Could a restructuring banking group stop filing Florida consolidated corporate income tax returns?

Plain-English summary

Florida allowed a parent corporation and its affiliated banking group to stop filing consolidated Florida corporate income tax returns beginning with the 1998 tax year.

The group did not show that consolidated filing itself caused a substantial adverse tax effect; its pro forma figures indicated that aggregate separate-return liability would remain the same. Even so, the Department found good cause in the group's major restructuring, including interstate expansion and realignment of its mortgage-banking business after changes in federal banking law and other business circumstances.

Approval carried four conditions: deconsolidation had to begin with the year ending December 31, 1998; the group could have no realized but unrecognized income or expense items that would later benefit former consolidated members; separate and consolidated pro forma liability for 1998 could not differ; and the members or their successors could not elect another Florida consolidated return before the year ending December 31, 2003.

What this means for you

Corporate tax departments

Florida's good-cause analysis was not limited to an immediate increase in tax. A major, documented change in business circumstances supported deconsolidation even when the pro forma tax result was neutral.

Banking and M&A teams

Permission was conditional. Before requesting separate filing, identify deferred items, model separate-versus-consolidated liability, and account for any waiting period before a later consolidated election.

Common questions

Did the group prove consolidated filing caused higher tax? No. The Department said the pro forma 1998 liabilities were the same overall.

Why did Florida still approve the request? The Department found good cause in the substantial restructuring and related changes in law and circumstances.

When did approval begin? The tax year ending December 31, 1998.

Could the former members immediately elect consolidated filing again? No. The TAA barred them and their successors from doing so before the tax year ending December 31, 2003.

Citations and references

• Fla. Stat. § 220.131(1), (3)
• Fla. Admin. Code R. 12C-1.0131(1)(a)2.
• Fla. Admin. Code R. 12C-1.0131(3)(b)
• Fla. Stat. § 213.22

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 99C1-003

Original ruling text

SUMMARY

A parent corporation exercising a consolidated filing
election requested permission to discontinue that election.
The parent corporation has undertaken a major restructuring
effort in order to take advantage of Section 102 of the
Riegle-Neal Interstate Banking and Branching Efficiency
Act, which became effective in 1997. The restructuring
will include expansion outside of Florida, as well as
realignment of the company's mortgage banking business. As
a result, the Department granted the request based on the
change in circumstance described herein.

Jul 13, 1999

Re: Technical Assistance Advisement 99(C)1-003
Request for Authority to Discontinue Consolidated Filing
s. 220.131, Florida Statutes
XXX (hereinafter "Parent")

Dear :

Your letter of XXX, 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 (F.A.C.), and is
issued under the authority of s. 213.22, Florida Statutes
(F.S.).

FACTS PRESENTED BY THE TAXPAYER

Your letter of XXX, states that Parent is the parent corporation
of an affiliated group, which operated almost entirely in
Florida and filed a consolidated federal return for more than
five years. In XXX, Parent merged with another banking
organization, which also operated mostly in Florida and had also
been filing a consolidated federal return. The original

affiliated group absorbed the parent of the acquired group, but
the subsidiaries remain in existence.

Parent states that as a result of the above-mentioned merger,
the two banking groups now have different, and incompatible,
computer systems. This has created significant difficulty for
Parent in converting the systems of the acquired banks to its
own system. In addition to the conversion taking more time than
originally anticipated, the conversion problems have also
resulted in unreliable aggregate financial data and other
distorted inter-company information.

In June 1997, Section 102 of the Riegle-Neal Interstate Banking
and Branching Efficiency Act (RNIBBEA) of 1994 became effective,
allowing banks to merge across state lines. Parent feels that
the acquisition of a predominantly Florida based banking group
does not directly affect its consolidated filing in Florida.
However, it is believed that Parent's ability to expand across
state lines has been hampered by its consolidated filing.

Parent also feels that a second change in federal law, which
involves Treasury Regulation 1.1502-13(g), provides for a
potential zero basis risk with respect to transfers of
intercompany obligations. Intercompany obligations transferred
among consolidated group members are often entitled to
nonrecognition treatment under Section 351 of the Internal
Revenue Code. Under the consolidated return regulations,
however, material, adverse federal income tax consequences might
result from such a transfer. For example, when an intercompany
obligation is transferred between members of a consolidated
group subject to Section 351, Treasury Regulation 1.1502-13(g)
might apply to recast the transaction, and consequently result
in an inappropriate gain.

Parent also claims that, unlike other Florida based financial
institutions which do not file a Florida consolidated return,
its ability to re-align its entire mortgage banking business has
been hampered because it currently files a Florida consolidated
income tax return. In view of pending federal legislation which
would grandfather certain corporate structures which certain
other financial institutions can use because they are not filing

a consolidated return in Florida, the parent cannot currently
create such a grandfather structure without significant adverse
income tax consequences.

In addition, Parent states that Florida statutes regarding a
financial organization's property factor (s. 220.15(3), F.S.)
could adversely impact the non-financial group members. As the
property factor used by financial organizations includes
intangible property, the numerator of the property factor would
increase, which in turn would increase the tax liability of the
non-financial members of the group. The final result would be
an adverse impact on income apportioned to Florida, if the
taxpayer were to expand its mortgage lending activities outside
of Florida.

Furthermore, Parent feels that if one of its banking companies
were to expand outside of Florida, use of a consolidated
apportionment factor would not properly reflect the extent of
that bank's business activities within Florida. As Florida's
sourcing rules relating to intangible assets, particularly,
security investment assets, will result in these assets being
included in the property factor's numerator for Florida
purposes, inclusion of the non expanding bank's investment
assets in the consolidated apportionment factor will tend to
over apportion the expanding bank's out of state income to
Florida.

Parent also claims that filing a consolidated Florida corporate
return would not currently have a substantial adverse tax effect
on the consolidated group. Since certain members of the group
have losses, which would offset the taxable income of other
group members, filing on a separate basis would actually
increase the tax liability of the group as a whole.

STATUTORY AND REGULATORY 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 this 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 ear, 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.

Rule 12C-1.0131(1)(a)2., F.A.C., states:

2. A subgroup of the affiliated group may not file a
   consolidated return.

Rule 12C-1.0131(3)(a), F.A.C., states:

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:

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 make 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 has a substantial
adverse effect on the consolidated tax liability of the
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
that 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. On the
contrary, the pro forma return provided for the 1998 tax year
indicates that, overall, the individual tax liabilities will
remain the same as with a consolidated filing.

Although the enactment of the RNIBBEA represents a change in
law, it does not directly bear on the Parent's consolidated
corporate income tax filing election. Rather, in the case at
hand, there is a change in circumstance. The Department finds
that good cause to discontinue filing consolidated tax returns
has been shown, because of the change in law and circumstances
referred to above. The information furnished by Parent shows
that there is currently substantial reorganization within the
business group. Therefore, based on the following four
conditions, the Department grants permission to discontinue
filing consolidated corporate income tax returns for the 1998
and later years;

1. That the deconsolidation be effective for tax year ending
   on December 31, 1998;

2. That the parent or other members of the affiliated group
   have no realized but unrecognized income or expense items
   that may be recognized at a later date, which would benefit
   any member of the affiliated group that has been included
   within the consolidated Florida corporate income tax
   returns that have been filed;

3. That there is no difference in tax liability for the tax
   year ended December 31, 1998, between the pro forma
   separate tax returns and the pro forma consolidated return
   for the same period; 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, 2003.

You are further advised that this response, your request and
related backup documents are public records under Chapter 119,
F.S., and are subject to disclosure to the public under the
conditions of s. 213.22, F.S. Confidential information must be
deleted before public disclosure. In an effort to protect
confidentiality, we request you provide the undersigned with an
edited copy of your request for Technical Assistance Advisement,

the backup material and this response, deleting names, addresses
and any other details which might lead to identification of the
taxpayer. Your response should be received by the Department
within 15 days of the date of this letter.

Sincerely,

Veralyn Bramble
Senior Tax Specialist
Technical Assistance & Dispute Resolution
Office of General Counsel