Two thousand, seven hundred family owned companies in Tennessee are organized as family owned non-corporate entities or FONCEs, which allows them to shield passive investments such as commercial property and rentals from state franchise and excise taxes. FONCEs hold at least $5 billion in property and $500 million in commercial rental income. The Bredesen administration says that is unfair to non-family competitors and wants to do away with the exemption.
Source: State Revenue Commissioner Reagan Farr
NASHVILLE — Strengthened by new legislative majorities, Republican leaders say they will resist expected attempts by Democratic Gov. Phil Bredesen to close off what the governor calls a “fairly outrageous” $45 million “loophole” benefiting some family owned businesses.
Republican Lt. Gov. Ron Ramsey, the Senate speaker, said he believes Gov. Bredesen likely would try to use that money to “plug” part of an estimated $800 million to $1 billion revenue shortfall.
But the Blountville lawmaker said that “philosophically I adamantly oppose it.”
“Tell those people who are paying the $45 million that all he (Bredesen) is doing is plugging a loophole,” the lieutenant governor said. “He’s raising their taxes.”
During recent budget hearings, Gov. Bredesen signaled that he once again will seek to end state tax exemptions on commercial rental income for businesses registered as family owned non-corporate entities. Since 2000, the companies, organized as limited liability companies, have been exempt from the state’s two main business taxes.
“I think it’s sinful on the one hand to be talking about laying off people and on the other hand giving a huge loophole to relatively wealthy individuals,” Gov. Bredesen said last month.
Administration efforts to close the loophole died last spring when business groups and legislators, including the bill’s House sponsor, then-Majority Leader Gary Odom, D-Nashville, questioned changes.
Since then, Republicans have strengthened their hand in the Senate with a 19-14 majority. House Republicans are expected to control the chamber after gaining a 50-49 majority.
Sen. Bo Watson, R-Hixson, a Senate Finance Committee member, said he opposed eliminating the commercial rental provision last session, seeing it as a tax increase.
“I don’t know why I would change my position on that unless they bring some new revelation that I didn’t realize last year,” Sen. Watson said.
Gov. Bredesen has told many departments they will have to slash spending in the fiscal year 2010 budget by as much as 15 percent.
Calling the issue one of fundamental fairness, Revenue Commissioner Reagan Farr said there is “no justifiable argument why you can say two office buildings on the same street should be taxed differently because one is owned by two brothers and the other is owned by two unrelated parties.”
The commissioner said the state contacted some 8,800 limited liability companies about their operations. About 2,700 say they hold commercial property, he said.
Family owned non-corporate entities are shielded from paying taxes on some $5 billion worth of property and $500 million of corporate rental income, Mr. Farr said. He said some $1.5 billion of property — and an estimated $216 million in rent — involves FONCE-owned property rented to a business with the same owner.
“They’re basically paying rents to themselves and sheltering it from taxes,” he said.
Commissioner Farr said the state is unlikely to collect the full $45 million in taxes from the entities because some will convert to business structures qualifying for other types of exemptions.
Still, he said, “we know it’s going to be more than the $15 million” figure provided to lawmakers earlier this year.
Andy Sher is a Nashville-based staff writer covering Tennessee state government and politics for the Times Free Press. A Washington correspondent from 1999-2005 for the Times Free Press, Andy previously headed up state Capitol coverage for The Chattanooga Times, worked as a state Capitol reporter for The Nashville Banner and was a contributor to The Tennessee Journal, among other publications. Andy worked for 17 years at The Chattanooga Times covering police, health care, county government, ...