Did growth, acquisitions, a reverse merger, and management changes justify ending consolidated filing?

Plain-English summary

A consolidated group renewed a request to file separate Florida corporate income tax returns after Florida had denied substantially the same request about one year earlier. The group cited business growth, acquisitions, a reverse merger, subsidiary changes, and changes in officers and directors.

Florida found no material intervening change in facts or law. The taxpayer had more and larger stores under different names, but it remained in the same retail line of business, and its organizational changes were commonplace changes in form or structure.

Florida denied deconsolidation and required continued consolidated filing.

What this means for you

A different argument is not a new fact. After an earlier denial, a taxpayer needs a material change in law or circumstances, and growth or restructuring alone may not change the nature of the business.

Common questions

Did substantial growth establish good cause? No. Florida found the underlying retail business remained the same.

Did the reverse merger or subsidiary changes help? No. The ruling treated them as structural choices and held the taxpayer to those choices.

Did new officers or directors matter? No. Management and board changes were not a basis for deconsolidation.

Citations and references

• Fla. Stat. § 220.131(1), (3) (consolidated-return election and continuation)
• Fla. Admin. Code r. 12C-1.0131(3)(b) (permission to discontinue consolidated filing)
• Regal Kitchens, Inc. v. Florida Department of Revenue, 641 So. 2d 158 (Fla. 1st DCA 1994)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 06C1-001

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 affiliated group was not granted permission to cease filing Florida
consolidated tax returns. The Taxpayer requested permission approximately one year ago, based upon changes in
circumstances, and permission was denied at that time. Taxpayer has advised that there have been no material
changes in law or circumstances in the intervening year. In addition, changes in the organizational structure of the
consolidated group, such as mergers, acquisitions, liquidations, dissolutions, and sales of subsidiaries, divisions, or
assets, are not a sufficient basis for deconsolidation when the nature of the business remains the same.

January 5, 2006

Re: Technical Assistance Advisement 06C1-001
Corporate Income Tax
Request for Authority to Discontinue Consolidated Filing
Section 220.131, F.S., Consolidated Filing Election
XXX: FEIN XX ("Taxpayer")
FEIN XX ("Old 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.
SUMMARY OF FACTS
At the time of the election to file Florida consolidated corporate income tax returns, Old Parent had XX subsidiaries
and directly operated XX stores in XX states, primarily located in the XXX and XXX regions of the United States. For
the tax year ending XX, Old Parent and its affiliated group had approximately XX in sales, XXX in property, and XX in
payroll. In XX, Old Parent carried mostly XXX, with the exception of a few XXX.
As of XX, Old Parent was the XXX in the United States. On XX, the Taxpayer, a XXX domiciled company, purchased
Old Parent Company through the use of an acquisition company. The acquisition company was then merged into Old
Parent Company. Old Parent Company changed its name and the Taxpayer changed its name.
The Internal Revenue Code classified the merger as a reverse acquisition, and Old Parent Company is treated as the

surviving group for tax purposes. As a result of this federal treatment, Old Parent Company's Florida consolidation
election remains effective for the Taxpayer even though the Taxpayer now controls Old Parent Company.
After the merger, the XXX original subsidiaries of Old Parent Company were merged into Old Parent Company. In
addition, several of the Taxpayer's operating subsidiaries, including the one subsidiary that had nexus with Florida and
was filing a separate Florida corporate income tax return, were also merged into Old Parent Company. None of the
Old Parent Company executive officers are executive officers of the Taxpayer. The commercial domicile of the
Taxpayer is in XXX, and the XXX corporate headquarters of Old Parent Company was closed.
As of XX, the Taxpayer owned and operated XX stores in approximately XX states. For the tax year ending XX, the
Taxpayer's affiliated group had approximately XXX in sales, XXX in property, and XXX in payroll. These sales,
property, and payroll figures represent an increase of XX%, XX%, and XX%, respectively, over the amount of Old
Parent Company's sales, property, and payroll at the time the consolidated election was made. In addition, none of
Old Parent Company's executive officers are executive officers of the Taxpayer.
The Taxpayer's Group will continue to file consolidated federal corporate income tax returns. The Taxpayer previously
estimated that its Florida tax liability for tax year ending XX will be a Florida loss of approximately XX on a
consolidated basis. On a separate return basis, the Taxpayer estimates that it would pay approximately XX in tax for
one entity and would have Florida losses of approximately XX for its other entities. The Taxpayer states that changes
in the Taxpayer's operating structure have been driven by efforts to centralize the Taxpayer's operations and to
reduce business inefficiencies that existed due to the combination of XXX separate public companies. The Taxpayer
also states that there are no known changes in Florida taxable income that will not be the result of economic or
organizational differences.
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 ...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
The Department previously considered Taxpayer's request to deconsolidate and by Technical Assistance Advisement
04C1-008, dated December 22, 2004, denied the Taxpayer's request for deconsolidation. In its current request for
deconsolidation, Taxpayer advised the Department that there have been no substantial or material changes in its
business during the intervening twelve month period.
When a taxpayer has been denied permission to deconsolidate, new facts or a change in law are required in order to
secure a different result. TAA 04C1-008 states that subsequent changes in statutes or regulations, or court
interpretations regarding those statutes or rules, is the only basis for changing that TAA. The Taxpayer admits that the
underlying facts have remained unchanged, but suggests that its latest arguments present a sufficient basis for
deconsolidation. Although these arguments are well-presented, Taxpayer is making the same arguments that were
considered and rejected in the first deconsolidation request. As with the first TAA, Taxpayer notes that it has merged
(in a reverse merger) with another company, which is in the same line of business as Taxpayer. It also argues (as in
its first deconsolidation request) that its Board of Directors has changed and that it has undergone a substantial
change in business circumstances from when it first elected consolidated filing to the present. A TAA is based upon
the relevant facts and circumstances presented by a taxpayer to the Department. It represents the position of the
Department based upon the facts presented under the law then in effect. Since the facts and law have not changed
since the first TAA, Taxpayer's request for deconsolidation should be denied. The previously issued TAA accurately
describes the Department’s position, and nothing has changed since that time.
The fact that nothing has changed since the Department issued TAA 04C1-008 is sufficient grounds for denying the
Taxpayer's latest request for deconsolidation. However, in the interest of fairness and completeness, the Department
will review the facts and law presented by the Taxpayer. The basis for Taxpayer's request for deconsolidation is that it
has undergone substantial growth since it made its Florida consolidated return election in XX. However, Taxpayer's
business has remained substantially the same – some of its stores are bigger and some of those stores operate under
different names, but Taxpayer is still in the same line of business. The Taxpayer contends that there have been
substantial changes (growth) in its business circumstances since the Florida consolidated reporting election was made
in XX. As in XX, Taxpayer is currently engaged in the business of selling XXX, primarily through retail outlets. In XX,
Taxpayer operated XX stores in XX states; Taxpayer now operates XX stores in XX states. However, the number of
stores operated by Taxpayer in Florida has only increased from XX stores to XX stores in a 10-year period. In XX,
Taxpayer operated under a single name and a single store format; Taxpayer now has some stores that are much
larger, and it operates those stores under different names. Taxpayer's sales have doubled from XX to XX. Finally,
Taxpayer states that during tax year ending XX, the entity that made the consolidated election became a second tier
subsidiary of an unrelated taxpayer and that it is no longer the parent company of its affiliated group.(FN 1)
The Taxpayer's business has been, and continues to be, the retail sale of XXX. Although Taxpayer has grown in some
areas, its business remains unchanged and its growth has been through acquisitions. Corporate reorganizations, such
as mergers, acquisitions, sales, or consolidations, are commonplace, and are often no more than changes in the form
or structure of the corporate organization. The Taxpayer merged one operating subsidiary into another and dissolved

an operating subsidiary. Taxpayers have ample opportunity to choose the form and structure of their mergers. The
Taxpayer chose to structure its merger with Old Parent Company as a reverse acquisition with the tax attributes of Old
Parent Company surviving, instead of the Taxpayer's tax attributes. Under Regal Kitchens, Inc. v. Florida Department
of Revenue, 641 So.2d 158 (Fla. 1st DCA 1994), the Taxpayer is bound by its choice.
Finally, the fact that the executive officers controlling the affiliated group are not the same as those executive officers
that made the initial election to consolidate is not a basis for granting permission to deconsolidate. Likewise, a change
in the board of directors from the point in time when the initial election to consolidate was made is not a basis for
granting permission to deconsolidate.
CONCLUSION
The information presented by the Taxpayer does not establish that there has been a significant change in the nature
of the Taxpayer's business circumstances. It is not an unreasonable exercise of discretion to require the continued
filing of consolidated Florida returns.
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 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,
Gary A. Moreland
Technical Assistance and Dispute Resolution
GAM/
Record ID No. 18231

FOOTNOTE 1. Treasury Regulation s. 1.1502-75(d), provides that a reverse acquisition, standing alone, is not a basis
for automatic deconsolidation.