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