A corporate group makes a consolidated net worth election for Tennessee franchise tax, and some affiliates are exempt from the tax. Are the exempt affiliates still included in the group, and do their assets count?

Plain-English summary

Tennessee's franchise tax ($0.25 per $100 of net worth) normally treats each company as a separate entity. But a member of an affiliated group can elect to compute its net worth on a consolidated basis (§ 67-4-2103(d)). Here the taxpayer heads a corporate group and plans to make that election. Some of its lower-tier affiliates are exempt from the franchise tax. The question: are the exempt affiliates included in the group for the election, and if so, how are their numbers reported?

The Department's answer: include them as members, but exclude their numbers. Because being a group member and being tax-exempt are "not mutually exclusive," the exempt affiliates are part of the affiliated group for the consolidated net worth election. But:

• their assets and liabilities are excluded from the consolidated net worth calculation — they're listed on FAE 170 Schedule F2 (to give the Department a complete picture of the corporate structure), but without their financial information; and
• their apportionment factors are excluded from both the numerator and the denominator of the group's apportionment formula on FAE 170 Schedule NC (§ 67-4-2111),

because the affiliates are exempt from franchise tax under § 67-4-2105(a).

This is the same principle the Department applied to a financial-institution group in LR 17-06 — the only differences are the forms and apportionment statute (a general affiliated group uses FAE 170, Schedule NC, and § 67-4-2111; a financial-institution group uses FAE 174, Schedule SC, and § 67-4-2118).

A couple of mechanics worth noting: the election locks in for a minimum of five years and then continues until the group revokes it (§ 67-4-2103(h)), and each taxable member still files its own return closing on the same date as the rest of the group. Also, the franchise tax base can't fall below a floor — the actual value of the real or tangible property owned or used in Tennessee (§ 67-4-2108(a)(1)).

The throughline: an exempt affiliate stays a member of the consolidated group — you list it for completeness — but its assets, liabilities, and apportionment factors all drop out, so it adds nothing to the group's franchise tax.

What this means for you

Corporate groups with exempt members making a consolidated net worth election

If your group includes a franchise-tax-exempt affiliate, don't simply omit it from the election. The Department's position is that the exempt affiliate is still a group member and should be listed (FAE 170 Schedule F2), even though its financial information isn't used. Listing it shows the full corporate structure without changing anyone's tax.

"Member of the group" is not the same as "taxed"

Inclusion in the affiliated group and exemption from tax are independent. Report the exempt affiliate as a member, but exclude its assets and liabilities from consolidated net worth and exclude its factors from both sides of the apportionment fraction (Schedule NC, § 67-4-2111). Pulling factors out of both the numerator and denominator keeps the exempt entity from distorting the group's apportionment percentage.

Know the lock-in and the base floor

The consolidated net worth election runs for a five-year minimum and continues until revoked (§ 67-4-2103(h)), so treat it as a multi-year commitment. And remember the franchise base can't drop below the actual value of your Tennessee real/tangible property (§ 67-4-2108(a)(1)), valued at cost less depreciation — consolidating net worth doesn't override that floor.

Accountants and tax professionals

The analysis tracks LR 17-06 (financial institutions) but for a general affiliated group: an affiliate exempt from franchise tax (here under § 67-4-2008(a)(14) / § 56-4-217(b), § 67-4-2105(a)) is included in the affiliated group (§ 67-4-2004(2)) for the § 67-4-2103(d) election, but its assets/liabilities are excluded from consolidated net worth (FAE 170 Sch. F2) and its factors excluded from both the numerator and denominator of the apportionment formula (FAE 170 Sch. NC, § 67-4-2111). Group membership and exemption are not mutually exclusive. Mind the § 67-4-2108(a)(1) property-value floor and the five-year election lock-in (§ 67-4-2103(h)).

Common questions

Q: We're making a consolidated net worth election and one affiliate is exempt. Do we include it?
A: Yes — include it as a group member (list it on FAE 170 Schedule F2), but exclude its assets and liabilities from consolidated net worth and its factors from both the numerator and denominator of the apportionment formula.

Q: Why list an exempt entity at all?
A: To give the Department a complete picture of the corporate structure. Being a member and being exempt are not mutually exclusive, and listing the exempt affiliate doesn't change anyone's tax.

Q: Do the exempt affiliate's apportionment factors count?
A: No. They're excluded from both the numerator and the denominator of the group's apportionment formula (FAE 170 Schedule NC, § 67-4-2111).

Q: Does making the consolidated election lock us in?
A: Yes. The election remains in effect for a minimum of five years and then continues until the group files a revocation (§ 67-4-2103(h)).

Q: Can I rely on this letter ruling?
A: No. A Tennessee letter ruling is binding on 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.):

• § 67-4-2103(d) (consolidated net worth election for franchise tax); § 67-4-2103(g)–(i) (registration form, five-year minimum, late election/revocation)
• § 67-4-2105(a) (franchise tax; the affiliates' exemption); § 67-4-2106(a) (franchise tax $0.25 per $100 of net worth); § 67-4-2007(a) (6.5% excise tax)
• § 67-4-2004(2)(A)–(B) ("affiliated group" — a taxpayer subject to franchise tax plus domestic persons connected by more than 50% ownership); § 67-4-2004(38) (persons subject to F&E)
• § 67-4-2111 (exclude an exempt member's factors from both sides of the franchise apportionment formula); § 67-4-2007(e)(1), § 67-4-2106(c) (default separate-entity filing)
• § 67-4-2108(a)(1), (a)(3) (franchise tax base floor — not less than the actual value of Tennessee real/tangible property, valued at cost less accumulated depreciation)
• § 67-4-2008(a)(14); § 56-4-217(b) (the affiliates' assumed exemption)

Related Tennessee ruling: Ltr. Rul. 17-06 (same "exempt member included but excluded" principle, applied to a financial-institution group — FAE 174, Schedule SC, § 67-4-2118).

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/17-13fe.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 17-13

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 tax to a group of affiliated entities making a consolidated
net worth election.
SCOPE
Revenue Rulings are statements regarding the substantive application of law and statements of
procedure that affect the rights and duties of taxpayers and other members of the public. Revenue
Rulings are advisory in nature and are not binding on the Department.
FACTS
[TAXPAYER] (the “Taxpayer”) is a corporation that owns 100% of the stock of a [REDACTED
COMPANY] that provides [REDACTED - PRODUCTS] to businesses in the [REDACTED] industries; this
[REDACTED COMPANY] in turn owns 100% of the stock of several lower-tier [REDACTED] companies
(collectively “[REDACTED COMPANY] Affiliates”). Taxpayer also owns 100% of an affiliate that
provides consulting services to independent [REDACTED ENTITIES] in Tennessee. The consulting
business is conducted through a single member limited liability company ("SMLLC") that owns
[REDACTED NUMBER] other entities. Taxpayer plans to make an election to report its franchise tax
on a consolidated basis with its affiliates pursuant to TENN. CODE ANN. § 67-4-2103(d). Included in this
election will be the [REDACTED COMPANY] Affiliates, which, for the purposes of this ruling, are
assumed to be exempt under TENN. CODE ANN. §§ 67-4-2008(a)(14), -2105(a); TENN. CODE ANN. § 56-4217(b).
RULINGS
Should Taxpayer include its [REDACTED COMPANY] Affiliates in its affiliated group for purposes of
the consolidated net worth election, even though the [REDACTED COMPANY] Affiliates are exempt
from the Tennessee franchise tax? If so, how should the Taxpayer report the [REDACTED COMPANY]
Affiliates’ net worth when calculating consolidated net worth pursuant to TENN. CODE ANN. § 67-42103(d)?
Ruling: Although the [REDACTED COMPANY] Affiliates are exempt from Tennessee franchise tax,
they are included in the Taxpayer’s affiliated group for purposes of the consolidated net worth
election. However, the [REDACTED COMPANY] Affiliates’ assets and liabilities should be excluded
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from the consolidated net worth calculation, and the [REDACTED COMPANY] Affiliates’ factors
should be excluded from both the numerator and denominator of affiliated group’s apportionment
formula because the [REDACTED COMPANY] Affiliates are exempt from the Tennessee franchise tax
under TENN. CODE ANN. § 67-4-2105(a).
ANALYSIS
Tennessee imposes an excise tax at the rate of 6.5% on the net earnings of all persons, as defined
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under TENN. CODE ANN. § 67-4-2004(38) (Supp. 2016), doing business within 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, pursuant to TENN. CODE ANN. §§ 67-4-2105(a), 2
2106(a) (2013). Persons subject to the Tennessee franchise and excise taxes include, but are not
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limited to, corporations, limited liability companies, and limited partnerships. 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
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separate entity basis.
For tax years beginning on or after January 1, 2004, TENN. CODE ANN. § 67-4-2103(d) (2013) allows a
taxpayer that is a member of an affiliated group to elect to compute its net worth for Tennessee
franchise tax purposes on a consolidated basis. Each affiliated group member computing its net
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worth on a consolidated basis must file a separate Tennessee franchise and excise tax return.
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
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for which the election is to take effect. If a member enters or leaves the affiliated group at any time
during the tax year, the affiliated group must file an amended group registration form on or before
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the due date of the return for the period in which the event takes place.
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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 election will continue unless the affiliated group
1

TENN. CODE ANN. § 67-4-2007(a) (Supp. 2016).

2

Note that, under TENN. CODE ANN. § 67-4-2108(a)(1) (2013), the franchise tax base “shall in no case be less than the actual
value of the real or tangible property owned or used in Tennessee, excluding exempt inventory and exempt required capital
investments.” According to TENN. CODE ANN. § 67-4-2108(a)(3), for purposes of this section, “property” is to be “valued at cost
less accumulated depreciation in accordance with generally accepted accounting principles.”
3

TENN. CODE ANN. § 67-4-2004(38).

4

TENN. CODE ANN. §§ 67-4-2007(e)(1), -2106(c) (2013).

5

Consolidated net worth is reported on Schedule F2 of FAE 170.

6

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

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Id.

8

TENN. CODE ANN. § 67-4-2103(h).

2

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revokes its election by filing a group revocation election form. Following the consolidated net worth
election, each member of the affiliated group that is subject to franchise and excise tax must file its
own franchise and excise tax return. Each member must close its taxable year on the same date as
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all other members of the group.
An “affiliated group” is defined as (1) “[a] taxpayer that, standing alone, is subject to the Tennessee
franchise tax”; (2) “[a]ll 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,
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regardless of whether such persons do business in Tennessee.” For this purpose, a non-corporate
taxable entity is more than 50% owned if upon liquidation more than 50% of the assets of the noncorporate taxable entity, directly or indirectly, accrue to a member or members of the affiliated
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group.
The Taxpayer represents that Taxpayer, {REDACTED COMPANY] Affiliates, and SMLLC comprise an
affiliated group under TENN. CODE ANN. § 67-4-2004(2), and therefore, the group plans to make a
consolidated net worth election.
The Taxpayer states that the [REDACTED COMPANY] Affiliates are exempt from the franchise tax
under TENN. CODE ANN. § 67-4-2105(a). Tennessee franchise tax law does not require such entities to
either be included in the affiliated group or utilize the exemption. The two are not mutually
exclusive. Accordingly, the [REDACTED COMPANY] Affiliates’ assets and liabilities should not be
included when reporting the consolidated net worth on FAE 170 Schedule F2 because the
[REDACTED COMPANY] Affiliates are exempt from the franchise tax under TENN. CODE ANN. § 67-42105(a). Moreover, the [REDACTED COMPANY] Affiliates’ factors should be excluded from both the
numerator and the denominator of the combined group’s apportionment formula on FAE 170
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Schedule NC pursuant to TENN. CODE ANN. § 67-4-2111.

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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.
10

TENN. CODE ANN. § 67-4-2103(d).

11

TENN. CODE ANN. § 67-4-2004(2)(A).

12

TENN. CODE ANN. § 67-4-2004(2)(B).

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Although the [REDACTED COMPANY] Affiliates should be listed on Schedule F2, it is not necessary to include their financial
information. Listing the [REDACTED COMPANY] Affiliates on Schedule F2 allows the Taxpayer to provide the Department with
a complete picture of the Taxpayer’s corporate structure. Listing the [REDACTED COMPANY] Affiliates does not affect the tax
consequences of any entities subject to Tennessee franchise and excise tax.

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Brent C. Mayo
Assistant General Counsel

APPROVED:

David Gerregano
Commissioner of Revenue

DATE:

8/30/17

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