Could an affiliated group stop filing Florida consolidated corporate income tax returns after federal tax-law changes?

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 tax year ending December 31, 1997. The Department found good cause because federal tax-law changes substantially worsened the group's consolidated Florida liability compared with the aggregate result from separate returns.

One change increased the group's foreign interest allocation, which reduced Florida's foreign-source-income deduction. Another ended the installment-sale deferral that had been a significant benefit of consolidated filing. The Department concluded that these changes directly affected the continued viability of the election.

Permission came with four conditions:

1. Deconsolidation took effect for years ending December 31, 1997.
2. The parent or group members had to recognize previously deferred intercompany items of income, gain, deduction, and loss on their 1997 Florida returns.
3. The difference between pro forma separate and consolidated 1997 liabilities had to match the redacted amount stated in the request.
4. The former group members and their successors could not elect Florida consolidated filing again before the tax year ending December 31, 2002.

What this means for you

A Florida consolidated-return election generally continues in later years. This ruling shows that permission to revoke could be available when a law change creates a substantial adverse consolidated result, but the approval may require timing restrictions, deferred-item recognition, quantified comparisons, and a multi-year bar on re-election.

Common questions

Q: Could the group simply switch to separate returns on its own? No. Florida law required the director's consent to discontinue consolidated filing.

Q: Why did the Department find good cause? Federal changes to foreign-interest allocation and installment-sale accounting substantially harmed the consolidated Florida result relative to separate returns.

Q: Did deconsolidation eliminate previously deferred income or losses? No. The approval required the appropriate group members to recognize previously deferred intercompany items in 1997.

Q: Could the group immediately elect consolidated filing again? No. The ruling barred the members and successors from a new election before the tax year ending December 31, 2002.

Citations and references

• Fla. Stat. § 220.131(1), (3) — consolidated election and required continued filing unless the director consents
• Fla. Admin. Code r. 12C-1.0131(3) — application, good-cause factors, and conditions for discontinuing consolidated returns
• Fla. Stat. § 220.13(1)(b)2. — foreign-source-income adjustment discussed in the request
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98C1-007

Original ruling text

Aug 21, 1998

Re: Technical Assistance Advisement 98(C)1-007 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, Florida Statutes.

FACTS AS PRESENTED BY THE TAXPAYER

Your letter dated XX, states that Parent is the parent corporation of an affiliated group of corporations domiciled in XXX, and since 1985 has filed consolidated Florida corporate income tax returns. Two recent changes to the Internal Revenue Code will have a substantial adverse effect on the consolidated tax liability of Parent's affiliated group relative to what the aggregate tax liability of the group would be if the group filed separate returns in the future.

First, pursuant to the Tax Reform Act of 1986, Congress drastically modified its rules for calculating the foreign tax credit. The new rules would have required Parent to multiply XX interest expenses by an asset ratio that would have included Parent's large foreign holdings. Because of this situation, Congress passed XX of the Tax Reform Act of 1986, which permitted Parent to calculate its interest expense on a separate company basis for purposes of computing the foreign tax credit. This legislation was repealed on XX, 1996. As a result, Parent's "foreign" interest for the first seven and one-half months of 1996 (under prior law) was XX, and its foreign interest for the next three and one-half months (under new law)

was XX. This tax year, 1997, is the first full year in which Parent has to calculate foreign interest expense using a consolidated foreign asset ratio. Its 1997 foreign interest expense is expected to be over XX.

This federal legislative change also will have a substantial adverse effect on the consolidated Florida tax liability of Parent's affiliated group relative to what the aggregate tax liability of the group would be if the members of the group filed separate returns for 1997. Florida requires taxpayers to subtract items like interest expense from the calculation of the deduction for foreign source income (e.g., foreign dividends, subpart F income and s. 78, IRC, gross up income). If Parent calculated its foreign interest on the stand alone basis for 1996, as it was permitted to do for the entire period 1985 through August 1996, it would report about XX in non-deductible (for Florida purposes) interest expense because it does not have significant foreign operations. On the other hand, Parent's 1997 foreign interest expense is expected to be more than XX under the new law. If Parent is not permitted to file separate returns, then this legislative change would result in Florida taxing Parent's 1997 foreign income, which is contrary to the legislative intent behind s. 220.13(1)(b)2., F.S.

Secondly, as a result of the Taxpayer Relief Act of 1997, the repeal of the installment sales method of accounting will have a substantial adverse effect on Parent's tax liability in Florida. One of the primary benefits Parent obtained through the filing of a Florida consolidated income tax return in 1985 and subsequent years was the ability to defer profit on the sale of XX under the installment sales method of accounting. The accumulated deferred profit from the installment sales method totaled more than XX at the end of 1996. This deferral was only available in Florida because of the election to file a consolidated return.

Essentially, when Parent sells a XX the XX gives Parent an installment obligation. Parent sells this note to one of its subsidiaries at face value. This transaction is ignored under the consolidated return regulations because Parent files a consolidated return with its subsidiaries. Additionally, the

consolidated return regulations treat the consolidated group as one entity for this purpose, and that entity doesn't receive payment on the installment obligation until a third-party sends it cash. However, with the repeal of the installment method, Parent is unable to defer a portion of the profit and consequently will no longer benefit from the consolidated filing election.

STATUTORY AND REGULATION AUTHORITY

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

(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 323147443, 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 years.

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

Pursuant to Rule 12C-1.0131(3)(b)2., F.A.C., the Department finds that there has been a change in the Internal Revenue Code which would have a substantial adverse effect on the consolidated filing group. Moreover, the changes in law bear directly on the viability of Parent's Florida corporate income tax consolidated return election.

Thus, the Department finds that good cause to discontinue filing consolidated tax returns has been shown. Further, based on the following four conditions, the Department grants permission to discontinue filing consolidated corporate income tax returns for the 1997 and later years:

1. That the deconsolidation be effective for tax years
   ending on December 31, 1997, and
2. That the Parent or other members of the affiliated
   group will recognize in their 1997 Florida Corporate Income Tax returns any intercompany or deferred items of income, gain, deduction and loss that were previously deferred by Parent and its subsidiaries in its Florida consolidated corporate income tax returns, and
3. That the difference in tax liability for the tax year
   ended December 31, 1997, between the pro forma separate tax returns and a pro forma consolidated return for the same period is approximately XX, and
4. That the members of the affiliated group that have
   been included within the consolidated Florida corporate income tax returns or successors to these members not elect to file a consolidated Florida corporate income tax return prior to the tax year ending December 31, 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 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.

Cordially,

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