Could a reorganized corporate group stop filing consolidated Florida corporate income tax returns and begin filing separate returns?

Plain-English summary

The Florida Department of Revenue granted the corporate group's request to stop filing consolidated Florida corporate income tax returns beginning with the 1995 tax year. The companies could file separately for 1995 and later years under the permission given in the advisement.

The Department did not find a substantial adverse effect caused by a change in tax law. Instead, it found good cause in the group's major reorganization: mergers, acquisitions, and a sale had left the legal corporate structure out of step with the companies' actual Florida operations. Continuing to consolidate would attribute income and activities to Florida that the Department said were outside the state's taxing jurisdiction.

The parent was incorporated in Florida but had a zero Florida apportionment factor, and only two of the five remaining subsidiaries had enough Florida nexus to file. On those facts, the Department found that a consolidated return would apportion more income to Florida than the companies' in-state activity supported.

What this means for you

Reorganized corporate groups

A group already required to file consolidated Florida returns could not simply stop on its own. The cited rule authorized Department permission, and this group obtained it by showing a significant change in circumstances and a resulting distortion.

Multistate tax departments

The ruling treated a contractual and organizational change as possible good cause even without a new statute or regulation. The key evidence was the mismatch between entity structure, nexus, functional operations, and the income the consolidated method assigned to Florida.

Accountants and tax professionals

Permission was specific to this group and began with its 1995 return. A request under the cited rule had procedural requirements, including submission to the Office of General Counsel no later than the 90th day before the consolidated return's due date, including extensions.

Common questions

Q: Did Florida let the group file separate returns?
A: Yes. The Department granted permission to discontinue consolidated filing for tax year 1995 and later years.

Q: Why did the Department find good cause?
A: The mergers, acquisitions, sale, and resulting organization no longer matched the group's functional Florida operations, causing consolidated filing to distort Florida-apportioned income.

Q: Was the decision based on a change in tax law?
A: No. The Department said it was unaware of a legal change causing substantial adverse effect. It relied instead on the changed contractual and organizational circumstances.

Q: Could the group stop filing consolidated returns without permission?
A: The ruling applied a rule authorizing the Department to grant permission. The group requested and received that permission rather than changing methods unilaterally.

Q: Can another corporate group rely on this TAA?
A: Not automatically. The advisement states that it binds the Department only under the facts and circumstances described in the request, and later legal changes or court interpretations may produce a different result.

Citations and references

• Fla. Admin. Code r. 12C-1.0131(3)(b)1.-2. (permission and good-cause standards for discontinuing consolidated returns)
• Fla. Stat. § 213.22 and Fla. Admin. Code ch. 12-11 (technical assistance advisements)
• Fla. Stat. ch. 119 (public records)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96C1-006

Original ruling text

Dec 19, 1996

Re: TAA 96(C)1-006

Corporate Income Tax - Consolidated Return Requirements
XXX, hereinafter referred to as "A";

XXX, hereinafter referred to as "B";

XXX, hereinafter referred to as "C";

XXX, hereinafter referred to as "D";

XXX, hereinafter referred to as "E";

XXX, hereinafter referred to as "F";

XXX, hereinafter referred to as "G"; and

XXX, hereinafter referred to as "H"

Dear:

Your letters of 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

According to the information provided in your letters, "A" was
incorporated in XXX. On XXX, "A" merged with "B" and "D," each
of which had subsidiaries. As a result of the merger, "B" and

"D" were absorbed by "A," but their subsidiaries remained in
existence. "A's" Florida corporate income tax return for

calendar year 1994, was filed on a consolidated basis and
included "A,"""C," and "F". Due to the timing of the merger, "E"

and "H" chose to file separately from "A," ""C," and "F."

"G" was acquired in XXX. "F" was sold in late XXX, and will be
liquidated in XXX. Although "H" reports income to Florida, "A"
has no Florida operations except for "C". "A" believes that
continuing to file on a consolidated basis results ina

distortion in the amount of income apportioned to Florida.

The companies would like permission to discontinue filing

consolidated returns, beginning with the 1995 return.
QUESTION

May "A" and its subsidiaries have permission to file separate

Florida corporate income tax returns beginning with their

December 31, 1995, return?

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 Office

of General Counsel, Tax Policy 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....

While the information submitted by "A" 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 "A," we have
determined that there has been a change in circumstances of a
contractual nature. The calculation of income under the terms
of the merger and subsequent corporate acquisitions, would
result in a distortion of the income reported to Florida, when
income continues to be reported on a consolidated basis, due to
the organizational structure not coinciding with the functional
operations within this State. Requiring the continued filing of

a Florida consolidated return by the companies after this
significant and substantial reorganization, results in income

and activities being attributed to Florida which are clearly

outside the taxing jurisdiction of this State.

This result is due, in part, to the parent company's being
incorporated in Florida, but having a Florida apportionment
factor of zero, while only two of the five subsidiaries

remaining after the mergers and acquisitions have sufficient

Florida nexus to cause them to have a filing requirement. Prior
to the mergers and acquisitions, three of the seven companies
involved were incorporated in Florida. One of these companies
no longer exists. Additionally, subsequent to the mergers one
company has been sold, and another acquired. Neither of those
companies has Florida nexus. Therefore, requiring these
companies to file a consolidated Florida corporate income tax
return would result in a greater amount of income being
apportioned to Florida than the activity conducted by the

companies would suggest is attributable to Florida.

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

1995 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

Tax Policy and Dispute Resolution

SCP/kk
Control No.: 25632