Could a reorganized and diversified corporate group stop filing Florida consolidated income-tax returns because its business circumstances had materially changed?

Plain-English summary

Florida granted a reorganized and diversified affiliated group permission to stop filing consolidated state corporate income-tax returns. The Department found that the group's business and operating circumstances had changed substantially since its original election.

The original corporation had formed subsidiaries and filed consolidated returns for years. It later reorganized under a new taxpayer in a transaction it believed was a federal reverse acquisition.

Over time, the business diversified into additional redacted industries, added and disposed of subsidiaries, changed executive leadership after the founder's death, divested operations, decentralized finance to business-unit level, and realigned divisions into separate companies. The stated purposes included isolating liabilities, limiting the effect of recalls across companies, enabling acquisitions through stock swaps, and considering public-debt financing.

The group continued to file a federal consolidated return. It projected lower Florida liability on separate returns and represented that the reorganization and deconsolidation request arose from economic conditions rather than tax planning.

The changes were good cause

Section 220.131 generally continued a Florida consolidated election until the Department consented to separate returns. Rule 12C-1.0131(3)(b) allowed the Department to consider changes in circumstances, even changes not directly affecting tax liability.

The Department found that the reorganization, diversification, market changes, and new operating structure materially affected the prudence of continuing consolidated filing.

Approval had three conditions

1. The taxpayer represented that it had no realized but unrecognized income or expense items; any later-recognized items had to be reported fully on the last Florida consolidated return.
2. The difference between the separate returns and the pro forma consolidated return for the stated year had to remain approximately the redacted amount disclosed.
3. The group could not join another Florida consolidated return before the redacted future tax year in the ruling.

The Department warned that omission of a material fact could adversely affect the advisement.

What this means for you

Reorganized parent groups

Operational restructuring, not just a tax-rate comparison, supported the request. Document management changes, subsidiary transactions, business diversification, liability separation, and financing objectives.

Corporate tax departments

Prepare the pro forma consolidated comparison and identify deferred items. Approval can be conditioned on both the disclosed tax effect and future filing behavior.

Accountants and tax professionals

A reverse acquisition or internal reorganization does not automatically revoke a Florida consolidated election. Department consent remains central under the ruling's framework.

Common questions

Q: What changes supported the request?
A: Reorganization, diversification, subsidiary additions and disposals, leadership changes, decentralized finance, and division realignment.

Q: Did the group continue federal consolidated filing?
A: Yes.

Q: Was the request described as tax planning?
A: No. The taxpayer said the changes and tax difference resulted from economic conditions.

Q: What happened to deferred items?
A: Any later-recognized item had to be reported fully on the last Florida consolidated return.

Q: Could the group quickly elect Florida consolidation again?
A: No. Approval included a future-year restriction.

Citations and references

• Fla. Stat. § 220.131(1) — Florida consolidated-return election requirements
• Fla. Stat. § 220.131(3) — continued filing and Department consent for separate returns
• Fla. Admin. Code r. 12C-1.0131(3)(b) — good cause and conditions to discontinue consolidated filing
• Fla. Stat. § 220.15 — Florida modifications to federal taxable income
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 04C1-002

Original ruling text

SUMMARY

QUESTION: May a consolidated group be granted permission to
cease filing Florida consolidated corporate income tax
returns based upon changes in law or circumstances?

ANSWER - Based on Facts Below: The consolidated group was
granted permission to cease filing Florida consolidated
corporate income tax returns based on the rule provisions
which address changes in law or circumstances.

Feb 19, 2004

Re: Technical Assistance Advisement 04C1-002
Corporate Income Tax
Request for Authority to Discontinue Consolidated Filing
Section 220.131, F.S., Consolidated Filing Election
XXX (hereinafter referred to as "Taxpayer")
XXX (hereinafter referred to as "Corporation A")

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

Corporation A, along with its consolidated group, has reported
its income on a consolidated basis for Florida corporate income
tax purposes since its initial election in XX, when it formed
its first subsidiary. On XX, Corporation A reorganized and
created the Taxpayer. The Taxpayer believes this transaction
will be considered a reverse acquisition under the federal code.

Corporation A began as a XXX in XX. During the XX's,
Corporation A expanded its XXX of XXX to serve XXX and XXX
industries. Currently, Corporation A sells XXX through three
distinct business channels that serve consumers where they XXX,
where they XXX, and where they XXX.

Since XX, the Taxpayer has diversified into other businesses
that include XXX, XXX, and XXX. Corporation A has added
approximately XXX new subsidiaries and sold or disposed of
approximately XX subsidiaries from XX to XXX.

In XX, the founder of Corporation A died suddenly. Key
management positions were filled from within. In XX, an outside
president and chief executive officer was hired to revitalize
the company. Corporation A soon divested XX subsidiaries. In
XX, the finance function was decentralized to increase
accountability to the business unit level. Several other
executive personnel changes were made to realign several of the
divisions of Corporation A into separate companies. The
business reorganization ensures isolation of liability, and it
limits the impact of recalls from one company on the other
companies. The new structure also provides the opportunity for
separate entities to make acquisitions by offering stock swaps,
and to consider public-debt financing.

The Taxpayer's Group will continue to file consolidated federal
income tax returns. The Taxpayer estimates that its Florida tax
liability for tax year ending XX will decrease from XXX on a
consolidated basis to XX on a separate return basis, with XX
companies reporting losses. The Taxpayer indicated in
conference that the reorganization, request for deconsolidation,
and difference in Florida tax liability from a consolidated
basis to a separate basis result from economic conditions and
not from tax planning.

Although some data is provided on the future filing aspects of
the Taxpayer and its affiliated group, the Department is unable
to provide specific guidance on these other years, other than
the general statutory provisions of Chapter 220, F.S., which
require entities to report their share of federal taxable income
modified by the provisions of s. 220.15, F.S.

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

Whether the Taxpayer should be granted permission to cease
filing consolidated Florida corporate income tax returns?

DISCUSSION AND ANALYSIS

Taxpayer 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". Taxpayer contends that the business of the
affiliated group has changed significantly since it made its
consolidated return election in XX.

The information provided by the Taxpayer shows substantial
growth in the consolidated group since XX, when the Taxpayer
first elected Florida consolidated reporting. The Taxpayer has
diversified into several areas it did not service in XX. There
have been changes in the market segments the Taxpayer services.
There have also been numerous changes in the way the Taxpayer
operates and generates its business. As a result, the
affiliated group has undergone changes, the magnitude of which
affect the prudence of continuing to file on a consolidated
basis for Florida corporate income tax purposes.

CONCLUSION

Based on the following three conditions, permission is granted
for the Taxpayer to discontinue filing consolidated corporate
income tax returns beginning with tax year ending XX:

1. That Taxpayer has no realized but unrecognized income or
   expense items that may be recognized at a later date. If
   the Taxpayer should be required to recognize any such items
   at a later date, they should be reported in full on the
   last Florida consolidated return;

2. That the difference in tax liability for the tax year
   ended XX, between the separate tax returns filed and a pro
   forma consolidated return for the same period is
   approximately XXX;

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

As a reminder, Technical Assistance Advisements are based on
full disclosure of all relevant facts, and the lack of
disclosure of a material fact by the Taxpayer may adversely
affect the response provided in this Technical Assistance
Advisement.

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 back-up 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 the
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.: 58037