Was a court-ordered class-action settlement account subject to Florida corporate income tax or return filing?

Subject

Taxability of Bank Account

Plain-English summary

The court-ordered class-action settlement bank account was not subject to Florida corporate income tax and did not have to file a Florida return. The account existed to segregate money contributed by the defendant and distribute it to class members and other qualified claimants under a federal consent decree.

The court specified eligibility, claim classes, payment priorities, disbursement procedures, records, and reporting. Plaintiffs' counsel administered the account. Although federal rules required a federal income-tax return for the account and federal tax was paid, Florida found that the account was not a corporation or other artificial entity created under a statute.

What this means for you

A federal filing obligation did not by itself make this account a Florida corporate taxpayer. The Department focused on the legal character of the arrangement: it was a court-controlled account used to hold and pay settlement money, not a separately created statutory entity.

Common questions

Q: Did the account earn income and file federally? Yes. The administrator reported its income and paid federal income tax, but that did not control the Florida entity analysis.

Q: Why was no Florida corporate return required? The account did not fit Florida's definition of a corporation or artificial legal entity subject to the corporate income tax.

Q: Would every settlement fund receive the same result? Not necessarily. This ruling depended on the consent decree and the account's specific legal structure and administration.

Citations and references

• Fla. Stat. § 220.02 — legislative intent and entities subject to corporate income tax
• Fla. Stat. § 220.03(1)(e), (aa) — corporation and taxpayer definitions
• Fla. Stat. § 220.11(1) — corporate income tax
• Fla. Stat. § 220.22(1) — Florida return filing requirement
• Fla. Admin. Code r. 12C-1.022 — corporate return requirements
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98C1-008

Original ruling text

Oct 09, 1998

Re: Technical Assistance Advisement 98(C)1-008 XXX ("Defendant") Corporate Income Tax - Taxability of Bank Account Sections 220.02, 220.03, 220.11, 220.22, F.S.

Dear :

Your letter of February 16, 1998, requested a Technical Assistance Advisement on the corporate income tax consequences of a bank account established to pay out the settlement of a class action lawsuit. You supplemented that request with your letter of September 30, 1998. 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 the result of a class action lawsuit, a Consent Decree was entered by a U.S. District Judge in Florida. As part of the settlement agreement, the Consent Decree ordered the establishment of an account with a national banking association designated by plaintiffs' counsel and approved by the Court. The deposits made to the account by the defendant were to be distributed, as set forth in the Consent Decree, to the various class plaintiffs and other class claimants. Plaintiffs' counsel is responsible for administering the payment process, including disbursements made from the bank account to the class plaintiffs and other class claimants.

The court retained jurisdiction of the matter for a period of ten years after the entry of the Consent Decree, with provisions for earlier termination if all contributions had been made and all other terms of the agreement had been met. The Consent Decree specifically sets out the method for determining eligibility for payment, the different classes of claims, the procedure for identification of claimants, the priority of

different claims, the procedures for disbursement of funds, and reporting and record-keeping requirements. In other words, the entire mechanism for payment of claims from the bank account is established by the court in the Consent Decree.

Pursuant to federal income tax provisions, plaintiffs' counsel, as administrator of the account, filed a Form XXX to report the income earned by the account, and paid federal income tax.

REQUESTED RULING

You request a ruling that the bank account is not an entity subject to the Florida Income Tax Code, s. 220.02, F.S., et seq.

STATUTORY AUTHORITY

Section 220.11(1), F.S., states in part:

A tax measured by net income is hereby imposed on every taxpayer for each taxable year... for the privilege of conducting business, earning or receiving income in this state, or being a resident or citizen of this state...

Section 220.02(1), F.S., states in part:

It is the intent of the Legislature in enacting this code to impose a tax upon all corporations, organizations, associations, and other artificial entities which derive from this state or from any other jurisdiction permanent and inherent attributes not inherent or available to natural persons, such as perpetual life, transferable ownership represented by shares or certificates, and limited liability for all owners....

Section 220.03(1), F.S., includes the following language:

(e) "Corporation" includes... all other... legal entities, and artificial persons which are created by or pursuant to the statutes of this state, the United States, or any other

state, territory, possession, or jurisdiction. The term "corporation" does not include proprietorships, even if using a fictitious name; partnerships of any type, as such; state or public fairs or expositions, under chapter 616; estates of decedents or incompetents; testamentary trusts; or private trusts. (aa) "Taxpayer" means any corporation subject to the tax imposed by this code, and includes all corporations for which a consolidated return is filed under s. 220.131....
[Emphasis added]

Section 220.22(1), F.S., provides:

A return with respect to the tax imposed by this code shall be made by every taxpayer for each taxable year in which such taxpayer either is liable for tax under this code or is required to make a federal income tax return, regardless of whether such taxpayer is liable for tax under this code.

Rule 12C-1.022, F.A.C., provides:

Returns; Filing Requirement.
(1) In general, every corporation as defined in s. 220.03(1)(e), F.S., subject to tax under Part II of Chapter 220, F.S., and every bank and savings association subject to tax under Part VII of Chapter 220, F.S., shall make a return of income for each taxable year in which such entity is either liable for tax under the Florida Income Tax Code, or is required to make a federal income tax return, regardless of whether such taxpayer is liable for tax under the Florida Income Tax Code. (a) The Florida Income Tax Code does not specifically provide for an exception from the filing requirements for any organization, association, or legal entity. Therefore, every corporation, as defined in s. 220.03(1)(e), F.S., and every bank or savings association, as defined in s. 220.62, F.S., will be required to file a return absent a specific provision within the Internal Revenue Code or the Treasury Regulations exempting the entity from filing a federal tax return or a letter of determination from the Internal Revenue Service providing that the entity does not have a

federal filing requirement. [Emphasis added]

DISCUSSION

According to the facts provided and the terms of the Consent Decree, a bank account was established pursuant to the court's order to segregate the monies prior to payment to the class plaintiffs and qualified claimants. As such, it does not appear to fit within the definition of "corporation" found in s. 220.03(1)(e), Fla.Stat. Despite the requirements of the Internal Revenue Code that require the account to file a return under XXX, the bank account is not an artificial entity "...created by or pursuant to the statutes of this state, the United States, or any other state, territory, possession or jurisdiction". Consequently, the bank account is not an entity subject to the Florida corporate income tax, and is not a taxpayer required to file a Florida return.

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,

Deborah D. Hart
Assistant General Counsel

DDH/ms