Could a long-standing Florida consolidated corporate group stop filing consolidated returns after major business and organizational changes?

Plain-English summary

A corporate group had filed Florida consolidated income tax returns for many years but could not determine the exact year of its original election. Since then, it had transformed through acquisitions, mergers, new products and services, expansion into nearly twice as many states, international stores, and substantial growth in sales, assets, net income, employees, and locations.

Florida granted permission to stop consolidated filing. Rule 12C-1.0131 allows the Department to consider changes in law or circumstances, including changes that do not themselves affect income tax liability. The Department found the magnitude of this group's organizational, operational, and geographic changes sufficient to affect whether continued consolidation remained prudent.

The permission was conditional. The published ruling lists these conditions:

• The group represented that it had no realized but unrecognized income or expense items; any later-recognized item had to be reported fully on the final Florida consolidated return.
• The difference between the filed separate-return liability and a pro forma consolidated liability for the identified year was the approximately redacted amount disclosed to the Department.
• The taxpayer group could not become part of another Florida consolidated corporate return before the redacted future tax year specified in the ruling.

The source says "four conditions" but visibly enumerates only three; this page does not invent a missing fourth condition.

The Department also limited what it decided. It did not determine whether the taxpayer's separate returns would be valid and did not approve the transfer of income to a service-and-intellectual-property company through management fees or licensing fees.

What this means for you

A consolidated election normally continues

Once a group elects Florida consolidated filing, later separate returns require the Department's consent. Business preference or a lower tax result alone is not an automatic exit.

Major factual change can establish good cause

The persuasive record here showed a fundamentally different group—new businesses, acquisitions, markets, geographic reach, and scale—rather than a minor restructuring.

Permission can include protective conditions

Florida can require adjustments, protect deferred items, disclose the liability effect, and prevent a quick return to consolidated filing.

Deconsolidation approval does not bless every separate-return position

The TAA allowed the filing-method change only. Transfer pricing, intercompany fees, and the validity of the later returns remained open to examination.

Common questions

Q: Did Florida let the group stop consolidated filing?
A: Yes, because the group's business and structure had changed substantially since the original election.

Q: Was a tax reduction alone enough?
A: The ruling disclosed a lower separate-return liability, but the stated good-cause analysis focused on major changes in circumstances.

Q: Were there conditions?
A: Yes, including treatment of unrecognized items, the disclosed liability comparison, and a period before the group could join another Florida consolidated return.

Q: Did Florida approve the group's intercompany service and IP fees?
A: No. The ruling expressly left those issues undecided.

Citations and references

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

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 08C1-010

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: The consolidated group was granted permission to cease filing Florida consolidated
corporate income tax returns based on the rule provisions that address changes in law or
circumstances.
October 17, 2008
RE:

Technical Assistance Advisement 08C1-010
Corporate Income Tax - Request for Permission to Deconsolidate
Section 220.131, F.S.
Rule 12C-1.0131, F.A.C.

Dear:
This letter is in response to your letter of XXX requesting permission for the Taxpayer to
discontinue filing consolidated Florida corporate income tax returns beginning with tax year
ending XXX. This response constitutes a Technical Assistance Advisement under Chapter 1211, Florida Administrative Code, and is issued to you under the authority of section 213.22,
Florida Statutes.
FACTS AS PROVIDED BY TAXPAYER
The Taxpayer is unable to determine from its records the exact year in which it elected to file on
a consolidated basis in Florida. However, the Taxpayer believes it has filed on a consolidated
basis in Florida since at least the XXX tax year. The Department’s records concur that the
Taxpayer has filed on a consolidated basis since at least the XXX tax year.
Over the past XX years, the Taxpayer has become the largest specialty retailer of services and
solutions for the lifetime needs of XXX. Under several trademarks, the Taxpayer has developed
strong brand recognition for excellent product quality, performance, and reliability in each of its
lines of business. The Taxpayer has experienced tremendous growth in all aspects of its
business. Strategic acquisitions and market changes have enormously changed the Taxpayer’s
corporate structure and expanded its market presence domestically and internationally.
Since XXX, the Taxpayer has entered the market with the following products and/or services:
XXX,XXX,XXX…..,
Since XXX, the Taxpayer has almost doubled the number of states in which it has a presence and
has expanded into the international market. The majority of this expansion was accomplished
via acquisitions and mergers. Since XXX, the following acquisitions occurred:
•

XXX – XXX

Technical Assistance Advisement
Page 2
•
•
•
•
•
•
•
•

XXX – XXX
XXX – XXX
XXX – XXX
XXX – XXX
XXX – XXX
XXX – XXX
XXX – XXX
XXX – XXX

All of these acquisitions and expansion over the years have resulted in substantial growth for the
Taxpayer.

Sales
Assets
Net Income

of Employees

of States

of Stores

• XXX

XXX
XXX
XXX
XXX
XXX
XXX
XXX

XXX
XXX
XXX
XXX
XXX
XXX
XXX

The Taxpayer also expanded internationally in XXX by opening XXX new stores in XXX.
Currently, the Taxpayer has XXX stores in XXX.
Today, the Taxpayer consists of XXX companies, XXX of which are active. Of the XXX active
companies, the majority of the income and apportionment activity is generated by (1) Company
R, which houses all of the group’s stores and retail activities in the United States and Canada,
and (2) Company S, which performs all the accounting, finance, legal, tax, treasury, cash
management services, human resources and benefits, and advertising for affiliated companies,
and holds all the intellectual property for the affiliated group. Company S receives fees from its
affiliates that fully reimburse its operating costs, plus a mark-up based on a percentage of sales,
for the services it performs. 1
The Taxpayer estimates that its Florida tax liability for tax year ending XXX, will decrease from
XXX on a consolidated return basis to XXX on a separate return basis. The difference in the
income on a consolidated basis versus on a separate basis is that Company S’s substantial
income is apportioned at XXX on a separate basis versus XXXon a consolidated basis.
LEGAL AUTHORITY

1

Annual transfer pricing studies are performed by a third party to determine the arm’s length pricing between
Company S and its affiliates for all aspects of the services performed. In addition, a separate transfer pricing study
is performed to determine the arm’s length pricing related to the licensing of Company S’s intellectual property to
its affiliates.

Technical Assistance Advisement
Page 3
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(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:
(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

Technical Assistance Advisement
Page 4
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 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 under which its initial
   election to file Florida consolidated returns was made have changed. The Taxpayer also
   contends that it has made significant changes in its organizational structure, operations, and
   geographical market; that it has acquired and developed several diverse lines of business; and
   that it has experienced substantial growth since its initial election to file Florida consolidated
   returns.
   The information provided by the Taxpayer shows significant changes in the consolidated group
   since XXX. The Taxpayer has grown substantially (sales, income, extent and size of its
   operations, etc.) since XXX. The Taxpayer has also added several major lines of business since

Technical Assistance Advisement
Page 5
XXX. 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 four conditions, permission is granted for the Taxpayer to discontinue
filing consolidated corporate income tax returns beginning with tax year ending XXX

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 XXX, between the separate
   tax returns filed and a pro forma consolidated return for the same period is
   approximately XXX; and
3. That the Taxpayer Group does not become part of a consolidated Florida corporate
   income tax return prior to the tax year ending nearest XXX.
   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 Technical Assistance
   Advisement does not address whether the Taxpayer’s separate returns will be valid nor whether
   the transfer of income via management fees and intellectual property fees to Company S is
   permissible under Florida law.
   This response constitutes a Technical Assistance Advisement under section 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 section 213.122, F.S. Our response is based on those facts and the
   specific situation summarized above. You are advised that subsequent statutory or
   administrative rule changes, or judicial interpretations of the statutes or rules upon which this
   advice is based may subject similar 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, Florida Statutes, and are subject to disclosure to the public under the
   conditions of section 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 materials and
   this response, deleting the 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,
   Robert DuCasse
   Technical Assistance and Dispute Resolution

Technical Assistance Advisement
Page 6

Record ID 50043