TAX NEWS - 2010

Tennessee Income / Franchise Tax: New law requires captive REITs to add back dividends paid deduction and file combined return with affiliates

S.B. 3901, signed by gov. 6/30/10. Effective for tax years ending on or after July 1, 2010, new law generally requires a defined captive real estate investment trust (REIT) to add back its federal dividends paid deduction, as well as requires a "captive REIT affiliated group" to file its Tennessee franchise/excise tax return on a combined basis.

A captive REIT is generally defined as a federal income tax REIT under Internal Revenue Code Sec. 856(c)(1) that is not publicly traded and is 80% or more owned directly or indirectly by a single entity or individual.

A captive REIT affiliated group includes any entity that is greater than 50% owned (directly or indirectly) by a captive REIT; although the law provides an exception for captive REITs owned directly or indirectly by a bank or bank holding company or a public REIT. Also, the federal dividends paid deduction add-back requirement does not apply to a captive REIT that is owned, directly or indirectly, by a bank or a bank holding company or a public REIT.

The new law additionally revises the negligence penalty for any entity or individual not otherwise subject to Tennessee excise tax that fails to pay an excise tax equal to 6.5% of the gain from the sale of any asset in certain situations from the previous "greater of $10,000 or 50% of the underpayment," to simply "50% of the underpayment."

Also, the "Hall income tax" provision requiring every corporation having in-state stockholders to furnish a listing of such stockholders to whom dividends were paid (including their last known addresses and the amount of dividends paid) has been deleted.

For state sales tax purposes, the new law specifies that an exempt sale for resale generally does not include:

- A sale of tangible personal property or software to a dealer for use in the business of selling services; or
- A sale of services to a dealer for use in the business of selling, leasing, or renting tangible personal property or computer software, though some exceptions apply.