When a bank's subsidiary sells assets and is then moved from a first-tier to a second-tier position, are its sale transactions still included in the bank group's combined Tennessee franchise and excise return?
Plain-English summary
Tennessee taxes most companies on a separate-entity basis — each one files its own franchise and excise (F&E) return for its own activities, even if it joins a federal consolidated return. But a unitary group of financial institutions is a special exception: those affiliated financial companies file one combined return and pay tax on the group's combined net earnings.
Crucially, only certain entities count as a "financial institution" that belongs in that combined return. A holding company and a regulated financial corporation (a bank) qualify, and so does a direct, first-tier subsidiary of one of them. A second-tier subsidiary (a subsidiary of a subsidiary) does not — unless it independently earns most of its income from the business of a financial institution.
In this ruling, a bank holding company and its bank file a combined Tennessee return. The bank had a first-tier subsidiary ("New Holdings") that was restructured: New Holdings sold its interest in a lower entity and its remaining interest in a converted operating business, and the bank then planned to contribute New Holdings down a level, turning it from a first-tier into a second-tier subsidiary. The group asked two questions.
Question 1 — Are New Holdings' sale transactions still part of the combined return? Yes. The sales took place while New Holdings was a first-tier subsidiary and a member of the unitary group, so they are the group's transactions and belong in the combined return for that year. Because no federal short tax year was created, the combined return covers the full year. Once New Holdings becomes a second-tier subsidiary, it is no longer a financial institution and falls out of the combined return for future periods — and it does not have to file its own separate Tennessee return, because after the move it has no Tennessee business activity or nexus of its own.
Question 2 — Is the gain on the sales taxed under Tennessee's special "distributed asset" rules? No. Two anti-abuse statutes can tax the gain when a taxpayer distributes an asset to an entity that isn't otherwise subject to Tennessee tax and that entity then sells it. Here there was no distribution — New Holdings simply sold the assets — so those special rules do not apply.
The throughline: what matters is whether a transaction happened while the entity was a financial institution inside the unitary group, not where the entity sits at year-end.
What this means for you
Banks and bank holding companies with combined Tennessee returns
The "financial institution" line is drawn at first-tier. A direct subsidiary of your bank or holding company is a financial institution that belongs in the combined return; push it down so it becomes a second-tier subsidiary and it stops being a financial institution (unless it independently does the business of a financial institution for 50%+ of its gross income). Plan reorganizations with that switch in mind — it changes who is in the combined group.
Timing: measure unity at the moment of the transaction
A financial-institution unitary group includes all of its unitary activity for the year, even from a member that later leaves the group — but only the activity that occurred while that member was part of the group. The mirror image is also true: if an entity joins mid-year, its pre-joining transactions stay out. Because no federal short period was created here, the combined return simply covered the full year and swept in the in-group sales. (Note: a member must be in the group at the end of the year for the group to use that member's credits or Tennessee loss carryforwards.)
Selling vs. distributing an asset
If you are restructuring, the difference between selling an asset and distributing it matters. Tennessee's anti-abuse rules (§§ 67-4-2006(b)(1)(I), 67-4-2007(f)(1)) can tax the gain when an asset is distributed to a non-taxable entity that resells it within twelve months — but they are not triggered by an ordinary sale. Here the straightforward sale avoided those provisions.
Accountants and tax professionals
Watch the entity-classification mechanics: federal classification generally controls (§ 67-4-2007(d)), a federally disregarded SMLLC owned by a corporation is disregarded for F&E, and a REIT-owned LLC taxed as a partnership is not. Tennessee F&E returns must coincide with the federal accounting period and follow federal short-period treatment (§ 67-4-2015(a)), and short-period excise tax is not prorated. The Department grounded its answer in prior guidance (Rev. Rul. 97-59; Ltr. Rul. 98-31) treating a first-tier-to-second-tier restructuring as ending financial-institution status.
Common questions
Q: Is every subsidiary of a bank a "financial institution" for Tennessee F&E tax?
A: No. A holding company, a regulated financial corporation, and a direct first-tier subsidiary of one are financial institutions. A second-tier subsidiary is not — unless it independently earns 50% or more of its gross income from the business of a financial institution.
Q: A member of our combined group was sold or moved out during the year. Do its transactions still go in the combined return?
A: The transactions that occurred while it was a member of the unitary group belong in the combined return for that year. Activity after it leaves does not. If no federal short period is created, the combined return covers the full year.
Q: Does a member that leaves mid-year have to file its own Tennessee return for that year?
A: Not necessarily. In this ruling the departing entity did not have to file separately because, after the move, it had no Tennessee business activity and no substantial nexus of its own.
Q: We're selling assets in a reorganization. Will Tennessee tax the gain under its special distribution rules?
A: Only if there is an actual distribution of the asset to an entity not otherwise subject to Tennessee tax, followed by a sale. A direct sale of the asset, as here, does not trigger §§ 67-4-2006(b)(1)(I) or 67-4-2007(f)(1).
Q: Can another taxpayer rely on this letter ruling?
A: No. A Tennessee letter ruling binds the Department only as to the specific taxpayer it was issued to and cannot be relied on by anyone else. It also may be revoked or modified, and the law can change.
Citations and references
Statutes and authorities:
- TENN. CODE ANN. §§ 67-4-2105(a), -2007(a) — F&E on a person doing business with substantial nexus
- TENN. CODE ANN. § 67-4-2004(36) — "person" includes corporations and LLCs
- TENN. CODE ANN. § 67-4-2007(d); § 67-4-2106(c) — federal classification controls; corporate-owned SMLLC disregarded for F&E
- TENN. CODE ANN. § 67-4-2006(a)(1) — net earnings definition
- TENN. CODE ANN. § 67-4-2007(e)(1) — separate-entity default and its exceptions
- TENN. CODE ANN. § 67-4-2007(e)(2)(A); § 67-4-2006(a)(3) — financial-institution unitary group files combined on combined net earnings
- TENN. CODE ANN. § 67-4-2004(50) — "unitary group"
- TENN. CODE ANN. § 67-4-2004(17) — "financial institution"
- TENN. CODE ANN. § 67-4-2004(5)(A) — "business of a financial institution"; § 67-4-2004(5)(B) — under-50% gross-income carve-out
- TENN. CODE ANN. § 67-4-2004(21) — "holding company"; § 67-4-2004(43) — "regulated financial corporation"
- TENN. CODE ANN. § 67-4-2005; § 67-4-2015(a) — return period; no proration of short-period excise tax
- TENN. CODE ANN. § 67-4-2006(b)(1)(I); § 67-4-2007(f)(1) — distributed-asset gain rules
- TENN. CODE ANN. § 67-4-2109(e)(3); § 67-4-2006(c)(5) — credit / loss usable only from a member in existence at year-end
- 12 U.S.C. § 1841(a) — Bank Holding Company Act definition
- Treas. Reg. § 1.1502-76 — federal consolidated return period
- IRC § 368(a)(1)(F), §§ 351 and 721, § 338(h)(10) — federal reorganization, contribution, and election characterizations
- Tenn. Dept. of Rev. Ltr. Rul. 98-31 (July 28, 1998); Rev. Rul. 97-59 (Dec. 23, 1997) — first-tier-only financial-institution status; first-tier-to-second-tier restructuring
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/sales/24-08.pdf
Original ruling text
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.
Determining the status of an entity when it ceases being a first-tier subsidiary of a financial institution
that is part of a unitary group of financial institutions.
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.
[REDACTED] (“Bank Holding Co.”)1, which is a bank holding company under the Bank Holding Company
Act of 1956;2 [REDACTED] (“Bank”), which is a regulated financial corporation; and the affiliates of
Company names in this ruling are used fictitiously to enhance readability while protecting the requestor’s confidential
information. Any similarity to the actual names of existing companies is unintentional and coincidental.
1
2
12 U.S.C. § 1841, et seq.
[Bank Holding Co.] and [Bank] comprise a unitary group of financial institutions under Tennessee tax
law and file a combined Tennessee franchise and excise tax return on Tennessee form FAE174 (the
“Combined Group Return”).
Among the affiliates was [REDACTED] (“Affiliate Holdings Inc.”), a wholly owned first-tier subsidiary of
[Bank]. [Affiliate Holdings Inc.] was a [STATE] holding corporation that provided [INDUSTRY SECTOR]
services through its various operating subsidiaries (predominantly C-corporations and single member
limited liability companies (“SMLLCs”) treated as disregarded entities (“DREs”) for federal income tax
purposes). [Affiliate Holdings Inc.]’s core business is providing [INDUSTRY SECTOR] services in the
United States. [Affiliate Holdings Inc.] did not conduct the business of a financial institution. 3
As part of a strategic initiative for [Bank Holding Co.] and [Bank], [Bank Holding Co.] began to seek
third-party investors for the [Affiliate Holdings Inc.] business with the goals of 1) highlighting the
inherent value of the [INDUSTRY SECTOR] business, and 2) maintaining competitiveness of the
business within the broader market. It was also determined that a partnership structure change for
[Affiliate Holdings Inc.] would provide strategic flexibility for future transactions.
In [YEAR], various steps were taken to convert [Affiliate Holdings Inc.] into a partnership structure:
1) [Affiliate Holdings Inc.] converted into a SMLLC (“Affiliate Holdings LLC”), and
2) a newly formed, wholly owned, first-tier subsidiary of [Bank], [REDACTED], (“New Holdings”)
and a newly formed, wholly owned, first-tier subsidiary of [New Holdings], [REDACTED], (“New
Partners”) became members of [Affiliate Holdings LLC].
These steps had the result of [Affiliate Holdings LLC] being treated as a partnership for federal income
tax purposes starting on [DATE].4 Further, most of [Affiliate Holdings Inc.]’s corporate operating
subsidiaries either were liquidated or converted into LLCs treated as DREs for federal income tax
purposes. In addition, many of [Affiliate Holdings Inc.]’s existing SMLLCs treated as DREs were
liquidated.
Both [New Holdings] and [New Partners] have no activity other than holding their investments in
[Affiliate Holdings LLC]. [New Holdings] and [New Partners] are commercially domiciled outside of
Tennessee. Neither [New Holdings] nor [New Partners] are doing business in Tennessee or have
substantial nexus independently in Tennessee per TENN. CODE ANN. §§ 67-4-2004(14)(A) or -2004(47)(A).
On [DATE], [Bank] entered into a [REDACTED] Purchase Agreement with [REDACTED], a corporation
controlled by [REDACTED] (together referred to as “[Investor]”), to sell [PERCENTAGE] of the common
ownership interests of [Affiliate Holdings Inc.], which as noted above, converted to [Affiliate Holdings
LLC] prior to the sale such that [Investor] would acquire membership interests in an LLC treated as a
partnership for federal income tax purposes. On [Date], [Investor] purchased the [PERCENTAGE]
interest in the common units of [Affiliate Holdings LLC] from [New Holdings] in exchange for cash.
[CHART REDACTED]
3
TENN. CODE ANN. § 67-4-2004(17) (2022).
The various steps were characterized as an I.R.C. § 368(a)(1)(F) reorganization followed by I.R.C. §§ 351 and 721 contributions.
No distributions were involved in establishing the partnership structure.
4
2
As noted above, [New Holdings] was a first-tier subsidiary of [Bank] for the [YEAR] tax year, and as
such, met the Tennessee definition of “financial institution” and was included in the Combined Group
Return.5 [New Partners] was not included in the Combined Group Return because it was not a firsttier subsidiary of [Bank] and was not otherwise doing the business of a financial institution.
On [DATE], [New Holdings] sold 1) its interest in [New Partners], and 2) its remaining interests in
[Affiliate Holdings LLC], which it sold to [Investor] and another buyer. An I.R.C. § 338(h)(10) election
was made regarding the sale by [New Holdings] of its interests in [New Partners].
On or before [DATE], [Bank] plans to contribute [New Holdings] to [REDACTED] (“Sub Holdings”), a
wholly owned, first-tier subsidiary of [Bank]. [Sub Holdings] is a holding company whose only current
activity is holding the stock of [REDACTED]. After the contribution, [Sub Holdings] also would hold the
stock of [New Holdings].
[CHART REDACTED]
Neither the sale by [New Holdings] of 1) its interests in [New Partners] and 2) its remaining interests
in [Affiliate Holdings LLC], nor the subsequent proposed contribution of [New Holdings] to [Sub
Holdings], will create a short tax year for [New Holdings] for federal income tax purposes. No short
tax year is created for federal income tax purposes because [Bank] continues to own [New Holdings],
and although it has moved within a federal consolidated group, it has remained in existence and was
part of the federal consolidated group for the entire year.
1.
Would [New Holdings]’ unitary transactions be treated as that of a first-tier subsidiary of
[Bank], a regulated financial corporation, and thus be includible in the Combined Group
Return?
Ruling: Yes. For the [YEAR] tax year, transactions involving the sale of [New Holdings]’ interests
in [New Partners] and its remaining interests in [Affiliate Holdings LLC] must be included in
the Combined Group Return because the transactions occurred for the group while it was
unitary. [New Holdings] is not required to file a [YEAR] tax return covering its separate activities
occurring while not part of the unitary group because it is not a first-tier subsidiary of [Bank]
as of the end of its tax year and it is not otherwise doing the business of a financial institution,
nor does it have nexus independent of the unitary group.
2.
5
Would the sale by [New Holdings] of its interest in [New Partners] and its remaining interest
in [Affiliate Holdings LLC] be subject to the special rules of TENN. CODE ANN. §§ 67-4-2006(b)(1)(I)
or 67-4-2007(f)(1) so that the gain on the sale would be subject to Tennessee excise tax in
[YEAR], even if [New Holdings] did not otherwise do business in Tennessee or have substantial
nexus with Tennessee?
See TENN. CODE ANN. § 67-4-2004(17).
3
Ruling: No. TENN. CODE ANN. § 67-4-2006(b)(1)(I) applies to include gain from the sale of a
distributed asset in the distributing corporation’s net earning when the asset is distributed to
an individual or entity that is not otherwise subject to Tennessee excise tax. T ENN. CODE ANN. §
67-4-2007(f)(1) applies if the distributing corporation is no longer in existence or cannot
otherwise be taxed by Tennessee. As there was no distribution of interests in [New Partners]
or [Affiliate Holdings LLC] (i.e., the assets that were sold), these provisions would not apply to
the gain on the sale recognized in [YEAR].
Tennessee imposes franchise and excise taxes on the net worth and net earnings of a person doing
business and having substantial nexus in Tennessee.6 “Person” includes every corporation and limited
liability company, among other entities. 7 An entity is classified as a corporation, partnership, or other
type of business entity consistent with the way such entity is classified for U.S. federal income tax
purposes, except that an entity that is disregarded for U.S. federal income tax purposes is generally
not disregarded for Tennessee franchise and excise tax purposes.8 However, an SMLLC whose sole
member is a person taxed as a corporation for U.S. federal income tax purposes will be disregarded
for Tennessee franchise and excise tax purposes and its activities will be taxed as though they were
performed directly by its corporate owner.9
For excise tax purposes, a corporate taxpayer’s “net earnings” are its U.S. federal taxable income
“before the operating loss deduction and special deductions provided for in 26 U.S.C. §§ 241-247 and
249, and as adjusted by [TENN. CODE ANN. § 67-4-2006(b)-(c)].10
When it comes to a taxpayer that files federal returns on a consolidated basis with other members of
its unitary group, TENN. CODE ANN. § 67-4-2007(e)(1) (2022) states:
except for unitary groups of financial institutions, captive REIT affiliated groups, and
business entities that have been required or permitted to file excise tax returns on a
combined, consolidated or separate accounting basis under § 67-4-2104, each
taxpayer shall be considered a separate and single business entity for Tennessee
excise tax purposes and shall file its Tennessee 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 unitary group. The
federal taxable income computed on a separate entity basis excise tax return and
subject to adjustments set forth in § 67-4-2006 shall be the same federal taxable
income that would have been computed on the taxpayer’s federal return if it had been
filed on a separate entity basis rather than a consolidated basis.
1. [New Holdings]’ business occurred in the Unitary Group
6
TENN. CODE ANN. §§ 67-4-2105(a) (2022), -2007(a) (2022).
7
TENN. CODE ANN. § 67-4-2004(36).
8
TENN. CODE Ann. § 67-4-2007(d), -2106(c).
9
Id.
10
TENN. CODE ANN. § 67-4-2006(a)(1) (2022).
4
Tennessee requires unitary groups of financial institutions to file a combined return and pay tax based
on the apportioned combined net earnings of the entire unitary group. 11 “Unitary group” is defined by
TENN. CODE ANN. § 67-4-2004(50) as the “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.”
[Bank Holding Co.], [Bank], [New Holdings], [New Partners], [Affiliate Holdings LLC], and affiliates
constitute part of a unitary group if they are classified as financial institutions for Tennessee franchise
and excise tax purposes. Each of these entities not properly classed as financial institutions cannot be
“unitary” with the financial institutions in the group as the statute requires all entities to be financial
institutions to be included in a “unitary group.”
“Financial institution” is defined by TENN. CODE ANN. § 67-4-2004(17) 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. [SENTENCE REDACTED]12
The ”business of a financial institution” is defined by TENN. CODE ANN. § 67-4-2004(5)(A) as:
(i)
(ii)
(iii)
The business that a regulated financial corporation may be authorized to do under
state or federal law or the business that its subsidiary is authorized to do by the proper
regulatory authorities;
The business that any person organized under the authority of the United States or
organized under the laws of any other taxing jurisdiction or country does or has
authority to do that is substantially similar to the business that a corporation may be
created to do under title 45, or any business that a corporation or its subsidiary is
authorized to do by title 45;
Otherwise making, acquiring, selling or servicing loans or extensions of credit,
including, but not limited to, the following:
a. Secured or unsecured consumer loans;
b. Installment loans;
c. Mortgage or deeds of trust or other secured loans on real or tangible personal
property;
d. Credit card loans;
e. Secured or unsecured commercial loans of any type;
f. Letters of credit and acceptance of drafts;
g. The holding of participation loans in which more than one (1) lender is a creditor
to a common borrower;
h. Loans arising in factoring; and
i. Any other transactions of a comparable economic effect;
TENN. CODE ANN. § 67-4-2007(e)(2)(A). “Net earnings” for financial institutions that form a unitary group is defined in T ENN CODE
ANN. § 67-4-2006(a)(3) as the combined net earnings or net loss, [which is the federal taxable income or loss before the operating
loss deduction and special deductions provided for in 26 U.S.C. §§ 241, 242, 243-247], for all members of the unitary group,
with all dividends, receipts and expenses resulting from transactions between members of the unitary group excluded when
computing combined net earnings, and subject to the adjustments in [T ENN. CODE ANN. § 67-4-2006(b)-(c)] on a combined basis,
even if some of the members would not be subject to taxation under this part, if considered apart from their unitary group.
11
12
[FOOTNOTE REDACTED]
5
(iv)
(v)
Leasing or acting as an agent, broker or adviser in connection with leasing real and
personal property that is the economic equivalent of an extension of credit; or
Operating a credit card business.
Additionally, if the business of a financial institution generates less than 50 percent of a person’s gross
income, the person shall not be considered a financial institution. 13 For such purposes, the
computation of gross income of a person does not include income from nonrecurring, extraordinary
transactions.14
A “holding company” is defined by TENN. CODE ANN. § 67-4-2004(21), in part, as “any corporation defined
as a ‘bank holding company’ under 12 U.S.C. § 1841(a) of the Bank Holding Company Act of 1956 . . .”
[Bank Holding Co.] meets the definition of a holding company. “Regulated financial corporation” is
defined in part as “an institution, the deposits, shares, or accounts of which are incurred under the
Federal Deposit Insurance Act . . .”15 [Bank] meets this definition.
A ”subsidiary” of a bank holding company or a regulated financial corporation means a direct, first-tier
subsidiary.16 A second-tier subsidiary of a bank holding company or a regulated financial corporation
is not considered a financial institution.17
[Sub Holdings], [New Holdings], and [New Partners], even though their purpose is to hold stock or
interests in other entities, are not holding companies as defined in Tennessee statutes and they are
not “bank holding companies” under 12 U.S.C. § 1841(a) of the Bank Holding Company Act of 1956. As
holding companies, the income of these entities from the sources listed in T ENN. CODE ANN. § 67-42004(5) comprise less than 50 percent of the entity’s gross income. Therefore, unless these entities
are first-tier subsidiaries of a bank holding company or a regulated financial corporation, these
entities are not financial institutions for Tennessee franchise and excise tax purposes.
[Sub Holdings] is a first-tier subsidiary of [Bank], a regulated financial corporation. Therefore, [Sub
Holdings] is classified as a financial institution for Tennessee franchise and excise tax purposes. [New
Partners], as a subsidiary of [New Holdings], which is an entity that is not a holding company or
regulated financial corporation as defined in Tennessee statutes, is not a first-tier subsidiary of a
holding company or regulated financial corporation. Therefore, [New Partners] is not considered a
financial institution under Tennessee statutes.
Prior to its proposed contribution to [Sub Holdings], [New Holdings] was a first-tier subsidiary of
[Bank], a regulated financial corporation, and thus considered a financial institution for Tennessee
franchise and excise tax purposes. After its proposed contribution to [Sub Holdings], [New Holdings]
would no longer be a first-tier subsidiary of a bank holding company or a regulated financial
corporation. Therefore, [New Holdings] would not be considered a financial institution for Tennessee
franchise and excise tax purposes after the proposed contribution. After its change in ownership,
[New Holdings] must not be included in the Combined Group Return.
13
TENN. CODE ANN. § 67-4-2004(5)(B).
14
Id.
15
TENN. CODE ANN. § 67-4-2004(43).
16
See Tenn. Dept. of Rev. Ltr. Rul. 98-31 (July 28, 1998); see also Tenn. Dept. of Revenue Rev. Rul. 97-59 (Dec. 23, 1997).
17
Id.
6
Transactions involving the sale of [New Holdings]’ interests in [New Partners] and its remaining
interests in [Affiliate Holdings LLC] must be included in the Combined Group Return for [TAX YEAR]
Transactions involving the sale of [New Holdings]’ interest in [New Partners] and its remaining
interests in [Affiliate Holdings LLC], which transactions occurred prior to the change in [New Holdings]’
classification, must be included in the Combined Group Return.
TENN. CODE ANN. § 67-4-2005 (2022) provides that the excise tax is an accrued tax imposed for the
exercise of the corporate franchise during the period that coincides with the tax year covered by the
return required. TENN. CODE ANN. § 67-4-2015(a) provides that the return shall coincide with the
accounting period covered by the federal return and the appropriate tax must be paid at the time of
filing the return. Treas. Reg. § 1.1502-76 requires that a federal consolidated return must cover the
common parent’s entire consolidated tax year and each subsidiary’s transactions for the portion of
the year for which it is a member. In conjunction with this federal return requirement, T ENN. CODE ANN.
§ 67-4-2007(e)(1) provides that each taxpayer, except unitary groups of financial institutions and
others, shall be considered a separate and single business entity for Tennessee excise tax purposes
and shall file its Tennessee 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 unitary group.
Accordingly, Tennessee law requires that franchise and excise tax returns must coincide with the
accounting period of the federal return, and short period franchise and excise tax returns must be
filed if the person filed a short period return for federal income tax purposes. If no federal short period
is created, then the franchise and excise tax return must be based on the full tax year of the federal
return.
TENN. CODE ANN. § 67-4-2015(a) further provides that in the event a franchise and excise tax return
covers a period of less than twelve months, the excise tax shall not be prorated, meaning that income
and expenses are reported only for the period of time covered by the excise tax return.
The statutes do not specifically address when unity should be measured. 18 There are no statutes that
explicitly address whether unitary groups of financial institutions should include or exclude the gain
from the transactions of a member when the member is no longer in the group at the end of the
group’s tax year and when no short period occurs. Nor do the statutes explicitly address the converse,
when a member joins the group before the end of the group’s tax year when no short period occurs.
However, the statute does make clear that unitary groups of financial institutions are an exception to
separate entity filing. TENN. CODE ANN. § 67-4-2007(e).
[New Holdings]’ activities before the contribution to [Sub Holdings] remain a part of the federal
consolidated group that includes [Bank Holding Co.] and [Bank] and remain a part of the financial
institution unitary group for Tennessee tax purposes. Accordingly, when the federal consolidated
group return is filed for [TAX YEAR], [New Holdings]’ activities before the contribution will be included
in the consolidated group return. No short period is created for federal purposes, and therefore the
Tennessee specifically addresses when certain tax attributes of a member who leaves a unitary group of financial institutions
can be applied to the group. TENN. CODE ANN. § 67-4-2109(e)(3) provides that a unitary group of financial institutions may take
any qualified credit that was generated by any group member that is in existence as a member of the group at the end of the
group’s tax year. TENN. CODE ANN. § 67-4-2006(c)(5) also provides that a unitary group of financial institutions may take any
qualified Tennessee loss carryforward that was generated by a group member that is in existence as a member of the group at
the end of the group’s tax year.
18
7
full tax year of the federal consolidated group applies. However, no activity after [New Holdings]’
contribution to [Sub Holdings] would be included in the Combined Group Return. In other words, the
transactions or business that took place involving the sale of [New Holdings]’ interests in [New
Partners] and its remaining interests in [Affiliate Holdings LLC] are included in the Combined Group
Return because, at the time of the transactions, [New Holdings] was a part of the unitary group. The
unitary group must include all of its activity during the full year [YEAR] in its combined group return
because no short period was created. The unitary group’s activity during the full year [YEAR]
necessarily includes the transactions involving the sale of [New Holdings]’ interests in [New Partners]
and [Affiliate Holdings LLC] because those transactions are the transactions of the unitary group, not
the transactions of [New Holdings] as a separate entity after leaving the group.
Including this activity in the unitary group’s combined return is fair and equitable and otherwise
consistent with the statute. The activity of the unitary group necessarily denotes that the business
activities or operations were done in unity and of mutual benefit, dependent upon, or contributory to
one another, individually or as a group. Accordingly, a financial institution unitary group must include
all of its unitary activity in its combined group return even if a member later leaves the group,
regardless of whether a federal short period return is created. Including these transactions does not
violate the prohibition against proration because the inclusion is not then prorated on a full year basis.
Inclusion of the activity in the combined return is also consistent with prior department rulings,
including Tenn. Dept. of Revenue Rev. Rul. 97-59 (Dec. 23, 1997), which involved a first-tier subsidiary
of a financial institution (Company A) restructuring into a second-tier subsidiary of the financial
institution. In that ruling, the Department found that after the transaction, the Tennessee franchise
and excise tax return of Company A must be filed on a separate entity basis to include only its own
operations.
The same is true here. For future periods, even if [New Holdings] remains in the federal consolidated
group, its activity will not be included in the Tennessee combined franchise and excise return because
it is no longer a member of the unitary group of financial institutions. It also does not need to file a
separate return for its [YEAR] period as a separate entity because it has no business activity nor
substantial nexus with Tennessee after the contribution.
This fair and equitable result is highlighted by the fact that if [New Holdings] had not been a first-tier
subsidiary of [Bank] and was not otherwise subject to franchise and excise tax at the beginning of the
year, but later became a first-tier subsidiary and was thus included as part of the combined franchise
and excise tax return, [New Holdings]’ transactions prior to joining the group would not be included
in the group’s combined return. Only the activity that occurred while [New Holdings] was a part of the
unitary group will be included in the Combined Group Return.
2. The special rules of TENN. CODE ANN. §§ 67-4-2006(b)(1)(I) or 67-4-2007(f)(1) do not apply
because there is no distribution of the gain on the sale of an asset.
TENN. CODE ANN. § 67-4-2006(b)(1)(I) provides that when a taxpayer distributes assets to a non-taxable
entity which then sells them at a gain within twelve months of the distribution, the gain is subject to
excise tax, with the gain being recognized by the taxpayer making the asset distribution rather than
the seller. The facts of this ruling do not indicate that a distribution has occurred. Since no distribution
of assets has occurred, TENN. CODE ANN. § 67-4-2006(b)(1)(I) does not apply.
TENN. CODE ANN. § 67-4-2007(f)(1)(A) requires that any entity or individual not otherwise subject to
excise tax shall pay the tax if the entity or individual received the asset through a distribution from a
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taxpayer within the twelve-month period immediately prior to the sale and the taxpayer making the
distribution ceased to exist prior to the sale. As before, since no distribution of assets has occurred,
this provision does not apply. None of the other criteria that would subject an otherwise non-taxable
entity to the excise tax that are listed under TENN. CODE ANN. § 67-4-2007(f)(1) apply to the facts of this
ruling.
APPROVED:
David Gerregano
Commissioner of Revenue
DATE:
October 31, 2024
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