Detailed Tennessee Development
The Tennessee Department of Revenue recently ruled that a financial institution was not doing business in Tennessee and was not subject to Tennessee franchise and excise tax. The taxpayer was a fund organized as a limited partnership whose only activity was owning mortgages and receiving payments on those mortgages. From time to time, the taxpayer owned mortgages associated with properties in Tennessee or mortgages secured by Tennessee borrowers. The taxpayer acquired the mortgages through an independent investment manager. The Department was asked to determine whether the taxpayer was considered “doing business” in the state by virtue of its mortgage ownership activities.
Under Tennessee law, a financial institution is presumed to be doing business in the state if “the sum of its assets and the absolute value of its deposits attributable to sources within this state is five million dollars ($5,000,000) or more.” A financial institution is statutorily defined as any entity that generates 50 percent or more of its gross income from carrying on the “business of a financial institution,” which includes the acquiring or servicing of mortgages on real or tangible personal property. However, Tennessee law also provides a safe harbor under which a financial institution is not deemed to be doing business in Tennessee if its only activity in the state is “the ownership of an interest in a loan … attributed to this state and in which the payment obligations were solicited and entered into by a person that is independent and not acting on behalf of the owner.” The Department first determined that the taxpayer was a financial institution because it was generating its income solely from carrying out the business of a financial institution by acquiring and servicing mortgages. The Department further held that the safe harbor applied; the taxpayer’s activity was limited to owning interests in loans and collecting income from mortgaged property and the activities of the investment manager satisfied the statutory requirement that the mortgages were “solicited and entered into by a person that is independent and not acting on behalf of the owner.” Importantly, the investment manager was not affiliated with the taxpayer and represented numerous clients. Only after the loans were originally entered into would the investment manager assign an interest to a particular client. For more information on Letter Ruling 20-07, please contact Loren Chumley at 615-248-5565.
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