Could an affiliated group end Florida consolidated filing after expanding its market and entering new business lines?

Plain-English summary

Florida permitted the affiliated group to stop filing consolidated corporate income-tax returns. Since making its election, the group had expanded into new Florida and out-of-state markets, acquired additional businesses, entered another line of business, and operated under changed industry law.

The Department said neither the legal changes nor the business changes were enough standing alone. Together, however, the group's growth and changed focus established sufficient cause. The approval required separate filing from the redacted effective year, proper reporting of any later-recognized deferred items, preservation of the represented separate-versus-consolidated tax difference, and no new consolidated filing before the redacted future year.

What this means for you

Florida required a combined changed-circumstances showing and imposed conditions to preserve the expected tax result. Material expansion after an election could support relief, but deconsolidation remained discretionary and fact specific.

Common questions

Q: Was market expansion alone enough? No.

Q: Did industry-law changes automatically allow deconsolidation? No. They mattered in combination with the group's business changes.

Q: What happened to later-recognized deferred items? They had to be reported in full on the appropriate separate return.

Citations and references

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

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 02C1-007

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 02C1-007
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 the original XXX in the
consolidated group was chartered in XX. The affiliated group
was formed in XX, and it operates within the XXX industry.

By the XXX, "A" and its subsidiaries had 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. "A's"
principal asset consists of XXX, which represents the major
portion of all assets of the consolidated group. Additionally,
the majority of the consolidated net income for the tax year
ended XX, is attributable to the XXX.

Prior to XX, "A" had restricted its growth to the XXX. However,
the acquisition of another XXX allowed "A" to expand into
additional areas of Florida. This acquisition expanded "A's"
XXX business line from XXX in annual XXX to XXX today.

During XX and XX, XX of "A's" affiliated XXX were merged. In
XX, "A" purchased XXX in XX Florida XXX, thus expanding its
presence in XXX Florida.

In XX, "A" expanded its presence into XXX through the
acquisition of entities located in that state. "A" has
continued to acquire entities and offices in XXX through XX. At
this time approximately XXX of "A's" assets are located outside
of Florida. From XX to XX, "A" has increased its XXX assets
XXX. "A" presently has XXX locations and XXX. XXX of the XXX
are in XXX and XXX are in XXX, together representing XXX of
"A's" offices.

"A" has established an XXX, which allows use of XXX at XXX and
XXX in XXX, and XXX. "A" also offers XXX services to XXX, and
XXX through one of its subsidiaries which has operations in XXX
and XXX. Another of "A's" subsidiaries offers administration of
XXX, and XXX, for XXX, and XXX.

A subsidiary of the XXX offers access to XXX through an entity
which has no affiliation with "A".

The regulatory environment in which "A" operates has also
changed since the XXX. XXX allowed XXX to elect XXX status, thus
expanding the activities in which XXX could engage beyond
traditional XXX activities. "A" applied to be treated as a XXX
on XXX, and that status was approved on 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 the XXX. In addition, "A" cites changes in
the law relating to the XXX industry, including the passage of
XXX, which allows XXX to expand into the XXX business.

The information provided by the taxpayer shows substantial
growth in the consolidated group since the XXX, 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 industry. 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 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 basis, for the tax year ending XX, is
   approximately XXX; 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.: 51523