A governmental pension trust that is exempt from federal income tax owns a single-member LLC that operates in Tennessee. Is that LLC disregarded for Tennessee franchise and excise tax, and is the exempt trust taxed on the LLC's earnings?

Plain-English summary

A governmental pension trust — a tax-qualified trust under I.R.C. § 401(a) that is exempt from federal income tax under I.R.C. § 501(a) — set up a single-member LLC (SMLLC) to make investments in Tennessee. The SMLLC is disregarded for federal income tax (treated as a division of the pension trust). The trust asked whether the SMLLC is also disregarded for Tennessee franchise & excise (F&E) tax.

The answer: yes — but with an important catch. Tennessee's default rule is that every entity files F&E separately. There's a narrow exception for SMLLCs, and it has a specific requirement most people miss. To be disregarded for Tennessee F&E, an entity must be all three of:

1. a single-member LLC,
2. disregarded for federal income tax, and
3. wholly owned by a corporation.

That third element is the key. Tennessee will disregard an SMLLC only when its single member is a corporation. So the question became: is a § 501(a)-exempt pension trust a "corporation"?

Yes — a § 501(a)-exempt entity is treated as a corporation. Under the federal classification rules, an entity exempt from federal income tax under § 501(a) is deemed to have elected to be classified as an "association" (Treas. Reg. § 301.7701-3(c)(1)(v)), and an "association" is a corporation for federal tax purposes (I.R.C. § 7701(a)(3); Treas. Reg. § 301.7701-2(b)(2)). Tennessee follows the federal classification (§ 67-4-2007(d); § 48-249-1003). So the pension trust is a corporation for federal — and therefore Tennessee — tax purposes, the SMLLC is an LLC wholly owned by a corporation, and the SMLLC is disregarded for Tennessee F&E.

Disregarded doesn't mean tax-free. Because the SMLLC is disregarded, its earnings are treated as the pension trust's own net earnings. The trust is a not-for-profit, so those earnings are subject to Tennessee excise tax only to the extent they are unrelated business taxable income (UBTI, I.R.C. § 512) or otherwise taxable under Subchapter A of the Internal Revenue Code, or are attributable to activities unrelated to and outside the scope of the trust's exempt purpose (§ 67-4-2007(a)). Likewise, the trust is subject to Tennessee franchise tax on its Tennessee net worth (or real/tangible personal property) attributable to those same unrelated activities (§ 67-4-2105(b)).

The throughline: Tennessee disregards an SMLLC only if its single member is a corporation — and a § 501(a)-exempt organization qualifies as a corporation — but the exempt owner then steps into the SMLLC's shoes and is taxed on whatever portion is unrelated-business income.

What this means for you

Tax-exempt organizations investing through an SMLLC in Tennessee

Pension trusts, charities, and foundations often hold investments through a single-member LLC. The good news: if your exempt organization is the sole member, the SMLLC is generally disregarded for Tennessee F&E (because a § 501(a)-exempt organization counts as a corporation). The catch: disregard means the SMLLC's income flows up to you, and you owe Tennessee excise tax on any unrelated business taxable income and franchise tax on net worth tied to unrelated activities. Investment income that's within your exempt purpose generally stays exempt; UBTI does not.

The "single member must be a corporation" rule trips people up

Tennessee's SMLLC disregard is narrower than the federal rule. Federally, any SMLLC is disregarded regardless of who owns it. In Tennessee, an SMLLC is disregarded only if its single member is a corporation (§ 67-4-2007(d), -2106(c)). If your SMLLC's sole member is an individual, a partnership, or a non-corporate entity, the SMLLC is not disregarded for F&E — it files as a separate entity. Check the owner's federal classification first.

What counts as a "corporation" for this test

The Department treats "corporation" broadly: a state-law corporation; a non-corporate entity whose default federal classification is corporation; a foreign entity that defaults to corporation; an entity that elects corporate status on Form 8832; and — as here — an entity exempt under § 501(a) (deemed to elect association/corporation classification). Entities wholly owned by a State or political subdivision are also treated as corporations (Treas. Reg. § 301.7701-2(b)(6)).

Accountants and tax professionals

The analysis: Tennessee classifies entities for F&E consistent with federal classification and disregards an SMLLC only where its single member is a corporation (§§ 67-4-2007(d), -2106(c); § 48-249-1003). A § 501(a)-exempt entity is deemed to elect association classification (Treas. Reg. § 301.7701-3(c)(1)(v)), and an association is a corporation (I.R.C. § 7701(a)(3); Treas. Reg. § 301.7701-2(b)(2)), so the exempt owner satisfies the corporation requirement. The disregarded SMLLC's earnings become the exempt owner's net earnings, reachable by Tennessee excise tax to the extent of UBTI (I.R.C. § 512) or activities outside the exempt purpose (§ 67-4-2007(a)) and by Tennessee franchise tax on net worth attributable to such activities (§ 67-4-2105(b)). Compare the disregarded-entity reasoning in LR 18-03 and RR 19-02 (which turn on whether the federal classification is partnership vs. disregarded).

Common questions

Q: My tax-exempt organization owns a single-member LLC in Tennessee. Is it disregarded for F&E tax?
A: Generally yes. A § 501(a)-exempt organization is treated as a corporation, so its disregarded SMLLC meets Tennessee's "single member is a corporation" requirement and is disregarded for F&E.

Q: Does "disregarded" mean my organization owes no Tennessee tax on the LLC?
A: No. The SMLLC's earnings become your organization's net earnings, and you owe Tennessee excise tax to the extent they are unrelated business taxable income (I.R.C. § 512) or otherwise outside your exempt purpose, plus franchise tax on net worth tied to those unrelated activities.

Q: What if my SMLLC's single member is an individual or a partnership, not a corporation?
A: Then the SMLLC is not disregarded for Tennessee F&E. Tennessee's disregard exception applies only when the single member is a corporation; otherwise the SMLLC files as a separate entity.

Q: Why is a tax-exempt trust treated as a "corporation"?
A: Under the federal classification rules, an entity exempt under § 501(a) is deemed to have elected to be classified as an association, which is a corporation for federal tax purposes — and Tennessee follows the federal classification.

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. Confirm your own facts with a tax professional.

Citations and references

Tennessee statutes (Tenn. Code Ann.):

• § 67-4-2007(d), § 67-4-2106(c) (F&E classification follows federal; entities file separately EXCEPT a single-member LLC whose single member is a corporation, which is disregarded)
• § 67-4-2007(a) (6.5% excise tax on net earnings; not-for-profit taxed on UBTI / activities outside its exempt purpose); § 67-4-2105(a), § 67-4-2106(a) (franchise tax $0.25 per $100 of net worth)
• § 67-4-2105(b) (not-for-profit subject to franchise tax on Tennessee net worth/property attributable to UBTI or activities outside its exempt purpose)
• § 67-4-2004(38) (persons subject to F&E include LLCs and entities classified as corporations federally)
• § 48-249-1003 (a Tennessee LLC is treated as a partnership or an association taxable as a corporation per its federal classification)

Federal authorities:

• I.R.C. § 501(a) (federal income-tax exemption); § 401(a) (qualified trust); § 512 (unrelated business taxable income); § 7701(a)(3) (corporation includes associations)
• Treas. Reg. § 301.7701-2(a) (disregarded entity treated as a division of its owner); § 301.7701-2(b)(2) (corporation includes associations); § 301.7701-2(b)(6) (corporation includes entities wholly owned by a State or political subdivision); § 301.7701-2(b)(8) (foreign corporations); § 301.7701-3(c)(1)(v) (a § 501(a)-exempt entity is deemed to elect association classification)
• Tenn. Dep't of Revenue Notice 14-12 (June 2014) (entity classification / Form 8832 election)

Related Tennessee rulings: Ltr. Rul. 18-03; Rev. Rul. 19-02 (disregarded-entity / federal-classification analysis for F&E).

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/17-07fe.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 17-07
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 limited liability company that is
disregarded for federal income tax purposes to an entity described in Section 501(a) of the Internal
Revenue Code of 1986, as amended.
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

[PENSION TRUST] (the “Pension Trust”) is a governmental pension trust that is a qualified trust within
the meaning of I.R.C. § 401(a) and exempt from federal income taxes pursuant to I.R.C. § 501(a). The
Pension Trust is the sole member of [SMLLC] (the “SMLLC”). The SMLLC is disregarded for federal
income tax purposes and is therefore treated as a division of the Pension Trust for federal income
tax purposes under Treas. Reg. § 301.7701-2(a).

1

The Pension Trust formed the SMLLC to [REDACTED] in Tennessee for investment purposes. The
SMLLC's sole business activity is [REDACTED]. All income earned by the SMLLC accrues to the
Pension Trust for reinvestment or payment of governmental pension obligations. The SMLLC is the
sole business entity owned by the Pension Trust operating in the State of Tennessee.
RULING
Is the SMLLC a disregarded entity for Tennessee franchise and excise tax purposes?
Ruling: Yes. The SMLLC is a limited liability company that is wholly-owned by an entity
classified as a corporation for federal tax purposes.
ANALYSIS
Tennessee 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.1 Tennessee also imposes an excise tax at the
rate of 6.5% on the net earnings of all persons doing business within Tennessee.2 Persons subject to
the Tennessee franchise and excise taxes include, but are not limited to, limited liability companies
and business entities classified as corporations for federal income tax purposes.3 With certain
limited exceptions, each taxpayer is considered a “separate and single business entity” and must file
its Tennessee franchise and excise tax return on a separate entity basis.4
For Tennessee franchise and excise tax purposes, a business entity is classified as a corporation,
partnership, or other type of business entity, consistent with the way the entity is classified for
federal income tax purposes.5 However, “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.6 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.
For purposes of applying TENN. CODE ANN. §§ 67-4-2007(d), -2106(c), the Department has interpreted
the term “corporation” to include an entity formed as a corporation under state law; a noncorporate entity whose default classification for federal tax purposes is to be treated as a
corporation; an entity formed under another country’s laws whose default classification for federal

1

TENN. CODE ANN. §§ 67-4-2105(a) and -2106(a) (2013 & Supp. 2016).

2

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

3

TENN. CODE ANN. §§ 67-4-2004(38), -2007(d) (Supp. 2016).

4

TENN. CODE ANN. §§ 67-4-2106(c) and -2007(d).

5

Id.

6

Id.

2

tax purposes is to be treated as a corporation;7 and an entity that makes an election on federal Form
8832 (Entity Classification Election) to be classified as a corporation for federal tax purposes.8
With respect to limited liability companies, TENN. CODE ANN. § 48-249-1003 (2013) provides that, “[f]or
purposes of all state and local Tennessee taxes, a domestic or foreign limited liability company shall
be treated as a partnership or an association taxable as a corporation, as such classification is
determined for federal income tax purposes.”9 Thus, for Tennessee franchise and excise tax
purposes, a limited liability company will be treated as a corporation, partnership, or disregarded
entity in the same manner as it is for federal purposes, but it will file as a separate entity unless it
comes under the exception found in TENN. CODE ANN. §§ 67-4-2007(d), -2106(c).
Here, the SMLLC is a single member limited liability company and is treated as disregarded for
federal income tax purposes. It is wholly-owned by the Pension Trust, an entity that is exempt from
federal income tax under I.R.C. § 501(a). An entity that is exempt from federal income tax under
I.R.C. § 501(a) is treated as having made an election to be classified as a corporation for federal
income tax purposes.10 Therefore, the Pension Trust is classified as a corporation for federal income
tax purposes and, consequently, Tennessee franchise and excise tax purposes. Because the SMLLC
is a limited liability company wholly-owned by a corporation and disregarded for federal income tax
purposes, it is disregarded for Tennessee franchise and excise tax purposes.
Because the SMLLC is disregarded for Tennessee franchise and excise tax purposes, its earnings are
considered to be net earnings of the Pension Trust, a not-for-profit entity. However, these net
earnings may be subject to the Tennessee excise tax to the extent they constitute unrelated
business taxable income, as defined in I.R.C. § 512, or are otherwise subject to income taxes under
Subchapter A of the Internal Revenue Code.11 Additionally, as a not-for-profit entity, the Pension
Trust is subject to the Tennessee excise tax on all net earnings that are attributable to any activities
unrelated to and outside the scope of the activities that give it exempt status.12
Similarly, unless it qualifies for an applicable exemption, as a not-for-profit entity, the Pension Trust
is subject to the Tennessee franchise tax with respect to its Tennessee net worth, or real or tangible
7

See Treas. Reg. § 301.7701-2(b)(8) (West, Westlaw through May 4, 2017) (listing foreign entities that are classified federally as
corporations).
8

See Tenn. Dep’t of Rev., Notice 14-12 (June 2014), available at http://tn.gov/assets/entities/revenue/attachments/14-12fe.pdf.

9

This provision was enacted in 1994 as part of the Tennessee Limited Liability Company Act, see Tennessee Limited Liability
Company Act, ch. 868, §1, 1994 Tenn. Pub. Acts 654, 654-752 (originally codified at TENN. CODE ANN. § 48-211-101), codified as
amended at TENN. CODE ANN. § 48-249-1003, before the publication of the federal “check-the-box” regulations in late 1996. As
a result, the provision does not specifically reference “disregarded” entity option not available under the federal regulations.
10

Treas. Reg. § 301.7701-3(c)(1)(v) (West, Westlaw through May 4, 2017) (providing that entity exempt from federal income
taxation under I.R.C. § 501(a) is deemed to elect to be classified as an association for federal tax purposes); I.R.C. § 7701(a)(3)
(West, Westlaw through May 4, 2017) and Treas. Reg. § 301.7701-2(b)(2) (defining the term “corporation” to include
associations); cf. Treas. Reg. § 301.7701-2(b)(6) (defining the term “corporation” to include business entities wholly-owned by a
State or any political subdivision thereof).
11

TENN. CODE ANN. § 67-4-2007(a).

12

Id.

3

personal property owned or used, that is attributable to activities subject to income taxes under
I.R.C. § 512 or any other provision of Subchapter A of the Internal Revenue Code.13 Additionally, a
not-for-profit entity is subject to the franchise tax on all of its Tennessee net worth, or real or
tangible personal property owned or used, that is attributable to any activities that are unrelated to
and outside the scope of the activities that gave it exempt status.14
Consequently, if any of the aforementioned criteria are applicable to the Pension Trust through the
SMLLC’s operations, it will be subject to Tennessee excise and franchise taxes to the extent indicated
above.

Grant Marshall
Assistant General Counsel

David Gerregano
Commissioner of Revenue

5/30/17

13

TENN. CODE ANN. § 67-4-2105(b).

14

Id.

4