In June 2014, the Tennessee Department of Revenue issued Notice #14-12 (Notice 14-12) regarding the franchise and excise tax treatment of a single member limited liability company (SMLCC), wholly owned by a real estate investment trust (REIT). The Notice reverses the state’s position on the taxation of SMLLCs that are wholly owned by REITs, and that are disregarded for federal purposes. Specifically, the Notice provides that a SMLLC will be disregarded for Tennessee franchise and excise tax purposes if the SMLLC is disregarded for federal income tax purposes and the SMLLC is wholly owned by a REIT.For federal income tax purposes, an entity must be taxed as a corporation in order to make an election to be taxed as a REIT. [Tennessee Notice #14-12 (June 2014)]
Additionally, in June 2014, the Department made public a revenue ruling, Rev. Ruling 13-22, written in December 2013, discussing the computation of net earnings for Tennessee excise tax purposes for a federally disregarded entity whose regarded owner is a REIT. The ruling opined that such an entity, when regarded as a separate person for Tennessee excise tax purposes, would determine its federal taxable income starting point on a pro forma basis as though the entity were not a REIT. As a result, such entities are deprived from the benefit of the federal dividends paid deduction when calculating their taxable net earnings for Tennessee excise tax purposes.
While Notice 14-12 effectively renders Ruling 13-22 irrelevant in the context of a federally disregarded SMLLC whose single member is a REIT since such entities are now disregarded for Tennessee excise tax purposes, it does remain relevant for other federally disregarded entities, other than SMLLCs, whose regarded owner is a REIT.