Could an expanded and diversified corporate group stop filing Florida consolidated returns?

Subject

Consolidated Filing Election

Plain-English summary

Florida allowed the affiliated group to stop filing consolidated corporate income tax returns. The parent had grown from a single operation into a much larger multistate group with many subsidiaries and more diverse activities.

The Department did not find a material distortion, substantial adverse tax effect, or negative change in tax law. It nevertheless concluded that the magnitude of the group's organizational and operational changes affected the prudence of continuing consolidated filing.

What this means for you

The approval depended on four conditions: a specified effective year; no realized but unrecognized items that could later benefit a group member; a stated separate-versus-consolidated pro forma tax difference; and a bar on rejoining a Florida consolidated group before a specified year. Those dates and the tax amount are redacted.

Common questions

Q: Did the Department approve separate filing? Yes, subject to all four conditions.

Q: Did the group prove consolidated filing distorted Florida income? No. Approval rested on the scale of the business changes instead.

Q: Did the ruling waive estimated-tax penalties in advance? No. The Department said it could consider abatement only if penalties were later imposed.

Citations and references

• Fla. Stat. § 220.131(1) — consolidated-return election
• Fla. Stat. § 220.131(3) — continued consolidated filing unless the director consents
• Fla. Admin. Code r. 12C-1.0131(3) — permission and good-cause factors for discontinuing consolidated returns
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 00C1-004

Original ruling text

SUMMARY

QUESTION: May a parent company be granted permission to
cease filing Florida consolidated tax returns based on
changes in their organizational structure?

ANSWER - BASED ON FACTS BELOW: The parent company was
granted permission to cease filing Florida consolidated tax
returns based on the provisions of the F.A.C., which
addresses changes in business activities.

May 10, 2000

Re: Technical Assistance Advisement 00C1-004
Corporate Income Tax - Consolidated Filing Election
s. 220.131, F.S.
XXX, hereinafter referred to as "A"
XXX, hereinafter referred to as "B"
XXX, hereinafter referred to as "C"

Dear :

Your letter of XX, requested a Technical Assistance Advisement
granting the taxpayer referenced above permission to cease
filing its Florida corporate income tax returns on a
consolidated basis. This response to your request constitutes a
Technical Assistance Advisement under Chapter 12-11, Florida
Administrative Code, and is issued to you under the authority of
s. 213.22, Florida Statutes.

FACTS

Your letter of XX, states that "A" was incorporated in Florida
in XX. In XX, "A" opened an entity in Florida. "A" changed its
name, in XX, to the name XXX it currently uses.

In XX "A" owned XXX subsidiaries and a XXX interest in another
corporation. In XX, "A" purchased the remaining XXX of that

corporation to attain sole ownership. "A" also invested in an
out-of-state corporation which purchased "B". Additionally, "A"
invested in a XXX corporation which acquired a XXX interest in
"C". By the end of XX, "A" owned XXX subsidiaries.

During XX, "A" acquired another corporation positioned in the
subject industry, which owned XXX subsidiaries in XXX other
states. "A" also increased its ownership in "C" to XXX. At the
end of XX, "A" owned XXX subsidiaries. "A's" assets increased
from XXX at the beginning of XX, to XXX at the end of XX.

In XX, "A" formed a new subsidiary and acquired an entity
located in another state. "A" continues to expand, investing in
subsidiaries which are constructing facilities in XXX more
states, and is contemplating expanding its operations into XXX
additional states.

"A" has expanded from a single entity operation in XX in XX, to
owning XXX subsidiaries in XXX other states. Its operations
have expanded from building and purchasing facilities, to XXX an
XXX, and XXX.

"A" stipulates that there are no intercompany transactions, or
deferred income or expense items that may be recognized at a
later date, which would normally be included on a consolidated
return but would not be included on separately filed returns.

On the basis of the facts presented in the letter dated XX,
permission is requested for "A" and its subsidiaries to cease
filing Florida corporate income tax returns on a consolidated
basis, beginning with the tax year ending XX.

LAW

Section 220.131(1), F.S., states:

Notwithstanding any prior election made with respect to
consolidated returns, and subject to subsection (5), for
taxable years beginning on or after September 1, 1984, any
corporation subject to tax under this code which
corporation is the parent company of an affiliated group of

corporations may elect, not later than the due date for
filing its return for the taxable year, including any
extensions thereof, to consolidate its taxable income with
that of all other members of the group, regardless of
whether such member is subject to tax under this code, and
to return such consolidated taxable income hereunder, in
which case all such other members must consent thereto in
such manner as the department may by rule prescribe,
provided:

(a) Each member of the group consents to such filing by
specific written authorization at the time the consolidated
return is filed;

(b) The affiliated group so filing under this code has
filed a consolidated return for federal income tax purposes
for the same taxable year; and

(c) The affiliated group so filing under this code is
composed of the identical component members as those which
have consolidated their taxable incomes in such federal
return.

Section 220.131(3), F.S., states:

The filing of a consolidated return for any taxable year
shall require the filing of consolidated returns for all
subsequent taxable years so long as the filing taxpayers
remain members of the affiliated group or, in the case of a
group having component members not subject to tax under
this code, so long as a consolidated return is filed by
such group for federal income tax purposes, unless the
director consents to the filing of separate returns.
(emphasis added)

Rule 12C-1.0131(3), F.A.C., states in pertinent part:

(a)1. A group which filed, or was required to file, a
consolidated return for the immediately preceding taxable
year is required to file a consolidated return for the
taxable year unless it has permission to discontinue filing

consolidated returns under paragraph (b) or (c) of this
subsection; or as long as a federal consolidated return is
filed.

2. The requirement set forth in s. 220.131(1), F.S., that
   the parent company of an affiliated group must be subject
   to the Florida Income Tax Code is a condition that is
   necessary for an affiliated group to make an election to
   file a Florida consolidated return. There is no
   requirement in s. 220.131, F.S., that the parent be subject
   to the Florida Income Tax Code in each subsequent year.
   Therefore, the affiliated group may not break its
   consolidated election because the parent company no longer
   has nexus with Florida.

(b)1. Notwithstanding that a consolidated return is
required for a taxable year, the Executive Director or the
Executive Director's designee is authorized to grant
permission to a group to discontinue filing consolidated
returns. Any such application shall be made to the Office
of General Counsel, Technical Assistance and Dispute
Resolution, P.O. Box 7443, Tallahassee, Florida 32314-7443,
and shall be made not later than the 90th day before the
due date for the filing of the consolidated return,
including extensions of time. Permission to revoke will be
contingent upon an agreement between the taxpayer and the
Executive Director or the Executive Director's designee to
the terms, conditions, and adjustment under which the
change will be effected.

2. The Executive Director or the Executive Director's
   designee is authorized to grant permission to a group to
   discontinue filing consolidated returns if the net result
   of all amendments to the Florida Income Tax Code or the
   Internal Revenue Code or regulations with effective dates
   commencing within the taxable year has a substantial
   adverse effect on the consolidated tax liability of the
   group for such year relative to what the aggregate tax
   liability would be if the members of the group filed
   separate returns for such year. Other factors which will be
   taken into account in determining whether good cause exists

for granting permission to discontinue filing consolidated
returns beginning with the taxable year include:

a. Changes in law or circumstances, including changes which
do not affect income tax liability;

b. Changes in law which are first effective in the taxable
year and which result in a substantial reduction in the
consolidated net operating loss for such year relative to
what the aggregate net operating losses would be if the
members of the group filed separate returns for such year;
and

c. Changes in the Florida Income Tax Code or the Internal
Revenue Code or regulations which are effective prior to
the taxable year but which first have a substantial adverse
effect on the filing of a consolidated return relative to
the filing of separate returns by members of the group in
such year.

3. Permission to revoke may be contingent upon an agreement
   between the taxpayer and the Executive Director or the
   Executive Director's designee to the terms, conditions, and
   adjustment under which the change will be effected.

DISCUSSION AND ANALYSIS OF LAW

The information provided does not show that continuing to file
consolidated Florida corporate income tax returns would have a
substantial adverse effect on the consolidated group. Moreover,
the continued filing of consolidated returns would not produce a
material distortion of income apportioned to Florida. Further,
the Department is unaware of any changes in the Florida Income
Tax Code or the Internal Revenue Code that would negatively
affect the consolidated group.

However, the information provided by "A" does show that
substantial changes have occurred in the affiliated group from
XXX, when it began its expansion, and XXX, when it acquired many
new subsidiaries, both in terms of the size of the affiliated
group and the diversity of its operations. As a result, the

affiliated group has undergone changes, the magnitude of which
affect the prudence of continuing to file on a consolidated
basis for Florida corporate income tax purposes.

Therefore, based on the following four conditions, the
Department grants permission to discontinue filing consolidated
corporate income tax returns for the tax year ended XXX, and
later years:

1. That permission to file Florida corporate income tax
   returns on a separate basis is effective for tax years
   ending on XXX, and later, and

2. That "A" has no realized but unrecognized income or
   expense items that may be recognized at a later date which
   would benefit any member of "A's" affiliated group, and

3. That the difference in tax liability, on a separate and
   consolidated pro forma basis, for the tax year ended XXX,
   is approximately XXX, and

4. That the affiliated group not become part of a
   consolidated Florida corporate income tax return prior to
   the tax year ending XX.

Your letter also requests that the Department abate penalties
associated with underpayment of "A's" estimated tax for the tax
year ending XXX. However, the Department is not authorized to
abate penalties prior to their having been determined to be due.
If such penalties are imposed, you may request abatement at that
time.

This response constitutes a Technical Assistance Advisement
under s. 213.22, F.S., which is binding on the Department only
under the facts and circumstances described in the request for
this advice as specified in s. 213.22, F.S. Our response is
based on those facts and the specific situation summarized
above. You are advised that subsequent statutory or
administrative rule changes or judicial interpretations of the
statutes or rules upon which this advice is based may subject
similar future transactions to a different treatment than

expressed in this response.

You are further advised that this response, your request and
related backup documents are public records under Chapter 119,
F.S., and are subject to disclosure to the public under the
conditions of s. 213.22, F.S. Confidential information must be
deleted before public disclosure. In an effort to protect
confidentiality, we request you provide the undersigned with an
edited copy of your request for Technical Assistance Advisement,
the backup material and this response, deleting names, addresses
and any other details which might lead to identification of the
taxpayer. Your response should be received by the Department
within 15 days of the date of this letter.

Sincerely,

Suzanne C. Paul
Technical Assistance and
Dispute Resolution

SCP/
Control No.: 40819