entities for Tennessee franchise and
excise tax purposes.

3. N/A.
   ANALYSIS
   Tennessee imposes an excise tax at the rate of 6.5 percent on the net earnings of all persons
   doing business within Tennessee. Tenn. Code Ann. § 67-4-2007(a) (2007). Additionally,
   Tennessee imposes a franchise tax on all persons doing business within Tennessee, at the rate of
   $0.25 per $100, or major fraction thereof, of a taxpayer’s net worth. Tenn. Code Ann. §§ 67-42105(a) and 67-4-2106(a) (2007). Persons subject to the franchise and excise taxes include, but
   are not limited to, corporations, business trusts and limited liability companies. Tenn. Code Ann.
   § 67-4-2004(30) (2007).
   1.

The Business Trust

The Business Trust is treated as a separate entity for Tennessee franchise and excise tax
purposes.
Tenn. Code Ann. §§ 67-4-2007(d) (2007) and 67-4-2106(c) (2007) provide that, for purposes of
Tennessee franchise and excise taxation, a business entity shall be classified as a corporation,
partnership, or other type of business entity, consistent with the way the entity is classified for
federal income tax purposes. Tenn. Code Ann. §§ 67-4-2007(d) and 67-4-2106(c) further
provide, however, that “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 franchise and excise tax purposes. Thus, to be disregarded for Tennessee franchise
and excise tax purposes, an entity must be (1) a single member limited liability company; (2)
disregarded for federal income tax purposes; and (3) wholly owned by a corporation.
The Business Trust is a business trust, not a single member limited liability company. As a
result, the Business Trust will not be treated as a disregarded entity for Tennessee franchise and
excise tax purposes under Tenn. Code Ann. §§ 67-4-2007(d) and 67-4-2106(c), despite its
classification as a disregarded entity for federal tax purposes. Rather, the Business Trust will be
treated as a separate entity for Tennessee franchise and excise tax purposes, and must file its
Tennessee franchise and excise tax return on a separate entity basis.1

2. The [TENNESSEE LLCs]
   The [TENNESSEE LLCs] are treated as separate entities for purposes of Tennessee franchise
   and excise taxation.
   As noted above, Tenn. Code Ann. §§ 67-4-2007(d) and 67-4-2106(c) provide that, for purposes
   of Tennessee franchise and excise taxation, a business entity shall be classified as a corporation,
   1

See Tenn. Code Ann. §§ 67-4-2007(e)(1) (2007) and 67-4-2106(c) (2007). With certain exceptions, each taxpayer
shall be considered a separate and single business entity, and shall file its Tennessee franchise and excise tax return
“on a separate entity basis reflecting only its own business activities even though it may have filed a consolidated
federal income tax return with other members” of its group.

3

partnership, or other type of business entity, consistent with the way the entity is classified for
federal income tax purposes. Tenn. Code Ann. §§ 67-4-2007(d) and 67-4-2106(c) further provide
that “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
franchise and excise tax purposes. Thus, to be disregarded for Tennessee franchise and excise tax
purposes, an entity must be (1) a single member limited liability company; (2) disregarded for
federal income tax purposes; and (3) wholly owned by a corporation.
The [TENNESSEE LLCs] are single member limited liability companies that are disregarded for
federal income tax purposes. However, the [TENNESSEE LLCs] are owned by a business trust,
not by a corporation. Because they do not satisfy the third requirement of Tenn. Code Ann. §§
67-4-2007(d) and 67-4-2106(c), the [TENNESSEE LLCs] are not disregarded for Tennessee
franchise and excise tax purposes even though they are classified as disregarded entities for
federal tax purposes. Rather, the [TENNESSEE LLCs] are treated as separate entities for
Tennessee franchise and excise tax purposes, and each must file its respective Tennessee
franchise and excise tax return on a separate entity basis.
Conclusion
The Business Trust and the [TENNESSEE LLCs] will each be treated as a separate entity for
Tennessee franchise and excise tax purposes.

Kristin Husat
Senior Tax Counsel

APPROVED:

Reagan Farr
Commissioner of Revenue

DATE:

2/22/08

4