Predators Edition: All CAPS All the Time for Tennessee's Franchise & Excise Tax Obligated Member Exemption?

Nashville has become a hockey town, so when someone says something about the Caps in Nashville now, the Predators fans start drooling over Lord Stanley’s Cup. But in Tennessee’s franchise and excise tax world, there is a lesser-known CAPS provision that can pack a similar pop for unsuspecting obligated member entities who think they are exempt from the F&E tax.

By way of background, Tennessee taxes limited liability companies (LLCs), limited partnerships (LPs) and limited liability partnerships (LLPs) under the same tax laws that apply to tax corporations. Unlike corporations, however, Tennessee F&E law allows LLCs, LPs and LLPs to waive the limited liability protections that those entities generally provide. Such a waiver qualifies an entity waiving limited liability for an F&E exemption known as the obligated member entity exemption.

To make this election, LLCs, LPs and LLPs must include in their publicly-filed organizing document/articles of organization a provision that specifically states that the entity has waived limited liability. Here’s where it gets a little tricky…

The statutory provisions for LPs and LLPs specifically state that the phrase included in the organizing document that waives limited liability must be typed in …. wait for it … ALL CAPS. The statute specifically provides that it must be in all capital letters or the entity does not meet the statutory requirements of the exemption. You want to talk about a trap for the unwary…

Interestingly, however, the ALL CAPS requirement is not included in the waiver provisions for LLCs, so a LLC may waive limited liability by including a specific waiver provision in the articles of organization, and it need not be in all caps.

This recently came up in an exemption denial that the Department issued to a taxpayer, and the denial specifically stated that the exemption did not apply because the waiver language was not in all CAPS. Fortunately for the taxpayer, they had chosen an LLC rather than an LP or LLP as the organization form, so the statute did not require that the waiver be listed in all caps, so the LLC had properly qualified for the obligated member entity exemption, and a determination was issued granting the exemption.

This is a reminder of this trap and the fact that even the Department gets it wrong at least some of the time. Obligated member entities should be on the lookout for this TRAP, and LPs/LLPs might consider reviewing their organizational documents to confirm that the appropriate capitalizations were included in the organizing LP/LLP agreement. If not, it would be worth an amended and restated LP/LLP agreement to get that cleaned up before the Department decides to look at it.

Yes, the Preds have to be worried about the Caps on their quest for the Cup this year, but with this reminder, hopefully obligated member LLCs, LPs and LLPs don’t have to be worried about their own CAPS.