Could a parent corporation end Florida consolidated filing after organizational growth, new business lines, and regulatory change?

Plain-English summary

Florida permitted the parent and its affiliated group to stop filing consolidated corporate income-tax returns. The group had grown substantially, entered additional lines of business, expanded geographically, completed organizational changes, and operated under changed industry laws. Florida found that the business and legal changes established cause when considered together, although neither was sufficient by itself.

The approval had four conditions: separate filing began with the redacted effective year; deferred income or expense items had to be reported by the proper separate entity if later recognized; the redacted separate-versus-consolidated tax difference had to remain as represented; and the group could not join another Florida consolidated return before the redacted future year.

What this means for you

Ending a Florida consolidated election required Department permission and a fact-specific showing of changed circumstances. The Department also imposed conditions designed to preserve deferred items, the represented tax result, and a minimum period of separate filing.

Common questions

Q: Was expansion alone enough? No. The Department considered expansion together with industry-law changes.

Q: What happened to deferred income or expenses? Any later-recognized item had to be reported in full by the appropriate separate entity.

Q: Could the group quickly elect consolidated filing again? No. The ruling imposed a redacted waiting period.

Citations and references

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

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 02C1-006

Original ruling text

SUMMARY

QUESTION: May a parent company be granted permission to
cease filing Florida consolidated tax returns based on
changes in their organizational structure, expansion of its
business lines, and regulatory changes applicable to the
industry?

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
addresses changes in business activities and laws.

Sep 12, 2002

Re: Technical Assistance Advisement 02C1-006
Corporate Income Tax - Consolidated Filing Election
s. 220.131, F.S.
XXX, hereinafter referred to as "A"

Dear :

Your letter of XX, requested a Technical Assistance Advisement
granting the taxpayer referenced above permission to cease
filing its Florida corporate income tax returns on a
consolidated basis. 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

Your letter of XX, states that "A" was formed in XX, as the
parent corporation of an affiliated group of corporations that
operated within the XXX industry.

In XX, "A" and its subsidiaries elected to file their Florida
corporate income tax returns on a consolidated basis and

presently file a consolidated federal income tax return and
consolidated Florida corporate income tax return. In XX, a
public offering of "A's" stock was listed and sold, taking the
corporation "public". In XX, "A's" XXX subsidiary became
operational, and in XX, "A" expanded its operations into XXX
through another subsidiary. In XX, two of "A's" subsidiaries
merged. In XX, "A" expanded its XXX activity through the
acquisition of a XXX. From XX through XX, "A" continued to
acquire other entities and to expand its XXX, and it now offers
XXX. In XX, "A" expanded into XXX; and it opened XXX offices in
XX, which extended its presence outside of Florida. Also, in XX,
"A" formed a subsidiary to sell XXX. In XX, "A" entered into a
joint venture with a XXX to engage in XXX and XXX.

From XX to XX, "A" has expanded the number of its XXX from XXX
to XXX. Its assets have increased from XXX to XXX, and XXX have
increased from XXX to XXX.

The regulatory environment in which "A" operates has also
changed since XX. XXX became effective in XX. This section
allowed XXX, causing extensive growth within the industry.

Additionally, the XXX allowed XXX, thus expanding the activities
in which XXX could engage beyond XXX.

The XXX placed additional requirements on XXX relative to
information they must obtain concerning XXX.

"A" stipulates that there are no intercompany transactions, or
deferred income or expense items that may be recognized at a
later date, which would normally be included on a consolidated
return but would not be included on separately filed returns.

On the basis of the facts presented in the letter dated XX, and
additional information presented in your letter dated XX,
permission is requested for "A" and its subsidiaries to cease
filing Florida corporate income tax returns on a consolidated
basis, beginning with the tax year ending XX.

LAW

Section 220.131(1), F.S., states:

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 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:

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), F.A.C., states in pertinent part:

(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.

(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 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 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. . . .

DISCUSSION AND ANALYSIS OF LAW

"A" relies upon Rule 12C-1.031(3)(b)2.a., F.A.C., which permits
the Executive Director to consider "[c]hanges in law or
circumstances, including changes which do not affect income tax
liability". "A" contends that the business of the affiliated
group has changed significantly since it made its consolidated
return election in XX. In addition, "A" cites changes in the law
relating to the XXX industry, including the passage of the XXX,

which allows XXX to XXX, and the XXX.

The information provided by the taxpayer shows substantial
growth in the consolidated group since XX, when the taxpayer
first elected consolidated filing, both in terms of the size of
its market and through the additional lines of business in which
it is presently engaged.

"A" states that changes in the law governing the XXX industry
are also a basis for deconsolidation. XXX allows XXX to compete
in the XXX and XXX industries. The XXX provides additional
opportunities for XXX to do business beyond the XXX. This is
not a change in the law that directly affects "A's" Florida
consolidated reporting, even though it does affect the XXX
industry and "A" in general. "A" has taken affirmative steps to
enter the XXX and XXX business. These changes in the XXX
industry and "A's" business can be considered with "A's" growth
and change of business focus. While neither of the grounds
cited by "A", standing alone, is a sufficient basis for
deconsolidation, the legal changes in the XXX industry, when
considered together with the changes in "A's" business, brought
about by growth and expansion of the lines of business in which
it engages, establish a sufficient basis for granting "A's"
deconsolidation request.

Therefore, based on the following four conditions, the
Department grants permission to discontinue filing consolidated
corporate income tax returns for the tax year ending XX, and
later years:

1. That permission to file Florida corporate income tax
   returns on a separate basis is effective for tax years
   ending XX, and later, and

2. That "A" has no realized but unrecognized income or
   expense items that may be recognized at a later date. If
   "A" should be required to recognize any such items at a
   later date, they should be reported in full on the separate
   Florida corporate income tax returns of the appropriate
   entities, and

3. That the difference in tax, on a separate and
consolidated pro forma basis, for the tax year ending XX,
is approximately XX, and

4. That the affiliated group not become part of a
   consolidated Florida corporate income tax return prior to
   the tax year ending XX.

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 the specific situation summarized
above. You are advised that subsequent statutory or
administrative rule changes or judicial interpretations of the
statutes or rules upon which 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, 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,

Suzanne C. Paul
Technical Assistance and
Dispute Resolution

SCP/
Control No.: 51017