Could a parent corporation stop filing Florida consolidated returns after its affiliated group's core business and structure changed substantially?

Subject

Request for Authority to Discontinue Consolidated Filing

Plain-English summary

The parent received permission to end its Florida consolidated-return election and file separate corporate income tax returns. Since making the election, the group had changed its primary businesses, grown substantially and rapidly, acquired many companies, formed new subsidiaries, and liquidated others.

Approval was conditional. It applied from the specified year; the group could not have deferred income or expense items that would later benefit a member; total separate-return liability for the test year had to exceed the pro forma consolidated liability; and the group could not join another Florida consolidated return before the stated future year.

What this means for you

A consolidated election was not freely revocable. The Department required substantial changed circumstances and imposed conditions protecting against tax benefits from switching filing methods.

Common questions

Q: Did the group show that law changes caused a tax disadvantage? No. It relied on major changes in its business circumstances.

Q: Was permission granted? Yes.

Q: Could the group immediately reconsolidate? No. Approval included a barred period.

Citations and references

• Fla. Stat. § 220.131 — consolidated return election
• Fla. Admin. Code r. 12C-1.0131(3)(b)2. — permission to discontinue consolidated filing
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 01C1-010

Original ruling text

SUMMARY

QUESTION: May a parent company be granted permission to
cease filing Florida consolidated corporate income tax
returns based on changes in its core business activities
business focus?

ANSWER - Based on the Facts below: Yes. The parent company
was granted permission to cease filing Florida consolidated
corporate income tax returns based on provisions of the
F.A.C. which addresses changes in business activities.

Sep 14, 2001

Re: Technical Assistance Advisement 01C1-010
Request for Authority to Discontinue Consolidated Filing
Section 220.131, F.S., Consolidated Filing Election
XXX (hereinafter referred to as "the Taxpayer")

Dear :

Your letter of XX, requests permission for the Taxpayer 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 authority of s.
213.22, Florida Statutes.

FACTS SUPPLIED BY TAXPAYER

The Taxpayer, together with its consolidated group, currently
reports its income on a consolidated basis for Florida corporate
income tax purposes. The Taxpayer initially made its election
to file consolidated returns in XX.

Since electing to consolidate for Florida corporate income tax
purposes, the Taxpayer made major changes in its core lines of
business. First, the Taxpayer changed its XXX by redesigning it

to operate XXX, rather than on XXX. Next, the Taxpayer changed
its approach to the XXX business by creating XXX products that
covered the complete spectrum of customers' XXX needs. This
eliminated the need for customers to purchase some XXX from the
taxpayer and some XXX from other vendors. It also eliminated
the necessity to hire XXX to install the various XXX and test
them to make sure they worked together properly and to fix any
incompatibility problems.

The Taxpayer made these changes to its XXX. The Taxpayer also
developed a XXX. The Taxpayer also set up a XXX that allowed
smaller companies to utilize the Taxpayer's XXX products XXX
instead of purchasing the XXX. Additionally, the Taxpayer
purchased an XXX in XX, which enables corporate customers to
integrate all of the elements of their XXX.

Since electing to file consolidated corporate income tax returns
in Florida, the Taxpayer has acquired the stock or assets of XXX
companies. Many of these companies were acquired to obtain XXX
products needed to fill out the Taxpayer's XXX. The Taxpayer has
also incorporated XXX additional companies and liquidated XXX
subsidiaries since XXX.

The Taxpayer has experienced substantial growth over the past XX
years. Worldwide net assets have increased XXX. Worldwide
revenue has increased XXX, and worldwide operating income has
increased XXX. The Taxpayer's United States activities have
also experienced growth, with a XXX increase in revenue.

LEGAL 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.

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 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.

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.

ISSUE PRESENTED

Should the Executive Director grant the Taxpayer permission to
cease filing consolidated Florida corporate income tax returns?

DISCUSSION AND ANALYSIS

The first issue is whether the Taxpayer has shown the existence
of a substantial adverse effect by reason of filing consolidated
returns. There are two bases in the Florida Administrative Code
for allowing a taxpayer to revoke its consolidated reporting
election. Rule 12C-1.0131(3)(b)2., F.A.C., provides that
permission to deconsolidate may be granted if the net result of
all amendments to the Florida Income Tax Code or the Internal
Revenue Code or regulations would have 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.
The Taxpayer Group would pay more Florida corporate income tax
on a separate return basis, as compared to a consolidated
return. The Taxpayer has not cited any tax law changes as the
basis for its request, and further discussion of the main
portion of Rule 12C-1.0131(3)(b)2., F.A.C., is unnecessary.

Instead, the Taxpayer has relied upon Rule 12C-1.031(3)(b)2.a.,
F.A.C., which permits the Executive Director to consider changes
in law or circumstances, including changes which do not affect
income tax liability. There is no evidence of a change in law,
either federal or state, which has substantially affected the
Taxpayer's business activities or the business environment in
which it operates. Rather, the Taxpayer contends that the
business of the affiliated group has significantly changed since
it began filing consolidated Florida income tax returns.
According to the Taxpayer:

• its primary lines of business have changed,
• its business has grown substantially and rapidly,
• a large number of companies have been acquired, and
• the group has been restructured through the incorporation

of numerous new subsidiaries and the liquidation of other
subsidiaries.

The Taxpayer estimates that its affiliated group will pay the
same or more tax by filing separate returns. Therefore, based
on the following four conditions, the Department grants
permission to discontinue filing consolidated corporate income
tax returns for tax years XX and thereafter:

1. that the deconsolidation is effective for the tax year
   ending on XX;

2. that the Taxpayer or any member of its affiliated group
   has no realized but unrecognized income or expense items
   that may be recognized at a later date which would benefit
   a member of the affiliated group;

3. that the combined Florida corporate income tax liability
   of all separately filed returns for the tax year ended XX,
   is greater than the pro forma consolidated return for the
   same period; and

4. that the Taxpayer does not become part of a consolidated
   Florida corporate income tax return prior to the tax year
   ending XX.

CONCLUSION

The Taxpayer has met the requirements for granting permission to
discontinue the Florida corporate income tax consolidated filing
election. Accordingly, the Taxpayer's request for permission to
file separate income tax returns for the tax year ended XX, is
granted.

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 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,

Robert DuCasse
Technical Assistance and Dispute
Resolution

RCD/rd
Control No. 45205