Did a 50% LLC ownership transfer that caused a federal partnership technical termination also create a Florida liquidation, and how many Florida returns were required?

Subject

Taxable Income and Filing Requirement -- Short Taxable Years

Plain-English summary

The ownership transfer did not produce a Florida liquidation or taxable gain or loss for the LLC, but the LLC had to file two Florida short-period returns using two federal identification numbers. The transaction transferred one corporate member's 50% interest so that the LLC became indirectly wholly owned by one parent corporation.

For federal partnership purposes, the ownership change closed the old LLC's tax year and began a new tax year for a new LLC with a different federal identification number. Federal section 708 treated that event as a technical termination with a deemed liquidation and recontribution.

Florida reached a split result. For computing Florida taxable income, the state treated the LLC as a corporation, so federal partnership rules in Subchapter K did not apply. There was no actual liquidation or asset recontribution, and the federal deemed transaction did not create Florida corporate gain or loss.

For filing periods, however, Florida law followed the taxpayer's federal taxable year. Because the federal year closed on the exchange date and a new federal year began the next day, the LLC had to file one Florida short-year return for the old LLC and a second for the new LLC through calendar year-end. Each return used its corresponding federal identification number.

What this means for you

The ruling separated taxable-income classification from return-period administration. Florida's corporate treatment of the LLC displaced federal partnership rules when computing income, while the federal tax-year closing still controlled the number and timing of Florida returns.

An ownership change could therefore require extra Florida filings even when Florida recognized no liquidation gain or loss from the federal technical termination.

Common questions

Q: Did federal section 708 create a Florida liquidation? No. The Department said Subchapter K partnership rules did not apply when computing this LLC's Florida corporate taxable income.

Q: How many Florida returns were required for the exchange year? Two short-period corporate income tax returns.

Q: Which federal identification number applied? The old LLC used its number for the period ending on the sale date, and the new LLC used its different number for the period beginning the next day.

Q: Why did Florida follow the federal short years but not the federal deemed liquidation? Section 220.41 tied the Florida taxable year to the federal year, while sections 220.13 and 608.471 treated the LLC as a corporation for taxable-income computation.

Citations and references

• Fla. Stat. § 220.13(2)(j) — LLC taxable income computed as if the LLC filed as a corporation
• Fla. Stat. § 220.43(2) — final federal income adjustments as prima facie correct for Florida purposes
• Fla. Stat. § 220.41(1) — Florida taxable year follows the federal taxable year
• Fla. Stat. §§ 608.471(1) and 220.02(1) — LLC treated as a corporate artificial entity under Chapter 220
• I.R.C. § 708(a) and Subchapter K — federal partnership technical-termination rules found inapplicable to Florida taxable-income computation
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97C1-003

Original ruling text

Apr 30, 1997

Re: TAA 97(C)1-003
XXX ("Parent")
XXX ("Purchaser")
XXX ("Member 2")
XXX ("Member 1")
XXX ("Old LLC")
XXX ("New LLC")
LLC Taxable Income and Filing Requirement -- Short Taxable
Years
ss. 220.02(1), 220.13(2)(j), and 220.43(1), F.S.

Dear :

This is in response to your letter of January 21, 1997, in which
you requested a technical assistance advisement regarding
Florida corporate income tax filing requirements for limited
liability companies.

FACTS

A limited liability company, Old LLC, is equally owned by two
corporations, one of which, Member 1, is an S-Corporation, and
the other, Member 2, is a C-Corporation. The parent corporation
of Member 2, Parent, which owns 100% of the common stock of
Member 2, is considering forming a subsidiary corporation,
Purchaser, a Delaware corporation, to acquire Member 1's (the SCorporation) 50% common stock interest in Old LLC in exchange
for 3.2 million shares of Parent's own common stock. Parent is
a publicly traded corporation, and subsequent to this
transaction will be the common parent of Purchaser, Member 2,
and Old LLC. Old LLC, subsequent to this transaction, will be
50% directly owned by Member 2, and 50% directly owned by
Purchaser, and 100% indirectly owned by Parent, by means of its
indirect common stock ownership through its 100% direct
ownership of Member 2 and 100% direct common stock ownership of
Purchaser. Old LLC will close its tax year as of the close of
business on the day of the exchange for federal tax purposes,

and a new tax year will begin for federal tax purposes for New
LLC beginning the day after the stock exchange. Each limited
liability company will have a different federal identification
number.

QUESTIONS

1. Due to its classification as a C-Corporation for Florida
   purposes, what are the tax consequences, if any, for the
   exchange described above to the LLC? Does the sale of Old
   LLC corporate stock constitute a deemed liquidation of Old
   LLC followed by a deemed recontribution of assets to New
   LLC another limited liability company, for purposes of
   Chapter 220, Florida Statutes?
2. How should the LLC file its corporate income tax return, or
   returns, with Florida in the year of the exchange
   transaction? Is the LLC required to file two short period
   income tax returns with Florida, one for the short tax year
   of Old LLC, and another for the remainder of the LLC's
   calendar year, the short tax year of New LLC? Will each
   LLC use two different federal identification numbers, or
   will the LLC be required to file a single corporate income
   tax return using its original federal identification
   number, the identification number of Old LLC?
3. Since LLC is not treated for Florida corporate income tax
   purposes as a partnership, does Section 708, Internal
   Revenue Code, apply to the exchange transaction resulting
   in a "technical termination" for purposes of Chapter 220,
   F.S.

DISCUSSION AND ANALYSIS OF LAW

Paragraph 220.13(2)(j), F.S., states:

"Taxable income," in the case of a limited liability
company as defined in and organized pursuant to chapter 608
or a similar limited liability company created as an
artificial entity pursuant to the statutes of the United
States or any other state, territory, possession, or
jurisdiction, absent a federal report and determination of
taxable income as a corporation under the Internal Revenue

Code, means taxable income determined as if such limited
liability company were required to file or had filed a
federal corporate income tax return under the Internal
Revenue Code; (emphasis supplied)

Subsection 220.43(2), F.S., states:

A final determination under the Internal Revenue Code
adjusting any item or items of income, deduction, or
exclusion for any taxable year shall be prima facie correct
for purposes of this code to the extent such item or items
enter into the determination of net income under this code.

Paragraph 220.13(2)(j), F.S., requires LLC's to recalculate
their federal taxable income pursuant to the Internal Revenue
Code as though they were corporations in order to calculate
their Florida corporate income tax liability. This taxable
income computed under the Internal Revenue Code constitutes the
taxable income for Florida corporate tax purposes absent a
federal determination computing a different taxable income.
Subsection 220.43(2), F.S., then states that a final
determination adjusting any item of income, deduction, or
exclusion is prima facie correct for purposes of the Florida
Corporate Income Tax Code.

It is our understanding that there will not be an actual
liquidation of Old LLC or an actual recontribution of assets to
another limited liability company, New LLC. In computing the
taxable income of the LLC as a corporate entity, there is no
gain or loss to be reported by Old LLC on its Florida corporate
income tax return as a result of its "implicit" liquidation
resulting from the "technical termination" of Old LLC, as a
federal partnership. Subsection 708(a), Internal Revenue Code,
states that its provisions calling for the termination of a
partnership upon the sale or exchange of a partnership interest
is only for purposes of Subchapter K--Partners and Partnerships.
The LLC is treated for Florida corporate income tax purposes as
a "corporation" and the federal partnership rules in Subchapter
K, including Section 708, Internal Revenue Code, have no
application in computation of taxable income pursuant to
paragraph 220.13(2)(j), F.S.

With respect to the filing of the Florida corporate income tax
returns for the year of the exchange of the partnership
interest, Section 220.41, F.S., addresses the tax year which is
the basis for tax return filing. Subsection 220.41(1), F.S.,
states:

For purposes of the tax imposed by this code and the
returns required to be filed, the taxable year of a
taxpayer shall be the same as the taxable year of such
taxpayer for federal income tax purposes.

Since the tax year of Old LLC is closed for federal tax purposes
due to the exchange of corporate stock, as required by Section
220.41, F.S., the tax year is closed for Florida corporate
income tax purposes. The LLC should file two short period
corporate income tax returns using two different federal
identification numbers.

With respect to the third question of this TAA request, Section
608.471, F.S., and Subsection 220.02(1), F.S., clearly states
the legislative intent. Subsection 608.471(1), F.S., states:

A limited liability company is an "artificial entity"
within the purview of s. 220.02 and is subject to the tax
imposed under chapter 220.

A limited liability company is therefore a corporate entity for
purposes of Chapter 220, F.S., and any distribution is subject
to the corporate tax provisions contained in Subchapter C,
Internal Revenue Code. Accordingly, the treatment of the
exchange as a "technical termination" of a partnership under
Section 708(a), Internal Revenue Code, does not apply to an LLC
for Florida corporate income tax purposes. There is no
liquidation of Old LLC for purposes of determining gain or loss
in computing taxable income for Florida corporate income tax
purposes, and the "technical termination" of the partnership for
federal tax purposes has no application in computing Florida
corporate income tax under Chapter 220, F.S.

RESPONSES

1. The federal tax treatment pursuant to Section 708, Internal
Revenue Code, whereby Old LLC is deemed liquidated and
assets recontributed by the new partners to New LLC does
not constitute a liquidation and recontribution for Florida
corporate income tax purposes. The federal tax provisions
in Subchapter K, Internal Revenue Code, have no application
in computing taxable income for purposes of Chapter 220,
F.S., unless specifically stated in the Florida Income Tax
Code.

2. The tax year for the LLC is the same tax year as determined
   for federal tax purposes pursuant to subsection 220.41(1),
   F.S. Pursuant to the facts stated in this advice, the LLC
   will have two short tax periods for federal tax purposes
   and two different federal identification numbers. The LLC
   will likewise have two short tax years for Florida tax
   purposes: one short tax year for Old LLC closing at the
   close of business on the date of sale; and another short
   tax year for New LLC closing at its calendar year end. The
   two LLC's will also have and utilize two different federal
   identification numbers for Florida tax purposes.
3. The "technical termination" treatment contained in the
   federal partnership provisions of Subchapter K, Internal
   Revenue Code, has no application in computing taxable
   income of the LLC for Florida corporate income tax
   purposes. The federal partnership provisions have no
   application in computing taxable income, since the LLC is
   treated as a corporation for purposes of Chapter 220, F.S.,
   as stated in Sections 608.471, 220.02, and 220.13, F.S.

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,

Harry A. Baucom
Tax Law Specialist
Technical Assistance and Dispute
Resolution
HAB/hb
Control No.: 28123