A single-member LLC owned by a partnership has no Tennessee activity and just does securitization. Does it qualify for Tennessee's franchise and excise exemption for partnerships and trusts?

Plain-English summary

Tennessee exempts certain asset-backed securitization entities from franchise & excise (F&E) tax. To qualify under § 67-4-2008(a)(10), an entity must (A) be the right type — "classified as a partnership or trust" under the federal entity-classification rules (26 U.S.C. § 7701) — and (B) meet a sole-purpose requirement. This ruling addresses only part (A).

The structure: an LLC that is taxed as a partnership federally (the "Partnership") wholly owns several single-member LLCs (SMLLCs) that are disregarded for federal tax. Their only business is the securitization of loans. The question: do the SMLLCs qualify for the (a)(10)(A) exemption — i.e., do they count as a "partnership" — given that they're disregarded and treated as a division of the Partnership for federal tax?

The Department said yes. Here's the logic:

• This exemption is a rare place where federal classification controls. Ordinarily, federal tax interpretations are not binding when Tennessee applies its own tax law (Little Six Corp. v. Johnson; Tidwell v. Berke). But § 67-4-2008(a)(10)(A) is an exception — it expressly depends on the entity-classification rules under 26 U.S.C. § 7701. So for this exemption, the federal classification is the test.

• A disregarded SMLLC takes on its owner's classification. Under Treas. Reg. § 301.7701-2(a), a single-owner entity is either a corporation or disregarded; if disregarded, its activities are treated the same as a division of its owner. "Disregarded" isn't itself a classification — it's a default that makes the entity's federal treatment match its owner's. Because the SMLLCs' owner is a partnership, the disregarded SMLLCs are treated as partnerships for federal purposes.

• Therefore they meet the entity-type requirement. Since federal law treats the SMLLCs as a division of a partnership, they "qualify as partnerships" for § 67-4-2008(a)(10)(A) and so qualify for the F&E exemption under § 67-4-2008(a)(10) (assuming the sole-purpose test in (a)(10)(B) is met).

Important limits. The Department assumed (did not decide) that the SMLLCs meet the sole-purpose requirement and did not review whether they have nexus with Tennessee. The taxpayer cannot rely on this ruling to support a lack of nexus or entitlement to the exemption, and the ruling doesn't address the Trusts.

The throughline: for the § 67-4-2008(a)(10) securitization exemption — one of the few Tennessee provisions that turns on federal entity classification — a disregarded SMLLC inherits its owner's classification, so an SMLLC owned by a partnership is itself a "partnership" and can qualify.

What this means for you

Securitization and structured-finance vehicles in Tennessee

If you run asset-backed securitization through disregarded single-member LLCs under a partnership, those SMLLCs can qualify for the F&E exemption in § 67-4-2008(a)(10) as "partnerships" — because a disregarded entity is treated as a division of its owner, and here the owner is a partnership. But qualifying on entity type is only half the test; you also have to satisfy the sole-purpose requirement in (a)(10)(B), which this ruling didn't analyze.

This exemption is an exception to Tennessee's "federal law doesn't control" rule

Normally Tennessee applies its own tax law and doesn't treat federal classifications or federal-court rulings as binding. Section 67-4-2008(a)(10)(A) is different — it explicitly incorporates the federal 26 U.S.C. § 7701 classification rules. When a Tennessee provision expressly references federal classification, the federal characterization governs; when it doesn't, don't assume federal treatment carries over.

Don't over-read the ruling — nexus and sole-purpose weren't decided

The Department was careful: it assumed the entities meet the sole-purpose test and did not evaluate nexus, and it said the taxpayer cannot rely on the ruling for those points. So this confirms only the entity-type piece. You still need to independently establish the sole-purpose requirement (and your own nexus position).

Accountants and tax professionals

The analysis: § 67-4-2008(a)(10)(A) requires classification "as a partnership or trust in accordance with 26 U.S.C. § 7701" — an express federal-classification hook that is an exception to the usual rule that federal interpretations don't control Tennessee tax (Little Six Corp.; Tidwell v. Berke). A single-member LLC is disregarded under Treas. Reg. § 301.7701-2(a) and treated as a division of its owner, taking the owner's classification; an SMLLC owned by a partnership is therefore a "partnership" for (a)(10)(A). The (a)(10)(B) sole-purpose requirement and nexus were assumed, not decided. Compare the disregarded-entity/federal-classification analysis in LR 17-07 (SMLLC of a § 501(a)-exempt corporation is disregarded for F&E), LR 18-03 (public-REIT distribution deduction), and RR 19-02 (Subpart F; direct-ownership test).

Common questions

Q: My securitization SMLLC is owned by a partnership. Does it qualify for the § 67-4-2008(a)(10) exemption?
A: On the entity-type test, yes — a disregarded SMLLC is treated as a division of its owner, so an SMLLC owned by a partnership counts as a "partnership." But you must also meet the sole-purpose requirement in (a)(10)(B), which this ruling assumed rather than decided.

Q: Doesn't Tennessee ignore federal tax classifications?
A: Usually, yes — federal interpretations aren't binding when Tennessee applies its own tax law. But § 67-4-2008(a)(10)(A) is an exception: it expressly depends on the federal 26 U.S.C. § 7701 classification rules.

Q: What is a disregarded SMLLC "classified" as?
A: It takes on its owner's classification. "Disregarded" is a default, not a classification — the entity is treated as a division of its owner. Owned by a partnership, it's treated as a partnership.

Q: Does this ruling prove my entity has no Tennessee nexus or is fully exempt?
A: No. The Department assumed the sole-purpose test was met and did not review nexus. You cannot rely on the ruling to establish a lack of nexus or entitlement to the exemption.

Q: Can I rely on this revenue ruling?
A: No. A Tennessee revenue ruling is advisory and is not binding even on the Department, and it interprets the law at a point in time. Confirm your own facts with a tax professional.

Citations and references

Tennessee statutes (Tenn. Code Ann.):

• § 67-4-2008(a)(10) (franchise & excise exemption for certain securitization entities); § 67-4-2008(a)(10)(A), (A)(i) (entity-type requirement — classified as a partnership or trust under 26 U.S.C. § 7701); § 67-4-2008(a)(10)(B) (sole-purpose requirement — assumed met, not analyzed)
• § 67-4-2007(a) (6.5% excise tax); § 67-4-2105(a), § 67-4-2106(a) (franchise tax $0.25 per $100 of net worth); § 67-4-2004(38) (persons subject to F&E)
• § 67-4-2007(e)(1), § 67-4-2106(c) (default separate-entity filing); § 67-4-2108(a)(1), (a)(3) (franchise tax base floor — actual value of Tennessee real/tangible property at cost less depreciation)

Federal authorities:

• 26 U.S.C. § 7701(a)(2) (partnership definition)
• Treas. Reg. § 301.7701-2(a) (single-owner disregarded entity treated as a division of its owner); § 301.7701-2(b); § 301.7701-3(a) (entity-classification election)
• IRS Publication 3402 (Taxation of Limited Liability Companies)

Case law:

• Little Six Corp. v. Johnson, 1999 WL 336308 (Tenn. Ct. App. May 28, 1999) (federal tax rulings not binding when interpreting Tennessee tax law)
• Tidwell v. Berke, 532 S.W.2d 254 (Tenn. 1975) (revision of federal tax law doesn't revise a corresponding but unaltered state tax law)

Related Tennessee rulings: Ltr. Rul. 17-07; Ltr. Rul. 18-03; Rev. Rul. 19-02 (disregarded-entity / federal-classification analysis for F&E).

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/17-14fe.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
REVENUE RULING # 17-14
Revenue rulings are not binding on the Department. 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
Application of the Tennessee franchise and excise tax exemption under TENN. CODE ANN. § 67-42008(a)(10) to single member limited liability companies.
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
A limited liability company taxed as a partnership for federal income tax purposes (the
“Partnership”) wholly owns multiple single member limited liability companies (the “SMLLCs”) that
are disregarded for federal income tax purposes. The Partnership also owns interests in various
statutory trusts (the “Trusts”) that are similarly disregarded and taxed as divisions of the Partnership
for federal income tax purposes. The Partnership is subject to the Tennessee franchise and excise
taxes and conducts its business activities both within and without the state of Tennessee.
The SMLLCs and the Trusts have represented that they do not conduct any of their business
activities in Tennessee and do not believe that they have a substantial nexus with Tennessee such
that they would be subject to Tennessee franchise and excise tax on a separate entity basis. The
SMLLCs’ and the Trusts’ sole business activities are the asset-backed securitization of [REDACTED]
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loans.
RULING
Do the SMLLCs qualify for the exemption under TENN. CODE ANN. § 67-4-2008(a)(10)(A) (Supp. 2016)
because their activities are treated as a division of the Partnership for federal tax purposes?

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The Department has not reviewed or otherwise evaluated whether the SMLLCs and the Trust have nexus with Tennessee.
Similarly, it is assumed for purposes of this ruling that the SMLLCs and Trusts meet the requirements of TENN. CODE ANN. § 674-2008(a)(10)(B) for exemption from Tennessee’s franchise and excise taxes. The taxpayer cannot rely upon this ruling to
support any assertions relating to a lack of nexus with Tennessee or entitlement to any exemption. It is beyond the scope of
this ruling to address the application of the exemption to the Trusts.

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Ruling: Yes, the SMLLCs qualify for the exemption under TENN. CODE ANN. § 67-4-2008(a)(10)(A)
because they are treated as a division of the Partnership for federal tax purposes.
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), 3
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.
TENN. CODE ANN. § 67-4-2008(a)(10) provides an exemption from the Tennessee franchise and excise
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taxes for the types of entities listed in TENN. CODE ANN. § 67-4-2008(a)(10)(A). Qualifying entity types
include those “classified as a partnership or trust in accordance with 26 U.S.C. § 7701, and the
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federal regulations and rulings promulgated under 26 U.S.C. § 7701.”
Interpretations of federal tax law are generally not controlling for purposes of applying Tennessee
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tax law. However, whether an entity qualifies under TENN. CODE ANN. § 67-4-2008(a)(10)(A) presents
an exception to this rule because TENN. CODE ANN. § 67-4-2008(a)(10)(A) depends on the entity
classification rules under 26 U.S.C. § 7701.
26 U.S.C. § 7701(a)(2) (West 2014) defines partnership as a “syndicate, group, pool, joint venture, or
other unincorporated organization, through or by means which any business, financial operation, or
venture is carried on, and which is not, within the meaning of this title, a trust or estate or a
corporation.”
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TENN. CODE ANN. § 67-4-2007(a) (Supp. 2016).

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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.”
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TENN. CODE ANN. § 67-4-2004(38).

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

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Entities that meet the entity type requirement in subsection (A) must also meet the “sole purpose” requirement in
subsection (B). Analyzing subsection (B) is beyond the scope of this ruling because the SMLLCs are assumed to meet the sole
purpose requirement.
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TENN. CODE ANN. § 67-4-2008(a)(10)(A)(i).

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The Tennessee Court of Appeals has stated that “rulings of the federal courts in regard to federal tax laws are not binding on
Tennessee courts when they are called upon to interpret Tennessee tax laws.” Little Six Corp. v. Johnson, 1999 WL 336308 at 3
(Tenn. Ct. App. May 28, 1999); See also Tidwell v. Berke, 532 S.W.2d 254, 261 (Tenn. 1975) (finding that the revision of a federal
tax law does not precipitate a revised interpretation of a corresponding but unaltered state tax law).

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Treas. Reg. § 301.7701-2(a) (West 2016) defines “business entity” as “any entity recognized for federal
tax purposes (including an entity with a single owner that may be disregarded as an entity separate
from its owner under § 301.7701-3).” That section goes on to state that “a business entity with two or
more members is classified for federal tax purposes as either a corporation or partnership. A
business entity with only one owner is classified as a corporation or is disregarded; if the entity is
disregarded, its activities are treated in the same manner as … a division of the owner.” Business
entities not classified as corporations under Treas. Reg. § 301.7701-2(b) are considered “eligible
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entities” and can make a classification election. Eligible entities with a single member can choose to
be classified as an association taxable as a corporation or disregarded as an entity separate from its
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owner.
The SMLLCs qualify for the exemption from the Tennessee franchise and excise taxes in TENN. CODE
ANN. § 67-4-2008(a)(10)(A) because they are disregarded as entities separate from their parent,
which is a partnership, for federal tax purposes.
The SMLLCs have only one owner, the Partnership. Under Treas. Reg. § 301.7701-2(a), the SMLLCs
are classified as entities disregarded as separate from their owner and their income, deductions,
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gains, losses, and credits are reported on the owner’s income tax return.
Being an entity that is
disregarded as separate from its owner for federal tax purposes is not in and of itself a classification,
but instead, a default whereby the entity’s federal tax treatment is the same as its owner’s
classification. Because federal tax law disregards the separate entity status of the SMLLCs, and
instead treats them as a division of their owner, a partnership, the SMLLCs qualify as partnerships
for the purposes of TENN. CODE ANN. § 67-4-2008(a)(10)(A).
Accordingly, the SMLLCs meet the entity type requirement in TENN. CODE ANN. § 67-4-2008(a)(10)(A)
and, therefore, qualify for the exemption from the Tennessee franchise and excise taxes under
TENN. CODE ANN. § 67-4-2008(a)(10).
Brent C. Mayo
Assistant General Counsel

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APPROVED:

David Gerregano
Commissioner of Revenue

DATE:

9/20/17

Treas. Reg. § 301.7701-3(a)

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Id.

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See Internal Revenue Service Publication 3402, Taxation of Limited Liability Companies. https://www.irs.gov/pub/irspdf/p3402.pdf (Last visited August 30, 2017).

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