Could a much larger and more diversified group stop filing Florida consolidated returns?

Subject

Request for Authority to Discontinue Consolidated Filing

Plain-English summary

Florida granted the affiliated group permission to stop consolidated filing and begin separate returns for the tax year ending December 31, 1999. The Department found good cause in major changes since the original election, including tax-law effects, acquisitions, diversification, new business lines, workforce and apportionment shifts, joint ventures, and increased administrative burdens.

The approval imposed four conditions: the 1999 effective year; no realized-but-unrecognized intercompany items or deferred income or expenses that would escape separate returns; no participation in another Florida consolidated return before the 2004 tax year; and full reporting on the 1999 Florida return of specified gains realized federally but not yet recognized.

What this means for you

A consolidated election was not freely revocable. The group had to show good cause and accept detailed transition safeguards protecting Florida income recognition.

Common questions

Q: Did Florida grant permission to deconsolidate? Yes.

Q: When did separate filing begin? The tax year ending December 31, 1999.

Q: Could the group immediately join another consolidated return? No, not before the 2004 tax year.

Citations and references

• Fla. Stat. § 220.131 — Florida consolidated returns
• Fla. Admin. Code r. 12C-1.0131(3)(b) — permission to discontinue consolidated filing
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 00C1-011

Original ruling text

SUMMARY

QUESTION: May a parent company be granted permission to
cease filing Florida consolidated tax returns based upon
changes in tax law and business circumstances.

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

Sep 18, 2000

Re: Technical Assistance Advisement 00C1-011
Request for Authority to Discontinue Consolidated Filing
Section 220.131, F.S.
Rule 12C-1.0131(3)(b), F.A.C.
XXX (hereinafter referred to as "Taxpayer")
XXX (hereinafter referred to as "Corporation A")
XXX (hereinafter referred to as "Corporation B")
XXX (hereinafter referred to as "Corporation C")
XXX (hereinafter referred to as "Corporation D")
XXX (hereinafter referred to as "Corporation E")
XXX (hereinafter referred to as "Corporation F")

Dear :

Your letter of XX, requests permission to discontinue filing
consolidated returns for Florida corporate income tax purposes.
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 was incorporated in XXX.
Together with their consolidated group (the "Taxpayer Group"),
they currently report their income on a consolidated basis for

Florida corporate income tax purposes. Taxpayer initially made
their election to file consolidated returns in XX, but did not
receive any professional tax advice on the prudence of the
election. At the time of the election, the Taxpayer Group
consisted of the taxpayer and the XXX of their XXX subsidiaries,
that had the requirements to be included in the Florida
consolidated group. Furthermore, the Taxpayer Group elected to
file their Florida consolidated return, which was the same as
their federal consolidated return, under the XXX method. In XX,
the Taxpayer Group was engaged primarily in XXX and related
financing activities. These activities generated gross sales
totaling approximately XXX, with sales apportioned to Florida on
their XXX consolidated return, amounting to less than XXX.
Additionally, the XXX Taxpayer Group had fewer than XXX
employees working in XXX, and had market presence in only a
handful of other states.

During the XXs, the Taxpayer Group entered into, or expanded,
significantly different lines of business, including XXX, and
XXX. Some of these operations have since been discontinued or
sold, and others were expanded and are currently thriving. In
XX, taxpayer acquired the assets of Corporation B, a XXX based
XXX, from Corporation C. XXX sales grew from less than XXX
(XXX) to over XXX by year end XX. Taxpayer acquired significant
XXX property and payroll with the Corporation B acquisition. In
addition, Corporation A underwent reorganization in XX when
Taxpayer became the parent company.

By XX, the Taxpayer Group, had world-wide sales of XXX, and had
grown to XXX entities within the consolidated group. Since
then, the Taxpayer Group has more than tripled its annual unit
closings in its domestic XXX segment alone. Taxpayer Group has
entered into several joint ventures and affiliate acquisitions
which were not foreseen in XX. In addition, in XX taxpayer
expanded operations into the XXX market.

In XX, taxpayer underwent organizational realignment to provide
better focus on their individual customer groups and specific
geographic markets. Taxpayer was then conducting business in
XXX markets located throughout XXX states. These operations
included the formation of a targeted business unit that acquires

and develops major targeted new products.

In XX taxpayer acquired XXX based Corporation D and
subsidiaries, which significantly changed their overall
business. Prior to this acquisition, taxpayer subcontracted its
projects throughout its XXX year history. Corporation D's
operations were significantly different in that they maintained
their own XXX workforce. Where the taxpayer had historically
avoided the administrative burden of a large in-state workforce,
this acquisition brought that additional burden. Taxpayer's
management subsequently decided that Corporation D would be left
to run its business as it did prior to the acquisition.
Corporation D has significantly more administrative costs and
burdens than the taxpayer, and has recently been included in the
targeted business unit for financial and management reporting
purposes. Taxpayer also cites the following additional
significant burdens associated with the Corporation D
acquisition: 1) different technology and soft-ware packages
used, 2) different regulatory burdens for the product
operations, 3) differing management styles, and 4) differing
financial/accounting data gathering methodologies using the
volume of in-state employees and operations in XXX.

With the addition of Corporation D's XXX operations, Taxpayer
Group apportionment factors became significantly larger for XXX.
This is attributed to the non-traditional level of employment
(in-house construction crews) and the absolute size of
Corporation D. This acquisition has created a significant tax
base distortion for the Taxpayer Group by impacting the
following four areas: 1) increased the number of employees by
XX, 2) increased total sales by XX, 3) increased total payroll
by XX, and 4) increased total property by XX. These additions
have caused the Taxpayer Group to experience across the board
increases in their Florida consolidated apportionment factors,
with the sales factor increasing from XXX in 1997 to XXX in
1999. The payroll factor increased from XXX in 1997 to XXX in
1999, and the property factor increased from XXX in 1997 to XXX
in 1999.

Taxpayer Group also acquired Corporation E, a XXX, in XX.
Corporation E's financial reporting systems, accounting systems,

and overall technology were integrated into the Taxpayer Group
systems. However, the inclusion of Corporation E's income base
into the Taxpayer Group has created additional administrative
burdens in regard to tax in XXX.

As previously stated, assimilating their new subsidiaries and
assets into the Taxpayer Group has caused a tremendous
administrative burden for the taxpayer. This burden has been
compounded by several recent joint ventures, affiliations, and
technology initiatives. These compounding items range from a
Website, which currently attracts approximately XXX hits per
month, to a joint-venture electronic supply line that enables
XXX to procure materials and labor online.

The evolving XXX market of the late XXX has become one of the
Taxpayer Group's most important regions. Prior to XXX, Taxpayer
Group reported its core domestic XXX financial and management
data based on three regions. However, as XXX became an
increasingly important market, the Taxpayer Group made the
decision to make XXX a separate sub-region of Corporation F for
accounting and reporting purposes.

As mentioned previously, Taxpayer Group reported under the XXX
method until its elimination by the XXX. They benefited from
the XXX method. Once the XXX method was eliminated for federal
and Florida purposes, Taxpayer Group experienced a substantial
adverse financial impact. This impact was directly associated
with the change in federal tax law.

The Taxpayer Group states that they do not have any intercompany
items unrealized, but not recognized, nor any deferred income or
expenses that would normally be reported on a consolidated
basis, but would not be included in separately filed corporate
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 the 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 Taxpayer permission to stop filing
consolidated Florida corporate income tax returns?

DISCUSSION AND ANALYSIS

Taxpayer has relied on Rule 12C-1.0131(3)(b)2., F.A.C., which
provides that permission to deconsolidate may be granted "if the
net result of all amendments to the Florida Income Tax Code or
the Internal Revenue Code or regulations ... 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." In 1980, when making the election to file consolidated
Florida returns, the Taxpayer Group was using the XXX method of
reporting for dealers. Taxpayer Group received favorable tax
benefit from the XXX method. However, once the XXX method was
eliminated (XXX) for federal and Florida purposes, Taxpayer
Group was no longer able to defer XXX gain. Unable to defer
income, Taxpayer Group was forced to recognize increased income
in each subsequent tax year. At the time of the change in the
XXX method, they did not receive adequate tax advice related to
their Florida consolidated return. Consequently, this
substantial adverse impact went relatively unnoticed until the
late XXXs when the Taxpayer Group fully utilized their Florida
net operating loss (NOL) deductions. With their NOLs fully
utilized and Florida reporting as a separate business region,
the Taxpayer Group asked XXX to review its Florida State tax
reporting. Upon reviewing the Florida returns, it was
determined that the Taxpayer Group had a substantial adverse
impact related to the elimination of the XXX method of

reporting. Taxpayer Group contends that, based on the impact of
the change, there exists "good cause" to allow them to
discontinue filing a Florida consolidated return.

In addition to the change in tax law issue, Taxpayer Group
states that, since XXX, they have experienced drastic "changes
in circumstance." Some of these changes affected income tax
liability and others did not. Taxpayer Group relies 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."
They cite several acquisitions, expansions, joint
ventures/alliances, entering new lines of business, and
distortion of Florida apportioned income. The acquisition of
Corporation D in XXX significantly changed Taxpayer Group
operations. This acquisition increased the number of XXX
employees by XXX percent. In addition, sales, payroll, and
property have experienced percentage increases of XXX, and XXX,
respectively. The addition of Corporation D's in-house XXX
workforce has caused Taxpayer Group consolidated apportionment
factors to become significantly larger. In XXX Taxpayer Group
consolidated apportionment factors were XXX for sales, and XXX
for both payroll and property. By XXX, after the acquisition,
these factors had increased to XXX for sales, XXX for payroll
and XXX for property. Consequently, Taxpayer Group contends
that the Corporation D acquisition has created a significant tax
base distortion by disproportionately increasing their
consolidated apportionment factors in Florida.

In XXX Taxpayer Group also acquired Corporation E, a XXX
company. The combination of this acquisition with Corporation D
has created a substantial increase in administrative burdens for
the Taxpayer Group. In addition, Taxpayer Group is involved
with XXX separate web-based technology initiatives that provide
information ranging from marketing information to electronic
supply services. Assimilating these new subsidiaries and assets
into the Taxpayer Group, coupled with several recent joint
ventures, affiliations, and technology initiatives have also
added to their increased administrative burden.

In XXX, when the Taxpayer Group elected consolidated filing, it

consisted of a parent and XXX subsidiaries. Their consolidated
Florida income was less than XXX.

Since that time, they have grown into the nation's largest and
most diversified XXX company. Their international operations
made them the XXX largest XXX company in XXX in XXX. By XXX,
Taxpayer Group had world-wide of sales of approximately XXX, and
had grown to XXX entities. They are currently comprised of
approximately XXX subsidiaries throughout the world. Taxpayer
Group has entered into, or expanded, significantly different
lines of business, including XXX and XXX. As the Taxpayer Group
has grown, their Florida market has evolved into one of their
most important. In XXX, they made the decision to make Florida
a separate sub-region of Corporation F for accounting and
reporting purposes. The Taxpayer Group has experienced
tremendous grow and diversification. With its movement into new
business lines, acquisitions, and joint ventures, they have
undergone "changes in circumstances" as stated in Rule 12C1.0131(3)(b)2., FAC. Therefore, based on the following four
conditions, the Department grants permission to discontinue
filing consolidated corporate income tax returns for 1999 and
later years:

1. That the deconsolidation is effective for the tax year
   ending on December 31, 1999;

2. That the Taxpayer Group has no intercompany items
   realized, but not recognized, nor any deferred income or
   expenses that would normally be reported on a consolidated
   basis, but would not be included in separately filed
   corporate income tax returns.

3. That the Taxpayer Group does not become part of a
   consolidated Florida corporate income tax return prior to
   the tax year ending in 2004.

4. That any deferred gains which are realized for Federal
   tax purposes, but which have not yet been recognized, are
   required to be reported in total, on the 1999 Florida
   Corporate income tax return filed by the taxpayers.

CONCLUSION

Taxpayer Group 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 1999,
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 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,

Charles J. Dunning
Technical Assistance and Dispute Resolution

Control No. 41799