When a partnership makes an IRC § 754 election and pushes the basis step-up down to a Tennessee LLC, does it raise the LLC's Tennessee franchise tax and its excise tax?

Plain-English summary

A Tennessee manufacturer is organized as a single-member LLC (the "Taxpayer"). For federal tax it's a disregarded entity, but for Tennessee franchise and excise (F&E) tax it's a separate taxpayer that files on its own. Up the ownership chain (through several other SMLLCs) it's owned by a multi-member LLC taxed as a partnership. Only the Taxpayer has any Tennessee activity.

In a restructuring, some partners sold part of their interests to new buyers (the "Purchasers"), and the partnership made an IRC § 754 election. That election stepped up the Purchasers' basis in the partnership's property to fair market value under IRC § 743(b) (most of the step-up was in intangibles). The partnership then wanted to "push down" that step-up onto the Taxpayer's own books under GAAP pushdown accounting. The Taxpayer asked how that affects its two Tennessee taxes. The answer differs for each:

Franchise tax — Yes, the step-up counts. Tennessee's franchise tax is based on net worth, defined by statute as total assets minus total liabilities computed under GAAP. GAAP (ASC 805-50) lets a subsidiary of an acquired company elect pushdown accounting after a change of control. If the Taxpayer makes that election, the stepped-up basis shows up on its balance sheet — so it must include the step-up when computing net worth, which raises its franchise tax.

Excise tax — No, the step-up is excluded. Tennessee's excise tax is 6.5% on net earnings. A § 743(b) basis adjustment from a § 754 election is personal to the transferee partners only — it adjusts the Purchasers' distributive shares (on Schedules K/K-1) but makes no change to the partnership's common "inside" basis in its property. Because Tennessee taxes partnership earnings at the partnership level using that common basis, the Taxpayer determines its net earnings without any addition or subtraction for the § 743(b) adjustment — so the extra depreciation and amortization from the step-up do not reduce its excise tax.

The takeaway is a clean split: the same § 754 step-up, pushed down via GAAP, increases the franchise-tax base (net worth follows GAAP) but is ignored for the excise-tax base (net earnings follow the partnership's common basis, which a § 743(b) adjustment never touches).

What this means for you

Partnerships and LLCs with Tennessee operations doing a § 754 step-up

If your partnership makes a § 754 election after a sale of interests and elects GAAP pushdown accounting at a Tennessee subsidiary, expect the stepped-up basis to increase that subsidiary's franchise-tax net worth. But don't expect the matching § 743(b) depreciation/amortization to lower its Tennessee excise tax — Tennessee excludes the § 743(b) adjustment from net earnings.

Why franchise and excise diverge

The two taxes use different starting points. Franchise tax = GAAP net worth, so whatever GAAP puts on the balance sheet (including a pushed-down step-up) flows in. Excise tax = net earnings at the partnership level using the common inside basis, and a § 743(b) adjustment is by design personal to the buying partners and never alters that common basis. Same transaction, opposite results.

Pushdown accounting is an election — and it has a Tennessee cost

Electing GAAP pushdown accounting at the Tennessee entity is what pulls the step-up onto its balance sheet and into franchise-tax net worth. That's worth modeling before electing, because the franchise-tax increase comes without an offsetting excise-tax benefit from the step-up.

Accountants and tax professionals

Franchise-tax net worth is defined by § 67-4-2106(b) (GAAP); separate-entity filing is § 67-4-2106(c). Excise tax is § 67-4-2007(a); partnership net earnings are § 67-4-2006(a)(4), with the excess-depreciation add-back at § 67-4-2006(b)(1)(H). The § 743(b) adjustment is personal to the transferee under IRC § 743(b) and Treas. Reg. § 1.743-1(j), with no change to common basis or the partnership's § 703 computation. Pushdown accounting follows ASC 805-50.

Common questions

Q: Will a § 754 step-up raise my Tennessee franchise tax?
A: If you elect GAAP pushdown accounting at the Tennessee entity, yes. Franchise tax is based on GAAP net worth, and the pushed-down step-up appears on the balance sheet, increasing net worth.

Q: Does the same step-up cut my Tennessee excise tax through extra depreciation?
A: No. The IRC § 743(b) adjustment from a § 754 election is personal to the buying partners and doesn't change the partnership's common basis, so Tennessee determines net earnings without it — the step-up's depreciation and amortization don't reduce excise tax.

Q: Why does Tennessee treat the two taxes differently?
A: Franchise tax starts from GAAP net worth (which reflects pushdown accounting); excise tax starts from partnership-level net earnings on the common inside basis (which a § 743(b) adjustment never touches).

Q: Can I rely on this ruling?
A: Not directly. A Tennessee letter ruling binds the Department only as to the taxpayer and exact facts it addressed and cannot be relied on by anyone else. Confirm your own structure with a tax professional.

Citations and references

Tennessee franchise tax (net worth):
- Tenn. Code Ann. § 67-4-2105(a), -2106(a) (franchise tax on net worth)
- Tenn. Code Ann. § 67-4-2106(b) ("net worth" = total assets minus total liabilities computed under GAAP)
- Tenn. Code Ann. § 67-4-2106(c) (each taxpayer is a separate single business entity; separate-entity filing)

Tennessee excise tax (net earnings):
- Tenn. Code Ann. § 67-4-2007(a) (6.5% excise tax on net earnings); § 67-4-2007(d), (e)(1) (classification follows federal; separate-entity filing)
- Tenn. Code Ann. § 67-4-2006(a)(4) (partnership net earnings = ordinary income/loss under the IRC); § 67-4-2006(b)(1)(H) (add back excess depreciation)
- Tenn. Code Ann. § 67-4-2004(38) ("person" subject to F&E includes limited liability companies)

Federal authorities and GAAP:
- IRC § 754 (election to adjust basis of partnership property); IRC § 743(b) (basis adjustment on transfer of a partnership interest)
- Treas. Reg. § 1.743-1(j) (the § 743(b) adjustment is personal to the transferee; no change to common basis or the § 703 computation)
- FASB ASC 805-50 (GAAP pushdown accounting — use of the acquirer's basis in the acquiree's separate financial statements)

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/21-06fe.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 21-06
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 effect for Tennessee franchise tax purposes of an IRC § 754 election and the subsequent decision
by the electing partnership to “push down” the new partners’ adjusted basis in partnership property
to an indirectly owned single member limited liability company.
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.

1

FACTS
[TAXPAYER] (the “Taxpayer”) is a single member limited liability company (“SMLLC”) that is treated as
a disregarded entity for federal tax purposes. Through a tiered ownership structure consisting of
other SMLLCs in the ownership chain, the Taxpayer is indirectly wholly owned by a multimember
limited liability company that is classified as a partnership for federal tax purposes, [PARTNERSHIP]
(the “Partnership”). The Partnership and the other SMLLCs have no contacts with Tennessee; the
Taxpayer is the only entity with activities in Tennessee.
The Taxpayer manufactures tangible personal property at its manufacturing facility in Tennessee. The
Taxpayer’s earnings are distributed through the ownership tiers and ultimately to the Partnership.
The Partnership then distributes those earnings to its partners. As noted above, the Partnership is
classified as a partnership for federal tax purposes, while the Taxpayer and the other SMLLCs are
disregarded as separate entities for federal tax purposes and are each treated as a division of the
Partnership. However, for Tennessee franchise and excise tax purposes, the Taxpayer and the other
SMLLCs are classified as separate entities.
Prior to a restructuring that occurred in [YEAR], the Partnership was owned by [NUMBER] members.
Pursuant to the [YEAR] restructuring, the members sold [PERCENT] of their interests in the Partnership
to [NUMBER] unrelated limited liability companies (the “Purchasers”). The Partnership then made an
election under IRC § 754, such that the Purchasers’ adjusted basis in the Partnership’s property was
stepped up to fair market value under IRC § 743(b).
The Partnership and the Taxpayer keep their books under generally accepted accounting principles
(“GAAP”). The Partnership and the Taxpayer file consolidated GAAP financial statements that reflect
the step-up in the Purchasers’ basis in the Partnership’s property. Most of the step-up is related to
intangible property, not real or tangible property. The Partnership desires to “push down” the
Purchasers’ step-up in basis in the Partnership’s property to the Taxpayer, as recorded on their books
and records and as reported on their consolidated GAAP financial statements.
RULINGS
1.

If the Partnership elects, for GAAP financial statement purposes, to “push down” the step-up
in the Purchasers’ basis in Partnership property to the Taxpayer, is the Taxpayer required to
calculate its net worth for Tennessee franchise tax purposes to reflect the step-up in the
Purchasers’ basis in its property?
Ruling: Yes. If pushdown accounting is elected and applied to the Taxpayer’s financial
statements, in accordance with GAAP, the Taxpayer must calculate its net worth for franchise
tax purposes by including the step-up in basis of its assets.

2.

If the step-up is “pushed-down” to the Taxpayer, does the Taxpayer include the IRC § 743(b)
tax basis adjustments and associated amortization and depreciation deductions in the
Taxpayer’s net earnings for excise tax purposes due to the IRC § 754 election made by the
Partnership?

2

Ruling: No. If the Partnership makes an IRC § 754 election that results in a step-up in basis of
the Taxpayer’s assets for federal income tax purposes, the Taxpayer will exclude the IRC
§ 743(b) tax basis adjustments and associated amortization and depreciation deductions in its
net earnings for Tennessee excise tax purposes.
ANALYSIS
Inclusion of Step-up in Basis When Calculating Net Worth
The Taxpayer must calculate its net worth for franchise tax purposes by including the step-up in basis
of its assets. 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 A “person” subject to the
Tennessee franchise tax includes, but is not limited to, entities such as limited liability companies. 2
With certain limited exceptions, each taxpayer is considered a “separate and single business entity”
for franchise tax purposes, and must file its Tennessee franchise tax return on a separate entity
basis. 3 Under TENN. CODE ANN. § 67-4-2106(b) (2013), for taxpayers filing on a separate entity basis, “net
worth” is defined as the difference between a taxpayer’s total assets less its total liabilities computed
in accordance with GAAP.
According to GAAP, “pushdown accounting” is defined as “use of the acquirer’s basis in the preparation
of the acquiree’s separate financial statements.” 4 An acquiree shall have the option to apply
pushdown accounting in its separate financial statements when an acquirer—an entity or individual—
obtains control of the acquiree. 5 The option to apply pushdown accounting may be elected each time
there is a change-in-control event in which an acquirer obtains control of the acquiree. 6 “Any
subsidiary of an acquiree also is eligible to make an election to apply pushdown accounting to its
separate financial statements . . . irrespective of whether the acquiree elects to apply pushdown
accounting.” 7
Here, the Partnership is the acquiree, the Purchasers are the acquirers, and the Taxpayer is a
subsidiary of the acquiree. The Purchasers’ acquisition of [PERCENT] of the Partnership is the changein-control event that allows for the Taxpayer to use pushdown accounting in its separate financial
statements. Accordingly, pushdown accounting allows for the Purchasers’ basis to be used in
preparation of the Taxpayer’s separate financial statements.

1

TENN. CODE ANN. §§ 67-4-2105(a) (Supp. 2020) and -2106(a) (2013).

2

TENN. CODE ANN. § 67-4-2004(38) (Supp. 2020).

3

TENN. CODE ANN. § 67-4-2106(C) (2013).

FASB
Accounting
Standards
Codification
(hereinafter
“ASC”)
https://asc.fasb.org/glossarysection&trid=2899271 (last visited April 16, 2021).

4

5

ASC 805-50-25-4.

6

ASC 805-50-25-6.

7

ASC 805-50-25-8.

at

ASC

805-50-20,

available

at

3

For Tennessee franchise tax purposes, the Taxpayer must file its return on a separate entity basis.
The Taxpayer maintains its separate entity books and records in accordance with GAAP. “Net worth”
is expressly defined as being computed in accordance with GAAP. 8 GAAP permits the use of pushdown accounting. 9 Therefore, if the Taxpayer elects to apply pushdown accounting, the step-up in
basis of its assets will be reflected in its balance sheet, and the Taxpayer must compute its net worth
by including the step-up in basis.
Inclusion of IRC § 743(b) Tax Basis Adjustments and Associated Amortization and Depreciation
Deductions in Net Earnings
For Tennessee excise tax purposes, the Taxpayer’s net earnings or net loss will be determined without
making any addition or subtraction relating to the IRC § 743(b) basis adjustment pursuant to an IRC
§ 754 election. Tennessee imposes an excise tax at the rate of 6.5% on the net earnings of all persons
doing business in Tennessee. 10 A “person" subject to the Tennessee excise tax includes, but is not
limited to, entities such as limited liability companies. 11 For purposes of the Tennessee excise tax,
business entities are classified consistent with the way the entity is classified for federal income tax
purposes. 12 However, entities that are disregarded for federal income tax purposes, with certain
limited exceptions, shall not be disregarded for Tennessee excise tax purposes. 13 With certain limited
exceptions, each taxpayer is considered a “separate and single business entity for excise tax purposes,
and must file its Tennessee excise tax return on a separate entity basis. 14
Pursuant to TENN. CODE ANN. § 67-4-2006(a)(4) (Supp. 2020), in the case of a taxpayer treated as a
partnership for federal tax purposes, or any other person required to file a federal partnership return
on a federal form 1065 or any variation of that form, including but not limited to, limited liability
companies, “net earnings” or “net loss” is defined as an amount equal to:
The amount of ordinary income or loss determined under the applicable provisions of
the Internal Revenue Code, including, but not limited to, guaranteed payments to
partners and capital gains, which additional items are not already included in ordinary
income or loss; . . .
Further, TENN. CODE ANN. § 67-4-2006(b)(1)(H) states:
There shall be added to a taxpayer’s net earnings or net losses: . . . any depreciation
that the taxpayer deducted in computing its federal taxable income in excess of that
which the taxpayer could have deducted in computing such income…”
8

See TENN. CODE ANN. § 67-4-2106(b) (2013).

9

See generally ASC 805.

10

TENN. CODE ANN. § 67-4-2007((a) (Supp. 2020).

11

TENN. CODE ANN. § 67-4-2004(38).

12

TENN. CODE ANN. § 67-4-2007(d).

13

Id.

14

TENN. CODE ANN. § 67-4-2007(e)(1).

4

Turning to the provisions of the Internal Revenue Code, under IRC § 754:
If a partnership files an election, in accordance with regulations prescribed by the
Secretary, the basis of partnership property shall be adjusted, in the case of a
distribution of property, in the manner provided in section 734 and, in the case of a
transfer of a partnership interest, in the manner provided in section 743.
IRC § 743(b) provides:
In the case of a transfer of an interest in a partnership by sale or exchange or upon
the death of a partner, a partnership with respect to which the election provided in
section 754 is in effect or which has a substantial built-in loss immediately after such
transfer shall—
1) increase the adjusted basis of the partnership property by the excess
of the basis to the transferee partner of his interest in the partnership
over his proportionate share of the adjusted basis of the partnership
property, or
2) decrease the adjusted basis of the partnership property by the excess
of the transferee partner’s proportionate share of the adjusted basis
of the partnership property over the basis of his interest in the
partnership.
Under regulations prescribed by the Secretary, such increase or decrease shall
constitute an adjustment to the basis of partnership property with respect to the
transferee partner only.
Relatedly, Treas. Reg. § 1.743-1(j)(1) states:
The basis adjustment constitutes an adjustment to the basis of partnership property
with respect to the transferee only. No adjustment is made to the common basis of
partnership property. Thus, for purposes of calculating income, deduction, gain, and
loss, the transferee will have a special basis for those partnership properties the bases
of which are adjusted under section 743(b) and this section. The adjustment to the
basis of partnership property under section 743(b) has no effect on the partnership’s
computation of any item under section 703.
Treas. Reg. § 1.743-1(j)(2) goes on to state:
The partnership then adjusts the transferee’s distributive share of the items of
partnership income, deduction, gain, or loss, in accordance with paragraphs (j)(3) and
(4) of this section, to reflect the effects of the transferee’s basis adjustment under
section 743(b). These adjustments to the transferee’s distributive shares must be
reflected on Schedules K and K-1 of the partnership’s return (Form 1065).

5

Regarding an additional deduction, Treas. Reg. § 1.743-1(j)(4)(i)(A) states:
The amount of any positive basis adjustment that is recovered by the transferee in
any year is added to the transferee’s distributive share of the partnership’s
depreciation or amortization deductions for the year. The basis adjustment is adjusted
under section 1016(a)(2) to reflect the recovery of the basis adjustment.
The IRS has advised that Section 743(b) adjustments are personal to the transferee and do not affect
common basis. 15 The IRS has further stated that IRC § 743(b) was enacted to ameliorate the tax
consequences to a transferee partner by giving a partnership the option to eliminate discrepancies
between a transferee partner’s inside basis 16 and outside basis 17 when the partnership’s inside basis
in its property is not equal to the fair market value of the property. 18 An IRC § 754 election equalizes
the new partner’s inside and outside basis pursuant to an IRC § 743(b) basis adjustment.
Here, the Partnership made an election under IRC § 754, such that the basis of the Purchasers’ assets 19
was stepped up to fair market value, under IRC § 743(b). According to the Treasury Regulations, this
basis adjustment constitutes an adjustment to the basis of partnership property with respect to the
transferee only. No adjustment is made to the common basis of partnership property. 20 For purposes
of the IRC § 754 election, the Purchasers are the transferees and the Taxpayer constitutes partnership
property.
For federal income tax purposes, the step-up in basis is attributable to the Purchasers rather than the
partnership property. In other words, nothing changes with respect to the Partnership’s “inside basis”
in the partnership property as a result of the IRC § 754 election, and the IRC § 743(b) basis adjustment
is only determinative of the Purchasers’ distributive share of the Partnership’s items of income,
deduction, gain, or loss. The Partnership adjusts the Purchasers’ distributive share of the items of
partnership income, deduction, gain, or loss to reflect the effects of the Purchasers’ basis adjustment
under § 743(b). 21 These adjustments to the Purchasers’ distributive shares must be reflected on
Schedules K and K-1 of the Partnership’s return (Form 1065). 22
The adjustment of the stepped-up basis applies only to the Purchasers for federal income tax
purposes. The applicable provisions of the Internal Revenue Code and the accompanying regulations
See Office of Chief Counsel, IRS, memorandum, POSTU-101184-15 (June 30, 2017) (noting that Chief Counsel Advice may not
be used or cited as precedent).

15

16

“Inside basis” is the partnership’s tax basis in individual assets.

17

“Outside basis” is the tax basis of each individual partner’s interest in the partnership.

18

Supra note 15, citing Jt. Comm. On Taxation, Summary of the New Provision of the Internal Revenue Code of 1954, 92 (1955).

Because the Taxpayer is disregarded for federal income tax purposes, the assets and liabilities of the Taxpayer are treated
as assets and liabilities of the Partnership.

19

20

Treas. Reg. § 1.743-1(j)(1).

21

See Treas. Reg. § 1.743-1(j)(2).

22

Id.

6

expressly state that no adjustment is made to the common basis of partnership property. For
Tennessee excise tax purposes, partnerships are taxed directly at the partnership level, rather than
the partner level. Accordingly, for Tennessee excise tax purposes, the Taxpayer’s net earnings or net
loss will be determined without making any addition or subtraction relating to the IRC § 743(b) basis
adjustment pursuant to the IRC § 754 election.

APPROVED:

David Gerregano
Commissioner of Revenue

DATE:

6/10/2021

7