United States

Tennessee: Indirectly Owned SMLLCs will have Disregarded Status

Dec 19, 2016
From KPMG TaxWatch

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Recently, the Tennessee Department of Revenue addressed the excise and franchise tax filing consequences of converting a number of corporations to disregarded SMLLCs. After the corporate group’s planned reorganization, the corporate taxpayer parent will directly own 100 percent of the converted entities. A number of these converting entities will, in turn, own 100 percent of other corporations also converting to SMLLCs. The taxpayer and the converting entities all do business in Tennessee and have historically filed separate Tennessee returns. However, for Tennessee franchise tax purposes they have computed net worth on a consolidated basis. Under Tennessee law, an entity will be disregarded for Tennessee franchise and excise tax purposes if it is (1) a SMLLC; (2) disregarded for federal income tax purposes; and (3) wholly-owned by a corporation. The Department of Revenue concluded that after the reorganization, all of the converting entities will be disregarded for Tennessee franchise and excise tax purposes. The SMLLCs 100 percent directly owned by the corporate taxpayer will qualify as “wholly owned” by a corporation as required under Tennessee law for disregarded status. Moreover, the indirectly-owned SMLLCs will also qualify as wholly-owned by a corporation, despite the fact that they are owned by various SMLCCs. Because the “directly owned” SMLLCs will be treated as divisions of the corporate taxpayer, the corporate taxpayer be considered the direct owner of the indirectly-owned SMLLCs. Accordingly, for years after the reorganization, the corporate taxpayer will be required to include all of the converting entities in its Tennessee franchise and excise tax return.

The Department also ruled that (for the tax year in which the reorganization occurs) the converting entities will be included in the taxpayer’s affiliated group for purposes of the Tennessee franchise tax consolidated net worth election. However, any entity that is in “final return status”―such as an entity merging out of existence―could not be part of a consolidated net worth election. The converting entities would not be in "final return status" because they will continue doing business in Tennessee. For more information on this ruling, please contact Loren Chumley at 615-248-5565.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.