How did Florida treat a subsidiary's gain from distributing a foreign-partnership interest within an affiliated corporate group filing separate state returns?

Plain-English summary

The subsidiary's gain on distributing the foreign-partnership interest was subject to Florida corporate income tax and was business income. Although the affiliated group filed a consolidated federal return and expected federal deferral as a deferred intercompany transaction, the corporations filed separate Florida returns.

The distributing subsidiary's sole activity was owning the partnership interest. The Department therefore treated the distribution gain as arising from the ordinary course of that subsidiary's business rather than as nonbusiness income.

The parent's later contribution of the 49% partnership interest to another subsidiary would not be taxable if the contribution was not taxable for federal income-tax purposes. After the restructuring, each corporate partner had to report its own share of partnership income and add its share of the partnership's property, payroll, and sales factors to its separate Florida apportionment factors.

What this means for you

Federal consolidated-return deferral did not answer the Florida separate-return question. The ruling applied Florida's rule that a federal consolidated-group member computes its separate Florida taxable income as if it had filed a separate federal return, absent a Florida consolidated return.

Business-income classification also depended on the subsidiary's actual role. Because holding the partnership interest was Corporation A's only activity, disposing of part of that interest was treated as part of its business.

Common questions

Q: Was the distribution gain taxable in Florida? Yes, under the separate-return provisions cited by the Department.

Q: Was the gain business or nonbusiness income? Business income, because ownership of the partnership interest was the distributing subsidiary's sole activity.

Q: Was the parent's later capital contribution taxable? Not if it was nontaxable for federal income-tax purposes.

Q: Who reported the partnership's income after the restructuring? Each corporate partner reported its respective share on its separate Florida corporate return.

Q: How were the partnership's apportionment factors handled? Each partner added its attributable share of the partnership's property, payroll, and sales to its own factors.

Citations and references

• Fla. Stat. § 220.02(1) — corporate partners include their partnership income
• Fla. Stat. § 220.03(1)(r) — nonbusiness-income definition
• Fla. Stat. § 220.13(2)(f) — separate-return taxable income for federal consolidated-group members
• Fla. Stat. § 220.131(4) — Florida consolidated-return computation
• Fla. Admin. Code r. 12C-1.015(10) — partnership income and apportionment factors
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97C1-006

Original ruling text

Sep 23, 1997

Re: Technical Assistance Advisement 97(C)1.006
XXX ("Parent Corporation")
XXX ("Corporation A")
XXX ("Corporation B")
XXX ("Corporation C")
Corporate Income Tax - Chapter 220, F.S.

Transfer of Partnership Interest

Dear:

This is in response to your letter of April 2, 1997, in which

you requested a Technical Assistance Advisement regarding the
gain on the distribution of a partnership interest. You asked
whether the gain would be subject to corporate income tax in
Florida if separate entity returns are filed and whether the

gain should be characterized as business or nonbusiness income

pursuant to Section 220.03(1)(r), F.S.

FACTS

Parent Corporation is aC" corporation and the parent of an
affiliated group of corporations. Parent is commercially
domiciled in Florida and files a consolidated federal income tax

return and a separate entity income tax return in Florida.

Corporations A, B, and C are wholly owned subsidiaries of Parent
Corporation and each of the corporations is incorporated and
commercially domiciled in Florida. All three subsidiaries are
included in Parent Corporation's federal consolidated return and
file separate entity income tax returns in Florida.

Corporations A and B are each 50% owners of a partnership which
is organized under the laws of a foreign country. Corporation

A's sole activity is the ownership of the partnership interest.

To improve efficiency and reduce the overall reporting
requirements of the group, Parent Corporation is considering a

multi-step plan to simplify its corporate structure which will

be accomplished over a number of years. The Federal and state
tax consequences of the reorganization may have an impact on the
companies’ ability to implement the plan. To determine the

state tax consequences, you are providing the following analysis
of the proposed restructuring. Corporation A plans to distribute
49% of the partnership interest to Parent Corporation. This
distribution would result in a taxable gain under section 311(b)

of the Federal Internal Revenue Code. However, since Corporation
A is included in Parent Corporation's consolidated Federal

income tax return, the gain would be deferred for federal income
tax purposes as the distribution is a Deferred Intercompany

Transaction ("DIT") under Treasury Reg. s. 1.1502-13.

If the above transfer occurs, Parent Corporation plans to then
contribute the 49% interest in the partnership to Corporation C
as an additional capital contribution. Therefore, at the end of
the first year of the transaction, Corporation A will own a 1%
interest in the foreign partnership, Corporation B will own a
50% interest in the foreign partnership and Corporation C will

own a 49% interest in the foreign partnership.

Ultimately, the partnership will have one 99% partner

(Corporation C) and one 1% partner.

DISCUSSION AND ANALYSIS OF LAW

Section 220.02, F.S., provides in pertinent part:

(1) It is the intent of the Legislature in enacting this
code to impose a tax upon all corporations, organizations,
associations, and other artificial entities which derive
from this state or from any other jurisdiction permanent
and inherent attributes not inherent in or available to
natural persons, such as perpetual life, transferable
ownership represented by shares or certificates, and
limited liability for all owners. It is intended that

limited liability companies be subject to the tax imposed
by this code. It is the intent of the Legislature to

subject such corporations and other entities to taxation
hereunder for the privilege of conducting business,

deriving income, or existing within this state}...

However, a corporation or other taxable entity which is or
which becomes partners with one or more natural persons
shall not, merely by reason of being a partner, exclude
from its net income subject to tax its respective share of

partnership net income....

Section 220.13(2)(f), F.S., states:

"Taxable income," in the case of a corporation which is a
member of an affiliated group of corporations filing a
consolidated income tax return for the taxable year for
federal income tax purposes, means taxable income of such
corporation for federal income tax purposes as if such
corporation had filed a separate federal income tax return
for the taxable year and each preceding taxable year for
which it was a member of an affiliated group, unless a
consolidated return for the taxpayer and others is required

or elected under s. 220.131;

Section 220.131(4), F.S., states:

(4) The computation of consolidated taxable income for the
members of an affiliated group of corporations subject to

tax hereunder shall be made in the same manner and under
the same procedures, including all intercompany adjustments
and eliminations, as are required for consolidating the
incomes of affiliated corporations for the taxable year for
federal income tax purposes in accordance with s. 1502 of
the Internal Revenue Code, and the amount shown as
consolidated taxable income shall be the amount subject to

tax under this code.

Rule 12C-1.015(10), F.A.C. states:

Partnerships. The amounts of the property, payroll, and
sales of a partnership are attributable to the partners or
members of the joint venture. A corporation that is a
partner in a partnership must add its share of the
property, payroll, and sales to its own apportionment
factors, regardless of whether the partnerships are Florida

partnerships. Form F-10665 is used in part to distribute to

each partner subject to the tax its share of the

apportionment factors of the partnership or joint venture.

Section 220.03(1)(r), F.S., states:

"Nonbusiness income" means rents and royalties from real or
tangible personal property, capital gains, interest,
dividends, and patent and copyright royalties, to the

extent that they do not arise from transactions and

activities in the regular course of the taxpayer's trade or
business. The term "nonbusiness income" does not include
income from tangible and intangible property if the
acquisition, management, and disposition of the property
constitute integral parts of the taxpayer's regular trade

or business operations, or any amounts which could be
included in apportionable income without violating the due
process clause of the United States Constitution....

(emphasis supplied)

Subsection 220.02(1), F.S., cited above, provides that a
corporate partner in a partnership must include in its income,
its share of partnership income. In other words, any gain on
the distribution of the partnership interest must be included in
the corporate income tax return filed by the corporate partner.
Such share of partnership income will be subject to corporate

income tax in Florida.

Paragraph 220.03(1)(r), F.S., defines "nonbusiness income" as
certain types of income which arise from transactions and
activities which are not in the regular course of the taxpayer's
trade or business operations. Items of income from activities
which constitute integral parts of the taxpayer's regular trade

or business operations, or the inclusion of which in

apportionable income would not violate the due process clause of

the U.S. Constitution, are business income.

REQUESTED ADVISEMENT

Based on the proposed transaction described above, you have

requested our advice regarding the following issues:

1. Will the gain on the distribution of the partnership
   interest be subject to corporate income tax in Florida if

separate entity returns are filed?

RESPONSE:

According to the provisions of ss. 220.13, F.S., the gain on the
distribution of the partnership interest will be subject to

corporate income tax in Florida.

2. If the gain is taxable in the year of the distribution,
   will the gain be characterized as "business" or "nonbusiness"

income?

RESPONSE:

Based upon the facts presented in your letter, the sole activity
of Corporation A is ownership of the partnership interest;
therefore, the gain from the distribution of partnership

interest will be characterized as business income, because it is
derived from transactions in the ordinary course of the

taxpayer's business.

3. Will the subsequent contribution of the partnership

interest to Corporation C be a taxable transaction?

RESPONSE:

The subsequent contribution of 49% interest in the partnership
by Parent Corporation, as an additional capital contribution, to
Corporation C will not be treated as a taxable transaction if it

is not taxable for federal income tax purposes.

4. Will the corporate partners be responsible for
   including their respective portions of partnership income and
   apportionment factors on their respective separate entity

returns?

RESPONSE:

As previously discussed, s. 220.02(1), F.S., requires corporate
partners to include their respective shares of income from the
partnership in their taxable income. Rule 12C-1.015(10),
F.A.C., provides for each corporate partner to add the
apportionment factors of the partnership which are attributable
to the partner to its own apportionment factors. Therefore,
Corporations A, B and C must include their respective portions
of the partnership income on their respective separate corporate
income tax returns. Likewise, they are to include the
apportionment factors of the partnership attributable to them on

their separate returns.

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,

Moses O. Daramola
Senior Tax Specialist
Technical Assistance & Dispute Resolution

Office of the General Counsel

MOD/md
Control No: 28497