Could a changed multistate group end Florida consolidated filing, and how would its disregarded single-member LLC be treated?

Subject

Request For Authority to Discontinue Consolidated Filing

Plain-English summary

Florida allowed the affiliated group to stop filing consolidated corporate income tax returns beginning with the year ending December 31, 1997. Over roughly ten years, the parent had expanded from a Florida manufacturer into a primarily multistate wholesale distributor with personnel-services and HVAC/R distribution businesses. Florida treated those evolving business lines as a qualifying change in circumstances even though the group did not show a substantial adverse tax effect or an apportionment-factor change.

Approval carried four conditions:

1. Deconsolidation took effect for the year ending December 31, 1997.
2. Realized but unrecognized income or expense items benefiting a group member could not exceed $100,000.
3. The 1997 difference between filed separate returns and a pro forma consolidated return was approximately $9,774.
4. The group could not enter another Florida consolidated return before the year ending December 31, 2003.

The ruling also addressed a planned single-member limited liability company. Because it would be disregarded as a separate entity for federal purposes, Florida would not treat it as a separate company. The parent's factors were not separately pushed into the LLC; instead, the LLC's apportionment factors were included with the parent's factors as part of the same corporation.

What this means for you

The ruling combined two entity-structure points: deconsolidation required permission and negotiated safeguards, while a federally disregarded single-member LLC followed its corporate parent for Florida reporting and apportionment under the law then in effect.

Common questions

Q: Did the group prove consolidated filing caused a large tax disadvantage? No. Florida relied on established changes in business circumstances that did not substantially affect tax liability or apportionment.

Q: Could deferred items exceed the stated limit? No. The approval was conditioned on those realized but unrecognized items not exceeding $100,000.

Q: Was the single-member LLC a separate Florida corporate taxpayer? No. It was disregarded because it was disregarded federally.

Q: Where were the LLC's apportionment factors reported? They were combined with the parent's factors to reflect the corporation's income.

Citations and references

• Fla. Stat. § 220.131(1), (3) — consolidated election and continued filing unless the director consents
• Fla. Admin. Code r. 12C-1.0131(3) — timing, changed circumstances, and conditions for discontinuing consolidated returns
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98C1-005

Original ruling text

Jul 27, 1998

Re: Technical Assistance Advisement 98(C)1-005 Request For Authority to Discontinue Consolidated Filing XXX ("Parent") s. 220.131, F.S., Consolidated Filing Election

Dear :

Your letter of XX, requested a Technical Assistance Advisement to seek permission to discontinue filing consolidated returns for Florida corporate income tax purposes. Additionally, you requested rulings on the Florida corporate income tax treatment of a single member limited liability company. 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, F.S.

FACTS AS PRESENTED BY THE TAXPAYER

Your letter of XX, states that Parent is the parent corporation of an affiliated group of corporations. Parent is domiciled in Florida and historically has filed consolidated Florida corporate income tax returns. The main operating subsidiary has sales, property, and payroll, both within and without Florida. Parent claims that since 1988 it has experienced a substantial growth of its business. Moreover, the Parent is a development oriented company that has expanded into new business lines. Specifically, the Parent has added new businesses which include personnel services and heating, ventilation, air conditioning, and refrigeration unit ("HVAC/R") distributorships. Parent has evolved from being a Florida-based manufacturer to being primarily a multistate wholesale distributor. Consequently, Parent's income attributable to Florida decreased from 100 percent to 34 percent in a nine-year period.

Parent stipulates that there are intercompany transactions, deferred income or expense items that may be recognized at a later date which would normally be included on a consolidated

return but would not be included on separately filed returns. Further, parent stipulates that the amount of this deferred income is less than $100,000. Additionally, Parent states that the appropriate extension of time to file a corporate income tax return was filed for the fiscal year ended December 31, 1997, and Parent asserts that the submission was made within the required 90 days of the extended due date of the return.

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 (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, [Technical Assistance] 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

The information provided does not show that continuing to file consolidated Florida corporate income tax returns would have a substantial adverse effect on the consolidated group. Further, the Department is unaware of any changes in the Florida Income

Tax Code or the Internal Revenue Code that negatively affect the consolidated group.

However, the information provided by Parent shows that numerous changes have occurred in the business lines in which the group engages. The shifts appear to have been evolving over the last 10 years and do not appear to affect the apportionment factors used in the preparation of the corporate income tax return. Under Rule 12C-1.0131(3)(b), F.A.C., the Department may grant permission to a group to discontinue consolidated filing of the corporate income tax return when there is a change of circumstance which does not affect tax liability. Here, there appears to be an established change in circumstances which does not substantially affect tax liability or apportionment factors.

Therefore, based on the following four conditions, the Department grants permission to discontinue filing consolidated corporate income tax returns for the 1997 tax year and later years:

1. That the deconsolidation is effective for the tax year
   ending on December 31, 1997, and
2. That Parent has realized but unrecognized income or
   expense items that may be recognized at a later date which would benefit a member of the Parent affiliated group and the deferred amount will not exceed
   $100,000, and
3. That the difference in tax liability for the tax year
   ended December 31, 1997, between the separate tax returns filed and a pro forma consolidated return for the same period is approximately $ 9,774, and
4. That the affiliated group does not become part of a
   consolidated Florida corporate income tax return prior to the tax year ending December 31, 2003.

FACTS AS PRESENTED BY TAXPAYER

Parent is contemplating the formation of a single member limited liability company. The new limited liability company will be taxed as a division of Parent for federal purposes.

QUESTIONS

1. Will the limited liability company be treated as a separate
   company for Florida income tax purposes?

2. Will Parent's apportionment factors be included in the
   limited liability company's apportionment factors?

3. Will the limited liability company's apportionment factors
   be included in Parent's apportionment factors?

ANSWERS

1. No. As of July 1, 1998, a single member limited liability
   company that is disregarded as a separate entity for federal purposes would not be treated as a separate company for Florida corporate income tax purposes.

2. No.

3. Yes. As a division of Parent, the single member limited
   liability company should include its apportionment factors with those of Parent in order to properly reflect the income earned by the corporation.

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 interpretation 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 that you notify the undersigned in writing within 15 days of any deletions you may wish made to the request or the response.

Sincerely,

Beverly L. Hayes
Attorney
Technical Assistance and Dispute Resolution Office of General Counsel

BLH/