Section 1320-06-01-.40 - DISREGARDED ENTITIES(1) Disregarded Limited Liability Companies. A limited liability company is disregarded for franchise and excise tax purposes only if it is disregarded for federal income tax purposes and its single member is classified as a corporation for federal income tax purposes. If a limited liability company does not meet both of these requirements, it will be treated separately for franchise and excise tax purposes and must file its own separate franchise and excise tax return.(2) Other Federally Disregarded Entities. Only a limited liability company meeting the requirements of (1) will be disregarded for franchise and excise tax purposes. All other taxpayers subject to the franchise or excise tax will be treated separately, regardless of whether they are otherwise disregarded for federal income tax purposes.(3) Tiered Ownership of Limited Liability Companies. To determine whether a limited liability company is disregarded for franchise and excise tax purposes when it is only indirectly owned by a corporation, the analysis must take a "top down" approach and begin with the corporation and all directly-owned entities that directly or indirectly own the limited liability company. Example 1: Corporation X is the single member of LLC1. LLC1 is the single member of LLC2. Corporation X is classified as a corporation for federal income tax purposes. Both LLC1 and LLC2 are disregarded for federal income tax purposes. LLC1 is disregarded for franchise and excise tax purposes to Corporation X. As a disregarded entity, LLC1 is treated as a division of Corporation X and not as a separate entity. As a result, the ownership interest held by LLC1 in LLC2 is treated as owned directly by Corporation X. LLC2 is disregarded for franchise and excise tax purposes to Corporation X because its single member for tax purposes is Corporation X, a corporation.
Example 2: Corporation X is the single member of LLC1 and LLC2, each of which has a 50% ownership interest in LLC3. Corporation X is classified as a corporation for federal income tax purposes. LLC1, LLC2, and LLC3 are each disregarded for federal income tax purposes. LLC1 and LLC2 are each disregarded for franchise and excise tax purposes to Corporation X. As disregarded entities, LLC1 and LLC2 are each treated as a division of Corporation X and not as separate entities. As a result, the ownership interests held by LLC1 and LLC2 in LLC3 are treated as owned directly by Corporation X. LLC3 is disregarded to Corporation X for franchise and excise tax purposes because Corporation X is treated as its single member.
(4) Not-For-Profit Subsidiaries. Except as provided in T.C.A. §§ 67-4-2007 and -2105, a not-for-profit entity is generally exempt from franchise and excise taxes. T.C.A. § 67-4-2004 defines a "not-for-profit" entity as "any person described in §401, §408, §408A, §409, §501, §526, §527, §528, §529 or §530 of the Internal Revenue Code, codified in 26 U.S.C. §401, §408, §408A, §409, §501, §526, §527, §528, §529 or §530." If a taxpayer is disregarded for federal income tax purposes to an entity meeting the definition of a not-for-profit, the taxpayer also meets the definition of a not-for-profit and is exempt from franchise and excise taxes to the extent provided by T.C.A. §§ 67-4-2007 and -2105, regardless of whether the taxpayer is treated as a separate or disregarded entity for franchise and excise tax purposes.Tenn. Comp. R. & Regs. 1320-06-01-.40
New rules filed June 28, 2016; effective 9/26/2016.Authority: T.C.A. §§ 67-1-102, 67-4-2004, 67-4-2007, 67-4-2105, 67-4-2106, and 48-249-1003.