BEGIN:VCALENDAR
VERSION:2.0
X-WR-CALNAME:Articles
PRODID:-//Sitemason, Inc//Sitemason Calendar//EN
CALSCALE:GREGORIAN
METHOD:PUBLISH
BEGIN:VTIMEZONE
TZID:US-Central
LAST-MODIFIED:19870101T000000Z
BEGIN:STANDARD
DTSTART:16011104T020000
RRULE:FREQ=YEARLY;BYDAY=1SU;BYMONTH=11
TZOFFSETFROM:-0500
TZOFFSETTO:-0600
TZNAME:CST
END:STANDARD
BEGIN:DAYLIGHT
DTSTART:16010311T020000
RRULE:FREQ=YEARLY;BYDAY=2SU;BYMONTH=3
TZOFFSETFROM:-0600
TZOFFSETTO:-0500
TZNAME:CDT
END:DAYLIGHT
END:VTIMEZONE
BEGIN:VEVENT
UID:http://www.sitemason.com/element/d4rutj0/id/10954
SUMMARY:Tennessee Modifies the FONCE Exception to the Franchise and Excise Taxes and the Filing Requirements for Many Other Exemptions
DESCRIPTION:   The Tennessee General Assembly recently enacted the Tennessee Department of  Revenue’s (TDOR) annual “Technical Corrections Bill\,” and it is awaiting  Governor Bredesen’s signature. The Technical Corrections Bill includes  provisions important to those who own\, operate or advise a limited liability  company\, limited partnership or limited liability partnership (collectively\,  FLP) concerning Tennessee franchise and excise tax matters.  Among the items  changed are the following\:\n  * Family-owned  noncorporate entity (FONCE) exemption no longer includes rent from industrial  and commercial property and certain farm property\;\n  * Partners of an FLP are  permitted to elect\, by October 1\, 2009\, obligated member entity status with  retroactive effect\;\n  * Rental income  paid monthly to an affiliated entity is limited\; and \n  * Established initial and  annual exemption filing requirements.\n FONCE Exemption Limited\n Under existing law\, FLPs in which at least 95 percent of the  ownership interest is owned by members of a defined family group are exempt from  the Tennessee franchise and excise taxes as long as substantially all of its  income is derived from royalties\, rents\, dividends\, interest\, annuities and  sales or exchanges of securities.  For all tax years ending after June 30\, 2009\,  the FONCE exemption is no longer available to an FLP receiving substantially all  of its income from the rental of “industrial and commercial property” or farm  property used for recreational purposes.  FLPs which receive substantially all  of their income from these sources will become subject to the Tennessee  franchise and excise taxes for the current tax year\, unless they qualify under  another exemption. FLPs receiving rental income from residential rental property  will continue to qualify for the FONCE exemption\, provided the property has no  more than 4 residential units\, e.g. a quadplex.\n This provision is effective July 1\, 2009. Consequently\, any rental  income earned on or after that date for the current tax year by the FLP that  thus becomes nonqualifying must be taken into consideration for purposes of  determining if the income requirement is met for purposes of qualifying for the  FONCE exemption during the current year.  Note that if the FLP elects obligated member  entity status under the expanded window outlined below this income becomes  sheltered under that exemption.\n For those FLPs which desire to continue avoiding payment of the  Tennessee franchise and excise taxes\, several options exist. Among them is  qualifying for the obligated member entity exemption by electing to waive  limited liability protection as well as converting to a general partnership.   The two options have the same result of exposing the partners to entity  liabilities\, but they have significant governance differences\, and the general  partnership has an additional potential source of significant liability. Other  options exist\, including ones that minimize the liability exposure to partners.   FLPs should seek advice from legal counsel to explore all options and to  determine both the tax and nontax consequences of each option. \n Obligated Member Entity Election Expanded\n Under existing law\, FLPs for which all of the partners have complied  with the statutory requirements to waive limited liability protection for the  FLP are exempt from the Tennessee franchise and excise taxes.  The only  exception is for those FLPs in which a partner (or any owner in the chain of  ownership of the partner) of such FLP is itself an entity affording limited  liability protection to its owners.  In that case\, the FLP is subject to the  taxes on the portion of its income and equity that is allocable to the partner  retaining its own limited liability protection.  Generally\, the election to  waive limited liability protection must be filed by the later of the inception  of the FLP or January 1st of the year for which the exemption is  sought.\n In light of the amendment to the FONCE exemption\, the Technical  Corrections Bill permits the owners of FLPs to file an election no later than  October 1\, 2009 to waive limited liability protection so that the FLP will  qualify for the obligated member exemption for the current year.  Note that  this expansion of the election time period applies regardless of whether the  electing FLP is currently exempt under the FONCE exemption\, and\, affords a  planning opportunity not only for those seeking an alternate exemption because  of the change to the FONCE exemption but also for those entities that presently  are not exempt from the Tennessee franchise and excise taxes.\n Deduction for Rent Paid to Affiliated Entities Capped\n Under current law\, a lessee of real property can deduct all rent paid  to an affiliated entity\, regardless of whether it is subject to the Tennessee  franchise and excise taxes (e.g. an FLP\, owned by members of the same family\,  that owns the lessee which has elected to waive limited liability)\, thereby  reducing the lessee’s net income subject to the Tennessee excise tax.  The  Technical Corrections Bill limits the rent the lessee can deduct for payments to  an affiliate to a monthly  amount equal to 2 percent of the property tax appraised value of the leased  property. For example\, for a parcel with a property tax value of $500\,000\, the  lessee could deduct up to $10\,000 per month ($500\,000 x 2 percent) for rent.   Rent paid in excess of this cap would be added back to the net earnings of the  lessee. Notably\, rent is not defined in the statute\, making it unclear how the  payment of maintenance expenses and insurance will be treated for purposes of  the 2 percent rule.  A plain reading of the statute suggests that those expenses  can be deducted in addition to the rent threshold.\n Exemption Filing Requirements\n The TDOR presently requires that FLPs file an Application for  Exemption following formation for the initial tax year and Form 183 by April  15th annually thereafter.  The TDOR has taken the position that absent the  timely filing of such forms FLPs were subject to the Tennessee franchise and  excise taxes regardless of whether they would otherwise qualify for an  exemption.  The TDOR’s position was not grounded in any statutory authority.\n The Technical Corrections Bill makes certain exemptions contingent  upon the filing of the initial Application for Exemption with the TDOR within 60  days of the FLP’s formation (or in the case of an existing FLP seeking to  qualify under an exemption\, 60 days from the beginning of the tax year for which  the exemption is sought) and Form 183 by April 15th annually.  If either form is  not timely filed\, then the FLP will not qualify for the exemption otherwise  available\, unless the TDOR grants permission for a late filing.  The TDOR has  the option of imposing a $1\,000 penalty for a late filed form.  Note that these  filing requirements apply only to FLPs seeking to qualify for one of the  following exemptions\:  family-owned non-corporate entities\, farming/personal  residence\, affordable housing\, venture capital funds\, diversified investing  funds\, obligated member entities\, asset-backed securitization entities  (REMIC/FASIT)\, or other entities exempt as securing third-party  indebtedness.\n For more information\, please contact Paul C.  Hayes [http\://www.wallerlaw.com/attorneys/2007/06/11/hayes-paul-c.4752]\, Brett R. Carter  [http\://www.wallerlaw.com/attorneys/2007/06/11/carter-brett-r.4851]or any other member of Waller Lansden's Tax [http\://www.wallerlaw.com/services/tax]  practice.\n    WE ARE REQUIRED BY IRS  CIRCULAR 230 TO INFORM YOU THAT THE PRECEDING DISCUSSION WAS NOT INTENDED OR  WRITTEN TO BE USED\, AND IT CANNOT BE USED\, NOR RELIED UPON\, BY ANY TAXPAYER FOR  THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED UNDER FEDERAL TAX  LAW.  THE ADVICE WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE  TRANSACTIONS OR MATTERS ADDRESSED IN THE DISCUSSION.  EACH TAXPAYER SHOULD SEEK  ADVICE BASED ON ITS PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX  ADVISOR.\nThe opinions expressed in this bulletin are intended for  general guidance only.  They are not intended as recommendations for specific  situations.  As always\, readers should consult a qualified attorney for specific  legal guidance.\n
URL;VALUE=URI:
CATEGORIES:tax,trusts-and-estates
CLASS:PUBLIC
SEQUENCE:5
DTSTAMP:20120208T094808
CREATED;TZID=US-Central:20090622T155002
LAST-MODIFIED;TZID=US-Central:20090827T114019
DTSTART;VALUE=DATE:20090622
END:VEVENT
END:VCALENDAR