Could a Florida corporate group stop filing consolidated returns after the subsidiary that made the election merged into the ultimate parent?

Plain-English summary

The Department granted permission to discontinue the Florida consolidated return for the 1995 tax year and later years. The subsidiary that had made the consolidated election merged into the ultimate parent and no longer existed as an independent member of the filing group.

Requiring only the ultimate parent and the remaining subsidiary to file together would have created an impermissible subgroup because the federal consolidated group included many additional subsidiaries. The ultimate parent had not elected to bring that full federal group into a Florida consolidated return.

The Department also found no demonstrated distortion of Florida taxable income from separate filing. Those structural changes and the absence of distortion established good cause to end the prior election.

What this means for you

A Florida consolidated-return election generally continues in later years, but corporate restructurings can change whether the original filing taxpayers remain an affiliated group. Permission to stop filing is fact-specific and must come from the Department.

The ruling did not authorize a handpicked subset of a larger federal affiliated group to file a Florida consolidated return. It instead allowed the ultimate parent and remaining subsidiary to continue filing separately.

Common questions

Q: Why did the old consolidated filing requirement end? The subsidiary that made the election merged into the ultimate parent and ceased to remain a member of the original filing group.

Q: Could the ultimate parent and one subsidiary simply continue as a two-company consolidated group? No. That would have been a subgroup of the much larger federal consolidated group.

Q: Did the Department find separate filing distorted Florida income? No. The ruling said no such distortion had been shown.

Q: From what year was discontinuance approved? The 1995 tax year and later years.

Citations and references

• Fla. Stat. § 220.131(1)-(3) — consolidated election, continuation, and Department authority
• Fla. Admin. Code r. 12C-1.0131(1)(a)2. — no subgroup consolidated return
• Fla. Admin. Code r. 12C-1.0131(3) — continued filing and permission to discontinue
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97C1-005

Original ruling text

Sep 16, 1997

Re: TAA 97 (C)1-005
Request For Authority to Discontinue Consolidated Filing XXX ("Parent") XXX("Sub A") XXX ("Sub B") s. 220.131, F.S., Consolidated Return Election

Dear :

You asked whether a consolidated return was required to have been filed under the facts and circumstances contained in your letters of September 27, 1996, November 20, 1996 and January 17, 1997. The Department has determined that a consolidated return is no longer required under the facts and circumstances presented.

FACTS PRESENTED BY THE TAXPAYER

Sub A has been filing consolidated Florida corporate income tax returns since it made the election to do so with the tax year ended December 31, 1980. The members of the affiliated group include Sub A and Sub B. Parent files separate Florida returns. Additionally, Parent wholly owns four other subsidiaries that transact business in Florida and file separate returns.

As of November 16, 1995, Sub A merged into Parent, becoming a division of Parent. As a result of the merger, Sub A requests permission to discontinue filing consolidated returns. Thus, Parent and Sub B would continue to file separate returns.

REGULATORY AUTHORITY

Section 220.131(1), F.S., states 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 the 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.

Section 220.131(3), F.S., states:

(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. (emphasis added)

Rule 12C-1.0131 (1)(a)2., F.A.C., states:

(a)2. A subgroup of the affiliated group may not file a consolidated return.

Rule 12C-1.0131 (3)(a), F.A.C., states:

(a)1. A group which filed, or was required to file, a consolidated return for the immediately preceding taxable year is required to file a consolidated return for the taxable year unless it has permission to discontinue filing consolidated returns under paragraph (b) or (c) of this subsection; or as long as a federal consolidated return is filed.

2. The requirement set forth in s. 220.131(1), F.S., that
   the parent company of an affiliated group must be subject to the Florida Income Tax Code is a condition that is necessary for an affiliated group to make an election to file a Florida consolidated return. There is no requirement in s. 220.131, F.S., that the parent be subject to the Florida Income Tax Code in each subsequent year. Therefore, the affiliated group may not break its consolidated election because the parent company no longer has nexus with Florida.

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 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 had a substantial

adverse effect on the consolidated tax liability of a 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 OF LAW

In order to be valid, a consolidated filing election must be made by the parent corporation. The taxpayer has described the situation as follows. Parent is the parent corporation to Sub A and Sub A is the parent corporation to Sub B. As a result, the taxpayer surmises that a timely consolidated filing election was made by Sub A. Thus, the affiliated group consists of Sub A and its subsidiary, Sub B. For federal purposes, Parent filed a consolidated return and included some 40+ subsidiaries, including Sub A and Sub B. On federal returns, Parent serves as the parent corporation of the federal affiliated group. Additionally, the taxpayer has indicated that Parent has been filing Florida returns, on a separate basis, at least since 1978. Further, there are four other subsidiaries, excluding Sub

A and Sub B, that file separate Florida returns.

It appears that Sub A, as the parent company of an affiliated group of corporations, made a filing election under the first sentence of s. 220.131(1), F.S. (1979), to consolidate its taxable income with other members of the group subject to tax under Chapter 220, F.S. The merger provides that Sub A no longer exists as an independent corporation, and accordingly, no longer remains as a member of the group that had been filing a consolidated return. Therefore, under s. 220.131(3), F.S. (1995), a consolidated return is no longer required since the filing taxpayers no longer remain members of the affiliated group that had been filing a consolidated return.

In sum, the Department's position is that it would be inappropriate to require a consolidated return for Parent and Sub B without including the rest of the federal group. The Parent has made no indication that it desires to consolidate the federal group for Florida tax purposes. Moreover, although the Department has discretion to require a consolidated filing, this discretion is generally exercised if the separately filed returns of the group would result in an improper reflection of taxable income. s. 220.131(2), F.S. However, in the instant case, no such distortion has been shown to occur.

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 specific situation summarized above. You are advised that subsequent statutory or administrative rule changes or judicial interpretations of the statutes or rules upon 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,

Beverly L. Hayes
Attorney
Technical Assistance and Dispute Resolution

BLH/