A financial institution files a combined Tennessee franchise and excise return with its unitary affiliates, and some of those affiliates are tax-exempt securitization trusts. Does it still include the exempt trusts in the group, and do their income, net worth, and receipts count?

Plain-English summary

Tennessee's franchise & excise (F&E) taxes normally treat each company as a "separate and single business entity" that files its own return. Financial institutions are an exception: a financial institution and its unitary financial-institution affiliates must file a combined return and pay tax on the group's combined net earnings (excise) and combined net worth (franchise); they can also elect to compute net worth on a consolidated basis.

Here the taxpayer is a savings association that qualifies as a "financial institution" (§ 67-4-2004(17)) and files combined with its unitary affiliates. Some of those affiliates are asset-backed securitization trusts whose only business is securitizing debt — and they are exempt from both excise tax (§ 67-4-2008(a)(10)) and, by extension, franchise tax (§ 67-4-2105(a)). The taxpayer asked: do we still put the exempt trusts in the group, and if so, do their numbers count?

1. Excise tax — include them as members, but exclude their earnings and receipts. Because the trusts are unitary financial institutions, the taxpayer should include them in its financial-institution affiliated group (the Department stressed that being a group member and being exempt are "not mutually exclusive"). Practically, the trusts get listed on FAE 174 Schedule SF (to show the full corporate structure), but:

• their net earnings are excluded from the group's net earnings (they don't hit Schedule J), and
• their receipts are excluded from both the numerator and the denominator of the group's apportionment formula (§ 67-4-2013(b)).

2. Franchise tax (consolidated net worth election) — same approach. The taxpayer should likewise include the exempt trusts in the affiliated group for the consolidated net worth election (§ 67-4-2103(d)), but:

• their assets and liabilities are excluded from the consolidated net worth calculation (they don't hit Schedule F2), and
• their receipts are excluded from both the numerator and denominator of the apportionment formula (§ 67-4-2118),

because the trusts are exempt from franchise tax under § 67-4-2105(a).

The throughline: an exempt unitary affiliate is still a member of the combined/affiliated group — you list it for a complete picture — but you zero out its contribution. Its net earnings, its net worth (assets and liabilities), and its receipts all drop out of the group's tax base and apportionment factors. Membership and exemption coexist.

What this means for you

Financial-institution groups filing combined Tennessee F&E returns

If your unitary group includes a member that is exempt from F&E tax (for example, a securitization trust exempt under § 67-4-2008(a)(10)), don't simply drop it from the return. The Department's position is that the exempt member is still part of the unitary group and should be listed (FAE 174 Schedule SF), even though its financial information isn't used. Listing it gives the Department a complete view of the corporate structure without changing anyone's tax.

"Member of the group" is not the same as "taxed"

The key insight is that inclusion in the group and exemption from tax are independent. You report the exempt member as a member, but you exclude its net earnings, its net worth (assets/liabilities), and its receipts from the group's combined base and from both sides of the apportionment fraction. Pulling receipts out of both the numerator and the denominator keeps the exempt entity from distorting the group's apportionment percentage.

The mechanics (FAE 174 schedules)

For this taxpayer the Department mapped it onto the return: exempt trusts are listed on Schedule SF, but their net earnings stay off Schedule J (excise), their assets/liabilities stay off Schedule F2 (consolidated net worth), and their receipts are excluded from the apportionment schedules (Schedule S-E / SC). Treat the exempt member as present-but-zeroed.

Accountants and tax professionals

The analysis: financial institutions file combined and pay on apportioned combined net earnings/net worth of the unitary group (§§ 67-4-2006(a)(3), -2007(e)(2)(A), -2106(b)), overriding the default separate-entity rule (§§ 67-4-2007(e)(1), -2106(c)). A unitary member exempt under § 67-4-2008(a)(10) (and thus § 67-4-2105(a)) is included in the group but its net earnings are excluded from the base, its receipts excluded from the excise apportionment factor (§ 67-4-2013(b)), and — under the consolidated net worth election (§ 67-4-2103(d)) — its assets/liabilities excluded from net worth and its receipts excluded from the franchise apportionment factor (§ 67-4-2118). Group membership and exemption are not mutually exclusive. (Note: the ruling assumes, and does not decide, that the taxpayer and the trusts are financial institutions.)

Common questions

Q: One of our unitary affiliates is exempt from F&E tax. Do we leave it off the combined return?
A: No. The Department's view is that an exempt unitary financial institution is still a group member and should be listed (FAE 174 Schedule SF). You exclude its earnings, net worth, and receipts — but you don't drop it from the group.

Q: Why include an exempt entity at all?
A: Because it's still part of the unitary group, and listing it gives the Department a complete picture of the corporate structure. The Department was explicit that being a member and being exempt are "not mutually exclusive," and listing the entity doesn't change anyone's tax.

Q: Do the exempt trust's receipts go into the apportionment formula?
A: No. The exempt member's receipts are excluded from both the numerator and the denominator of the group's apportionment formula (§ 67-4-2013(b) for excise; § 67-4-2118 for franchise), so they don't skew the group's apportionment percentage.

Q: What about the franchise consolidated net worth election?
A: Same approach. Include the exempt member in the affiliated group for the election (§ 67-4-2103(d)), but exclude its assets and liabilities from the consolidated net worth and its receipts from the apportionment factor, because it's exempt from franchise tax (§ 67-4-2105(a)).

Q: Can I rely on this letter ruling?
A: No. A Tennessee letter ruling is binding on the Department only as to the specific taxpayer and facts it was issued to, and it can be revoked or modified. It also assumes the entities are financial institutions and does not decide that question. Confirm your own facts with a tax professional.

Citations and references

Tennessee statutes (Tenn. Code Ann.):

• § 67-4-2008(a)(10) (excise-tax exemption the securitization trusts qualify for); § 67-4-2105(a) (an entity exempt under § 67-4-2008 is also exempt from franchise tax)
• § 67-4-2006(a)(3) (financial institutions file on a combined basis); § 67-4-2007(e)(2)(A), § 67-4-2106(b) (combined return on the apportioned combined net earnings / net worth of the entire unitary group)
• § 67-4-2004(17) ("financial institution"); § 67-4-2004(52) ("unitary business" / "unitary group"); § 67-4-2004(38) (persons subject — business trusts, banks, savings associations); § 67-4-2004(18) ("financial institution affiliated group")
• § 67-4-2007(e)(1), § 67-4-2106(c) (default separate-entity filing); § 67-4-2007(a) (6.5% excise on net earnings); § 67-4-2106(a) (franchise tax $0.25 per $100 of net worth)
• § 67-4-2103(d) (consolidated net worth election); § 67-4-2103(g)–(i) (registration, five-year minimum, late election); § 67-4-2114(c)(1) (combined net worth); § 67-4-2004(2)(A)–(B) (affiliated-group definition for the election)
• § 67-4-2013(b) (exclude an exempt member's receipts from the excise apportionment formula); § 67-4-2118 (franchise apportionment formula)

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/17-06fe.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 17-06
Letter rulings are binding on the Department only with respect to the individual taxpayer
being addressed in the ruling. This ruling is based on the particular facts and circumstances
presented, and is an interpretation of the law at a specific point in time. The law may have
changed since this ruling was issued, possibly rendering it obsolete. The presentation of this
ruling in a redacted form is provided solely for informational purposes, and is not intended as
a statement of Departmental policy. Taxpayers should consult with a tax professional before
relying on any aspect of this ruling.
SUBJECT
The application of the Tennessee franchise and excise taxes to a unitary group of financial
institutions that includes exempt entities.
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 the taxpayer’s
detriment.
FACTS

[TAXPAYER] (the “Taxpayer”) is a savings association that has represented that it meets the definition
of a financial institution in TENN. CODE ANN. § 67-4-2004(17) (Supp. 2016) for Tennessee franchise and
excise tax purposes. As such, pursuant to TENN. CODE ANN. § 67-4-2006(a)(3) (Supp. 2016), the
Taxpayer files on a combined basis with its unitary, financial institution affiliates. The Taxpayer’s

1

affiliated group has elected to calculate and report taxable net worth for franchise tax purposes on a
consolidated basis pursuant to TENN. CODE ANN. 67-4-2103(d) (2013).
The Taxpayer has represented that among the Taxpayer’s unitary financial institution affiliates are
[REDACTED—TRUSTS] (the “Trusts”).1
The Trusts are [REDACTED]. The owner trustee of the Trusts is [REDACTED], which is commercially
domiciled in [REDACTED—STATE]. The sole business purpose of the Trusts is the asset-backed
securitization of debt obligations. Accordingly, for purposes of this ruling, it is assumed that the
Trusts are exempt under TENN. CODE ANN. § 67-4-2008(a)(10) (Supp. 2016).2
RULINGS
1.

Should the Taxpayer include the Trusts in its financial institution affiliated group for
Tennessee excise tax purposes, even though the Trusts are exempt from the Tennessee
excise tax? If so, how should the Taxpayer report the Trusts’ net earnings?
Ruling: Although the Trusts are exempt from Tennessee excise tax pursuant to TENN. CODE
ANN. § 67-4-2008(a)(10), the Taxpayer should include the Trusts in its financial institution
affiliated group for Tennessee excise tax purposes, as the Taxpayer has represented that the
Trusts are financial institutions that are unitary with the Taxpayer. The Trusts’ net earnings,
however, should be excluded from the net earnings of the financial institution affiliated
group, and the receipts of the Trusts should be excluded from both the numerator and the
denominator of the group’s apportionment formula.

2.

Should the Taxpayer include the Trusts in the financial institution affiliated group for
purposes of its consolidated net worth election, even though the Trusts are exempt from the
Tennessee franchise tax? If so, how should the Taxpayer report the Trusts’ net worth for the
purpose of calculating consolidated net worth pursuant to TENN. CODE ANN. 67-4-2103(d)?
Ruling: Although the Trusts are exempt from Tennessee franchise tax, they are included in
the financial institution affiliated group for purposes of the consolidated net worth election.
However, the Trusts’ assets and liabilities should be excluded from the consolidated net
worth calculation, and the Trusts’ receipts should be excluded from both the numerator and
the denominator of the financial institution affiliated group’s apportionment formula
because the Trusts are exempt from the Tennessee franchise tax under TENN. CODE ANN.
§ 67-4-2105(a).
ANALYSIS

1

This ruling does not address whether the Taxpayer and the Trusts are financial institutions for franchise and excise tax
purposes, and it is inapplicable in the event that the Taxpayer or its affiliates do not meet the definition of a financial
institution.

2

An entity that qualifies for an exemption under TENN. CODE ANN. § 67-4-2008 is also exempt from the Tennessee franchise
tax pursuant to TENN. CODE ANN. § 67-4-2105(a) (Supp. 2016).

2

Tennessee imposes an excise tax at the rate of 6.5% on the net earnings of all persons doing
business in Tennessee.3 Tennessee also imposes a franchise tax at the rate of $0.25 per $100, or
major fraction thereof, on the net worth of a person doing business in Tennessee.4 Persons subject
to the Tennessee franchise and excise taxes include, but are not limited to, business trusts, statechartered or national banks, and state-chartered or federally chartered savings and loan
associations.5 With certain limited exceptions, each taxpayer is considered a “separate and single
business entity” for Tennessee franchise and excise tax purposes and must file its Tennessee
franchise and excise tax return on a separate entity basis.6 One such exception is unitary groups of
financial institutions.7 Financial institutions must file a combined return for franchise and excise tax
purposes and pay tax based on the combined net worth8 and apportioned combined net earnings of
the entire unitary group.9 A financial institution affiliated group can also elect to calculate net worth
on a consolidated basis.10
I.

Excise Tax Affiliated Group

Although the Trusts qualify for the exemption from excise tax set forth in TENN. CODE ANN. § 672008(a)(10), the Taxpayer should include the Trusts in its financial institution affiliated group for
Tennessee excise tax purposes, as the Taxpayer has represented that the Trusts are financial
institutions and members of the unitary group under TENN. CODE ANN. § 67-4-2007(e)(2)(A). The
Trusts’ net earnings, however, should be excluded from the net earnings of the financial institution
affiliated group, and the receipts of the Trusts should be excluded from both the numerator and the
denominator of the group’s apportionment formula.
"Financial institutions subject to tax in this state, that are members of a unitary group,11 shall file a
combined return and pay tax based on the apportioned combined net earnings of the entire unitary
group."12
3

TENN. CODE ANN. § 67-4-2007(a) (Supp. 2016).

4

TENN. CODE ANN. §§ 67-4-2105(a), -2106(a) (2013).

5

TENN. CODE ANN. § 67-4-2004(38).

6

TENN. CODE ANN. §§ 67-4-2007(e)(1), -2106(c).

7

TENN. CODE ANN. §§ 67-4-2006(a)(3). A "financial institution" is defined for franchise and excise tax purposes as "a holding
company, any regulated financial corporation, a subsidiary of a holding company or a regulated financial corporation, an
investment entity that is indirectly more than fifty percent (50%) owned by a holding company or a regulated financial
corporation, or any other person that is carrying on the business of a financial institution." TENN. CODE ANN. § 67-4-2004(17)
8

TENN. CODE ANN. § 67-4-2114(c)(1) (2013).

9

TENN. CODE ANN. § 67-4-2007(e)(2)(A); TENN. CODE ANN. § 67-4-2106(b).

10

TENN. CODE ANN. § 67-4-2103(d) (2013).

11

The terms "unitary business" or "unitary group" are defined to mean "business activities or operations of financial
institutions that are of mutual benefit, dependent upon, or contributory to one another, individually or as a group, in
transacting the business of a financial institution." The unitary group "includes those entities that are engaged in a unitary
business transacted wholly in, or in and out of the state of Tennessee, even if some of the entities would not be subject to tax
in this state, if considered apart from their unitary group." TENN. CODE ANN. § 67-4-2004(52).

3

Because the Taxpayer has represented that the Trusts are financial institutions and engage in
activities that are of mutual benefit, dependent upon, or contributory to its affiliated entities, the
Trusts should be included on the Taxpayer’s combined FAE 174, Franchise and Excise Financial
Institution and Captive Real Estate Investment Trust Tax Return (the “FAE 174”) by listing each Trust
on Schedule SF.13 The Trusts, however, are exempt from the excise tax under TENN. CODE ANN. § 67-42008(a)(10). Tennessee excise tax law does not require such entities to either be included in the
combined group or utilize the exemption. The two are not mutually exclusive. Accordingly, the
Trusts are part of the financial institution’s unitary group and included in the Taxpayer’s combined
FAE 174, but their net earnings should not be included in determining the unitary group’s excise tax
liability on FAE 174 Schedule J because the entities are exempt from Tennessee excise tax under
TENN. CODE ANN. § 67-4-2008(a)(10). Moreover, the Trusts’ receipts should be excluded from both the
numerator and the denominator of the combined group’s apportionment formula on FAE 174
Schedule S-E pursuant to TENN. CODE ANN. § 67-4-2013(b).
II.

Consolidated Net Worth Election

Because the Taxpayer has represented that the Trusts are financial institutions and engage in
activities that are of mutual benefit, dependent upon, or contributory to its affiliated entities, the
Taxpayer should include the Trusts in the financial institutions affiliated group for purposes of the
consolidated net worth election; however, the Trusts’ net worth should not be included in the
consolidated net worth calculation because the Trusts are exempt from the Tennessee franchise tax
under TENN. CODE ANN. § 67-4-2105(a).
For tax years beginning on or after January 1, 2004, TENN. CODE ANN. § 67-4-2103(d) (2013) allows a
taxpayer that is a member of an affiliated group to elect to compute its net worth for Tennessee
franchise tax purposes on a consolidated basis. Each affiliated group member computing its net
worth on a consolidated basis must file a separate Tennessee franchise and excise tax return.14
To compute net worth on a consolidated basis, all members of an affiliated group must file a group
consolidated net worth registration form on or before the due date of the tax return for the period
for which the election is to take effect.15 If a member enters or leaves the group at any time during
the tax year, the group must file an amended group registration form on or before the due date of
the return for the period in which the event takes place.16

12

TENN. CODE ANN. § 67-4-2007(e)(2)(A).

13

Although the Trusts should be listed on Schedule SF, it is not necessary to include their financial information. Listing the
Trusts on Schedule SF allows the Taxpayer to provide the Department with a complete picture of the Taxpayer’s corporate
structure. Listing the Trusts does not affect the tax consequences of any entities subject to Tennessee franchise and excise
tax.

14

Consolidated net worth for financial institutions is reported on Schedule F2 of FAE 174.

15

TENN. CODE ANN. § 67-4-2103(g) (2013). The consolidated net worth registration form is available on the Department’s
website at http://tn.gov/assets/entities/revenue/attachments/f1308301.pdf.
16

Id.

4

Once made, the consolidated net worth election remains in effect for a minimum of five years.17
After the initial five years, the consolidated net worth computation election will continue unless the
group revokes its election by filing a group revocation election form.18
Following the consolidated net worth election, as a financial institution affiliated group in TENN. CODE
ANN. § 67-4-2004(18), the group must file a combined return and compute its net worth on a
consolidated basis. Each member must close its taxable year on the same date as all other members
of the group.19
An “affiliated group” is defined as (1) “[a] taxpayer that, standing alone, is subject to the Tennessee
franchise tax”; (2) “[a]ll other domestic persons in which the taxpayer, directly or indirectly, has more
than 50% ownership interest”; (3) “[a]ll other domestic persons that, directly or indirectly, have more
than 50% ownership interest in the taxpayer”; and (4) “[a]ll other domestic persons in 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.”20 For this purpose, a non-corporate
taxable entity is more than 50% owned if upon liquidation more than 50% of the assets of the noncorporate taxable entity, directly or indirectly, accrue to a member or members of the affiliated
group.21
Because the Taxpayer has represented that the Trusts are part of its affiliated group as defined in
TENN. CODE ANN. § 67-4-2004(2)(A), the group made a consolidated net worth election. The Trusts
should be listed on FAE 174 Schedule SF because they are part of the affiliated group. Furthermore,
the Taxpayer states that the Trusts are exempt from the franchise tax under TENN. CODE ANN. § 67-42105(a). Tennessee franchise tax law does not require such entities to either be included in the
affiliated group or utilize the exemption. The two are not mutually exclusive. Accordingly, the Trusts’
assets and liabilities should not be included when reporting the consolidated net worth on FAE 174
Schedule F2 because the Trusts are exempt from the franchise tax under TENN. CODE ANN. § 67-42105(a). Moreover, the Trusts’ receipts should be excluded from both the numerator and the
denominator of the combined group’s apportionment formula on FAE 174 Schedule SC pursuant to
TENN. CODE ANN. § 67-4-2118.

Brent C. Mayo
Assistant General Counsel

17

TENN. CODE ANN. § 67-4-2103(h).

18

Id. TENN. CODE ANN. § 67-4-2103(i) authorizes the Commissioner of Revenue to accept a late election or a late revocation of
an election, or to permit any early revocation of an election to compute net worth on a consolidated basis if the
Commissioner determines there is reasonable and good cause for such action.
19

TENN. CODE ANN. § 67-4-2103(d).

20

TENN. CODE ANN. § 67-4-2004(2)(A).

21

TENN. CODE ANN. § 67-4-2004(2)(B).

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APPROVED:

David Gerregano
Commissioner of Revenue

DATE:

4/19/17

6