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Tennessee Franchise & Excise Tax Exemptions For Family-Owned Non-Corporate Entities
Sept. 10, 2009
By: W. King Copler, Bryson M. Kirksey
On June 25, 2009, Governor Bredesen signed into law legislation changing the types of income that can be classified as passive income for purposes of determining whether a limited liability company, limited partnership or registered limited liability partnership can qualify as a FONCE (“family-owned non-corporate entity”) and therefore be exempt from the Tennessee F&E tax.
If you own or have a financial interest in a FONCE, such as a limited liability company, limited partnership or registered limited liability partnership, this change in the law may cause the Company to become subject to the F&E tax unless changes are made in the way the Company is organized.
To qualify as a FONCE for the F&E tax exemption, your Company must receive substantially all of its income from passive sources. Until the law was modified, rents from commercial property were included in the definition of passive income. However, with the enactment of the new legislation, rents from commercial property are no longer part of passive income. Additionally, the definition of commercial property is extended to include property with more than four residential units. Depending on the type of income generated by your Company, it may no longer qualify for the FONCE exemption.
To remedy this situation and preserve a FONCE’s exemption from the F&E tax, the new legislation allows an entity to elect obligated member entity (“OME”) status for the entity. This election and the corresponding changes to the entity’s organizational documents must be completed and filed on or before October 1, 2009, in order to preserve the exemption from the F&E tax during the current year.
OME status means that the individual owners and financial interest holders (other than creditors) of a FONCE will be personally liable for the debts of the FONCE in much the same way as general partners are personally liable for the debts of a general partnership. In deciding whether to choose OME status, you may want your accountant to estimate for you the amount of F&E tax that your Company would be required to pay if your Company were to become subject to the F&E tax. If you have a FONCE with any kind of property other than residential (less than four units per tract) or family farm, please contact us or your CPA promptly to determine whether your FONCE may lose its F&E exemption.
If you have any questions regarding the application of the FONCE or OME exemption, or if you would like for us to explain in greater detail the changes that need to be made to elect OME status, please do not hesitate to call our Tax & Estate Preservation Department at 423.756.3000.