Did Florida let a diversified corporate group stop filing consolidated returns?

Subject

Request for Authority to Discontinue Consolidated Filing

Plain-English summary

Florida allowed the affiliated group to discontinue consolidated corporate income tax filing. Since making its election, the parent had expanded outside Florida, entered additional related businesses, and developed lines requiring separate strategies, management teams, and autonomy.

An investment banker advised that the expanding line would be attractive as a stand-alone IPO but that combining all three lines would be less successful. The Department treated those changed circumstances, together with the expectation of the same or more Florida tax on separate returns, as sufficient cause.

What this means for you

The ruling did not create a general right to revoke a consolidated election. The approval depended on the requester's specific business evolution and four conditions: an effective deconsolidation year; no realized but unrecognized income or expense items that could later benefit an affiliate; separate-return tax substantially the same as or greater than the pro forma consolidated tax; and no return to a Florida consolidated group before a stated but redacted year.

Common questions

Q: Did Florida approve the request? Yes, subject to all four stated conditions.

Q: What business changes supported approval? Expansion beyond Florida, new related business lines, separate management needs, and a proposed stand-alone IPO.

Q: Was tax reduction the stated reason? No. The group represented that separate filing would produce the same or more Florida corporate income tax.

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)(b) — 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 00C1-008

Original ruling text

SUMMARY

QUESTION: May a parent company be granted permission to
cease filing Florida consolidated tax returns based upon
major business changes, and the acquisition of a subsidiary
utilizing a different accounting system?

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 address
changes in business activities, and difficulties in
reconciling two new accounting systems. Taxpayer will pay
the same or more tax based upon separate return filing.

Jun 20, 2000

RE: Technical Assistance Advisement 00C1-008
Corporate Income Tax
Request for Authority to Discontinue Consolidated Filing
s. 220.131, F.S., Consolidated Filing Election
XXX (hereinafter referred to as "Taxpayer")

Dear :

Your letter of XX, requests permission to discontinue filing
consolidated returns for Florida corporate income tax purposes
for the tax year ended XX. On XX, you provided additional
information relating to your request. This response to your
request constitutes a Technical Assistance Advisement under
Chapter 12-11, Florida Administrative Code, and is issued to you
under authority of s. 213.22, Florida Statutes.

FACTS SUPPLIED BY TAXPAYER

Taxpayer is a XXX corporation that currently reports its income
on a consolidated basis for Florida corporate income tax
purposes as the parent of an affiliated group (the "Taxpayer
Group"). Taxpayer made its election to file Florida

consolidated returns in XX, and at that time, only did business
in the State of Florida. According to Taxpayer, the consolidated
return election was made without consideration of future events.
Soon thereafter, Taxpayer entered a related line of business,
and expanded this business outside the State of Florida. This
new line of related business proved to be very successful, while
the old line of business experienced little or no growth. In
the early XX's, Taxpayer underwent a major corporate
reorganization whereby the two lines of business were
reorganized into two subsidiaries under the common ownership of
Taxpayer.

In recent years, Taxpayer has started a third related line of
business, which is primarily directed at the XXX. This business
is incorporated in the State of Florida. Taxpayer has continued
to expand its business into additional states, and its sales
volume has increased substantially since XX. Taxpayer's
original line of business has continued to experience very
limited growth, and has not expanded outside the State of
Florida. Taxpayer's lines of business have taken different
directions over the past XX years, and those businesses now
require separate business strategies, separate management teams,
and strategic autonomy. Taxpayer has consulted with an
investment banking firm, and has been advised that the expanding
line of business would be attractive as a stand-alone issue in
the IPO market. According to this investment firm, a
combination of the three lines of business would not be as
successful in an IPO offering.

Taxpayer represents that it is not under audit, and that this
issue is not being considered by the Department of Revenue.
Taxpayer further represents 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.

If the Taxpayer and its affiliates file on a separate return
basis, rather than a consolidated basis, they are expected to
pay the same or more in Florida corporate income taxes for the
foreseeable future. The Taxpayer will continue to file

consolidated federal income tax returns.

LEGAL AUTHORITY

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

(1) 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:

(3) 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.

Rule 12C-1.0131 (3)(b), F.A.C., states:

(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 had a substantial
   adverse effect on the consolidated tax liability of a 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.

ISSUE PRESENTED

Has sufficient reasonable cause been established for the
Executive Director to grant permission to Taxpayer to stop
filing consolidated Florida corporate income tax returns?

DISCUSSION AND ANALYSIS

Taxpayer has relied upon Rule 12C-1.031(3)(b)2.a., F.A.C., which
permits the Executive Director to consider "[c]hanges in law or
circumstances, including changes which do not affect income tax
liability." Taxpayer contends that the business of the
affiliated group has changed significantly since 1982, and
suggests that continued filing of consolidated returns would be
unduly burdensome to its business plan.

Since electing consolidated reporting, Taxpayer has
substantially expanded its business, and has changed its core
business. At the time of its XXX consolidated return election,
Taxpayer's business was limited to the State of Florida. Since
that time, Taxpayer has expanded outside the State of Florida,
and has entered new, but related lines of business. Taxpayer
did not consider these potential changes in its business when it
made its consolidated return election in XX. Taxpayer and its
affiliates will pay the same or more in tax by filing separate

returns. Taxpayer wishes to deconsolidate in order to obtain
the substantial benefits an IPO may bring to its shareholders.
The existence of all four of these factors establishes that the
substantial reasons exist in the affiliated group, as compared
to XX, when Taxpayer first elected to file on a consolidated
basis, 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 the Taxpayer to discontinue
filing consolidated corporate income tax returns for the tax
year beginning XX, and later years:

1. That the deconsolidation is effective for the tax year
   ending on XX;

2. That Taxpayer has no realized but unrecognized income or
   expense items that may be recognized at a later date which
   would benefit an affiliate of the Taxpayer;

3. That the difference in tax liability for the tax year
   ended XX, between the separate tax returns filed and a pro
   forma consolidated return for the same period is
   substantially the same or greater than the amount of tax on
   the pro forma consolidated return;

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

CONCLUSION

Taxpayer has met the requirements for granting permission to
discontinue the Florida corporate income tax consolidated filing
election. Accordingly, Taxpayer's request for permission to
file separate income tax returns for the tax year ended XX, is
granted.

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 specific situation summarized above.
You are advised that subsequent statutory or administrative rule
changes or judicial interpretations of the statutes or rules
upon this advice is based may subject future transactions to a
different treatment than expressed in this response.

You are further advised that this response, your request and
related back-up 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 that 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 the
identification of the Taxpayer. Your response should be
received by the Department within 15 days of the date of this
letter.

Sincerely,

Gary A. Moreland
Technical Assistance and Dispute Resolution

GAM/gm
Control No. 41125