A Tennessee corporation will convert several subsidiaries that do business in Tennessee into single-member LLCs disregarded for federal income tax, effective December 31, 2016. How do those conversions affect its Tennessee franchise and excise tax returns and consolidated net-worth election?

Plain-English summary

The taxpayer is a Tennessee corporation (its identity is redacted) that runs two business units and is planning a corporate reorganization effective December 31, 2016. As part of it, the corporation will convert a number of the companies in its federal consolidated group that do business in Tennessee — the "Converting Entities" — into single-member LLCs (SMLLCs) that are disregarded for federal income tax purposes. After the reorganization the corporation will own all of them, some directly and some through a first-tier subsidiary. The Converting Entities will keep doing business in Tennessee. Separately, another affiliated company (the "Merging Entity") may merge into the corporation and cease to exist. The corporation and the Converting Entities have historically filed separate Tennessee franchise and excise (F&E) returns, and the affiliated group has long elected to compute net worth on a consolidated basis. The corporation asked four questions about how the conversion affects its F&E filing.

The answers turn on one core rule. Tennessee classifies a business the same way it's classified for federal income tax — except that an entity disregarded federally is not disregarded for Tennessee F&E unless it is a single-member LLC whose single member is a corporation. So to be disregarded for F&E, an entity must be (1) a single-member LLC, (2) disregarded federally, and (3) wholly owned by a corporation (§ 67-4-2007(d); § 67-4-2106(c)). For ownership through multiple tiers, the Department uses a "top-down" approach (Rule 1320-06-01-.40(2)), starting at the corporation. A disregarded entity is then treated as a division of its corporate owner.

Applying that:

1. Tax year ending 12/31/2016 — file separately. Because the reorganization isn't effective until December 31, 2016, the corporation and each Converting Entity are still separate taxpayers for that year and must file separate F&E returns.

2. Tax year ending 12/31/2017 — include them all. After the conversion, each Converting Entity is an SMLLC wholly owned (directly or, via the top-down analysis, indirectly) by the corporation, so it's disregarded for F&E and treated as a division of the corporation. All of them must be included on the corporation's F&E return beginning with the 2017 year.

3. 2016 — exclude the converting entities' property and net worth. Because the corporation and the Converting Entities still file separately for 2016, the corporation reports only its own property and apportioned net worth and excludes the Converting Entities'.

4. 2016 consolidated net-worth election — entities stay in, the merged-away entity drops out. The Converting Entities remain in the corporation's affiliated group for the consolidated net-worth election for 2016, because a conversion leaves the same entity in existence and doing business in Tennessee — so they're not in "final return status." But if the Merging Entity merges out of existence into the corporation, it does enter final return status (§ 67-4-2004(16)) and is excluded from the group for 2016; the corporation must then file an amended group registration form.

The throughline for any business reorganizing in Tennessee: converting a subsidiary to an SMLLC owned by a corporation makes it a disregarded "division" for F&E (so its income and net worth fold into the parent's return), and that takes effect for the year after the conversion's effective date — while an entity that truly merges away and ceases to exist is handled under the "final return status" rules instead.

What this means for you

Businesses reorganizing Tennessee subsidiaries

If you convert a subsidiary into a single-member LLC that's disregarded federally and wholly owned by a corporation, Tennessee will treat it as disregarded for franchise and excise tax too — as a division of the corporate owner, folded into the owner's F&E return. If the single member is not a corporation (for example, a partnership or an individual), the SMLLC is not disregarded for Tennessee F&E and continues to file on its own.

Timing matters

Classification changes take effect with the entity's status, not retroactively. Here, a December 31, 2016 conversion meant separate returns for the 2016 year and a combined return (entities folded in) starting in 2017. Plan filings around the effective date.

Tiered (indirect) ownership

For LLCs owned through other LLCs, Tennessee uses a top-down analysis starting from the corporation (Rule 1320-06-01-.40(2)). A second-tier SMLLC owned by a first-tier SMLLC can still be disregarded to the corporation, because the first-tier disregarded LLC is treated as a division of the corporation — making the corporation the effective owner of the lower tier.

Consolidated net-worth election and "final return status"

Disregarded entities are automatically covered by their group member's consolidated net-worth election. A conversion doesn't trigger "final return status," because the converted entity is deemed the same entity and keeps doing business (§ 48-249-703(e)). But a true merger out of existence does trigger final return status (§ 67-4-2004(16)), pulling that entity out of the group — and the group must file an amended consolidated net-worth registration form. The election itself runs for a minimum of five years once made.

Accountants and tax professionals

The disregarded-entity test (§ 67-4-2007(d); § 67-4-2106(c)) requires an SMLLC owned by a "corporation" — a term that includes state-law corporations, entities whose default federal classification is a corporation, and entities electing corporate status on federal Form 8832. Excise tax is 6.5% of net earnings (§ 67-4-2007(a)); franchise tax is $0.25 per $100 of net worth (§§ 67-4-2105(a), -2106(a)). Each taxpayer is otherwise a separate, single business entity (§ 67-4-2007(e)(1); § 67-4-2106(c)). Coordinate the consolidated net-worth election (§ 67-4-2103) with the final-return-status suspension (§ 67-4-2115(b); § 67-4-2004(16)) when entities enter or leave the group.

Common questions

Q: I'm converting a subsidiary to a single-member LLC. Will Tennessee treat it as disregarded for franchise and excise tax?
A: Only if it's a single-member LLC, disregarded for federal income tax, and its single member is a corporation. Meet all three and it's disregarded — treated as a division of the corporate owner and folded into that owner's F&E return. Miss the corporate-owner requirement and it keeps filing on its own.

Q: When does the change take effect?
A: With the conversion's effective date, going forward — not retroactively. In this ruling a December 31, 2016 conversion meant separate returns for 2016 and a combined return starting in 2017.

Q: What about an LLC owned by another LLC?
A: Tennessee uses a top-down approach starting from the corporation (Rule 1320-06-01-.40(2)). A lower-tier single-member LLC can still be disregarded to the corporation if the entities above it are disregarded and ultimately owned by the corporation.

Q: Does converting an entity put it in "final return status"?
A: No. A conversion leaves the same entity in existence, so it isn't in final return status. A merger that ends the entity's existence is different — that entity enters final return status and leaves the consolidated group.

Q: Can I rely on this letter 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. Confirm your own facts with a tax professional.

Citations and references

Tennessee statutes (Tenn. Code Ann.):

• § 67-4-2007 (excise tax: (a) 6.5% of net earnings; (d) classification follows federal, but a federally disregarded entity other than an SMLLC owned by a corporation is not disregarded; (e)(1) each taxpayer is a separate and single business entity)
• § 67-4-2105(a), § 67-4-2106 (franchise tax of $0.25 per $100 of net worth; § 67-4-2106(c) federal-classification rule and separate-entity filing)
• § 67-4-2004(2) (definition of "affiliated group"); § 67-4-2004(16) ("final return status"); § 67-4-2004(38) (persons subject to the franchise and excise taxes)
• § 67-4-2103 (consolidated net-worth election and registration; minimum five-year term); § 67-4-2115(b) (consolidated election suspended for a taxpayer in final return status)
• § 48-249-1003 (LLC tax classification follows federal); § 48-249-703(e) (a converted LLC is deemed the same entity as before)

Tennessee rules and federal references:

• Tenn. Comp. R. & Regs. 1320-06-01-.40(2) ("top-down" approach for tiered LLC ownership)
• Treas. Reg. § 301.7701-2 (federal entity classification); IRS Form 8832 (entity classification election)

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/16-10fe.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 16-10

Letter rulings are binding on the Department only with respect to the individual taxpayer
being addressed in the ruling. This ruling is based on the particular facts and circumstances
presented, and is an interpretation of the law at a specific point in time. The law may have
changed since this ruling was issued, possibly rendering it obsolete. The presentation of this
ruling in a redacted form is provided solely for informational purposes, and is not intended as
a statement of Departmental policy. Taxpayers should consult with a tax professional before
relying on any aspect of this ruling.

SUBJECT

The application of the Tennessee franchise and excise taxes to the conversion of multiple Tennessee
corporations to single member limited liability companies that are disregarded for federal income
tax purposes.

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 the taxpayer's
detriment.

FACTS

[CORPORATION] [(the “CORPORATION’)] is a Tennessee corporation that operates diversified businesses
through two distinct business units. [CORPORATION] plans to reorganize its corporate structure effective
December 31, 2016 (the “Reorganization”). As part of the Reorganization, [CORPORATION] intends to

convert [REDACTED - NUMBER] corporations in its federal consolidated group that are doing business in
Tennessee (the “Converting Entities”) to single member limited liability companies (“SMLLCs") that will be
disregarded for federal income tax purposes. |

After the Reorganization, [CORPORATION] will directly own 100% of [REDACTED - NUMBER] of the
Converting Entities (the “Directly Owned First Tier Converting Entities”):

[REDACTED]

After the Reorganization, [CORPORATION] will indirectly own 100% of [REDACTED - NUMBER]
additional Converting Entities (the “Indirectly Owned Second Tier Converting Entities”), each of which
is directly owned by an entity that is 100% directly owned by [CORPORATION]:

[REDACTED] 2

[CORPORATION] and the Converting Entities do business in Tennessee and have historically filed
separate Tennessee franchise and excise tax returns. After the Reorganization, the Converting Entities will
continue to be registered to do business in Tennessee. °

Additionally, another entity owned by [CORPORATION] (the “Merging Entity”) may merge into
[CORPORATION] as of December 31, 2016, and will thereafter cease to exist.

The federal income tax classification of each entity and its position in the organizational structure is
illustrated in Appendix A.

For the tax year ending December 31, 2004, the members of the [CORPORATION] affiliated group, as
defined in TENN. CODE ANN. 8 67-4-2004(2)(A) (Supp. 2016), elected to compute net worth, for
Tennessee franchise tax purposes, on a consolidated basis, and the affiliated group has since been
filing accordingly under this methodology.* The Converting Entities and the Merging Entity are
members of [CORPORATION'S] affiliated group and are included in [CORPORATION'S] consolidated
net worth election.

RULINGS

1. For the tax year ending December 31, 2016, should [CORPORATION] and the Converting
   Entities file Tennessee franchise and excise tax returns on a separate entity basis?

' This letter ruling is based upon the facts as provided by the taxpayer. If the facts surrounding a particular Converting Entity
differ in any way from the facts as stated in this letter ruling, this ruling will not apply to that Converting Entity.

? [REDACTED].

3 [REDACTED - NUMBER] additional subsidiaries that not currently doing business in Tennessee will convert to SMLLCs as part
of the Reorganization. Because these entities are not doing business in Tennessee, they are not addressed in this ruling.

Ruling: Yes. Prior to the Reorganization, [CORPORATION] and each of the Converting Entities
is treated as a separate entity for Tennessee franchise and excise tax purposes.
[CORPORATION] and each of the Converting Entities must, therefore, file separate Tennessee
franchise and excise tax returns for the tax year ending December 31, 2016.

2. For the tax year ending December 31, 2017, should [CORPORATION'S] Tennessee franchise
   and excise tax return include all of the Converting Entities?

Ruling: Yes. Following the Reorganization, the Converting Entities will be disregarded to
[CORPORATION] for purposes of the Tennessee franchise and excise taxes. Accordingly, all of
the Converting Entities must be included on [CORPORATION'S] Tennessee franchise and
excise tax return for the tax year ending December 31, 2017.

3. For the tax year ending December 31, 2016, should [CORPORATION] exclude the property
   and net worth of the Converting Entities on its Tennessee franchise and excise tax return?

Ruling: Yes. [CORPORATION] should exclude the property and net worth of the Converting
Entities and include only its property and calculated apportioned net worth on its Tennessee
franchise and excise tax return for the tax year ending December 31, 2016.

4. For the tax year ending December 31, 2016, will the Converting Entities and the Merging
   Entity have the ability to utilize the consolidated net worth election?

Ruling: For the tax year ending December 31, 2016, the Converting Entities will be included in
[CORPORATION'S] affiliated group for purposes of the Tennessee franchise tax consolidated
net worth election. If the Merging Entity merges out of existence and into [CORPORATION]
pursuant to the Reorganization, however, the Merging Entity will not be included in
[CORPORATION'S] affiliated group for the tax year ending December 31, 2016, because TENN.
CODE ANN. 8 67-4-2004(16) would in that case require the Merging Entity to file its Tennessee
franchise and excise tax return in final return status.

ANALYSIS

Tennessee imposes an excise tax at the rate of 6.5% on the net earnings of all persons doing
business in Tennessee.” Tennessee also imposes a franchise tax at the rate of $0.25 per $100, or
major fraction thereof, on the net worth of a person doing business in Tennessee.” Persons subject
to the Tennessee franchise and excise taxes include, but are not limited to, corporations such as
[CORPORATION] and limited liability companies.’ With certain limited exceptions, each taxpayer is
considered a “separate and single business entity” for Tennessee franchise and excise tax purposes
and must file its Tennessee franchise and excise tax return on a separate entity basis.®

° TENN. CODE ANN. 8 67-4-2007(a) (Supp. 2016).
° TENN. CODE ANN. 88 67-4-2105((a) (Supp. 2016), -2106(a) (2013).
7 TENN. CODE ANN. § 67-4-2004(38) (Supp. 2016).

8 TENN. CODE ANN. 8 67-4-2007(e)(1) (Supp. 2016); TENN. CODE ANN. 8 67-4-2106(c).

1 AND 2. DISREGARDED ENTITY STATUS

Prior to the Reorganization, [CORPORATION] and each of the Converting Entities is treated as a
separate entity for Tennessee franchise and excise tax purposes. [CORPORATION] and each of the
Converting Entities must, therefore, file separate Tennessee franchise and excise tax returns for the
tax year ending December 31, 2016.

Following the Reorganization, the Converting Entities will be disregarded to [CORPORATION] for
Tennessee franchise and excise tax purposes. Accordingly, all of the Converting Entities must be
included on [CORPORATION'S] Tennessee franchise and excise tax return for the tax year ending
December 31, 2017.

TENN. CODE ANN. 88 67-4-2007(d) (Supp. 2016), -2106(c) (2013) provide that, for Tennessee franchise
and excise tax purposes, a business shall be classified as a corporation, partnership, or other type of
business entity, consistent with the way the entity is classified for federal income tax purposes.
However, TENN. CODE ANN. 88 67-4-2007(d), -2106(c) further provide that “entities that are
disregarded for federal income tax purposes, except for limited liability companies whose single
member is a corporation, shall not be disregarded” for Tennessee franchise and excise tax
purposes. Thus, to be disregarded for Tennessee franchise and excise tax purposes, an entity must
be (1) a single member limited liability company; (2) disregarded for federal income tax purposes;
and (3) wholly owned by a corporation.

For purposes of TENN. CODE ANN. 88 67-4-2007(d), -2106(c), the term “corporation” includes an entity
formed as a corporation under state law; a non-corporate entity whose default classification for
federal tax purposes is to be treated as a corporation; an entity formed under another country’s
laws whose default classification for federal tax purposes is to be treated as a corporation;” and an
entity that makes an election on federal Form 8832 (Entity Classification Election) to be classified as a
corporation for federal tax purposes.

TENN. CODE ANN. 8 48-249-1003 (2013) provides that, “[flor purposes of all state and local Tennessee
taxes, a domestic or foreign LLC shall be treated as a partnership or an association taxable as a
corporation, as such classification is determined for federal income tax purposes.”’° Thus, for
Tennessee franchise and excise tax purposes, a limited liability company will be treated as a
corporation, partnership, or disregarded entity in the same manner as it is for federal purposes.

With regard to tiered ownership of limited liability companies, TENN. Comp. R. AND REGS 1320-06-01-
A0(2) (2016) (“Rule 40(2)”) provides that "to determine whether a limited liability company is
disregarded for franchise and excise tax purposes when it is only indirectly owned by a corporation,

° See Treas. Reg. 8 301.7701-2(b)(8) (West, Westlaw through Apr. 27, 2016) (listing foreign entities that are classified federally
as corporations).

'° This provision was enacted in 1994 as part of the Tennessee Limited Liability Company Act, see Tennessee Limited Liability
Company Act, ch. 868, 81, 1994 Tenn. Pub. Acts 654, 654-752 (originally codified at TENN. CODE ANN. 8 48-211-101), codified as
amended at TENN. CODE ANN. 8 48-249-1003, before the publication of the federal “check-the-box” regulations in late 1996. As
a result, the provision does not specifically reference “disregarded” entity option not available under the federal regulations.

the analysis must take a ‘top-down’ approach and begin with the corporation and all directly-owned
entities that directly or indirectly own the limited liability company.”

Before the Reorganization, each of the Converting Entities is treated as separate taxpayers under
Tennessee franchise and excise tax law.'' [CORPORATION'S] Reorganization will be effective on
December 31, 2016. [CORPORATION] and the Converting Entities should continue to file as separate
taxpayers, in accordance with TENN. CODE ANN. 88 67-4-2007(e)(1), -2106(c), as they have in previous
years, for the tax year ending December 31, 2016.

For the tax year ending December 31, 2017, [CORPORATION] should file its Tennessee franchise and
excise tax return to include all of the Converting Entities in its return.

Following the Reorganization, each of the Converting Entities will be a SMLLC that is treated as a
disregarded entity for federal income tax purposes. The Directly Owned First Tier Converting Entities
will be disregarded SMLLCs for federal income tax purposes following the Reorganization. The
Directly Owned First Tier Converting Entities are wholly owned by a corporation, [CORPORATION].
Therefore, following the Reorganization, the Directly Owned First Tier Converting Entities are treated
as disregarded entities for Tennessee franchise and excise tax purposes. Because the Directly
Owned First Tier Converting Entities are disregarded, they will be treated as a division of their owner,
[CORPORATION], for Tennessee franchise and excise tax purposes following the Reorganization.

Furthermore, following the Reorganization, the Indirectly Owned Second Tier Converting Entities will
be disregarded SMLLCs for federal income tax purposes. The Indirectly Owned Second Tier
Converting Entities will be wholly owned by various Directly Owned First Tier Converting Entities that
are all SMLLCs. However, because the Directly Owned First Tier Converting Entities will be treated as
divisions of [CORPORATION], [CORPORATION] will be treated as the Indirectly Owned Second Tier
Converting Entities’ direct owner for purposes of the Tennessee franchise and excise taxes following
the Reorganization. Because the Indirectly Owned Second Tier Converting Entities will be treated as
wholly owned by a corporation (i.e., [CORPORATION]) the Indirectly Owned Second Tier Converting
Entities will be entities that are disregarded to [CORPORATION] for Tennessee franchise and excise
tax purposes following the Reorganization.

After fully analyzing the status of the Converting Entities within the organizational structure, using
the top-down approach required under RULE 40(2), all of the Converting Entities will be treated for
Tennessee franchise and excise tax purposes as entities that are disregarded to [CORPORATION].
Because the Converting Entities will be disregarded following the Reorganization, they will be
treated as divisions of their owner, [CORPORATION]. Accordingly, [CORPORATION] must include the
Converting Entities in its Tennessee franchise and excise tax return beginning with the tax year
ending December 31, 2017.

3. SEPARATE TAXPAYER FILING
   [CORPORATION] should exclude the property and net worth of the Converting Entities and include

only its property and calculated apportioned net worth on its Tennessee franchise and excise tax
return for the tax year ending December 31, 2016.

"' See TENN. CODE ANN. 88 67-4-2007(d), -2106(c).

As stated above, before the Reorganization, each of the Converting Entities is treated as a separate
entity under Tennessee franchise and excise tax law.'* [CORPORATION'S] Reorganization will be
effective on December 31, 2016. [CORPORATION] and the Converting Entities should continue to file
as separate entities, in accordance with TENN. CODE ANN. 88 67-4-2007(e)(1), -2106(c), as they have in
previous years, for the tax year ending December 31, 2016.

Because [CORPORATION] and the Converting Entities should continue to file as separate entities for
the tax year ending December 31, 2016, the calculation of the apportioned net worth and the
reporting of property in the state should also be on a separate entity basis. Accordingly,
[CORPORATION] should not include the Converting Entities’ property or net worth on its Tennessee
franchise and excise tax return for the tax year ending December 31, 2016.

4. CONSOLIDATED NET WORTH ELECTION

For the tax year ending December 31, 2016, the Converting Entities will be included in
[CORPORATION'S] affiliated group for purposes of the Tennessee franchise tax consolidated net
worth election. If the Merging Entity merges out of existence and into [CORPORATION] pursuant to
the Reorganization, however, the Merging Entity will not be included in [CORPORATION'S] affiliated
group for the tax year ending December 31, 2016, because TENN. CODE ANN. 8 67-4-2004(16) would in
that case require the Merging Entity to file its Tennessee franchise and excise tax return in final
return status.

All entities that are included in the [CORPORATION'S] affiliated group '® can make a joint election to
compute net worth on a consolidated basis for purposes of calculating the Tennessee franchise
tax.'* All entities that are disregarded for Tennessee franchise and excise tax purposes to a member
of the affiliated group are covered by the consolidated net worth election by virtue of being
disregarded to an affiliated group member. If the affiliated group makes a consolidated net worth
election, all entities that are part of the group and subject to the Tennessee franchise tax must
compute net worth on a consolidated basis.

To compute net worth on a consolidated basis, all members of an affiliated group must file a group
consolidated net worth registration form on or before the due date of the tax return for the period
for which the election is to take effect.'° If a member enters or leaves the group at any time during

"2 See TENN. CODE ANN. 88 67-4-2007(d), -2106(c).

13 An “affiliated group” is defined as (1) “[a] taxpayer that, standing alone, is subject to the Tennessee franchise tax”; (2) “[alll
other domestic persons in which the taxpayer, directly or indirectly, has more than 50% ownership interest”; (3) “[a]ll other
domestic persons that, directly or indirectly, have more than 50% ownership interest in the taxpayer”; and (4) “[a]ll other
domestic persons in which a person described in [(3), above,] directly or indirectly, have more than 50% ownership interest,
regardless of whether such persons do business in Tennessee.” TENN. CODE ANN. 8 67-4-2004(2)(A). For this purpose, a non-
corporate taxable entity is more than 50% owned if upon liquidation more than 50% of the assets of the non-corporate
taxable entity, directly or indirectly, accrue to a member or members of the affiliated group. TENN. CODE ANN. 8 67-4-
2004(2)(B).

• The computation of consolidated net worth includes the financial information of all entities that are part of the affiliated
  group regardless of whether an entity must individually file a franchise and excise tax return.

'S TENN. CODE ANN. § 67-4-2103(g) (2013). The consolidated net worth registration form is available on the Department's
website at https://www.tn.gov/assets/entities/revenue/attachments/f1308301.pdf.

the tax year, the group must file an amended group registration form on or before the due date of
the return for the period in which the event takes place.'° Once made, the consolidated net worth
election remains in effect for a minimum of five years.'” After the initial five years, the consolidated
net worth computation election will continue unless the group revokes its election by filing a group
revocation election form. '®

However, TENN. CODE ANN. 8 67-4-2115(b) (Supp. 2016) provides that when a taxpayer is “part of an
affiliated group that has elected to compute its net worth on a consolidated basis, such election shall
not apply to the taxpayer while it is in final return status unless the entire affiliated group is in final
return status during the same tax period”’? TENN. CODE ANN. 8 67-4-2004(16) (Supp. 2016) defines
final return status as “the status of any person... that has commenced the process of effecting a
surrender of charter, withdrawal of qualification to do business in this state... merger...
conversion... or any similar event that results in, or is intended to result in, the taxpayer ceasing to
exist, or no longer being subject to the tax imposed by this part.” Final return status applies to “the
first return that reflects any activity or event giving rise to such status, and shall apply to all
subsequent returns filed by the taxpayer.””°

For the tax year ending December 31, 2016, [CORPORATION] and the Converting Entities comprise
an affiliated group as defined under TENN. CODE ANN. 8 67-4-2004(2), and [CORPORATION] has
represented that all such entities were included in its consolidated net worth election.' Although a
reorganization is taking place, the Converting Entities will not be in “final return status” because they
will continue doing business in Tennessee and subject to the Tennessee franchise and excise taxes.
The Tennessee Revised Limited Liability Company Act governs conversions in Tennessee. TENN. CODE
ANN. 8 48-249-703(e) (2016) states that “[w]hen any conversion of another entity to a domestic LLC
has become effective under this section . . . (1) [t]he domestic LLC shall be deemed to be the same
entity as the converting other entity.”* Because the Converting Entities are deemed under state law
to be the same entities as before the conversion, will continue doing business in Tennessee, and will
continue to be subject to the Tennessee franchise and excise taxes, they will not fall under the final

"id.

” TENN. CODE ANN. § 67-4-2103(h).

"8 Id. TENN. CODE ANN. § 67-4-2103(i) authorizes the Commissioner of Revenue to accept a late election or a late revocation of
an election, or to permit any early revocation of an election to compute net worth on a consolidated basis if the
commissioner determines there is reasonable and good cause for such action.

1° TENN. CODE ANN. 8 67-4-2115(b) (Supp. 2016).

?° TENN. CODE ANN. 8 67-4-2015(h) (Supp. 2016).

*1 all foreign entities that are part of the organizational structure are excluded from the affiliated group making the election.
Each affiliated group member that is subject to the Tennessee franchise and excise tax must file its own separate franchise
and excise tax return, but the consolidated net worth upon which each entity’s franchise tax is imposed is computed based

upon the assets and liabilities of all members of the affiliated group. See TENN. CODE ANN. 8 67-4-2106(b).

» “If the converting other entity is a foreign entity, the conversion shall be permitted under the laws of the jurisdiction of the
converting other entity.” TENN. CODE ANN. 8 48-249-703(g).

return provisions. Accordingly, [CORPORATION'S] affiliated group will be able to utilize the
consolidated net worth election for the tax year ending December 31, 2016.

If the Merging Entity merges out of existence and into [CORPORATION] pursuant to the
Reorganization, however, the Merging Entity will be in final return status because it will cease to
exist after the merger. The Merging Entity’s status will not terminate the consolidated net worth
election, but [CORPORATION] must file an amended group registration form following the
Reorganization, informing the Department of Revenue of the change before the due date of the
franchise and excise tax return.”

Brent C. Mayo
Assistant General Counsel

APPROVED: Richard H. Roberts
Commissioner of Revenue

DATE: November 18, 2016

°3 TENN. CODE ANN. 8 67-4-2103(g).

Appendix A

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