Could a corporate group stop filing Florida consolidated income-tax returns after a merger distorted its contractual allocation of tax?

Subject

Consolidated Return Requirements

Plain-English summary

Florida granted the parent and its subsidiaries permission to stop filing consolidated Florida corporate income-tax returns. Although the group did not show a substantial adverse tax effect or a relevant law change, the Department found good cause in a merger-related contractual change.

The merger required the parent to track the absorbed company's financial activity separately when calculating dividends for former policyholders. Including the surviving subsidiary's sales, property, and payroll in the consolidated apportionment factor distorted the income reported to Florida for that contractual allocation. Permission applied for the redacted requested tax year and later years.

What this means for you

A prior consolidated-return election was not self-revoking. The group needed Department permission and facts establishing good cause under the rule; here, the decisive fact was a contractual distortion created by the merger.

Common questions

Was permission granted? Yes.

Did the group prove a substantial adverse tax-liability change? No, but the Department found a qualifying change in contractual circumstances and distortion.

Could any merged group switch automatically? No. The ruling was a fact-specific permission grant.

Citations and references

• Fla. Admin. Code r. 12C-1.0131(3)(b)
• Fla. Stat. § 213.22

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 94C1-008

Original ruling text

Oct 25, 1994

Re: TAA 94(C)1-008
Corporate Income Tax - Consolidated Return Requirements

Dear:

Your letters of XX, XX, and XX, requested a Technical Assistance Advisement concerning the request for permission to discontinue filing consolidated Florida corporate income tax returns. This response to your request 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.

FACTS

XXX, hereafter referred to as Parent, and its subsidiaries properly elected to file consolidated Florida corporate income tax returns beginning with the XXX tax year.

On XXX, Parent merged with another company, which had a subsidiary. As a result of the merger, the other company was absorbed by Parent, but the subsidiary remained in existence.

Under the terms of the merger, Parent is required to separate the merged company's financial activity from its own in determining dividend payments to the merged company's former policy holders. The merged company had no Florida premiums, and its subsidiary had only a small percentage. Your letter of XX, states that although the taxable income reported is the same under either basis of reporting, the pro forma apportionment factor is greater on a consolidated basis than on a separate basis, because including the subsidiary's sales, property, and payroll in the calculation increases it. Accordingly, you believe it is inequitable to include former merged company policyholders and Parent policyholders in a consolidated return and allocate a portion of the tax to them.

The companies would like permission to discontinue filing consolidated returns, beginning with the XXX return.

QUESTION

May Parent and its subsidiaries have permission to file separate Florida corporate income tax returns beginning with their XXX, returns?

DISCUSSION AND ANALYSIS OF LAW

Rule 12C-1.0131, F.A.C., states in part:

"(3)(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 Chief, Bureau of Technical Assistance and Training, 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."

While the information submitted by Parent fails to show that continuing to file consolidated Florida corporate income tax returns would have a substantial adverse effect on the company, and we are unaware of any changes in law, or in the Florida Income Tax Code or Internal Revenue Code or regulations which would have a substantial adverse effect on Parent, we have determined that there has been a change in circumstances of a contractual nature, and the calculation of income under the terms of the merger results in a distortion of the income reported to Florida, when reported on a consolidated basis.

Due to this distortion, we believe good cause to discontinue filing consolidated returns has been shown, and permission to discontinue filing of consolidated returns is granted for the XXX tax year and later years.

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 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 and your request are public records under Chapter 119, F.S., which are subject to disclosure to the public under the conditions of s. 213.22, F.S. Your name, address, and any other details which might lead to identification of the taxpayer must be deleted by the Department before disclosure. In an effort to protect the confidentiality of such information, we request you notify the undersigned in writing within 15 days of any deletions you wish made to the request or the response.

Sincerely,

Suzanne C. Paul
Statutory Compliance Section

SCP/kk
Control No.: 17479