Did acquisitions and expanded customers justify deconsolidation when the affiliated group continued the same service business and separate filing would reduce tax?

Plain-English summary

Florida denied deconsolidation because acquisitions had expanded the affiliated group without significantly changing the nature of its service business. The group had acquired related businesses before and after electing consolidated filing, but continued providing the same general services.

Florida emphasized that corporate acquisitions and reorganizations are common and often change structure rather than business nature. The group had received a Florida tax benefit from consolidated filing and predicted lower future tax from separate filing. The Department said the request was not necessarily solely tax-motivated, but the tax effect was relevant.

What this means for you

Revenue growth, geographic expansion, and related-business acquisitions may be insufficient to exit a consolidated election if the underlying business remains the same. Groups should document an actual change in business nature or another rule-based ground.

Common questions

Q: Did expanding the customer base establish a business change?
A: No. Florida focused on the continuing nature of the services.

Q: Did expected tax savings matter?
A: Yes. The Department considered the benefit from switching after earlier consolidated-return benefits.

Q: Was permission granted?
A: No. The consolidated filing requirement continued.

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 03C1-006

Original ruling text

SUMMARY

QUESTION: May an affiliated group be granted permission to
cease filing Florida consolidated tax returns without
showing changes in law or the organizational structure of
the consolidated group?

ANSWER - Based on Facts Below: No. The affiliated group
was not granted permission to cease filing Florida
consolidated tax returns. Changes in the organizational
structure of the consolidated group, such as mergers and
acquisitions of related businesses, were not a sufficient
basis for deconsolidation when the nature of the business
remains the same.

Sep 24, 2003

Re: Technical Assistance Advisement 03C1-006
Corporate Income Tax
Request for Permission to Deconsolidate
s. 220.131, F.S.; Rule 12C-1.0131, F.A.C.
XXX ("Taxpayer")

Dear :

This letter is in response to your request for permission to
discontinue filing a consolidated Florida income tax return for
the tax year ending XX. This response 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.

STATEMENT OF FACTS

The Taxpayer and its affiliated group are engaged in the
business of providing XXX services. These XXX services are
provided to the XXX industry in general, as well as to XXX
companies and employers. Generally speaking, the Taxpayer and

its affiliates provide XXX with a wide range of XXX services.
On the other hand, XXX companies are usually provided with a
specific set of XXX and employers with XXX for their employees.
In XX, the Taxpayer acquired a company engaged in the business
of providing XXX and XXX services to XXX companies. In XX, the
Taxpayer acquired a company engaged in the business of providing
XXX services to XXX applicants through the use of field
locations. In XX, the Taxpayer acquired another company engaged
in providing XXX services and XXX services to the XXX industry.
This latter acquisition significantly expanded the Taxpayer's
revenue and customer base.

Subsequently, Taxpayer made an election to file a Florida
consolidated return for the tax year ending XX. The election
was made in order to reduce the Taxpayer's filing burden. In
addition, Taxpayer owed less corporate income tax to Florida
during the XX or XX year period in which it has filed on a
consolidated basis than it would have if it had filed separate
returns. Recently, the Taxpayer has announced the purchase of
another XXX company, which will expand the Taxpayer's business
in the Southwest and Middle West of the United States. Except
for this recently announced acquisition, the acquisitions and
changes described above all occurred prior to the Taxpayer's
Florida election to report on a consolidated basis. The nature
of Taxpayer's business remains the same. Taxpayer predicts that
filing on a separate basis will reduce its Florida corporate
income tax liability in future years. Taxpayer will continue to
file consolidated federal income tax returns.

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:

(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 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

Taxpayer seeks permission to deconsolidate based upon a change
in its underlying business. Rule 12C-1.0131(3)(b)2.a., F.A.C.
In other words, Taxpayer's request is not based upon changes in
the tax laws or changes that affect Taxpayer's net operating
losses. Taxpayer would also pay less Florida corporate income
tax in the future, if it is permitted to deconsolidate.
Taxpayer will continue to file consolidated federal income tax
returns. See Statement of Facts.

Taxpayer contends that there have been substantial changes in
business circumstances since the Florida consolidated reporting
election was made in XX. The facts presented, however, do not
support this contention. Corporate reorganizations, such as
mergers, acquisitions, sales, or consolidations, are
commonplace, and they are often no more than changes in the form
or structure of the corporate organization. Taxpayer acquired
several XXX companies prior to making its consolidated return
election. It now expects to acquire another. Taxpayer's
primary business has not changed - it provides XXX services. It
acquired on-going XXX businesses before it made its Florida
consolidated return election, and it acquired another one after
its election.

Once a taxpayer makes a consolidated return election, it is
bound to its election unless the Executive Director allows for
deconsolidation. In other words, taxpayers are not allowed to
shift between separate filing and consolidated filing. Taxpayer

made its Florida consolidated return election XX years ago. The
tax aspects of a deconsolidation request must be closely
examined when it follows a consolidated election made a few
years earlier. Taxpayer realized a Florida tax benefit by making
a consolidated return election for the XX - XX tax years.
Taxpayer would realize an additional Florida tax benefit if it
is permitted to file separate Florida returns for the XX tax
year. It cannot be said that the deconsolidation request is
solely tax motivated, but such a reason must be considered in
determining whether deconsolidation should be granted.

These two factors support the conclusion that the Taxpayer
should not be permitted to cease filing consolidated Florida
corporate income tax returns. The Taxpayer's business has not
undergone a significant change sufficient to support
deconsolidation.

CONCLUSION

The information presented by Taxpayer does not establish that
there has been a significant change in the nature of Taxpayer's
business. Therefore, the Department, cannot grant the Taxpayer's
request to discontinue filing a consolidated Florida income tax
return.

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. 213.122, F.S. Our response is
based on those facts and the 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,
Florida Statutes, 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 materials and this response,
deleting the 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.

If you have further questions with regard to this matter and
wish to discuss them, you may contact Gary A. Moreland at
Technical Assistance and Dispute Resolution, (850) 922-4700. If
you have specific questions and would like a written response,
the request should be addressed to the Office of General
Counsel, Technical Assistance and Dispute Resolution, Department
of Revenue, P.O. Box 7443, Tallahassee, Florida 32314-7443.

Sincerely,

Gary A. Moreland
Technical Assistance and
Dispute Resolution

GAM
Control No. 55394