Could a substantially larger and more diversified corporate group revoke its Florida consolidated-return election because its business circumstances had changed?

Plain-English summary

The taxpayer had elected Florida consolidated filing when it was a moderately sized domestic distributor. Since then, the group had become a much larger multinational business, expanded its product and service offerings and geographic markets, increased its sales force, and changed its supply-chain and branch operations.

The Department found those substantial organizational and economic changes sufficient to grant permission to discontinue consolidated Florida corporate income tax returns.

The permission carried three conditions: deconsolidation had to begin with the specified taxable years; any intercompany unrealized, unrecognized, deferred income, or deferred expense later recognized had to be reported in full on the last Florida consolidated return; and changes in Florida taxable income had to arise from economic or organizational differences rather than state tax planning.

What this means for you

Long-term transformation of the business can establish good cause to revoke a consolidated election, but the Department can impose transition rules that prevent deferred items from escaping tax or the change from becoming a tax-planning device.

Common questions

What change supported deconsolidation? Substantial growth, international expansion, diversification, and operational restructuring since the original election.

What happened to deferred intercompany items? If later recognized, they had to be reported in full on the last consolidated return.

Could the resulting income changes be tax-driven? No. They had to reflect economic or organizational differences, not state tax planning.

Citations and references

• Fla. Stat. § 220.131 and Fla. Admin. Code r. 12C-1.0131(3)(b), as cited in the advisement.

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 12C1-005

Original ruling text

Executive Director
Lisa Vickers

QUESTION: Whether the Taxpayer and its subsidiaries should be permitted to cease filing consolidated
Florida corporate income tax returns?
ANSWER: The consolidated group was granted permission to cease filing Florida consolidated corporate
income tax returns based on the rule provisions that address changes in law or circumstances.

May 17, 2012
XXX
XXX
XXX
Re:

Technical Assistance Advisement (TAA) 12C1-005
Corporate Income Tax
Request for Authority to Deconsolidate
Section: 220.131, F.S.
Rule: 12C-1.0131(3)(b), F.A.C.
XXX (hereinafter referred to as “Taxpayer”)

Dear XXX:
This is in response to your request dated XXX for a Technical Assistance Advisement (TAA) pursuant to
section 213.22, F.S., and Rule Chapter 12-11, F.A.C., regarding Taxpayer’s request to discontinue filing
consolidated Florida corporate income tax returns. An examination of your letter has established that you
have complied with the statutory and regulatory requirements for issuance of a TAA. Therefore, the
Department is hereby granting your request for a TAA.
FACTS AS PROVIDED BY TAXPAYER
Taxpayer began filing a consolidated Florida corporate income tax return in XXX. At that time, Taxpayer
was a moderately-sized nationwide industrial distributor of air compressors, air conditioning equipment,
air tools and paint spraying equipment, blowers and various other items. Taxpayer operated only in the
United States and sold only tangible goods. Taxpayer asserts that it elected to consolidate in order to take
advantage of net operating losses of its subsidiaries.
At the time of its consolidated return election, Taxpayer sold and delivered products primarily through its
catalog and XXX nationwide branches. Taxpayer utilized its retail branch locations as its primary point of
contact for customer service as well as product delivery of its XXX-item product offering.
Child Support Enforcement – Ann Coffin, Director  General Tax Administration – Jim Evers, Director
Property Tax Oversight – James McAdams, Director  Information Services – Tony Powell, Director

www.myflorida.com/dor
Tallahassee, Florida 32399-0100

Technical Assistance Advisement 12C1-005
Page 2

During the XXX, Taxpayer experienced tremendous growth in all aspects of its business. Taxpayer
established a presence in over XXX countries through strategic acquisitions and growth in XXX, XXX,
XXX, XXX and XXX. In XXX, Taxpayer began to sell its products through various websites in order to
provide new ways to connect to its customers. The websites give customers access to Taxpayer’s entire
XXX-item product offering and currently generate approximately XXX of Taxpayer’s sales. In XXX,
Taxpayer acquired the XXX division of XXX (“Limited”), XXX largest distributor of XXX, which
increased its consolidated net sales by approximately XXX.
In addition, Taxpayer also began offering expert maintenance, repair and operations consulting services.
Through its XXX service, Taxpayer provides its customers expert maintenance, repair and operations
materials consulting and logistics services on certain aspects of the management of customers’
maintenance, repair and operations product needs or a full outsourcing where Taxpayer manages
customers’ entire maintenance, repair and operations inventory processes. Once Taxpayer began offering
consulting services, it made a gradual shift into serving new customers, namely XXX and XXX XXX, as
well as large companies.
In XXX, Taxpayer transitioned its traditional warehouses into larger, more highly automated distribution
centers. Prior to this change, Taxpayer had hundreds of branches, all of which carried inventory to match
its sales. After this change, Taxpayer’s branches were able to carry smaller amounts of inventory and
focus their efforts on sales and customer service, thereby reducing the amount of time required to pick,
pack and ship customer orders along with the ability to shift to smaller branches.
Taxpayer also launched a XXX force program called the XXX program. This program employs customerfacing resources to visit and solicit sales directly from customers, both new and existing. XXX sales
representatives visit customers in Taxpayer-branded vehicles and act as XXX, allowing Taxpayer to serve
its customers in the electronic world or at the customer’s location.
In its quest to continue its international expansion, Taxpayer made the following acquisitions:
•
•
•

XXX – Taxpayer acquired a XXX interest in XXX, XXX locations and more than XXX dealer
relationships across XXX.
XXX – Taxpayer purchased the remaining XXX of XXX.
XXX- Taxpayer acquired the XXX (“Group”), with a customer base of XXX with more than
XXX products in XXX.
ISSUE

Whether the Taxpayer and its subsidiaries should be permitted to cease filing consolidated Florida
corporate income tax returns?

Technical Assistance Advisement 12C1-005
Page 3

LEGAL AUTHORITY
Section 220.131, F.S., provides in part:
(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.
(2) 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.
(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.

Technical Assistance Advisement 12C1-005
Page 4

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.
   DISCUSSION AND ANALYSIS
   Taxpayer relies on Rule 12C-1.0131(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 under which its initial election to file Florida consolidated returns was
   made have changed significantly. Taxpayer also asserts that since it began filing its Florida corporate
   income tax return on a consolidated basis, it has substantially enhanced and expanded its core business,
   entered the industrial service industry and entered several new geographic markets. Taxpayer also asserts
   that its business has grown significantly since its election was made.
   The information provided by Taxpayer shows significant changes in its consolidated group since XXX.
   Taxpayer has grown substantially in size, from a moderately-sized domestic XXX with a XXX-item
   offering, to a multi-national, broad-line XXX offering over XXX products and services in more than XXX
   countries. In addition, Taxpayer’s sales force has increased dramatically, since its XXX consolidated
   filing election, increasing approximately XXX between XXX and XXX. Taxpayer has also increased in
   size and efficiency due to its increase in XXX, from XXX in XXX sales in XXX to approximately XXX
   of sales today. Taxpayer has also significantly streamlined its supply chain and inventory levels, thereby
   allowing its branches to focus on sales and customer service rather than on tracking inventory. As a result
   of Taxpayer’s growth and diversification, the affiliated group has undergone considerable changes, the
   magnitude of which affects the prudence of continuing to file on a consolidated basis for Florida corporate
   income tax purposes.

Technical Assistance Advisement 12C1-005
Page 5

CONCLUSION
Based on the following conditions, permission is granted for the Taxpayer to discontinue filing
consolidated corporate income tax returns:

1. That the deconsolidation is effective for the taxable years ending on or after XXX.
2. That Taxpayer and its subsidiaries have no intercompany unrealized or unrecognized items or
   deferred income or expenses 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; and
3. Changes in Florida taxable income are the result of economic or organizational differences and
   are not the result of state tax planning.
   This response constitutes a Technical Assistance Advisement under Section 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 Section 213.22, F.S. Our response is predicated 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 documents are public records under
   Chapter 119, F.S., which are subject to disclosure to the public under the conditions of Section 213.22,
   F.S. Your name, address, and any other details, which might lead to identification of the taxpayer, must
   be deleted before disclosure. In an effort to protect the confidentiality of such information, we request you
   provide the undersigned with an edited copy of your request for Technical Assistance Advisement, backup
   material and response within fifteen days of the date of this advisement.
   Sincerely,

Pamela K. Slater, Esq., LL.M.
Senior Attorney
Technical Assistance and Dispute Resolution
(850)717-7658
Record ID: 116002