Tennessee – SMLLCs qualify as partnerships using federal classification

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October 2017

Overview

A Tennessee Letter Ruling provides that single member limited liability companies (SMLLCs) qualify for the exemption applicable to partnerships engaged in asset-backed securitization activities. Because the SMLLCs are disregarded as entities separate from their parent - a partnership - for federal tax purposes, the SMLLCs are treated as partnerships for purposes of the asset-backed securitization exemption.

Although the Ruling concerns the interpretation of federal classification rules as applied to the asset-backed securitization exemption, the Ruling may serve as the latest development in what may be a transition towards taxpayers applying federal classification treatment to Tennessee’s franchise and excise tax for purposes of determining whether an SMLLC is disregarded.

The takeaway

The Ruling's implications may be broader than the immediate question of eligibility for the asset-backed securitization exemption.  Classification of entities and their method of taxation has been a source of confusion in Tennessee.  Over time, we have witnessed a change in how the Tennessee Department of Revenue has applied this exemption, moving from a strict constructionist interpretation to a more practical approach.  For example:

  • Statutorily, the only entity that can be disregarded for Tennessee franchise and excise tax purposes is a limited liability company that is disregarded for federal income tax purposes and whose single member is a corporation.
  • The Department has allowed a federally disregarded SMLLC to be disregarded if its single member was a federally disregarded SMLLC whose single member was a corporation.   However, this treatment did not extend to a federally disregarded SMLLC whose owner was a federally disregarded trust with a single corporate owner.
  • Department Notice #13-16 (November 2013), provides that it would interpret the term ‘corporation’ to mean “any entity that is classified as a corporation for federal income tax purposes.” So, for example, a SMLLC would now be disregarded if its single member was a ‘check the box’ partnership that was taxed as a corporation for federal income.  

Although the Ruling concerns the interpretation of federal classification rules as applied to the asset-backed securitization exemption, the Ruling may serve as the latest development in what may be a transition towards taxpayers applying federal classification treatment to Tennessee’s franchise and excise tax for purposes of determining whether an SMLLC is disregarded.   For example, how would the Department view a situation where a federally disregarded SMLLC is owned by a federally disregarded entity (other than an SMLLC) whose owner is a corporation?   Would that SMLLC be treated as a disregarded entity? Does this Ruling signify a relaxation of the Department’s strict interpretation of the statutory SMLLC treatment?

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Peter Michalowski

Peter Michalowski

State and Local Tax Leader, PwC US

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