Does an out-of-state limited partnership qualify as an exempt "family-owned" entity for Tennessee franchise and excise tax when a father's ownership only reaches the partnership indirectly, through a trust and a tiered second partnership?

Plain-English summary

An out-of-state limited partnership owns rental real estate in Tennessee (and other states), with all its income coming from rents. Its ownership is layered: two siblings each own 1% directly; a grantor trust owns 1% directly; and a second limited partnership owns the remaining 97%. That second partnership, in turn, is owned by the same two siblings (1% each), plus the same grantor trust acting as BOTH its general partner (1%) and its limited partner (97%). The grantor trust itself is wholly owned by the siblings' father, who is still living. The taxpayer asked whether this whole structure qualifies as a tax-exempt "family-owned noncorporate entity" under Tennessee's franchise and excise tax law.

The Department said no. Tennessee's exemption requires that at least 95% of the entity's ownership units be held by people who qualify as "members of the family" under a specific list of relationships (ancestors, spouses, lineal descendants, and — critically — the estate or trust of a DECEASED family member). Walking through each of the taxpayer's four partners:

• The two siblings (1% each, 2% total): qualify as lineal descendants of their father, a qualifying family relationship.
• The grantor trust (1% direct + indirectly controlling the 97% second-partnership stake): does NOT qualify. The statute only recognizes a trust as a "member of the family" when it's the estate/trust of a deceased family member — a living person's grantor trust doesn't fit, no matter how closely related the grantor is.
• The second limited partnership (97%): also does NOT qualify — it's not a person at all, let alone one that fits the family-relationship list.

So only the two siblings' 2% direct stake actually counts toward the 95% threshold — nowhere close. The Department was explicit about WHY the father's much larger effective interest doesn't help: even though he ultimately controls a large share of the structure through the trust and the tiered partnership, he doesn't own any UNITS in the taxpayer partnership itself — his connection runs through two layers of intervening entities. Reading the statute to count that kind of indirect, layered ownership as if the father directly owned units would go beyond the statute's plain language, which the Department declined to do, especially given the general rule that the taxpayer bears the burden of proving an exemption and any well-founded doubt defeats the claim.

What this means for you

Family real estate and investment partnerships structured with trusts or tiered entities

Tennessee's family-owned exemption is strict about directness: it only counts units owned straight-line by qualifying family members (or the testamentary trust/estate of a deceased one) — not units reached indirectly through a living grantor trust, an intervening partnership, or other layered structures, no matter how completely one family actually controls the whole arrangement. If preserving this exemption matters, structure ownership so qualifying family members hold at least 95% of the TAXPAYER ENTITY's own units directly, and be aware that a living grantor trust (as opposed to a deceased person's estate/testamentary trust) does not count as a family member under this specific Tennessee statute.

Accountants and tax professionals administering multi-generational or estate-planning entity structures

This ruling is a useful cautionary contrast to cases where a custodial IRA arrangement satisfies the family-ownership test because a custodial account isn't legally a trust and the individual beneficiary holds direct legal title. Here, by contrast, an actual grantor trust interposed between the living grantor and the taxpayer entity broke the direct-ownership chain the statute requires. The key variable to check in any layered ownership structure: does a qualifying family member hold UNITS in the taxpayer entity directly, or only an indirect economic interest through another entity?

Common questions

Q: Does it matter that the whole partnership structure is, in substance, controlled by one family?
A: Not under this ruling's reasoning — Tennessee's exemption looks at DIRECT ownership of units in the specific taxpayer entity by people/entities that fit the statute's family-relationship list, not overall economic control or ultimate beneficial ownership.

Q: Would a testamentary trust (from a deceased family member's estate) count differently than this living grantor trust?
A: Yes — the statute specifically includes the estate or trust of a DECEASED family member as a qualifying "member of the family." A living grantor trust, as here, doesn't fit that category.

Q: Can ownership through a tiered/intervening partnership ever count toward the 95% threshold?
A: Not under this ruling — only units owned directly in the taxpayer entity itself count; an ownership interest reached through another partnership layer doesn't.

Q: Can another partnership with a similar layered ownership structure rely on this ruling?
A: No. A Tennessee letter ruling binds the Department only as to the specific taxpayer and facts it was issued to, and it can be revoked or modified by the Commissioner. Confirm your own entity's exact ownership chain with a tax professional.

Citations and references

Tennessee statutes (Tenn. Code Ann.):

• § 67-4-2008(a)(11)(A)-(B)(i) (2007) (family-owned noncorporate entity exemption; 95%+ direct ownership by qualifying family members, including only a deceased individual's estate/trust)
• § 67-4-2007(a) (2007) (6.5% excise tax); §§ 67-4-2105(a), 67-4-2106(a) (2007) (franchise tax)
• § 67-4-2004(30) (2007) ("person" definition, including limited partnerships)

Tennessee cases cited by the ruling:

• Boarman v. Jaynes, 109 S.W.3d 286 (Tenn. 2003) (statutes read without forced/subtle construction that would limit or extend their meaning)
• Saturn Corp. v. Johnson, 197 S.W.3d 273 (Tenn. Ct. App. 2006); International Harvester Co. v. Carr, 466 S.W.2d 207 (Tenn. 1971) (courts give effect to the plain import of statutory language)
• American Airlines, Inc. v. Johnson, 56 S.W.3d 502 (Tenn. Ct. App. 2000); Rogers Group, Inc. v. Huddleston, 900 S.W.2d 34 (Tenn. Ct. App. 1995); Tibbals Flooring Co. v. Huddleston, 891 S.W.2d 196 (Tenn. 1994); United Canners, Inc. v. King, 696 S.W.2d 525 (Tenn. 1985) (taxpayer bears the burden of proving an exemption; doubt defeats the claim)

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/08-07fe.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 08-07

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 a limited partnership owned in part by a grantor trust qualifies as an exempt familyowned noncorporate entity for purposes of Tennessee franchise and excise taxation.
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
[TAXPAYER] is a limited partnership with headquarters in [STATE – NOT TENNESSEE]. The
Taxpayer owns real estate in [TENNESSEE AND OTHER STATES]. The Taxpayer derives 100
percent of its income from rental real estate activities.

The partners of the [TAXPAYER] are as follows:
[NAME 1]
[NAME 2]
[NAME - TRUST]
[NAME – LIMITED PARTNERSHIP]

1.00%
1.00%
1.00%
97.00%

The partners of [LIMITED PARTNERSHIP] are as follows:
[NAME 1]
[NAME 2]
[TRUST] (as general partner)
[TRUST] (as limited partner)

1.00%
1.00%
1.00%
97.00%

The [TRUST] is a grantor type trust wholly owned by [NAME 3], the father of [NAME 1 AND
NAME 2].
QUESTION
Is the Taxpayer exempt as a family-owned noncorporate entity for purposes of Tennessee
franchise and excise taxation?
RULING
No.
ANALYSIS
The Taxpayer is not exempt as a family-owned noncorporate entity for purposes of Tennessee
franchise and excise taxation because the Taxpayer does not qualify as a “family-owned” entity.
Tennessee imposes an excise tax at the rate of 6.5 percent on the net earnings of all persons
doing business within Tennessee. Tenn. Code Ann. § 67-4-2007(a) (2007). Additionally,
Tennessee imposes a franchise tax on all persons doing business within Tennessee, at the rate of
$0.25 per $100, or major fraction thereof, of a taxpayer’s net worth. Tenn. Code Ann. §§ 67-42105(a) (2007) and 67-4-2106(a) (2007). Persons subject to the Tennessee franchise and excise
taxes include, but are not limited to, limited partnerships. Tenn. Code Ann. § 67-4-2004(30)
(2007).
Tenn. Code Ann. § 67-4-2008(a)(11)(A) (2007) exempts from the Tennessee excise tax any
“family-owned noncorporate entity,” where substantially all the activity of the entity is the
production of passive investment income. In addition, Tenn. Code Ann. § 67-4-2105(a) (2007)
provides an exemption from the Tennessee franchise tax for any entity exempt from the excise
tax under the provisions of Tenn. Code Ann. § 67-4-2008. Tenn. Code Ann. § 67-42008(a)(11)(B)(i) (2007) provides that “‘family-owned’ means that at least ninety-five percent
(95%) of the ownership units of the entity are owned by members of the family, which means,
with respect to an individual, only:” (a) an ancestor of such individual; (b) the spouse or former

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spouse of such individual; (c) a lineal descendent of such individual, of such individual’s spouse
or former spouse, or of a parent of such individual; (d) the spouse or former spouse of any such
lineal descendent; or (e) the estate or trust of a deceased individual who, while living, was one of
the types of individuals described herein. (Emphasis added.)
Thus, to qualify for the family-owned noncorporate entity exemption under Tenn. Code Ann.
§ 67-4-2008(a)(11), partners in the Taxpayer who qualify as “members of the family” must own
at least 95 percent of the ownership units of the Taxpayer. [NAME 1 AND NAME 2], the two
individuals who are partners in the Taxpayer, are both the lineal descendents of one individual,
[NAME 3], and thus qualify as “members of the family” under Tenn. Code Ann. § 67-42008(a)(11)(B)(i)(c). The third partner, the [TRUST], is a trust owned by [NAME 3], an
individual who qualifies as a member of the family; however, [NAME 3] is not deceased. As a
result, the [TRUST] does not come within the definition of “members of the family” under Tenn.
Code Ann. § 67-4-2008(a)(11)(B)(i). The fourth partner, [LIMITED PARTNERSHIP], is a
limited partnership, and likewise does not come within the definition of “members of the
family.” Accordingly, only two partners in the Taxpayer qualify as members of the family; these
two partners collectively own just two percent of the ownership units in the Taxpayer. Because
members of the family own less than 95 percent of the ownership units in the Taxpayer, the
Taxpayer does not qualify as a “family-owned” entity.
Note that while the Taxpayer is ultimately owned by three individuals who come within the
definition of “members of the family,”1 [NAME 3’S] indirect ownership of the Taxpayer through
the [TRUST] and [LIMITED PARTNERSHIP], cannot be taken into account in the
determination of whether the Taxpayer is “family-owned” under Tenn. Code Ann. § 67-42008(a)(11)(B)(i). As noted above, Tenn. Code Ann. § 67-4-2008(a)(11)(B)(i) provides that the
term “family-owned” means that “at least ninety-five percent (95%) of the ownership units of the
entity are owned by members of the family.” (Emphasis added.) [NAME 3] does not own units
in the Taxpayer; rather, he owns an interest in a trust that owns an interest in a partnership that
owns an interest in the Taxpayer. To treat [NAME 3] as a “member of the family” in the absence
of actual ownership of units in the Taxpayer would impermissibly extend the meaning of the
statute beyond its plain language. The Tennessee Supreme Court has stated that legislative intent
is to be ascertained whenever possible “without forced or subtle construction that would limit or
extend the meaning of the language.” Boarman v. Jaynes, 109 S.W.3d 286, 290-291 (Tenn.
2003). Similarly, the Tennessee Court of Appeals has stated that courts must give effect to the
“plain import of the language of the act.” Saturn Corp. v. Johnson, 197 S.W.3d 273, 276
(Tenn.Ct.App. 2006) (citing International Harvester Co. v. Carr, 466 S.W.2d 207, 214 (Tenn.
1971)).
Additionally, the burden is on the taxpayer to establish entitlement to an exemption from
taxation. The Tennessee Supreme Court has stated that “[a]lthough the rule is well-established
that taxing legislation should be liberally construed in favor of the taxpayer and strictly construed
against the taxing authority, it is an equally important principle of Tennessee tax law that
‘exemptions from taxation are construed against the taxpayer who must shoulder the heavy and
exacting burden of proving the exemption.’” American Airlines, Inc. v. Johnson, 56 S.W.3d 502,
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All three are the lineal descendents of one individual, i.e., the parent of [NAME 3] and the grandparent of [NAME
1 AND NAME 2].

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506 (Tenn.Ct.App. 2000) (quoting Rogers Group, Inc. v. Huddleston, 900 S.W.2d 34, 36
(Tenn.Ct.App. 1995)). The Tennessee Supreme Court has also stated that the burden is on the
taxpayer to establish the exemption, and any well-founded doubt is sufficient to defeat a claimed
exemption from taxation. American Airlines, Inc. v. Johnson, 56 S.W.3d at 506 (citing Tibbals
Flooring Co. v. Huddleston, 891 S.W.2d 196, 198 (Tenn. 1994); United Canners, Inc. v. King,
696 S.W.2d 525, 527 (Tenn. 1985)). [NAME 3’S] lack of actual ownership of units in the
Taxpayer raises sufficient doubt so as to defeat a claimed exemption from the Tennessee
franchise and excise taxes.
Accordingly, the Taxpayer is not exempt for purposes of Tennessee franchise and excise taxation
pursuant to Tenn. Code Ann. § 67-4-2008(a)(11) (2007).

Kristin Husat
Senior Tax Counsel

APPROVED:

Reagan Farr
Commissioner of Revenue

DATE:

02/20/08

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