Could a group stop consolidated filing after Florida changed its treatment of a disregarded LLC?

Subject

Discontinue Consolidated Filing

Plain-English summary

Florida allowed the group to begin filing separate corporate income tax returns for years ending on or after December 31, 1999. The parent had placed its Florida operations in a single-member LLC. A later Florida law change conformed the LLC's treatment to its federal disregarded-entity election, requiring the parent to combine the LLC's income and apportionment factors on the parent's Florida return.

The Department treated that change in law and circumstances as grounds for deconsolidation. It did not decide whether the combined factors distorted Florida activity and expressly refused to approve or validate the intercompany transfer-pricing agreement.

What this means for you

The permission carried three conditions: it applied to years ending on or after December 31, 1999; the group had to recognize previously deferred intercompany items on its 1999 Florida returns; and the covered members and successors could not elect Florida consolidated filing before the year ended December 31, 2004.

Common questions

Q: Did Florida approve separate returns? Yes, subject to the three stated conditions.

Q: Did the ruling approve the transfer-pricing agreement? No. It expressly said the agreement was not approved or validated.

Q: Did the Department decide the apportionment-distortion claim? No. It said that issue was more appropriate for examination.

Citations and references

• Fla. Stat. § 220.131(3) — continued consolidated filing unless the director consents
• Fla. Admin. Code r. 12C-1.0131(3)(b) — permission and good-cause factors for discontinuing consolidated returns
• Ch. 98-101, Laws of Florida — Florida treatment of limited liability companies
• IRC § 721 — nonrecognition provision identified in the stated facts
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 00C1-006

Original ruling text

SUMMARY

QUESTION: May a parent company be granted permission to
cease filing Florida consolidated tax returns based upon
major business changes, and the acquisition of a subsidiary
utilizing a different accounting system?

ANSWER - Based on Facts Below: The parent company was
granted permission to cease filing Florida consolidated tax
returns based on the provisions of the F.A.C. which address
changes in business activities, and difficulties in
reconciling two new accounting systems. Taxpayer will pay
the same or more tax based upon separate return filing.

May 26, 2000

RE: Technical Assistance Advisement 00C1-006
Corporate Income Tax
Request for Authority to Discontinue Consolidated Filing
s. 220.131, Florida Statutes
XXX ("Taxpayer")

Dear :

Your letter of XX, requests permission from the Executive
Director to discontinue filing consolidated returns for Florida
corporate income tax purposes. The Department has considered
your letter and additional materials submitted thereafter,
including the documents and brief received on XX. This response
to your request constitutes a Technical Assistance Advisement
under Chapter 12-11, F.A.C., and is issued under the authority
of s. 213.22, F.S.

Summary of Facts

Taxpayer is a XXX corporation, and is engaged in the XXX
business throughout much of the United States. Taxpayer first
elected to file consolidated Florida income tax returns in XX,

about the same time it acquired a competitor's XXX that were
located in Florida. In XX, Taxpayer formed a single member
Limited Liability Company ("LLC"), named XXX. (hereinafter
referred to as "XYZ"). Taxpayer contributed all of its Florida
assets and operations to XYZ in a transaction qualifying for
nonrecognition treatment pursuant to IRC s. 721. According to
Taxpayer, the transaction was undertaken at the advice of
Taxpayer's lawyers and accountants in order to isolate
significant business risks associated with operating XXX in
Florida, and to shield Taxpayer and its assets from such
business risks. Taxpayer seeks permission to cease filing
Florida consolidated income tax returns. Taxpayer cites the law
changes governing the taxation of Limited Liability Companies as
the basis for its request, and argues that the combination of
the LLC's income and apportionment factors with Taxpayer's
income and apportionment factors, causes an alleged "distortion"
of its apportionment factors. Taxpayer has advised that it is
not currently under audit and that it will continue to file
consolidated federal income tax returns.

Prior Florida income tax law treated Limited Liability Companies
in a manner similar to the tax treatment of corporations. This
meant that LLCs were treated as separate legal entities subject
to the Florida Income Tax Code, regardless of whether or not the
LLC was owned by individuals or by a corporation. Senate Bill
704 changed the law by conforming the Florida income tax
treatment of LLCs to that of the federal income tax treatment of
LLCs. The Internal Revenue Code and Regulations provide for a
"check the box" tax election for LLCs. A single member LLC has
two federal tax choices, which will be given effect under the
Florida Income Tax Code. They are: (1) the single-member LLC
may elect to be treated as a corporation, separate and apart
from its owner; or (2) the single-member LLC may elect to be
disregarded, and treated as a sole proprietorship or division,
whose income flows through to its owner. Senate Bill 704 was
introduced in the Florida Legislature on January 20, 1998, and
became effective for tax years ending on or after July 1, 1998,
as Chapter 98-101, Laws of Florida.

On its federal filings, XYZ "checked the box" to be treated as a
disregarded entity for federal income tax purposes, so that its

income flowed through to the Taxpayer on its federal income tax
returns. At the time of Taxpayer's election, the Florida Income
Tax Code treated all LLCs as separate artificial legal entities,
subject to tax in a manner similar to corporations. When Senate
Bill 704 became law, the federal flow-through treatment was
extended to the Florida Income Tax Code. LLCs were no longer
treated as separate legal entities, unless a taxpayer made a
federal election to have the LLC treated as a corporation.
Instead, for LLCs electing passthrough treatment, the income and
apportionment factors of the LLC were combined with those of its
corporate owner. As a consequence of this law change, the
income of XYZ was required to be reported on Taxpayer's Florida
income tax returns. Taxpayer contends that portions of this
income should be apportioned outside the State of Florida, and
that combining the income and apportionment factors of XYZ and
Taxpayer results in alleged "distortion."

Taxpayer and XYZ entered into an inter-company transfer pricing
agreement prepared by Taxpayer's accounting firm, effective XXX.
This pricing agreement purports to be an arms-length
transaction, and provides for an allocation of income between
Taxpayer and XYZ. Although this deconsolidation request involves
a restructuring of Taxpayer and a review of certain Taxpayer
documents, this Technical Assistance Advisement will not
consider, examine or address the substance of those documents,
and will be limited to the issue of whether or not the
deconsolidation should be granted because of a change in law or
circumstances. Nothing in this Technical Assistance Advisement
should be construed as an approval or acceptance of the intercompany transfer pricing agreement.

Applicable Law

Section 220.131(3), F.S., states:

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(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 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.

Discussion & Analysis

Taxpayer states that it had a business reason for organizing a
limited liability company, and then transferring its Florida
operations and assets to that LLC. Those business reasons were
to isolate May 26, 2000 business risks and to separately account
for its Florida operations. Taxpayer also states that it was
surprised by the legislative changes contained in Senate Bill
704, and that this change not only resulted in the inclusion of
additional income on Taxpayer's return, but also the distortion
of its apportionment factors.

Rule 12C-1.0131, F.A.C., compares the "effect on the
consolidated tax liability of a group from 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 that
may be taken into account include: (1) Changes in law or
circumstances, including changes which do not affect income tax
liability; (2) Changes in law which affect net operating losses;
and (3) changes in the Florida Income Tax Code or Internal
Revenue Code or regulations which have a substantial adverse
effect on the filing of a consolidated return relative to the
filing of separate returns by members of the group. Rule 12C1.0131, F.A.C.

Taxpayer contends that it had business reasons for structuring
its business in a certain manner, and that because of an
unanticipated change in the law, its apportionment factors now
do not accurately reflect its business activities in Florida.
In other words, Taxpayer claims that the change in the law
governing LLCs resulted in additional income that caused a
change in its apportionment factors. It is Taxpayer's claim

that not only was it required to report the income from the LLC
on its return, but also, because of Taxpayer's circumstances,
the combination of this income does not accurately reflect its
business activities in Florida.

The circumstances of this case are unique. As a result of a
change in the law, Taxpayer is now required to combine the
apportionment factors and income of its LLC on its Florida
corporate income tax return. The Taxpayer claims that this
combination of the LLC's apportionment factors and Taxpayer's
apportionment factors does not accurately reflect its business
activities in Florida. Taxpayer purports that it had a business
reason for isolating its Florida operations, through the
transfer to XYZ. There has been a change in law, at least with
respect to the taxation of XYZ. Those changes may or may not
affect Taxpayer's present organization, and may or may not
accurately reflect its business activities in Florida. In this
instance, this issue is more appropriate to the Department's
examination function, rather than the issue of deconsolidation.
The Department will grant Taxpayer permission to begin filing
separate returns under the following terms and conditions:

1. That the deconsolidation be effective for tax years
   ending on or after December 31, 1999;

2. That the Taxpayer or other members of the affiliated
   group will recognize in their 1999 Florida Corporate
   Income Tax returns any inter-company or deferred items
   of income, gain, deduction, and loss that were
   previously deferred by Taxpayer and its subsidiaries
   in its Florida consolidated corporate income tax
   returns; and

3. 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, 2004.

Conclusion

Taxpayer is granted permission to begin filing separate returns
for the tax years ending on or after December 31, 1999. Nothing
in this Technical Assistance Advisement should be construed as
approving or validating the transfer pricing agreement entered
into by Taxpayer.

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 future transactions to a
different treatment than expressed in this response.

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 that 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,

Gary A. Moreland
Technical Assistance and Dispute Resolution
Office of General Counsel

GAM/gm
Control No. 36805