Could two Florida corporations deconsolidate after a reverse cash merger placed them in a new federal group headed by a parent without Florida nexus?

Subject

Request for Authority to Discontinue Consolidated Filing

Plain-English summary

The two Florida corporations received permission to stop filing a Florida consolidated return after the reverse subsidiary cash merger. The merger placed them in a new federal consolidated group headed by a parent without Florida nexus. Florida required the state return to mirror the federal component members and would not accept a return for only the Florida subset.

Separate filing began with the period starting August 30, 2000. The conditions required no beneficial unrecognized intercompany or deferred items, full recognition of realized but unrecognized federal gains in that period, and no new Florida consolidated group before the tax year ending in 2005.

What this means for you

A merger-driven change in the federal group can justify revoking the old Florida election when the new parent cannot head a Florida consolidated return, but deferred tax items must be resolved.

Common questions

Q: Was deconsolidation approved? Yes.

Q: Why could the old Florida group not continue? It would have been only a subset of the new federal group.

Q: Could the companies reconsolidate immediately? No.

Citations and references

• Fla. Stat. § 220.131(1) and (3) — Florida consolidated returns and federal-group mirroring
• Fla. Admin. Code r. 12C-1.0131(3)(b)2.a. — changed circumstances and revocation
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 01C1-006

Original ruling text

SUMMARY

QUESTION: May a parent company be granted permission to
cease filing Florida consolidated corporate income tax upon
changes in business circumstances.

ANSWER: Based on the Facts below - Yes. The parent company
was granted permission to cease filing Florida consolidated
corporate income tax returns based on provisions of the
F.A.C. which addresses changes in business circumstances.

Jun 05, 2001

Re: Technical Assistance Advisement 01C1-006
Corporate Income Tax
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")

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

Formed in XX, taxpayer and Corporation A are XXX corporations
headquartered in XXX, and have nexus for Florida corporate
income tax filing purposes. Corporation A owns 100 percent of
taxpayer's stock, and for the years XX-XX, these two entities
filed consolidated Florida F-1120's and consolidated federal
1120's.

On XX, Taxpayer and Corporation A were involved in a reverse
subsidiary cash merger. As a result of that merger, Corporation
A became a wholly owned subsidiary of the new entity,
Corporation B. Taxpayer's ownership structure did not change.
Corporation B, incorporated in the State of XXX on XX, is
domiciled in XXX. Corporation B does not have nexus for Florida
corporate income tax purposes. For the years ending on December
30, 2000 and beyond, Corporation B will file a federal
consolidated form 1120 (U.S. Corporation Income Tax Return).
That return will include the following entities:

1. Corporation B (Parent)

2. Corporation A

3. Taxpayer

4. Corporation C

Under Florida law, the Florida consolidated income tax return is
required to mirror the federal consolidated income tax return.
To meet this standard, the parent corporation (Corporation B)
must also be subject to corporate income tax under the Florida
tax code. This new group of entities does not meet this
standard, as Corporation B does not have Florida nexus.
Therefore, Corporation A and Taxpayer request permission to
deconsolidate, and file separate Florida corporate income tax
returns beginning with the period starting August 30, 2000.

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

The first issue is whether taxpayer has shown the existence of a
substantial adverse effect by reason of filing consolidated
returns. There are two bases in the Florida Administrative Code
for allowing a taxpayer to revoke its consolidated reporting
election. Rule 12C-1.0131(3)(b) 2., F.A.C., 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 of 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". The
taxpayer has not cited any tax law changes as the basis for its
request, and further discussion of the main portion of Rule 12C1.0131(3)(b) 2., F.A.C. is not necessary.

Instead, taxpayer's request relies on Rule 12C-1.0131(3)(b)
2.a., F.A.C., which permits the Executive Director to consider
"changes in law or circumstances, including changes which do not
affect income tax liability". Taxpayer cites a change in
circumstance occurring when Corporation A became a wholly owned
subsidiary of Corporation B. This ownership change took place
in August of 2000, when Taxpayer and Corporation A were acquired
through a reverse subsidiary cash merger. The new parent,
Corporation B, will be filing a consolidated federal corporate
income tax return which will include the following subsidiaries:
Corporation A, (former parent), Taxpayer, and Corporation C.
Since Florida statutes require that the Florida consolidated
corporate return "mirror" the federal consolidated corporate
return, Taxpayer and Corporation A are not permitted to file a
return consisting of a subset of the new taxpayer group.
Therefore, based on the following four conditions, the
Department grants permission to discontinue filing consolidated
Florida corporate income tax returns beginning with period
starting August 30, 2000:

1. That the deconsolidation is effective for the income tax
returns beginning with period starting August 30, 2000;

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 2005.

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 income tax returns
   filed by the taxpayers, for the period starting August 30,
   2000.

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 Florida corporate income tax returns beginning
with the period starting August 30, 2000, is granted subject to
the provisions in the preceding paragraph.

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. 44787