Did an out-of-state reinsurer have to file Florida corporate income tax solely because it owned part of an LLC doing business in Florida?

Subject

Filing Requirements

Plain-English summary

The out-of-state reinsurer did not become subject to Florida corporate income tax merely because it owned part of an LLC doing business in Florida. Although the LLC was treated as a partnership for federal tax, Florida's statute treated LLCs as corporations. Under the cited rule, holding stock or an ownership interest in a Florida-taxable corporation did not by itself create nexus for the owner.

The reinsurer had no Florida office or employees, earned no Florida income, wrote no direct insurance on Florida property or risks, and did not assume reinsurance from Florida-domiciled companies. On those stated facts, it did not have to file a Florida return because of the LLC interest.

The Department identified one unresolved fact that could reverse the answer: whether the reinsurer assumed reinsurance covering property or risks located in Florida. If it did, that activity would subject it to Florida corporate income tax and require a return.

The LLC had a different answer. It served Florida customers, and its president worked from a Florida home, so the LLC itself was subject to Florida corporate income tax and had to file.

What this means for you

Ownership and operating activity were analyzed separately. Passive ownership in an entity with Florida nexus did not automatically attribute that nexus to the foreign owner under the rule applied, while the entity's own Florida customers and Florida-based executive created its filing duty.

The ruling did not answer how the reinsurer would report distributed income or apportion income if it became taxable; those questions were expressly left unanswered because the ownership interest alone did not create nexus.

Common questions

Q: Did federal partnership treatment of the LLC control Florida? No. Florida treated the LLC as a corporation for Chapter 220 administration.

Q: Did ownership of the LLC require the reinsurer to file? No, not without other Florida activities creating nexus.

Q: What fact could have required the reinsurer to file? Assuming reinsurance on property or risks in Florida.

Q: Did the LLC itself have to file? Yes. It served Florida customers and its president worked from Florida.

Q: Did the TAA decide the reinsurer's apportionment method? No. The Department did not reach the distribution and apportionment questions.

Citations and references

• Fla. Stat. § 220.03(1)(e) — Florida corporation definition, including LLCs under the cited law
• Fla. Admin. Code r. 12C-1.011(2)(b) — holding stock in a Florida-taxable corporation does not alone create tax liability
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98C1-004

Original ruling text

May 04, 1998

RE: Technical Assistance Advisement 98(C)1-004 Corporate Income Tax - Filing Requirements XXX, hereinafter referred to as "A"

Dear :

Your letter of XX, requested a Technical Assistance Advisement on "A's" filing requirements for corporate income tax purposes under the facts and circumstances presented in that letter. 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

Your letter of XX, states that "A" is incorporated and domiciled in XXX. "A" is a reinsurer which writes no direct insurance on properties or risks with Florida situs, nor does it assume reinsurance from companies domiciled in Florida. "A" has no office or employees in Florida, and earns no income from Florida.

"A" has an interest in a XXX limited liability company (LLC) which is treated as a partnership for federal income tax purposes. "A" and the other member of the LLC, who is an individual employed and residing in Florida, each appoint two members of a four member board to manage the LLC.

The LLC provides consulting services to mortgage lenders on originating and closing of residential mortgages; underwriting, processing, and closing of mortgages; and marketing of services to lenders. The LLC will have an Internet site where borrowers may apply for mortgages. These Internet applications will be processed by the lender, or the lender will direct the LLC to process them. Although the LLC's headquarters will be outside of Florida and it will have employees in three other states, the

LLC will provide services to Florida customers and its president will work out of his home in Florida.

QUESTIONS

1. Will "A" be subject to Florida corporate income tax and be
   required to file a return as a result of its ownership interest in the LLC?
2. If the answer to question one is "yes," will "A" be
   required to report the income distributed to it by the LLC to Florida even if the LLC has already paid Florida corporate income tax on it?
3. If the answer to question one is "yes," will "A" be
   required to apportion its income to Florida using a single factor apportionment factor, or a three factor apportionment factor?

DISCUSSION AND ANALYSIS OF LAW

Paragraph 220.03 (1)(e), F.S., states in pertinent part:

"Corporation" includes all domestic corporations; foreign corporations qualified to do business in this state or actually doing business in this state; joint-stock companies; limited liability companies, under chapter 608;... (emphasis supplied)

Rule 12C-1.011, F.A.C., states in pertinent part:

(2) The following activities will not, in themselves, subject a foreign (non-Florida) corporation to the income/franchise tax. However, these exempted activities will not relieve a corporation from taxation if the corporation is otherwise subject to taxation.

(b) Holding stock in a Florida corporation or a corporation that is subject to the Florida corporate income/franchise tax.

Paragraph 220.03 (1)(e), F.S., defines LLC's as corporations for Florida corporate income tax purposes. Therefore, LLC's are

treated as corporations to the greatest degree possible in administering the provisions of Chapter 220, F.S.

Rule 12C-1.011 (2)(b), F.A.C., provides that holding the stock of a corporation which is subject to Florida corporate income tax will not subject the holder to Florida corporate income tax in the absence of other activities which would create nexus for the holder.

The answers to your specific questions follow:

1. "A" will not be subject to Florida corporate income tax,
   nor will it be required to file a return as a result of its ownership interest in the LLC.

However, while your letter states that "A" does not assume reinsurance from companies domiciled in Florida, and does not write direct insurance on properties or risks located in Florida, it does not say whether "A" assumes reinsurance on properties or risks in Florida. If "A" does assume reinsurance on properties or risks in Florida, that activity would cause "A" to be subject to Florida corporate income tax, and it would be required to file a return.

Additionally, the LLC will be subject to Florida corporate income tax and will be required to file a return as the result of its activities in Florida, and as a result of the activities of its president in Florida.

Because the answer to question one was "no," questions two and three do not apply to this discussion and no response to those questions is provided.

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
Technical Assistance and
Dispute Resolution

SCP/kh
Control No.: 32985