Could an affiliated corporate group stop filing Florida consolidated returns because it misunderstood the election and later sold a Florida subsidiary?

Plain-English summary

The Florida Department of Revenue refused to let the affiliated group stop filing consolidated Florida corporate income tax returns. The parent company's misunderstanding of the original election and later sale of a Florida subsidiary did not establish good cause to switch to separate returns.

The group had elected Florida consolidated filing and continued to file a federal consolidated return with the same affiliated group. Florida law generally required continued consolidated filing unless the Department consented to separate returns.

A mistaken election was not enough

The parent said it had made the election without adequate professional advice and believed a change in circumstances would permit deconsolidation. The Department found no rule authorizing relief merely because the taxpayer misunderstood the election.

The group had also benefited from the election. In one described year, consolidated filing caused the group to pay half what separate Florida returns would have produced because losses in some affiliates offset income in another. The Department concluded that the group could not keep those benefits and later revoke the election based on its original mistake.

Buying and selling subsidiaries did not materially change the business

The group's Florida presence decreased after it sold the stock of its Florida subsidiary. But the Department found that the affiliated group's underlying business remained the same, its activities remained integrated, and the parent continued doing business in Florida.

Acquisitions, liquidations, and subsidiary sales could change Florida apportionment without amounting to the kind of change in law or circumstances that justified deconsolidation. The ruling stated that purchasing and selling a subsidiary was not itself a basis for permission.

The group did not show the rule's good-cause factors

The cited regulation allowed the Department to consider substantial adverse effects from tax-law changes and other changes in law or circumstances. The taxpayer did not demonstrate such a qualifying change. Its request to file separate returns was therefore denied.

What this means for you

Affiliated groups considering a Florida consolidated election

Treat the election as a long-term commitment. Model future acquisitions, dispositions, profitable affiliates, losses, and Florida apportionment before electing.

Groups seeking deconsolidation

A more favorable separate-return result, dissatisfaction with prior advice, or ordinary changes in group membership may not establish good cause. The request should be tied to the statutory and regulatory grounds for Department consent.

Corporate tax advisers

Document the advice and projections supporting the initial election. The ruling shows why a later claim that management misunderstood the consequences may carry little weight after the group has received a tax benefit.

Common questions

Q: Can a Florida consolidated-return election ordinarily be revoked at will?
A: No. Section 220.131(3) required continued consolidated returns unless the director consented to separate filing.

Q: Did inadequate professional advice justify revocation here?
A: No. The Department found that a mistaken election was not a regulatory basis for deconsolidation.

Q: Why did the prior tax benefit matter?
A: The group had paid less tax through consolidated filing, including half of the separate-return amount in one described year.

Q: Did selling the Florida subsidiary establish a sufficient change?
A: No. The group's Florida activity diminished, but the nature of its business remained the same.

Q: What was the result?
A: The request for permission to file separate Florida corporate income tax returns was denied.

Citations and references

• Fla. Stat. § 220.131(1) — requirements for electing Florida consolidated filing
• Fla. Stat. § 220.131(3) — continued consolidated filing and Department consent to separate returns
• Fla. Admin. Code r. 12C-1.0131(3)(b) — application process and factors for permission to discontinue consolidated returns

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 05C1-004

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: The affiliated group was not granted permission to cease filing Florida
consolidated tax returns. A misunderstanding as to the consequences of electing consolidated return filing is not a
basis for deconsolidation when the affiliated group benefits from the election by paying less Florida tax. Changes in
the organizational structure of the affiliated group, such as acquisitions, liquidations, and sales of subsidiaries which
increase or reduce Florida apportionment, were not a sufficient basis for deconsolidation when the nature of the
business remains the same.

August 4, 2005

Re: Technical Assistance Advisement 05C1-004
Corporate Income Tax
Request for Authority to Discontinue Consolidated Filing
Section 220.131, F.S.
XXX (hereinafter referred to as "Taxpayer")
XXX (hereinafter referred to as "FloCo")
Dear :
Your letter of XX, requests permission for the Taxpayer and its affiliated group to discontinue filing consolidated
returns for Florida corporate income tax purposes for tax years beginning XX. By letter dated XX, Taxpayer provided
additional information with respect to its request. 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
Taxpayer is the parent company in an affiliated group of approximately XX corporations headquartered in XXX.
Taxpayer currently reports its income on a consolidated return basis for Florida and federal corporate income tax
purposes. Taxpayer and its affiliates initially made a Florida consolidated return election for the tax year ending XX.
Taxpayer states that it made its Florida election in XX without adequate professional advice, believing at the time that
"a mere change in circumstances" would allow Taxpayer to request and receive approval to deconsolidate.
Taxpayer's affiliated group operates a number of businesses, most of which are related to XXX. Over the past XX
years, Taxpayer has bought and sold several businesses, most of which were related to XXX. The most recent
acquisition (XXX) was a manufacturer of XXX. In addition to its XXX corporate affiliates, Taxpayer owns XX limited

liability companies that have elected to be taxed as partnerships, and which are engaged in XXX, XXX, and XXX. At
least XX of Taxpayer's affiliates are holding companies located in XXX that own or have owned notes receivable from
other members of the affiliated group. To some extent, the business activities of Taxpayer's affiliated group are
integrated. For example, one affiliate will supply raw material, provide marketing services, or make loans to another
affiliate.
On XX, Taxpayer acquired the stock of FloCo. Taxpayer states that it made an election to file consolidated Florida
corporate income tax returns because its two affiliated group members (Taxpayer and FloCo) were doing business in
Florida. Taxpayer is an XXX, with about XX% of its business activities in Florida. FloCo is a XXX, with about XX% of
its business activities in Florida. The main ingredient used in FloCo's manufacturing process is XXX, most of which it
purchased from Taxpayer. At the end of XX, Taxpayer sold the stock of FloCo.
Taxpayer plans to continue filing consolidated U.S. corporate income tax returns. Taxpayer represents that it is has
not been contacted by the Department with respect to an audit and is not currently under audit. Taxpayer further
states that it has no realized but unrecognized intercompany gains or losses that will be recognized currently or in the
future. In addition to a lack of professional advice, Taxpayer claims that its activities in Florida have drastically
changed, so that a consolidated filing does not accurately reflect its activities in Florida. Taxpayer notes that the only
entity in the affiliated group that is now subject to Florida tax on a separate return basis is itself.
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:

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 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.
   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 its business
presence in Florida has diminished since it made its consolidated return election in XX for the XX tax year. In addition,
Taxpayer states that it made its Florida consolidated return election without adequate professional advice.
Based on the data provided by Taxpayer, some members of Taxpayer's affiliated group are profitable, while other
affiliated group members are unprofitable and generate net operating losses. In XX, Taxpayer and members of its
affiliated group had significant net operating losses, while FloCo reported a significant profit. Of Taxpayer's XX
affiliated corporations, Taxpayer and FloCo were the only two entities that had significant business activities in Florida.
Taxpayer had significant losses, but a small Florida apportionment fraction, while FloCo had significant income and a
large Florida apportionment fraction. In XX, the benefits of consolidated filing resulted in Taxpayer and its affiliated
group paying half of what it would have paid if it had filed separate Florida corporate income tax returns.
Florida law allows taxpayers to elect to file consolidated Florida corporate income tax returns, even though some
taxpayers may pay less tax as a result of such an election. Florida law generally requires taxpayers to continue to file
Florida consolidated corporate income tax returns once the election has been made. It is well-established that
permission to cease filing consolidated returns will not be granted if the reason for such request is that a taxpayer will
pay less Florida corporate income tax.
Taxpayer states that it was mistaken as to the effect of its consolidated Florida return election, and that it did not
receive adequate advice when it made its consolidated return election XX years earlier. Taxpayer has received the
benefits of filing consolidated Florida corporate income tax returns by paying less Florida corporate income tax
throughout this period. Rule 12C-1.031(3), F.A.C., does not authorize relief in the case of a mistaken consolidated
return election and equity will not allow a taxpayer to benefit from its own mistake. For these reasons, a lack of
adequate advice is not a basis for deconsolidation.
In addition, Taxpayer states in its supplemental letter that it should be allowed to deconsolidate because its business
activities in Florida have drastically changed. The Florida business activities of Taxpayer's affiliated group have
diminished because of the sale of FloCo, but the business of Taxpayer's affiliated group is the same. Taxpayer
continues to conduct business in Florida, and its activities are unitary with the affiliated group. It is well-established
that the purchase and sale of a subsidiary is not a basis for granting deconsolidation. Taxpayer bought and sold
subsidiaries both before and after it bought and later sold FloCo. Taxpayer has not shown that its business has
changed in a significant way, nor has it shown "[c]hanges in law or circumstances, including changes which do not
affect income tax liability."
CONCLUSION
Taxpayer has not 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 denied.
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
Record ID: 14973