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