Could an expanding affiliated group stop filing Florida consolidated corporate income tax returns after its business changed?

Subject

Request for Authority to Discontinue Consolidated Filing

Plain-English summary

Florida allowed the affiliated group to discontinue consolidated corporate income tax filing effective for the fiscal year ending November 30, 1997. The parent had grown from a business with few inactive subsidiaries into a global group with alliances, joint ventures, acquisitions, and many operations outside Florida. It said the original Florida election had been made without adequate professional advice.

The Department did not find that continued consolidated filing caused a substantial adverse tax effect, materially distorted Florida income, or had been harmed by a tax-law change. It nevertheless treated the group's evolving business circumstances as sufficient to permit deconsolidation, subject to four conditions:

1. Separate filing took effect for the year ending November 30, 1997.
2. The parent had no realized but unrecognized income or expense items that could later benefit a group member.
3. The difference between the filed separate returns and a pro forma consolidated return for that year was approximately $73,043.
4. The affiliated group could not enter a Florida consolidated return before the tax year ending November 30, 2002.

What this means for you

This ruling shows that Florida's permission process considered changes in business circumstances, not only tax-law changes or quantified distortion. But approval was discretionary, fact-specific, timely requested, and tied to negotiated safeguards against shifting deferred items or quickly reversing the election.

Common questions

Q: Did the group prove consolidated filing substantially increased its tax? No. The Department expressly said the information did not show a substantial adverse effect or material distortion.

Q: What business facts supported approval? The group had evolved through new products, alliances, joint ventures, acquisitions, and expanding subsidiaries, while most activities occurred outside Florida.

Q: Were deferred intercompany items allowed to escape recognition? No such items could exist under a condition of the approval.

Q: Could the group reconsolidate the following year? No. The approval barred consolidated Florida filing before the year ending November 30, 2002.

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, good-cause factors, and conditions for discontinuing consolidated returns
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98C1-006

Original ruling text

Jul 31, 1998

Re: Technical Assistance Advisement 98(C)1-006 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. 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 XXX and has historically filed consolidated federal and Florida corporate income tax returns. Parent claims that in 1993 it unveiled 35 new products and in 1996 it introduced 250 new products. Further, Parent has evolved from a portable computer company to an industry leader in global communication technology. Moreover, since 1982, Parent has formed alliances, joined ventures and acquired many subsidiaries.

Currently, Parent conducts only sales activities in Florida. Manufacturing, distribution, research and all other business activities are conducted outside of Florida. The operations of Parent's subsidiaries, with the exception of one, are carried on outside of Florida. Initially, because Parent's subsidiaries were few and inactive a decision was made to file consolidated returns for Florida purposes. However, now, the Parent believes that it did not have adequate professional advice in this matter. Further, Parent believes that the filing of consolidated returns does not fairly represent the business activities that Parent and its subsidiaries conduct in Florida.

Parent stipulates that there are no 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. Additionally, Parent states that the appropriate extension of time to file a corporate income tax return was filed for the fiscal year ended November 30, 1997. Further, the Parent asserts that the submission was made within the required 90 days of the extended due date of the return.

STATUTORY AND 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 Request to Discontinue Consolidated Filing 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. Moreover, the filing of a consolidated return would not produce a material distortion of income apportioned to Florida. 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 group. The shifts appear to have been evolving over the life of the business. Additionally, the taxpayer asserts that the election to file a consolidated tax return was made without benefit of adequate professional advice.

Therefore, based on the following four conditions, the Department grants permission to discontinue filing consolidated corporate income tax returns for the 1996 tax year and later years:

1. That the deconsolidation be effective for tax years
   ending on November 30, 1997, and
2. That Parent has no realized but unrecognized income or
   expense items that may be recognized at a later date which would benefit any member of the Parent affiliated group, and
3. That the difference in tax liability for the tax year
   ended November 30, 1997, between the separate tax returns filed and a pro forma consolidated return for the same period is approximately $73,043, and
4. That the affiliated group not become part of a
   consolidated Florida corporate income tax return prior to the tax year ending November 30, 2002.

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 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 that 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 Office of General Counsel

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