Could a parent company revoke its Florida consolidated-return election after major changes in its group's market, operations, and organization?

Subject

Consolidated Filing Election

Plain-English summary

The parent company received permission to stop filing Florida consolidated corporate income tax returns. The group did not demonstrate that tax-law changes made consolidation substantially adverse, but its market size, operations, acquisitions, divestitures, and organizational structure had changed enough that continued consolidated filing was no longer prudent.

The permission applied beginning with the specified year. The group had to recognize realized but previously unrecognized items that could benefit a member, maintain the represented separate-versus-consolidated taxable-income difference, and avoid joining another Florida consolidated return until the stated future year.

What this means for you

Substantial operational and organizational change could support revocation even without a tax-law change, but the Department attached conditions preventing deferred benefits or a quick return to consolidation.

Common questions

Q: Did the group establish a substantial adverse tax effect from continued filing? No.

Q: Why was permission still granted? The magnitude of the group's market, operational, and organizational changes affected the prudence of remaining consolidated.

Q: Were deferred items ignored? No. They had to be recognized under the conditions stated in the ruling.

Citations and references

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

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 01C1-011

Original ruling text

SUMMARY

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

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 activities.

Sep 21, 2001

Re: Technical Assistance Advisement 01C1-011
Corporate Income Tax - Consolidated Filing Election
s. 220.131, F.S.
XXX, hereinafter referred to as "A"

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" is the parent company of a
group of affiliated corporations that XXX.

"A" was formed in the late XX's to provide XXX. During the
XX's, "A" acquired a number of XXX companies located throughout
the United States. Also, during the late-XX's, "A" expanded into
the XXX industry through acquisition of XXX and XXX.

During the XX's, "A" entered the XXX through one of its
subsidiaries. By XX, "A" was providing XXX to XXX customers in
XXX major metropolitan areas, through XXX subsidiaries.

During the early-to mid-XX's, "A" participated in XXX through
one of its subsidiaries, to acquire XXX necessary to expand its
operations to XXX.

"A" began filing its Florida corporate income tax return on a
consolidated basis in XX. At that time, "A's" consolidated
group contained XXX companies which were operating in more than
XXX states. XXX of the XXX companies had nexus in Florida.

During the XX's, XXX participated in mergers, acquisitions,
divestitures, and swaps, in order to expand XXX and increase
their competitive edge. Additionally, during this period, XXX,
increasing competition between XXX and XXX. Also during this
period, XXX was XXX in a number of states, opening markets to
additional competition from XXX. Due to the rapid advance of
technology, companies in the XXX were constantly upgrading their
XXX equipment.

In XX, "A" expanded its services to include XXX, through the
acquisition of XXX by one of its subsidiaries.

In XX, "A" had divested itself of all XXX, and at the end of XX
"A" no longer had any XXX operations. In XX, "A" divested
itself of the subsidiary in which its XXX were held by merging
that subsidiary into an unrelated company which offered XXX. A
significant portion of the operations of these two subsidiaries
occurred in Florida; consequently, "A's" consolidated Florida
apportionment factor decreased upon their divestiture.

At present, "A" continues to provide XXX to its customers.
Whereas its XXX once provided the vast majority of "A's" income,
only XXX of the consolidated group's operating profits are now
derived from this source. At the beginning of XX, "A's"
affiliated group consisted of XXX corporations with operations
in XXX states. Additionally, XXX of the corporations in "A's"
consolidated group had nexus in XXX. Of those, only XXX remain
in the consolidated group existing today.

"A" stipulates that its tax computations, prepared on a separate
basis, include intercompany transactions that are presently
realized but unrecognized, but which would not be recognized on
a consolidated filing basis.

On the basis of the facts presented in your letter dated XX, and
additional information presented in your 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. 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
between XXX, when "A" made its consolidated filing election and
XXX, in terms of the size of "A's" market and the extent 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 ending XX, and
later years:

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

2. That "A" will recognize all realized but unrecognized
   income or expense items that might be recognized at a later
   date, when filing on a consolidated basis, which would
   benefit any member of "A's" affiliated group, when it first
   begins filing its returns on a separate basis.
   Additionally, if "A" should be required to recognize any
   such items at a later date, they should be reported in full
   on the separate Florida corporate income tax returns of the
   appropriate entities, and

3. That the difference in taxable income, on a separate and
consolidated pro forma basis, for the tax year ending XX,
is approximately $XX, and

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

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 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.: 45833