Could a corporation stop filing Florida consolidated corporate income-tax returns after an acquisition ended its former affiliated group?

Plain-English summary

Florida granted a corporation permission to stop filing consolidated state corporate income-tax returns after an acquisition ended its former affiliated group. The taxpayer could use separate Florida returns beginning with the previously filed return for the period ending December 31, 2002, subject to two conditions.

The taxpayer and its subsidiaries had previously filed consolidated federal and Florida returns. An unrelated parent then bought more than a redacted percentage of the taxpayer's stock, causing the old affiliated group to cease existing and placing the taxpayer inside the buyer's federal affiliated group.

The new parent filed a federal consolidated return, but its group was not eligible to file a matching Florida consolidated return under section 220.131. The taxpayer had already filed a standalone Florida return without realizing that Department permission was required to discontinue consolidated filing.

The acquisition was good cause to change filing method

Rule 12C-1.0131(3)(b) allowed the Department to consider changes in law or circumstances, including changes that did not affect tax liability. The Department found that the acquisition was such a change because:

• The taxpayer's old affiliated group no longer existed.
• The taxpayer became part of a different federal consolidated group.
• Florida's consolidated-return requirements did not allow the taxpayer and its subsidiaries to file as only a subset of that new federal group.

The Department therefore granted permission to discontinue the former Florida consolidated election.

Permission came with two conditions

1. Any deferred gains, intercompany items, deferred income, or expense items already realized for federal purposes but not yet recognized had to be fully reported on the taxpayer's final Florida consolidated return.
2. The taxpayer could not join another Florida consolidated corporate income-tax return before the redacted tax year stated in the ruling.

What this means for you

Acquired companies and parent groups

An acquisition that destroys one affiliated group and places the company in a different federal group can support a request to end a Florida consolidated election. The state filing group must align with the statutory federal-group requirements.

Corporate tax departments

Do not assume filing a separate return automatically revokes a prior consolidated election. The ruling required Department permission and imposed conditions on deferred items and future consolidated filing.

Accountants and tax professionals

Review final consolidated-return items before requesting a change. Unrecognized intercompany and deferred amounts can be a condition of approval.

Common questions

Q: Why could the taxpayer stop filing consolidated Florida returns?
A: Its former affiliated group ceased to exist after the acquisition, and it could not file a Florida consolidated return containing only part of the new federal group.

Q: Had the taxpayer already filed a separate Florida return?
A: Yes. It later learned that Department permission was required and requested approval.

Q: Did the Department grant the request retroactively to that separate return?
A: Yes, beginning with the previously filed return for the period ending December 31, 2002, subject to the stated conditions.

Q: What happened to deferred intercompany or income items?
A: Realized but unrecognized items had to be reported in full on the final Florida consolidated return.

Q: Could the taxpayer immediately join another Florida consolidated group?
A: No. The approval barred that through the redacted future tax year specified in the ruling.

Citations and references

• Fla. Stat. § 220.131(1) — election and membership requirements for Florida consolidated returns
• Fla. Stat. § 220.131(3) — continued filing obligation and Department consent for separate returns
• Fla. Admin. Code r. 12C-1.0131(3)(b) — permission, good cause, and conditions for discontinuing consolidated filing
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 04C1-004

Original ruling text

SUMMARY

QUESTION: May a parent company be granted permission to
cease filing Florida consolidated tax returns based upon
changes in business circumstances.

ANSWER - Based on Facts Below: Yes. The parent company was
granted permission to cease filing Florida consolidated tax
returns based on the rule provisions which addresses
changes in business circumstances.

Mar 26, 2004

Re: Technical Assistance Advisement 04C1-004
Request for Authority to Discontinue Consolidated Filing
Section 220.131, F.S.
Rule 12C-1.0131(3)(b), F.A.C.
XXX, FEI # XX (herein referred to as "Taxpayer")
XXX, FEI # XX (herein referred to as "Parent")

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

Taxpayer is a XXX corporation that, for the periods ending XX
through XX filed consolidated federal and Florida corporate
income tax returns. Taxpayer's final Florida consolidated
return was filed for the short-year period ending XX. This
filing was necessitated, as greater than XX% of the taxpayer's
outstanding shares of stock were purchased by the heretofore
unrelated entity referred to as the Parent. Consequently, on

XX, the taxpayer and its affiliated group ceased to exist and
became part of the parent's affiliated group. Although the
parent files a consolidated federal return, it is not eligible
to file in Florida on a consolidated basis, pursuant to s.
220.131, F.S.

As stated previously, Taxpayer's final Florida consolidated
return was filed for the period XX - XX. Subsequent to
Taxpayer's final Florida consolidated return, it filed a standalone (separate) Florida corporate income tax return, for the
period XX - XX, in the name of Taxpayer.

At the time the taxpayer filed the stand-alone Florida return,
it was unaware that the Florida Administrative Code required
that the taxpayer be granted permission from the Executive
Director of the Florida Department of Revenue to discontinue
filing a Florida consolidated corporate income tax return.
Having been lately informed of that requirement, Taxpayer now
respectfully requests that permission be granted to discontinue
filing Florida consolidated corporate income tax returns.

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 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:

(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... 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

Has sufficient reasonable cause been established for the
Executive Director to grant Taxpayer permission to stop filing
consolidated Florida corporate income tax returns?

DISCUSSION AND ANALYSIS

Taxpayer's request relies on Rule 12C-1.0131(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 cites a change in circumstance,
occurring when greater than XX% of its outstanding stock was
purchased by the heretofore unrelated entity referred to as the
Parent on XX. The Parent will be filing a consolidated federal
corporate income tax return, which will now include the taxpayer
and its Subsidiaries. Taxpayer has stated that its affiliated
group that had filed a consolidated return for Federal and
Florida income tax purposes no longer exists. Taxpayer is now
included within the Parent's affiliated group that will be
filing a consolidated return for Federal income tax purposes.
Accordingly, pursuant to subsection 220.131(3), F.S., the
Taxpayer no longer is required to file a consolidated return.
In addition, since Florida statutes require that the Florida
consolidated corporate return "mirror" the federal consolidated
corporate return, Taxpayer and subs are not permitted to file a
return consisting of a subset of the new taxpayer group.
Therefore, based on the following two conditions, the Department
grants the Taxpayer permission to discontinue filing
consolidated Florida corporate income tax returns, beginning
with the previously filed return for the period ending XX.

1. That any deferred gains, intercompany items, deferred
   income, or expense items which have been realized for
   Federal tax purposes, but which have not been recognized,
   should have been reported in total on the Taxpayer's final
   consolidated corporate income tax return filed for the
   period ending XX.

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

CONCLUSION

Taxpayer has met the requirements for granting permission to
discontinue the Florida corporate income tax consolidated filing
election. Accordingly, Taxpayer's request for permission to

file separate Florida corporate income tax returns beginning
with the previously filed return for the period ending 12/31/02,
is granted subject to the provisions in the preceding paragraph.

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,

Charles J. Dunning
Technical Assistance and Dispute Resolution

Control No.: 58964