Could a greatly expanded corporate group stop filing Florida consolidated income-tax returns because its business circumstances had changed since the election?

Plain-English summary

Florida granted a greatly expanded affiliated group permission to stop filing consolidated state corporate income-tax returns. The Department found that the group had changed enough since its original election that continuing the old filing method was no longer prudent.

Since making the election, the parent had raised significant capital, become publicly held, added multiple lines of business, expanded across the United States and internationally, and increased its subsidiaries, operations, assets, equity, employees, and annual gross revenue. The exact figures and business descriptions were redacted.

The group planned to continue filing a federal consolidated return. It estimated that separate Florida returns would produce a lower state liability than consolidated filing and stated that it had not implemented tax-planning activities aimed at changing the Florida result.

Major business change was good cause

Section 220.131 generally required a group that elected consolidated Florida filing to continue until the Department consented to separate returns. Rule 12C-1.0131(3)(b) allowed consent for changes in law or circumstances, including changes not directly affecting income-tax liability.

The Department concluded that the scale and nature of the affiliated group had changed materially enough to satisfy that standard. It did not give specific guidance for later years beyond the general requirement to report each entity's share of federal taxable income with Florida modifications.

Permission came with 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 filed separate returns and a pro forma consolidated return for the stated year had to be approximately the redacted amount disclosed in the request.
3. The group could not become part of another Florida consolidated return before the redacted future tax year stated in the ruling.

The Department also warned that failure to disclose a material fact could adversely affect the advisement.

What this means for you

Growing parent companies and affiliated groups

Large changes in ownership profile, business lines, geographic reach, subsidiaries, assets, workforce, and revenue can support a request to revoke an old consolidated election. Growth alone is not automatic approval; the Department reviewed the full history and tax comparison.

Corporate tax departments

Prepare separate and pro forma consolidated calculations, identify deferred intercompany items, disclose tax-planning activity, and propose clear future-filing conditions.

Accountants and tax professionals

Florida consolidated filing is a continuing election. A group seeking separate returns needs Department consent and should not assume that changed business economics alone end the obligation.

Common questions

Q: What changed after the original consolidated election?
A: The parent became public, raised capital, added businesses and jurisdictions, and grew substantially in subsidiaries, assets, employees, and revenue.

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

Q: Did separate Florida returns reduce the estimated tax?
A: Yes, according to the redacted comparison supplied by the taxpayer.

Q: Were deferred items a condition of approval?
A: Yes. Any later-recognized item had to be reported fully on the final Florida consolidated return.

Q: Could the group immediately join another Florida consolidated return?
A: No. Approval included a redacted future-year restriction.

Citations and references

• Fla. Stat. § 220.131(1) — Florida consolidated-return election requirements
• Fla. Stat. § 220.131(3) — continued consolidated filing and Department consent for separate returns
• Fla. Admin. Code r. 12C-1.0131(3)(b) — good cause, permission, and conditions for discontinuing 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 04C1-003

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: Yes. 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.

Mar 22, 2004

Re: Technical Assistance Advisement 04C1-003
Corporate Income Tax
Request for Authority to Discontinue Consolidated Filing
Section 220.131, F.S., Consolidated Filing Election
XXX (hereinafter referred to as "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, 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. At the time of
the election to file Florida consolidated corporate income tax
returns, the taxpayer had XXX, which consisted of XXX of
approximately XXX providing XXX services to XXX, and XXX with
XXX outside Florida.

Since electing to file on a consolidated basis in Florida, the
Taxpayer has raised a significant amount of capital, has become
a publicly held corporation, and has expanded its lines of
business to include not only XXX, but also:

1. XXX;
2. XXX;
3. XXX;
4. XXX;
5. XXX; and
6. XXX.

The Taxpayer has expanded geographically across the United
States and throughout the world. The Taxpayer now has
operations in XX states, XX, XX, XX, XX, and XX. The number of
direct and indirect subsidiaries increased from XX to XX, and
the number of XXX (XXX) increased from XX to XX. In addition,
the Taxpayer's total assets and total equity increased by XX and
XX, respectively. The Taxpayer's number of employees increased
by XX and its annual gross revenue increased by XX.

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 XXX on a separate return basis, with XXX
companies reporting XXX. The Taxpayer stated that no tax
planning activities directed towards affecting the Florida
income tax on either a consolidated or separate company basis
have been implemented.

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...
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 and that the
circumstances under which it made its initial election to file
Florida consolidated returns has changed significantly since it
made its consolidated return election in XX.

The information provided by the Taxpayer shows XXX in the
consolidated group since XX, when the Taxpayer first elected
Florida consolidated reporting, both in terms of the XXX and
through XXX in which it is presently engaged. 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.: 58878