When a corporation indirectly owns an interest in a Tennessee-nexus limited partnership through a chain of tiered limited partnerships, does its share of that partnership's income get taxed twice for Tennessee excise tax purposes — once at the partnership level and again when it flows up to the corporation?

Subject

Avoiding double taxation of tiered pass-through partnership income for Tennessee franchise and excise tax purposes.

Plain-English summary

The Tennessee Department of Revenue confirmed that a corporation doesn't get taxed twice on the same income when it flows up through a chain of tiered limited partnerships — one with Tennessee nexus, one without.

The taxpayer corporation held a 49.49% interest in "LP1" (no Tennessee nexus, so LP1 itself owes no Tennessee tax), which in turn held a 99% interest in "LP2" (which does have Tennessee nexus and files its own Tennessee franchise and excise returns). Because partnerships aren't taxed federally, LP2's income first flows federally into LP1, then into the corporation — meaning the corporation's own federal taxable income already includes its indirect share of LP2's income (49.49% of 99%). But LP2 already paid Tennessee excise tax on that same income directly, in its own hands, as a Tennessee-nexus filer. Without a fix, the same dollar of income would be taxed twice in Tennessee: once at LP2's level, and again when it re-appears inside the corporation's federal taxable income.

Tennessee's statute (Tenn. Code Ann. § 67-4-2006(b)(2)(L)) fixes this with a subtraction: income is removed from a taxpayer's excise tax base if it (1) is included in the taxpayer's net earnings, (2) comes from a pass-through entity that itself files and pays Tennessee excise tax, (3) is allocated to the taxpayer as an owner of that pass-through entity, and (4) hasn't already been subtracted at that pass-through entity's own level. Using the ruling's worked example, the corporation's federal income (its own $2,000 plus $445 from LP1 plus $388 indirectly from LP2) totals $2,833 — but the $388 attributable to LP2 gets subtracted, leaving $2,445 as the corporation's actual Tennessee excise tax base, since that portion was already taxed once at LP2.

Apportionment works the same way, in reverse. When the corporation computes its Tennessee apportionment formula (property, payroll, and receipts factors), it includes its indirect ownership share of any pass-through entity that does NOT have its own Tennessee nexus (like LP1) — but specifically EXCLUDES its indirect share of any pass-through entity that DOES have Tennessee nexus and already computes its own apportionment (like LP2), since LP2's property/payroll/receipts are already fully accounted for at LP2's own level.

What this means for you

Corporations with tiered partnership investment structures

If your ownership chain runs through multiple layers of partnerships and only some of them have independent Tennessee nexus, don't assume your parent-level excise tax base automatically double-counts income already taxed at a lower tier — Tennessee's subtraction mechanism under § 67-4-2006(b)(2)(L) is specifically designed to prevent that. But you do need to trace the chain carefully: the subtraction (and the parallel apportionment exclusion) applies entity-by-entity based on which tier actually has Tennessee nexus and files its own return, not automatically to the whole structure.

Accountants and tax professionals

This ruling is a useful worked numerical example of Tenn. Code Ann. § 67-4-2006(b)(2)(L)/(b)(1)(J) applied across a three-tier structure (corporation → LP1 → LP2), plus the mirror-image apportionment rule under §§ 67-4-2012/67-4-2111 that pulls in a non-nexus intermediate entity's factors (LP1) while excluding a nexus-holding lower-tier entity's factors (LP2) because those are already reflected in that entity's own separate apportionment computation. Worth keeping as a template when modeling multi-tier partnership structures with mixed Tennessee nexus.

Common questions

Q: Does income from a lower-tier partnership get taxed at every level it passes through?
A: No. If a lower-tier pass-through entity already has Tennessee nexus and pays its own excise tax on that income, the same income is subtracted when it reappears in an upper-tier owner's federal taxable income, preventing double taxation.

Q: Does an intermediate entity with no Tennessee nexus (like LP1 in this ruling) owe any Tennessee tax itself?
A: No. An entity with no Tennessee nexus isn't subject to Tennessee franchise or excise tax at all, regardless of its role in the ownership chain.

Q: How does apportionment treat a lower-tier entity that already files its own Tennessee return?
A: Its property, payroll, and receipts are excluded from the upper-tier owner's apportionment formula, since that lower-tier entity already computes its own separate apportionment.

Q: Does this ruling apply to other multi-tier partnership structures?
A: No. A Tennessee letter ruling binds the Department only for the specific taxpayer and facts addressed and cannot be relied on by others, though the mechanics it walks through apply generally under the cited statutes.

Citations and references

Statutes:

• Tenn. Code Ann. § 67-4-2006(b)(2)(L) (subtraction for income already taxed at a pass-through entity's level)
• Tenn. Code Ann. § 67-4-2006(b)(1)(J) (parallel addition rule for losses/expenses)
• Tenn. Code Ann. § 67-4-2006(a)(4) (net earnings computation for partnership-taxed entities)
• Tenn. Code Ann. § 67-4-2004(28) (definition of "pass-through entity")
• Tenn. Code Ann. §§ 67-4-2012, 67-4-2111 (franchise/excise tax apportionment formula: property + payroll + 2×receipts, divided by four)
• Tenn. Code Ann. §§ 67-4-2012(b), 67-4-2111(b)(4) (property factor, incl. indirect ownership of non-nexus pass-through entities)
• Tenn. Code Ann. §§ 67-4-2012(e), 67-4-2111(e)(5) (payroll/compensation factor, incl. indirect ownership)
• Tenn. Code Ann. §§ 67-4-2012(g), 67-4-2111(e)(4) (receipts factor, incl. indirect ownership)

Source

• Landing page: https://www.tn.gov/revenue/tax-resources/legal-resources/tax-rulings.html
• Original PDF: https://www.tn.gov/content/dam/tn/revenue/documents/rulings/fae/06-06fe.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 06-06
WARNING
Letter rulings are binding on the Department only with respect to the individual
taxpayer being addressed in the ruling. This presentation of the ruling in a
redacted form is informational only. Rulings are made in response to particular
facts presented and are not intended necessarily as statements of Department
policy.
SUBJECT
Whether the portion of income or loss that has been passed-through to a corporation
but was reported on the excise tax return of a limited partnership in which the
corporation, directly or indirectly, has an interest must be deducted from, or added to in
the case of a loss, the corporation’s federal taxable income or loss before the net
operating loss deduction and special deductions.
SCOPE
This letter ruling is an interpretation and application of the tax law as it relates to a
specific set of existing facts furnished to the Department by the Taxpayer. The rulings
herein are binding upon the Department, and are applicable only to the individual
Taxpayer being addressed.
This letter ruling may be revoked or modified by the Commissioner at any time. Such
revocation or modification shall be effective retroactively unless the following conditions
are met, in which case the revocation shall be prospective only:
(A) The Taxpayer must not have misstated or omitted
material facts involved in the transaction;
(B) Facts that develop later must not be materially different
from the facts upon which the ruling was based;
(C) The applicable law must not have been changed or
amended;
(D) The ruling must have been issued originally with respect
to a prospective or proposed transaction; and
(E) The Taxpayer directly involved must have acted in good
faith in relying upon the ruling and a retroactive revocation of
the ruling must inure to his detriment.

FACTS
The Taxpayer is a Delaware C corporation with stand-alone Tennessee tax nexus. The
Taxpayer holds a 49.49% limited partnership interest in [LP1], a [STATE – NOT
TENNESSEE] limited partnership without stand-alone Tennessee tax nexus. [LP1]
holds a 99% limited partnership interest in [LP2], a [STATE – NOT TENNESSEE]
limited partnership with stand-alone Tennessee tax nexus.
[LP1] and [LP2] also hold other limited partnership interests in various other limited
partnerships that do not have stand-alone Tennessee tax nexus. Attached to the
Taxpayer’s Letter Ruling request as Exhibit A is an organizational chart showing the
complex and extensive organizational structure for the [GROUP] of entities.
The Taxpayer timely files Tennessee franchise, excise tax returns with the Tennessee
Department of Revenue. Since it has no Tennessee tax nexus, [LP1] has no franchise,
excise tax return filing obligation regarding its own income or the flow-through income
that it receives from its interest in other limited partnerships. A portion of [LP2’s]
business operations are based in Tennessee. Thus, [LP2] has tax nexus in Tennessee
and timely files Tennessee franchise, excise tax returns.
For federal income tax purposes, the Taxpayer includes 49.49% of the [LP1’s] income
in its federal taxable income before the net operating loss deduction and special
deductions.
QUESTION PRESENTED
Should the portion of income or loss that has been passed-through to the Taxpayer, but
that was reported on the Tennessee excise tax return of [LP2], be deducted from, or
added to in the case of a loss, the Taxpayer’s federal taxable income or loss before the
net operating loss deduction and special deductions when the Taxpayer computes its
excise tax base?

RULING
Yes.
Assuming that the Taxpayer also has tax nexus in another state(s), it is also important
to note that, since [LP2] is doing business in Tennessee and is subject to Tennessee
franchise, excise tax, none of its property, payroll compensation or gross receipts are
passed-through to the Taxpayer for apportionment formula purposes.
However, in addition to its own property, payroll compensation and receipts, the
Taxpayer will include in its apportionment formula for franchise, excise tax purposes, its
ownership share of the property, payroll compensation and gross receipts of any limited

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partnership, subchapter S corporation, limited liability company, or other entity treated
as a partnership for federal income tax purposes, in which the taxpayer has an
ownership interest, directly or indirectly through one (1) or more such entities, and that
is not doing business in Tennessee and thus is not subject to Tennessee franchise,
excise tax.
ANALYSIS
General Analysis and Example
A limited partnership is not subject to federal income tax. Instead, its income and
expenses are passed-through to its owners/partners and included in the federal return
filed by such owners/partners. For federal income tax purposes, [LP2] will pass 99% of
its pass-through income and expenses plus 99% of its own income and expenses
through to [LP1]. [LP1] will then pass 49.49% of such income and expenses plus
49.49% of its own income and expenses through to the Taxpayer. The Taxpayer’s
federal taxable income before the net operating deduction and special deductions will
include the income and expenses of entities treated as partnerships in which the
Taxpayer directly, or indirectly through another entity treated as a partnership, has an
ownership interest.
For purposes of a simplified example, suppose that for federal income tax purposes,
[LP2] has ordinary income of $1,000 plus an ordinary net loss of $200 passed-through
to it from other entities treated as partnerships in which it directly, or indirectly through
another entity treated as a partnership, has an ownership interest. [LP2] will then passthrough to [LP1] 99% of its net earnings of $800 ($1,000 - $200 = $800), which amounts
to $792 (99% × $800 = $792).
Assume that [LP1] has net income of $900 consisting of $1,200 in ordinary income plus
a $300 ordinary net loss passed-through to it from other entities treated as partnerships
in which it directly, or indirectly through another entity treated as a partnership, has an
ownership interest. [LP1] will then pass-through to the Taxpayer 49.49% of its net
earnings of $1,692 ($792 + $1,200 - $300 = $1,692), which amounts to $837 (49.49% ×
$1,692 = $837). Assume that, in addition to pass-through items, the Taxpayer’s own
federal net earnings before the net operating loss deduction and special deductions
amount to $2,000.
The question presented concerns how [LP2], [LP1] and the Taxpayer will be treated for
Tennessee excise tax purposes.
When computing an entity’s excise tax base, Tenn. Code Ann. § 67-4-2006(b)(2)(L)
requires any item of gain or income that meets the following criteria to be subtracted
from the entity’s net earnings (losses).
(i) Is included in the determination of the taxpayer’s net earnings or loss;

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(ii) Is from a pass-through entity which is subject to and files a return for the tax
imposed by this part;
(iii) Is allocated to a partner, shareholder, beneficiary or another owner of such passthrough entity; and
(iv) Is not subtracted from the net earnings or loss of such pass-through entity under
subdivision (b)(2)(M)[.]
Subdivision (b)(2)(M), referenced above in Tenn. Code Ann. § 67-4-2006(b)(2)(L)(iv),
has no application to the facts presented in this Letter Ruling because it concerns a
pass-through entity’s items of gain or income that are included in the federal taxable
income of a real estate investment trust. Tenn. Code Ann. § 67-4-2006(b)(1)(J)
contains provisions identical to those set forth above with regard to the criteria for
adding loses and expense items to an entity’s net earnings or losses.
A “pass-through entity,” as the term is used in Tenn. Code Ann. § 67-4-2006(b)(2)(L)(ii)(iv) set forth above, is defined as follows by Tenn. Code Ann. § 67-4-2004(28):
“Pass-through entity” means an S corporation, an entity treated as a partnership for
federal income tax purposes, an entity treated as a trust for federal income tax
purposes or a business entity which has a single owner and which is disregarded as
an entity separate from its owner for federal income tax purposes, but not for
purposes of this part and part 21 of this chapter[.]
Because they are entities treated as partnerships for federal income tax purposes, [LP2]
and [LP1] qualify as pass-through entities for Tennessee excise tax purposes.
Application of Tennessee Excise Tax Statutes to [LP2]
The facts presented state that [LP2] has stand-alone Tennessee tax nexus.
Tenn.
Code Ann. § 67-4-2006(a)(4) requires [LP2] to compute its net earnings for Tennessee
excise tax purposes in the following manner:
In the case of a person or taxpayer treated as a partnership for federal tax purposes,
or any other person required to file a federal partnership return on a federal form
1065 or any variation of that form, including, but not limited to, limited liability
companies, “net earnings” or “net loss” is defined as an amount equal to:
(A)

The amount of ordinary income or loss determined under the applicable
provisions of the Internal Revenue Code, including, but not limited to,
guaranteed payments to partners and capital gains, which additional items are
not already included in ordinary income or loss; less

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(B)
(C)

The amount subject to self-employment taxes, without regard to any cap,
Distributable or paid to each partner or member; provided, that this amount
shall not create or increase any net loss; less
The amount contributed to qualified pension or benefit plans, including all
plans described in 26 U.S.C. § 401, of any partner or member, provided,
however, that this amount shall not create or increase any net loss; as
adjusted by subsections (b) and (c).

Because none of [LP2’s] income or loss is from a pass-through entity that is subject to
excise tax and files an excise tax return, the additions and deductions required by
Tenn. Code Ann. §§ 67-4-2006(b)(2)(L) and 67-4-2006(b)(1)(J) do not apply. According
to the organizational chart that accompanied the Taxpayer’s Letter Ruling request, none
of the owner’s of [LP2] are individuals, so it would have no income subject to selfemployment taxes distributable or paid to its partners and would not contribute to a
pension plan of any partner. [LP2] is subject to excise tax on its ordinary income plus or
minus any other applicable additions or deductions required by Tenn. Code Ann. § 674-2006.
Continuing with the simplified example set forth above, assuming that none of the items
required by Tenn. Code Ann. § 67-4-2006 to be added to or deducted from its pro-forma
federal net earnings apply, and assuming for the simplicity of this example that [LP2]
has no tax nexus outside Tennessee, [LP2] would be subject to Tennessee excise tax
on its net ordinary income of $800.
Application of Tennessee Excise Tax Statutes to [LP1]
The facts presented state that [LP1] has no Tennessee tax nexus. Therefore, it is not
subject to Tennessee excise tax.
Application of Tennessee Excise Tax Statutes to the Taxpayer
The Taxpayer’s federal net earnings (loss) before the net operating loss deduction and
special deductions consist of the following items:

1. 100% of its own income (loss).
2. 49.49% of [LP1’s] income (loss).
3. 49.49% of 99% of [LP2’s] income (loss).
   Tenn. Code Ann. §§ 67-4-2006(b)(2)(L) and 67-4-2006(b)(1)(J) operate to remove any
   income or loss passed-through to the Taxpayer by a pass-through entity that has
   already been subjected to the Tennessee excise tax. [LP2’s] income (loss) has already
   been subjected to Tennessee excise tax in the hands of [LP2], but 49.49% of 99% of
   such income (loss) now appears again in the federal net earnings of the Taxpayer.
   Such income qualifies for subtraction from the Taxpayer’s federal net earnings (loss)
   under Tenn. Code Ann. § 67-4-2006(b)(2)(L) because:

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1. It is included in the determination of the taxpayer’s net earnings or loss;

2. It is from a pass-through entity ([LP2]) that is subject to the excise tax and files
   an excise tax return;
3. It is allocated to an owner (the Taxpayer) of such pass-through entity ([LP2]); and
4. It is not subtracted from the net earnings or loss of the pass-through entity ([LP2])
   under Tenn. Code Ann. § 67-4-2006(b)(2)(M).
   Applying this to the facts set forth in the above simplified example, the Taxpayer’s
   federal net earnings (loss) before net the operating loss deduction and special
   deductions consist of the following items:
5. Its own income of $2,000.
6. [LP1’s] income of $445 (49.49% × $900).
7. [LP2’s] income $388 (49.49% of 99% × $792 = $388).
   The Taxpayer’s total income is $2,833 ($2,000 + $445 + $388 = $2,833). However,
   under the provisions of Code Ann. § 67-4-2006(b)(2)(L), $388 will be subtracted from
   this amount. Assuming that, for purposes of this simplified example, none of the other
   items required by Tenn. Code Ann. § 67-4-2006 to be added to or deducted from the
   Taxpayer’s federal net earnings before the net operating loss deduction and special
   deductions apply, and assuming that the Taxpayer has no tax nexus outside
   Tennessee, the Taxpayer would be subject to Tennessee excise tax on $2,445 ($2,833
   - $388 = $2,445).
   Although [LP2’s] income passes through [LP1] to the Taxpayer, under Tennessee’s
   excise tax law such income retains its character in the hands of the Taxpayer as income
   previously subjected to Tennessee excise tax in the hands of [LP2].
   Applicable Franchise, Excise Tax Apportionment Formula Statutes
   Tenn. Code Ann. §§ 67-4-2012 and 67-4-2111 permit business entities that are doing
   business both within and without the State of Tennessee to apportion their net earnings
   and net worth to Tennessee by multiplying such net earnings and net worth by a
   fraction, the numerator of which is the property factor plus the payroll factor plus twice
   the receipts factor and the denominator of which is four.
   Tenn. Code Ann. §§ 67-4-2012(b) and 67-4-2111(b)(4), the pertinent parts of which are
   set forth below, make the following provisions concerning the computation of a
   taxpayer’s franchise, excise tax apportionment formula property factor:
   “Property” also includes a taxpayer’s ownership share of the real or tangible property
   owned or rented by any limited partnership, subchapter S corporation, limited liability
   company, or other entity treated as a partnership for federal income tax purposes, in
   which the taxpayer has an ownership interest, directly or indirectly through one (1) or

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more such entities, and which is not doing business in Tennessee and, therefore is
not subject to Tennessee [franchise] excise tax.
With regard to the payroll factor, the pertinent parts of Tenn. Code Ann. §§ 67-4-2012(e)
and 67-4-2111(e)(5) make the following provisions:
“Compensation” also includes a taxpayer’s ownership share of any specific
compensation of any limited partnership, subchapter S corporation, limited liability
company, or other entity treated as a partnership for federal income tax purposes, in
which the taxpayer has an ownership interest, directly or indirectly through one (1) or
more such entities, and which is not doing business in Tennessee and thus is not
subject to Tennessee [franchise] excise tax.
Similar provisions are made by pertinent parts of Tenn. Code Ann. §§ 67-4-2012(g) and
67-4-2111(e)(4) with regard to the receipts factors:
“Gross receipts” also includes a taxpayer’s ownership share of gross receipts of any
limited partnership, subchapter S corporation, limited liability company, or other
entity treated as a partnership for federal income tax purposes, in which the taxpayer
has an ownership interest, directly or indirectly through one (1) or more such entities,
and which is not doing business in Tennessee and thus is not subject to Tennessee
[franchise] excise tax.
Application of Franchise, Excise Tax
Apportionment Formula Statutes to [LP2]
If [LP2] also has tax nexus in another state(s), it will apportion its net earnings and net
worth to Tennessee for franchise, excise tax purposes using the property, payroll
compensation and receipts apportionment formula previously described.
In addition to its own property, payroll compensation and receipts, [LP2] will include in
its apportionment formula for franchise, excise tax purposes, its ownership share of the
property, payroll compensation and gross receipts of any
limited partnership,
subchapter S corporation, limited liability company, or other entity treated as a
partnership for federal income tax purposes, in which the taxpayer has an ownership
interest, directly or indirectly through one (1) or more such entities, and that is not doing
business in Tennessee and thus is not subject to Tennessee franchise, excise tax.
Application of Franchise, Excise Tax
Apportionment Formula Statutes to [LP1]
The facts presented state that [LP1] has no Tennessee tax nexus. Therefore, it is not
subject to franchise, excise tax and will not compute an apportionment formula.

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Application of Franchise, Excise Tax
Apportionment Formula Statutes to the Taxpayer
If the Taxpayer also has tax nexus in another state(s), it will apportion its net earnings
and net worth to Tennessee for franchise, excise tax purposes using the property,
payroll compensation and receipts apportionment formula previously described.
In addition to its own property, payroll compensation and receipts, the Taxpayer will
include in its apportionment formula for franchise, excise tax purposes, its ownership
share of the property, payroll compensation and gross receipts of any limited
partnership, subchapter S corporation, limited liability company, or other entity treated
as a partnership for federal income tax purposes, in which the taxpayer has an
ownership interest, directly or indirectly through one (1) or more such entities, and that
is not doing business in Tennessee and thus is not subject to Tennessee franchise
excise tax. This will include the following:

1. 100% of its own property, payroll compensation and receipts.
2. 49.49% of [LP1’s] property, payroll compensation and receipts.
3. 49.49% of property, payroll compensation and gross receipts passed-through to
   [LP1] by any limited partnership, subchapter S corporation, limited liability
   company, or other entity treated as a partnership for federal income tax
   purposes, in which the Taxpayer has an ownership interest, directly or indirectly
   through [LP1] and that is not doing business in Tennessee and thus is not
   subject to Tennessee franchise excise tax.
   It is important to note that the Taxpayer’s indirect ownership share (49.49% of 99%) of
   property, payroll compensation and receipts of [LP2] will be excluded from the
   Taxpayer’s apportionment formula because, although the Taxpayer indirectly has an
   ownership interest in [LP2] through [LP1], [LP2] is doing business in Tennessee and Is
   subject to Tennessee franchise, excise tax. Thus, none of [LP2’s] property, payroll
   compensation and receipts are passed-through to the Taxpayer.

Arnold B. Clapp
Special Counsel to the Commissioner

APPROVED: Loren L. Chumley, Commissioner

DATE: 3/14/06

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