Could a Florida consolidated group switch to separate returns after bankruptcy, reorganization, acquisitions, divestitures, and major market changes?

Plain-English summary

Florida granted this affiliated group permission to stop filing consolidated corporate income tax returns and begin filing separate returns. The Department found that bankruptcy-driven reorganization, acquisitions, discontinued business lines, divestitures, and changed markets were changes in circumstances substantial enough to make continued consolidation imprudent.

The document is heavily redacted. It does not disclose the company's industry, election year, bankruptcy year, businesses bought or sold, revenue percentages, tax amounts, effective deconsolidation year, or earliest reconsolidation year.

A consolidated election normally remains binding

Section 220.131 allowed a parent company and the identical affiliated group filing federally to elect a Florida consolidated return. Once elected, subsection (3) generally required consolidated returns in later years while the group remained affiliated and continued federal consolidation, unless the director consented to separate filing.

Rule 12C-1.0131(3)(b) authorized the Department to grant permission for good cause, including changes in law or circumstances that did not themselves affect tax liability. Applications were due no later than 90 days before the consolidated return due date, including extensions, and approval could carry terms, conditions, and adjustments.

Bankruptcy and business transformation supplied good cause

The parent had been forced into bankruptcy and emerged with a mandate to reassess its operations. It reorganized around profitable activities, made acquisitions, discontinued several lines, divested multiple holdings, and actively developed a market for a product whose share of total revenue had materially increased.

The Department found that the magnitude of those changes affected the prudence of continuing to file on a consolidated basis. It also noted that the group would continue filing a federal consolidated return; Florida permission was specifically needed to change the state filing method.

Four conditions governed the transition

The approval required:

1. No realized but unrecognized income or expense items remained; if any later required recognition, the item had to be reported in full on the last Florida consolidated return.
2. The approximate tax difference between the filed separate returns and a pro forma consolidated return for a redacted year was incorporated into the agreement, but the amount is redacted.
3. The group could not join another Florida consolidated return before a redacted future tax year.
4. Changes in Florida taxable income had to result from economic or organizational differences, not state tax planning.

The Department declined to give specific guidance for other future years beyond the general Chapter 220 rules because the submitted future data was limited.

What this means for you

Affiliated corporate groups

A Florida consolidated election cannot be revoked simply because separate returns reduce tax. The group must obtain permission and establish good cause from genuine legal, economic, or organizational change.

Companies emerging from bankruptcy

Bankruptcy, restructuring, acquisitions, divestitures, and a materially changed business mix can collectively support deconsolidation when they alter the reasonableness of continued group filing.

Corporate tax teams

Prepare a pro forma tax comparison, identify every deferred item, document the non-tax business reasons for the change, and expect a waiting period before future reconsolidation.

Common questions

Q: Did the group continue filing a federal consolidated return?
A: Yes. The ruling addressed permission to stop Florida consolidation while federal consolidation continued.

Q: Was a lower Florida tax liability enough by itself?
A: No. One express condition required the income changes to come from economic or organizational differences rather than state tax planning.

Q: What business changes mattered?
A: Bankruptcy, extensive reorganization, acquisitions, discontinued lines, divestitures, changed markets, and a different revenue mix.

Q: Are the transition years and amounts public?
A: No. They are redacted from the official TAA.

Citations and references

• Fla. Stat. § 220.131(1) — election requirements for Florida consolidated returns
• Fla. Stat. § 220.131(3) — continued consolidated filing unless separate returns are approved
• Fla. Stat. § 220.15 — Florida apportionment rules referenced for future filings
• Fla. Admin. Code r. 12C-1.0131(3)(b) — application timing, good-cause factors, and approval conditions
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 04C1-006

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 or circumstances?

ANSWER - Based on Facts Below: 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 or

circumstances.

August 30, 2004

Re: Technical Assistance Advisement 04C1-006
Corporate Income Tax

Request for Authority to Discontinue Consolidated Filing

Section 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 was first formed in XX by several family-owned XXX. Since its inception, the Taxpayer has grown into

one of the XXX companies.

The Taxpayer, along with its consolidated group, has reported its income on a consolidated basis for Florida corporate
income tax purposes since its initial election to consolidate in XX. Since XX, the Taxpayer has undergone many
changes. In XX, the Taxpayer was forced into bankruptcy. In XX, the Taxpayer emerged from bankruptcy with a
mandate to re-evaluate the way it conducted business. With this mandate in mind, the Taxpayer underwent an
extensive reorganization and focused on engaging in activities that were profitable. The Taxpayer made several
acquisitions and discontinued several lines of business. The Taxpayer focused on the XXX, and it divested its XXX

operations. The Taxpayer also divested its XXX holdings and its XXX holdings.

Through this process of reorganizing, the Taxpayer also started to actively pursue a market for its own XXX. Sales of

its XXX now represent XX of its total revenue, compared to less than XX prior to the bankruptcy.

The Taxpayer's Group will continue to file consolidated federal income tax returns. The Taxpayer estimates that its
Florida tax liability for tax year ending XX, will decrease from XX on a consolidated basis to XX on a separate return
basis, with XXX companies reporting losses. The Taxpayer states that the differences in Florida tax liability from a
consolidated basis to a separate basis are the result of economic conditions and not tax planning. The Taxpayer also
states that its intangible holding companies will file separate Florida income tax returns if the deconsolidation request

is granted.

Although some data is provided on the future filing aspects of the Taxpayer and its affiliated group, the Department is
unable to provide specific guidance on these other years, other than the general statutory provisions of Chapter 220,

F.S., which require entities to report their share of federal taxable income modified by the provisions of s. 220.15, F.S.

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(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 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

Whether the Taxpayer should be granted permission to cease 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
circumstances and business of the affiliated group have changed significantly since it made its consolidated return

election in XX.

The information provided by the Taxpayer shows substantial changes in the consolidated group since XX, when the
Taxpayer first elected Florida consolidated reporting. The Taxpayer has divested from several lines of business that it

previously provided in XX. Since XX, there have been changes in the market segments that the Taxpayer services. In

order to survive, the Taxpayer has been forced to make numerous changes in the way the Taxpayer operates and
generates its business. 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.

CONCLUSION

Based on the following four conditions, permission is granted for the Taxpayer to discontinue filing consolidated

corporate income tax returns beginning with tax year ending XX:

1. That Taxpayer has no realized but unrecognized income or expense items that may be recognized at a later date. If
   the Taxpayer should be required to recognize any such items at a later date, they should be reported in full on the last

Florida consolidated return;

2. That the 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 approximately XX;

3. That the Taxpayer Group does not become part of a consolidated Florida corporate income tax return prior to the

tax year ending XX.

4. Changes in Florida taxable income are the result of economic or organizational differences and are not the result of

state tax planning.

As areminder, Technical Assistance Advisements are based on full disclosure of all relevant facts, and the lack of
disclosure of a material fact by the Taxpayer may adversely affect the response provided in this Technical Assistance

Advisement.

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.SOur response is based on those facts and specific situation summarized above. You are advised that subsequent
statutory or administrative 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,

Robert DuCasse

Technical Assistance and Dispute Resolution

RCD/rd
Control No.: 60950