Could a parent company stop filing Florida consolidated corporate income-tax returns after substantial changes in its affiliated group and operations?

Plain-English summary

The parent received conditional permission to stop filing Florida consolidated corporate income-tax returns. The Department did not find a change in tax law or proof that consolidation itself caused a substantial adverse tax effect. It did find substantial changes since the election in the group's size, markets, organizational structure, products, and geographic operations.

Those business changes were large enough to affect the prudence of continued consolidation. Permission was subject to specified effective years, proper treatment of realized but unrecognized income and expense items on separate returns, the submitted pro forma difference, and a restriction on rejoining a Florida consolidated return before the redacted date.

What this means for you

A Florida consolidated election normally continues. Material changes in the affiliated group's actual business can support permission to discontinue, but the Department may impose conditions to prevent income or expense items from escaping proper reporting.

Common questions

Q: Was separate filing approved? Yes, subject to the ruling's conditions.

Q: Did the group prove that consolidation caused a substantial adverse tax effect? No.

Q: What supported approval instead? Major changes in the group's market, size, structure, and operations.

Citations and references

• Fla. Stat. § 220.131 — Florida 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 02C1-001

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.

Feb 26, 2002

Re: Technical Assistance Advisement 02C1-001
Corporate Income Tax -- Consolidated Filing Election
s. 220.131, F.S.
XXX, hereinafter referred to as "A"

Dear :

Your letter of XX, and the previous request for a Technical
Assistance Advisement, dated 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

The letter of XX, states that "A" is the foreign XXX parent
company of a group of affiliated corporations that XXX. "A" has
filed its Florida corporate income tax returns on a consolidated
basis since XX.

Since XX "A" has had XXX with a XXX in Florida. This XXX.
Throughout its existence, "A" has acquired XXX and has created

subsidiaries outside of Florida to XXX unrelated to those XXX by
"A's" Florida XXX.

Your letter, dated XX, states that XXX companies were included
in "A's" XX consolidated tax return. XXX of these companies XXX
were XXX, and XXX were XXX entities.

In the year XX, the consolidated group included XXX companies, a
XXX company, and a XXX company. XXX of the XXX were acquired
subsequent to XXX, and the XXX company was acquired in XX. In
the year XX, the XXX company had sales of XX which constituted
XX of consolidated sales for the year.

In XX, "A's" consolidated federal tax return reported sales of
XX, and assets of XX. The consolidated federal return for the
year XX, reported consolidated sales of XX, and assets of XX.

In XX, the Florida operation, which XXX, had sales of XX,
representing XX of sales for the year. From XX through XX, "A"
began using a number of revolutionary materials in the XXX. In
XX, a XXX. Subsequently, XXX more XXX were introduced in XX, in
XX, and in XX. All of these XXX are XXX in another state, and
use completely different XXX than do XXX. For the year XX,
sales of these products represented XX, or XX of consolidated
sales for the year. XXX sales for the same period represented
XX, or XX of consolidated sales for the year. Also, in XX, "A"
began XXX in still another state. The company had not
previously XXX. In XX, sales of XXX were XX, or XX of
consolidated sales for the year. Additionally, sales of the XXX
represented XX of consolidated sales for the year XX.

Between XX and XX, "A" has also been XXX, or has been XXX, in
the XXX. Of these, only XX related to the XXX operation in
Florida. The balance relate to products XXX in other states.

The letter dated XX, states that on XX, "A" acquired XX of the
stock of a company which XXX. This company was purchased in
order to acquire XXX, which "A" believes can be used to make the
XXX operations of both the acquired company and the Florida XXX
subsidiary more efficient.

On XX, "A" transferred all of the XX. Subsequently "A" no
longer had any XXX, and consisted only of XX located outside of
Florida. On XX, only XX of "A's" subsidiaries XXX Florida.

Because of recent changes in the XXX, "A" plans to merge the XXX
wholly owned subsidiaries that are XXX in Florida. This will
allow the merged entities to achieve XXX, and allow them to
become more XXX. This XXX will be located in Florida, for
purposes of XXX. "A" will remain the XXX of the XXX but will no
longer have XXX Florida.

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 and
form 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, the Department grants permission to discontinue
filing consolidated corporate income tax returns for the tax
year ending XX, and later years, provided that:

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

2. "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. The difference in taxable income, on a separate and

consolidated pro forma basis, for the tax year ending XX,
is approximately XXX, and

4. 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.: 48274