Could a Florida corporate group stop using its grandfather consolidated-return election after the filing member converted to a single-member LLC?

Plain-English summary

Florida granted permission to discontinue the group's grandfather consolidated-return filing and move the entire affiliated group to normal consolidated filing. The old filing member had converted from a C corporation to a single-member LLC treated as a division of the parent for federal income-tax purposes.

The permission had three conditions: no member of the Florida-nexus group could have realized but unrecognized income or expense items that might later benefit an affiliated member; the parent group had to satisfy every requirement for making the new consolidated election; and the entire affiliated group had to continue filing consolidated Florida returns through the redacted minimum year stated in the ruling.

The Department also warned that Florida's separate-return-limitation-year rules could limit the net operating losses usable on the consolidated returns.

What this means for you

The ruling did not create an automatic right to change filing methods. It approved this group's change on specific facts and conditions, including a complete-group election and safeguards against shifting deferred items or losses.

Common questions

Q: Did Florida require the converted entity to keep using the grandfather election? No. The Department permitted that filing method to end after the redacted tax year.

Q: Could the parent include only selected affiliates in the new return? No. The conclusion required the parent and its entire affiliated group to file the normal consolidated return.

Q: Were net operating losses automatically available after the change? No. The ruling expressly warned that separate-return-limitation-year requirements might restrict their use.

Citations and references

• Fla. Stat. § 220.131 — Florida consolidated returns
• Fla. Admin. Code r. 12C-1.0131 — permission to discontinue consolidated filing
• Fla. Admin. Code r. 12C-1.013 — separate-return-limitation-year requirements
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 02C1-010

Original ruling text

SUMMARY

QUESTION: May a company be granted permission to cease
filing consolidated tax returns under the Grandfather
Election when it converts from a C-corporation to a
Delaware single member limited liability company?

ANSWER - Based on Facts Below: The company was ineligible
to continue the filing of Florida consolidated tax returns
under the Grandfather Election, based upon provisions of
the Florida Statutes and F.A.C., which address the
Grandfather Election.

Oct 24, 2002

Re: Technical Assistance Advisement 02C1-010
Corporate Income Tax
Request for Authority to Discontinue Consolidated Filing
Section 220.131, F.S.
(XXX) (hereinafter referred to as "the Taxpayer")
(XXX) (hereinafter referred to as "Corporation A")

Dear :

Your letter of XX, requests permission for the Taxpayer to
discontinue filing consolidated returns under the Grandfather
Election 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

The Taxpayer, together with its subsidiaries that have nexus in
Florida, reports its income on a consolidated basis under the
"grandfather election" for Florida corporate income tax
purposes. The Taxpayer made this election in XX and has
continued to file in this manner since the election. When the

election was made, XXX corporations, including the Taxpayer,
were included in the grandfather election return. The Taxpayer
made this election when Corporation A's group contained XXX
corporations. There were XXX other subsidiaries within
Corporation A's affiliated group that had nexus with Florida at
the time of the election.

Since XX, Corporation A has grown to approximately XXX
corporations, and the number of corporations with Florida nexus
has grown to XXX, of which XXX are included in the grandfather
election returns under the Taxpayer and the others are filing
separately. On XX, Corporation A reorganized its structure into
industry groups. This new organizational structure reduces the
number of companies included in the grandfather election to XXX
and increases the number of separately filed Florida corporate
income tax returns.

In addition, on XX, the Taxpayer converted from a C-corporation
to a XXX single member limited liability company. As a single
member limited liability company, the Taxpayer will be treated
as a division of Corporation A for federal income tax purposes
beginning XX. Corporation A would like to file a XXX Florida
consolidated return that will include all members of its
affiliated group.

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(2), F.S., states:

Subject to subsection (5), the director may require a
consolidated return for those members of an affiliated
group of corporations which are subject to tax and which
would be eligible to elect to consolidate their incomes
under subsection (1), if the filing of separate returns for
such corporations would improperly reflect the taxable
incomes of such corporations or of such group.

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:

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.

Rule 12C-1.0131(4), F.A.C., states in part:

(a) Unless otherwise provided by these rules or manifestly
inconsistent with the provisions of the Florida Income Tax
Code, the consolidated taxable income for a consolidated
return year under these rules shall be determined in the
same manner and under the same procedures, including
intercompany adjustments and eliminations, as are required
by the federal income tax regulations in the case of a
federal consolidated return.

(b) If the Florida affiliated group differs in its members
from the federal affiliated group because of an election
made within 90 days of December 20, 1984, or upon filing
the taxpayer's first return after December 20, 1984, to
file consolidated returns on the same basis that
consolidated returns were filed for the taxable year
immediately preceding the taxable year beginning on or
after September 1, 1982, such non-qualifying members shall
not be considered includible corporations and all
computations hereunder shall be made as if such members
were not members of the affiliated group....

ISSUE PRESENTED

Whether the Taxpayer should be granted permission to cease
filing consolidated Florida corporate income tax returns under
the Grandfather Election and allow Corporation A and all of its
subsidiaries, including the Taxpayer, to file consolidated
Florida income tax returns?

DISCUSSION AND ANALYSIS

First, we are not addressing the validity or invalidity of the

original grandfather election. The issue we are addressing is
whether the Taxpayer has shown the existence of a substantial
adverse effect by reason of filing consolidated returns under
the grandfather election. There are two provisions 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 or regulations would have 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 12C-1.0131(3)(b)2., F.A.C., is
unnecessary.

Instead, the Taxpayer has relied upon Rule 12C-1.031(3)(b)2.a.,
F.A.C., which considers changes in law or circumstances,
including changes which do not affect income tax liability.
There is no evidence of a change in law, either federal or
state, which has substantially affected the Taxpayer's business
activities or the business environment in which it operates.
Rather, the Taxpayer contends that the circumstances under which
the original grandfather election was made have changed over the
past XX years.

This is not a situation where Taxpayer has received the benefits
of consolidated reporting under the grandfather election and
wishes to change its reporting methods for tax avoidance
reasons. Corporation A has requested permission to file a normal
consolidated return with all members of its affiliated group for
the XX tax year.

CONCLUSION

Therefore, based on the following three conditions, permission
is granted for the Taxpayer to discontinue filing consolidated
corporate income tax returns under the grandfather election for
tax years ending after XX, and for Corporation A and its entire
affiliated group, including the Taxpayer and those entities that

would normally have been included in the Taxpayer's grandfather
election return, to file normal consolidated Florida corporate
income tax returns for tax years ending after XX:

1. that the Taxpayer or any member of its Florida nexus
   group has no realized but unrecognized income or expense
   items that may be recognized at a later date which would
   benefit a member of the affiliated group;

2. that Corporation A and its affiliated group follow all
   statutory and administrative requirements necessary to make
   a consolidated election for the first tax year ending after
   XX.

3. that Corporation A file Florida consolidated income tax
   returns with all corporations of its affiliated group
   through at least tax year ending XX.

Additionally, the Taxpayer should be aware of the separate
return limitation year (SRLY) requirements in Rule 12C-1.013,
F.A.C. These requirements may limit the application of net
operating losses that may be used on the Florida consolidated
income tax returns.

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,

Robert DuCasse
Technical Assistance and Dispute Resolution

RCD/rd
Control No.: 51881