Page 302 - TaxAdviser_2022

TAX CLINIC

A corollary to the exception discussed
above is that in tiered LLC structures,
LLCs indirectly wholly owned by
corporations may also be disregarded.
Tennessee regulations adopt a “top
down” approach to determine whether
an LLC indirectly owned by a corpora-
tion is disregarded (Tenn. Comp. R. &
Regs. §1320-06-01-.40(3)). For example,
LLC3 is 50% owned by LLC1 and 50%
owned by LLC2. Both LLC1 and LLC2
are wholly owned by the same corpora-
Many entities that are disregarded for to the franchise and excise taxes (Tenn. tion. All three LLCs are disregarded
federal, and most other states’, income Code §§67-4-2007(a) and 67-4-2105(a)). for federal income tax purposes. In this
tax purposes are regarded for Tennessee Tennessee defines the term “persons” as situation, as LLC1 and LLC2 are both
franchise and excise (FAE) tax purposes. “every corporation, subchapter S corpora- disregarded into the corporation for
Coupled with mandatory separate legal tion, limited liability company, … limited federal income (and Tennessee FAE) tax
entity filing for most taxpayers, but partnership, … business trust, regulated purposes, LLC3 is wholly owned by the
required combined filing for captive real investment company, REIT, … bank, or corporation and therefore disregarded for
estate investment trust (REIT) affiliated … savings and loan association” (Tenn. Tennessee FAE tax purposes.
groups and unitary groups of financial Code §67-4-2004(38)). Essentially, every
institutions, determining the proper Ten- nonexempt limited liability entity with Tennessee combined/
nessee filer can be challenging. one exception (described below) is subject consolidated filings
Not only is ascertaining the proper to tax. Nonlimited liability entities, in- Tennessee requires captive REIT affiliat-
filing entity in Tennessee more difficult cluding general partnerships, are not sub- ed groups (CRAGs) and unitary groups
because of the state’s partially noncon- ject to tax. Also, Tennessee has a number of financial institutions to file on a com-
forming rules on entity classification, but of specific exemptions contained in Tenn. bined basis on Tennessee Form FAE 174,
issues also arise in determining which Code Section 67-4-2009, including for Franchise and Excise Financial Institution
entity reports the gain from selling venture capital funds and obligated mem- and Captive Real Estate Investment Trust
interests in entities that are disregarded ber entities, that potentially could exempt Tax Return. The CRAG rules can trip
for federal purposes but regarded for otherwise taxable entities from Tennessee up taxpayers, as the captive REIT com-
Tennessee purposes. That can mean the FAE taxes. bined filing includes all entities owned
difference between no Tennessee FAE There is an exception, as noted above, greater than 50% by the captive REIT,
tax on a transaction and substantial tax. to the general rule that limited liability including entities that would otherwise
Starting with the basics, Tennessee entities are subject to the taxes: Limited separately file, including partnerships and
imposes both an excise tax based on the liability companies (LLCs) are disre- SMLLCs owned by those partnerships
apportioned net earnings (income) of garded entities if (1) their single member (Tenn. Code §67-4-2004(8)). A captive
taxable persons (taxpayers) and a fran- is a corporation (or an entity treated REIT is a federal REIT in which an
chise tax based on the higher of the en- as a corporation for federal income tax entity or individual, directly or indirectly,
tity’s Tennessee property or apportioned purposes) and (2) they are disregarded has an 80% or greater ownership inter-
net worth. Tennessee’s FAE taxes apply for federal income tax purposes (Tenn. est, with a few exceptions (Tenn. Code
to most limited liability entities — not Code §67-4-2007(d)). No other federally §67-4-2004(7)).
just entities taxed as corporations for disregarded entities — no federally disre- Tennessee, in addition, allows certain
federal income tax purposes. garded partnerships, no qualified REIT affiliates to elect to determine franchise
subsidiaries, no qualified Subchapter tax net worth on a consolidated basis
Tennessee taxable and S subsidiaries, no disregarded single- (Tenn. Code §67-4-2103(d)). However,
disregarded entities member LLCs (SMLLCs) owned by separate returns are generally required,
Under Tennessee law, “all persons, except individuals, partnerships, or other non- and Tennessee property, the other mea- IMAGE BY OMERSUKRUGOKSU/ISTOCK
those having not-for-profit status, doing corporate entities — are disregarded for sure of the franchise tax, is generally
business in [Tennessee] and having a sub- Tennessee FAE purposes (Tenn. Comp. determined on a separate-entity basis.
stantial nexus in [Tennessee]” are subject R. & Regs. §1320-06-01-.40(2)). CRAGs do determine net worth on a

22 June 2022 The Tax Adviser