Could a corporate group stop filing Florida consolidated returns after substantial growth, acquisition, and business-model changes?

Plain-English summary

A corporate group asked Florida for permission to stop filing consolidated corporate income tax returns. Since making its original election, the group had grown substantially, acquired another company, expanded into new business lines, and changed its business model. It stated that the difference between consolidated and separate liabilities arose from economic or organizational differences rather than state tax planning.

Florida granted permission based on changed circumstances. The Department found that the combined growth, acquisition, and strategic changes were large enough to affect the prudence of continued consolidated filing.

The approval was not unconditional. It required treatment of any realized but unrecognized items on the final consolidated return, adherence to the represented tax-liability difference and a stated waiting period, changes driven by economics or organization rather than state tax planning, and resolution within 90 days of outstanding Florida inquiries or billings for group entities.

What this means for you

A prior Florida consolidated election generally continues, but the Department could consent to separate filing for good cause. This ruling shows that major operational and organizational change could qualify, subject to transaction-specific conditions designed to protect the tax base.

Common questions

Did Florida allow the group to stop filing consolidated returns? Yes, beginning with the redacted tax year specified in the ruling and subject to five conditions.

What changed after the original election? The group reported major growth, an acquisition, new business lines, and a materially different business model.

Was a lower separate-return liability enough by itself? No. Florida relied on the broader changed circumstances and required that the income differences result from economic or organizational factors, not state tax planning.

What happened to deferred items? Any realized but unrecognized income or expense later requiring recognition had to be reported in full on the last Florida consolidated return.

Were unresolved Department matters allowed to remain open? No. The approval required outstanding inquiries or billings for group-controlled entities to be resolved within 90 days.

Citations and references

• Fla. Stat. § 220.131(1)-(3) (consolidated election, required filing, and consent to separate returns)
• Fla. Admin. Code r. 12C-1.0131(3)(b) (permission to discontinue consolidated filing)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 06C1-009

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.

December 14, 2006

Re: Technical Assistance Advisement 06C1-009
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 "AA Company")
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 and its subsidiaries have filed consolidated Florida income tax returns since at least tax year ended XX.
In XX, the Taxpayer had XX subsidiaries and was organized into XXX: XXX, XXX, XXX, and XXX. The Taxpayer had
net revenues of approximately XX, total assets of approximately XX, and approximately XX employees.
Today, the Taxpayer is a XXX and XXX. The Taxpayer has XX subsidiaries and is organized into XXX: XXX, XXX,
XXX, XXX, XXX. For tax year ended XX, the Taxpayer had net revenues of approximately XX, total assets of
approximately XX, and approximately XX employees. The Taxpayer has experienced substantial growth from XX to
the present, with revenues increasing almost XX percent, total assets increasing by XX percent, and the number of
employees increasing over XX percent. About half of the increases noted above is the result of growth of the
Taxpayer and half is directly attributable to the Taxpayer's purchase of AA Company on XX.
The Taxpayer's business model changed from primarily providing XXX and assistance products to now operating as
an integrated XXX, XXX, and XXX for all levels of an enterprise. The Taxpayer believes that this change in its

business model in addition to its substantial growth (with or without the addition of AA Company) is sufficient to
warrant the granting of permission to deconsolidate for Florida corporate income tax purposes.
The Taxpayer estimates that its Florida tax liability for tax year ending XX, will decrease from XX on a consolidated
return basis to XX on a separate return basis. The Taxpayer also estimates that its Florida tax liability for tax years
ending XX, through XX, would be between XX and XX of a million dollars; and on a separate return basis, its Florida
tax liability would be XX.(FN 1) The Taxpayer states that the difference in Florida tax liability from a consolidated basis
to a separate basis is the result from economic or organizational differences and not from tax planning.
The Taxpayer states that one subsidiary of AA Company owns the XXX to XXX. This subsidiary licenses the use of
the technology to other subsidiaries of AA Company and to third parties for the use of the products outside Florida.
This subsidiary is headquartered in XXX with approximately XX in property, XX in payroll, and approximately XX in
third party royalties.(FN 2)
Upon the acquisition of AA Company, one of the AA Company subsidiaries had approximately XX in deferred revenue
from maintenance, consulting, education, and other services. As a result of the purchase accounting, the deferred
revenue related to these services was recorded as an adjustment to goodwill, and thus, will never be recognized for
book purposes. For federal and Florida income tax purposes, the deferred revenue will be recognized as the services
are rendered. In addition, the Taxpayer also has deferred revenue that will be recognized for federal and Florida
income tax purposes as services are rendered. Virtually all of the deferred revenue recognized by the Taxpayer and
its subsidiaries, including AA Company, is within entities that will have nexus with Florida on a separate company
basis for tax year ended XX.
ISSUE PRESENTED
Whether the Taxpayer should be granted permission to cease filing consolidated Florida corporate income tax
returns?
LEGAL AUTHORITY
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(2), F.S., states:
Subject to subsection (5), the director may require a consolidated return for those members of an affiliated group of
corporations which are subject to tax and which would be eligible to elect to consolidate their incomes under
subsection (1), if the filing of separate returns for such corporations would improperly reflect the taxable incomes of
such corporations or of such group.
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.
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 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
   The 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." The Taxpayer
   contends that the circumstances of the affiliated group have changed significantly since it made its consolidated return
   election in XX.(FN 3)
   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 also expanded into new lines of business that
   it did not provide in XX and has made a significant decision that will determine its future survival. As a result of the
   combination of these facts, 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 five conditions, permission is granted for the Taxpayer to discontinue filing consolidated
   corporate income tax returns beginning with tax year ending XX:
4. 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;
5. 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 XX;
6. That the Taxpayer Group does not become part of a consolidated Florida corporate income tax return prior to the
   tax year ending nearest XX;
7. That changes in Florida taxable income are the result of economic or organizational differences and are not the
   result of state tax planning; and
8. That the Taxpayer resolve within 90 days of the date of this letter any Florida outstanding letters of inquiry and/or
   billings for each and every entity within the affiliated group and/or controlled by the affiliated group.

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
Record ID: 26222

FOOTNOTE 1. One of the AA Companies has a substantial Florida SRLY net operating loss. This Company was
merged into the Taxpayer in XX.
FOOTNOTE 2. We note that the royalty company has nexus with Florida. To the extent that royalty income is from
Florida, corporate income tax should be paid to Florida.
FOOTNOTE 3. XX is the earliest year for which the Taxpayer has records indicating that it filed a Florida consolidated
return.