Could an affiliated group stop filing Florida consolidated returns when legal changes and fundamental business changes were sufficient only in combination?

Plain-English summary

Florida allowed the affiliated group to stop filing consolidated corporate income tax returns because changes in law and major changes in the group's business were sufficient when considered together. The group had grown substantially, entered new lines of business, and operated in a different business environment from the one existing when it elected consolidated filing.

The Department said ordinary growth by acquisition did not necessarily change the nature of a business, and the cited legal changes did not directly alter Florida consolidated reporting. Neither ground independently justified deconsolidation. Their combined effect did.

Permission was subject to four fact-specific conditions, much of which the public ruling redacted: the effective year, treatment of specified transactions, represented differences between separate and consolidated liabilities, and a restriction on making a new Florida consolidated election before a stated year.

What this means for you

An affiliated group seeking to leave consolidated filing should document more than a preferable tax result. This ruling required meaningful changes in the business environment and law, analyzed together, plus compliance with Department-imposed conditions.

Common questions

Q: Was business growth alone enough?
A: No. The Department said the growth and legal changes became sufficient only in combination.

Q: Did the group continue consolidated federal filing?
A: Yes.

Q: Was permission unconditional?
A: No. Florida imposed four ruling-specific conditions.

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 03C1-004

Original ruling text

SUMMARY

QUESTION: May a consolidated group be granted permission to
cease filing Florida consolidated corporate income tax
returns based upon changes in law combined with fundamental
changes in business operations?

ANSWER - Based on Facts Below: Yes. The consolidated group
was granted permission to cease filing Florida consolidated
corporate income tax returns based on the Rule provisions
which address changes in law and changes in business
activities.

Sep 23, 2003

Re: Technical Assistance Advisement 03C1-004
Corporate Income Tax
Request for Authority to Discontinue Consolidated Filing
s. 220.131, F.S., Consolidated Filing Election
XXX (hereinafter referred to as "Taxpayer")

Dear :

Your letter of XX, requests permission for the Taxpayer 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

The Taxpayer, along with its affiliated group, currently reports
its income on a consolidated basis for Florida corporate income
tax purposes. Taxpayer initially made its Florida consolidated
return election in XX.

Taxpayer was one of the XXX in the XXX when it made its Florida

consolidated return election. Since making that election,
Taxpayer has grown even larger through acquisitions and normal
growth and, like many XXX, has entered new lines of business due
to changes in the regulatory environment. Taxpayer has expanded
its XXX, from offices in XX to offices in XX. Using the most
important measures of growth, the Taxpayer has increased in size
by a factor of XX over the past XX. Taxpayer has increased
certain business operations by a factor of XX the past XX. Some
of this growth is attributable to the Taxpayer's expansion into
businesses which were previously XXX. Taxpayer has acquired XXX
and has entered the XXX. In addition to its XXX, Taxpayer now
offers XXX.

The Taxpayer and its affiliated group will continue to file
consolidated federal income tax returns. The Taxpayer estimates
that its Florida corporate tax liability for the tax year ending
XX will XX from approximately XX on a consolidated return basis
to approximately XX on a separate return basis, an XX of more
than XX. Taxpayer has been XX. Taxpayer has indicated that,
except for changes resulting from normal income fluctuations,
the total Florida tax liability for Taxpayer and its affiliated
group members filing on a separate return basis in XX should be
substantially XX or XX than the total consolidated XX Florida
tax liability for the Taxpayer and its affiliated group members.
In other words, filing separate returns rather than consolidated
returns will not affect the total amount of corporate income tax
paid to Florida unless the affiliated group earns less income
due to economic conditions.

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 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:

(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 permission to Taxpayer to stop
filing consolidated Florida corporate income tax returns?

DISCUSSION AND ANALYSIS

Taxpayer 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". Taxpayer contends that the business of the
affiliated group has changed significantly since it made its
consolidated return election in XX. In addition, Taxpayer cites
changes in the law relating to the XXX, including the passage of
the XXX, which allows XXX and the XXX, and the XXX.

The information provided by Taxpayer shows substantial growth in
the consolidated group since XX, when Taxpayer first elected
Florida consolidated reporting. Taxpayer has grown XXX since
making its initial election, and by a factor of XX in new market
segments. As a result, the Taxpayer contends that the
affiliated group has undergone changes, the magnitude of which
affects the prudence of continuing to file on a consolidated
basis for Florida corporate income tax purposes. The fact that
the Taxpayer has grown XXX over a XX period as a result of
acquisitions does not appear to be the substantial growth
contemplated by Rule 12C-1.0131(3), F.A.C. Growth attributable
to the acquisition of a major competitor does not necessarily
result in a substantial change in the business - the nature of
the business and the way the business operates is the same as
before. However, the actual increase in business is sufficient,
because the Taxpayer is now operating in a new business
environment, and because the overall size of the market has
limited Taxpayer's growth into those markets to a factor of XX.
Taxpayer is now XXX, rather than one operating primarily in the
XXX.

Taxpayer contends that changes in the law governing the XX are

also a basis for deconsolidation. XXX allows XXX to compete in
the XXX. XXX provides additional opportunities for XXX to do
business XXX. This is not a change in the law that directly
affects Taxpayer's Florida consolidated reporting, even though
it does affect the XXX and Taxpayer in general. Taxpayer has
entered additional lines of business, including XXX. These
changes in the XXX and Taxpayer's business can be considered
with Taxpayer's growth and change of business focus. While
neither of the grounds cited by Taxpayer standing alone is a
sufficient basis for deconsolidation, considering the legal
changes in the XXX together with the changes in Taxpayer's
business brought about by growth, these factors establish a
sufficient basis for granting deconsolidation.

Therefore, based on the following four conditions, the
Department grants permission to the Taxpayer to discontinue
filing consolidated corporate income tax returns for the XX tax
year and later years:

1. That the deconsolidation is effective for the tax year
   ending on XX;

2. That Taxpayer XXX. These transactions will be XXX
   Taxpayer and its affiliated group through the XXX
   consolidated Florida corporate income tax return no later
   than XX;

3. That the difference in tax liability for the tax year
   ended XX, on a separate and consolidated basis is
   approximately XX in tax on a separate return basis. That
   the estimated difference in tax liability for the tax year
   ended XX, between the separate tax returns filed and a pro
   forma consolidated return for the same period is XX, on a
   separate return basis.

4. That the Taxpayer Group does not elect to become part of
   a consolidated Florida corporate income tax return prior to
   the tax year ending XX.

CONCLUSION

Taxpayer 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 XX, 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 back-up 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 that 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 the
identification of the Taxpayer. Your response should be
received by the Department within 15 days of the date of this
letter.

Sincerely,

Gary A. Moreland
Technical Assistance and Dispute Resolution

GAM/gm
Control No. 55737