Tennessee Releases Franchise And Excise Tax Administrative Rulings Covering Variety Of Topics, Including Not- For-Profit Entities, Nexus And Intangible Expenses

Earlier this year, the Tennessee Department of Revenue released several 2012 revenue and letter rulings1 addressing a variety of franchise and excise (income) tax questions. In particular, the Department discussed the rules with respect to a not-for-profit's franchise and excise tax liability. In addition, the Department ruled that an out-of-state intangible holding company's licensing agreement with an out-of-state affiliated company was not sufficient to create Tennessee franchise or excise tax nexus, and that accounts receivable was not an "intangible expense" subject to the related-party expense addback rules for excise tax purposes.

"Not-for-Profit" LLC Subject to Franchise and Excise Tax to Limited Extent

The Department issued a letter ruling addressing the applicability of the franchise and excise taxes to a "not-for-profit" limited liability company (LLC) doing business in Tennessee.2 The LLC's sole indirect owner was a non-corporate government plan, and since the government plan owned the LLC through a series of disregarded entities, the LLC was treated as a disregarded entity for federal income tax purposes. Although an LLC doing business in Tennessee is generally subject to the state's franchise or excise tax, including a single member LLC that is not owned by a corporation, the Department found that the taxpayer qualified for an exclusion based on its "not-for-profit" status. In determining that the taxpayer qualified as a "not-for-profit," the Department gave weight to the fact that the taxpayer was a disregarded entity for federal income tax purposes, and as such, treated as a division of a member trust or organization classified as an IRC Sec. 401(a) governmental retirement savings plan.3

In spite of the general applicability of the "not-for-profit entity" exclusion from franchise and excise taxation, the Department cautioned that the taxpayer would be subject to excise tax to the extent its net earnings constituted unrelated business taxable income under IRC Sec. 5124 or are otherwise subject to income tax under Subchapter A of the IRC.5 In addition, excise tax would apply to any net earnings attributable to activities unrelated to or outside the scope of activities that give the taxpayer its exempt status. The taxpayer would be subject to franchise tax with respect to its net worth, or property (both real and tangible) owned or used, which is attributable to activities subject to income tax under IRC Sec. 512 or any other...