Could a parent company stop filing consolidated Florida corporate income-tax returns after major changes in its business circumstances?

Plain-English summary

The Florida Department of Revenue granted a parent company's request for its affiliated group to stop filing consolidated Florida corporate income-tax returns.

The group had undergone substantial operational changes since making its consolidated election. The ruling described new purchasing flexibility and supply-chain control, replacement of former-shareholder administrative services with internal or third-party functions, loss of major customers, acquisitions, expanded products and services, and a broader business focus. Taken together, those changes established good cause under the administrative rule.

Permission was not unconditional. The Department imposed five requirements addressing the effective year, absence of realized-but-unrecognized items, a period before rejoining a Florida consolidated return, reporting of deferred gains, and allocation of net operating-loss carryovers.

What this means for you

Parent companies and affiliated groups

A prior consolidated election generally continues. Stopping requires Department consent and a fact-specific showing of good cause, plus agreement to the terms of deconsolidation.

Tax directors

Document operational and strategic changes since the original election, not merely the tax result of filing separately.

Accountants and tax professionals

Plan for deferred items and net operating-loss allocation. The ruling required an allocation under Rule 12C-1.013(15)(g)1. to accompany the separate returns for the specified period.

Common questions

Q: Did the Department permit the group to stop consolidated filing?
A: Yes.

Q: Was a tax-law change required to establish good cause?
A: No. The rule allowed consideration of changed business circumstances even when they did not affect income-tax liability.

Q: Was permission automatic once circumstances changed?
A: No. It was granted subject to five conditions.

Q: Did the ruling address net operating-loss carryovers?
A: Yes. It required an allocation to be attached to the specified separate returns.

Citations and references

• Fla. Stat. §§ 220.131 and 213.22
• Fla. Admin. Code rr. 12C-1.013(15)(g)1. and 12C-1.0131(3)(b)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 15C1-006

Original ruling text

Executive
Director
Marshall Stranburg

QUESTION: MAY A PARENT COMPANY BE GRANTED PERMISSION TO CEASE
FILING FLORIDA CONSOLIDATED TAX RETURNS BASED UPON CHANGES IN
BUSINESS CIRCUMSTANCES?
ANSWER: THE PARENT COMPANY WAS GRANTED PERMISSION TO CEASE FILING
FLORIDA CONSOLIDATED TAX RETURNS BASED ON PROVISIONS OF THE F. A. C.
WHICH ADDRESS CHANGES IN BUSINESS CIRCUMSTANCES.
August 10, 2015
Re:

Technical Assistance Advisement 15C1-006
Request for Authority to Discontinue Consolidated Filing
Section 220.131, F.S.
Rule 12C-1.0131(3), F.A.C.
XXXX (“Taxpayer”)
FEIN: XXXX

Dear XXXX:
This is in response to your request dated XXXX, for a Technical Assistance Advisement
(“TAA”) pursuant to s. 213.22, F.S., and Rule Chapter 12-11, F.A.C., regarding permission to
discontinue filing consolidated corporate income tax returns. An examination of your letter has
established that you have complied with the statutory and regulatory requirements for issuance of
a TAA. Therefore, the Department is hereby granting your request for a TAA.
FACTS SUPPLIED BY TAXPAYER
Taxpayer was created as the result of a joint venture between XXXX and XXXX. On XXXX,
Taxpayer was spun off and became a new publicly traded company, headquartered in XXXX.
Taxpayer currently files as part of a consolidated group for both federal and Florida purposes,
and has been filing as part of a consolidated group since XXXX.
Taxpayer was initially established as an XXXX company that serviced XXXX and is currently
the XXXX largest XXXX company in the United States, based on revenues and customer
XXXX under contract. As part of the spin off agreement, Taxpayer entered into a XXXX
Agreement with XXXX, (“XXXX”), a subsidiary of XXXX, one of Taxpayer’s former XX
percent shareholders. Under the agreement, Taxpayer was required to purchase at least XXXX
Child Support – Ann Coffin, Director  General Tax Administration – Maria Johnson, Director
Property Tax Oversight – Dr. Maurice Gogarty, Director  Information Services – Damu Kuttikrishnan, Director

http://dor.myflorida.com/dor/
Florida Department of Revenue
Tallahassee, Florida 32399-0100

Technical Assistance Advisement
Page 2
from XXXX, and to participate in XXXX program. Even though Taxpayer one of the largest
XXXX in the United States, it was required to purchase all of its XXXX (“XXXX”). Based on
this agreement, Taxpayer was unable to achieve the cost efficiencies it might otherwise have
realized, if it had been able to purchase XXXX from the XXXX manufacturers and providers.
The agreement with XXXX was set to expire in XXXX, but Taxpayer renegotiated the contract
in early XXXX. After Taxpayer renegotiated the contract with XXXX, Taxpayer gained
substantial flexibility which allowed it to purchase XXXX from other manufacturers in
percentages that increased by XX percent each year, beginning with XX percent from XXXX, up
to XX percent from XXXX.
At the time the contract was renegotiated, Taxpayer began using a XXXX process to procure
XXXX. Taxpayer initially had agreements with more than XXXX manufacturers for the first
time, in XXXX. The ability to negotiate XXXX allowed Taxpayer to achieve greater
efficiencies and profitability than had existed before.1
With its greater purchasing flexibility, Taxpayer was also able to expand its procurement
function. The team now consists of XXXX. This team is primarily responsible for contract
negotiation, identifying pricing trends that may impact buying and inventory decisions, and
managing the XXXX programs associated with each supplier contract.
As a result of the change to Taxpayer’s supply chain, it became necessary for Taxpayer to
contract with a XXXX company to warehouse and distribute a portion of its inventory. This
function had been previously performed by XXXX. The third party XXXX was put in place
effective XXXX and is expected to grow significantly of the next XXXX years, considering the
expected number of XXXX. Taxpayer also expects to continue to expand its XXXX.
At the time of the spin off, in XXXX, Taxpayer also entered into an XXXX agreement (XXXX)
with XXXX (“XXXX”), a wholly owned subsidiary of XXXX, Taxpayer’s other XX percent
shareholder. Under the XXX agreements with XXXX received certain XXXX and support
related to XXXX, as well as corporate administrative services, related to payroll and employee
benefits, human resources, risk management, treasury, tax, accounting and financial reporting
services. These agreements were set to expire on XXXX, but were extended through XXXX.
During XXXX, and after the expiration of the agreements, Taxpayer began to administer these
functions itself, or sourced them through third parties it XXXX. Additionally, in XXXX,
Taxpayer lost its two largest XXXX, which accounted for roughly XX percent of its annual
revenue in XXXX. In response, Taxpayer took steps to expand its XXXX business, and to
diversify its product offerings and customer base through acquisitions and XXXX.
Taxpayer expects to expand through acquisitions of at least XXXX, and to diversify the products
and services it offers its customers by expanding its product line into the area of XXXX.

1

In XXXX, the taxpayer achieved cost savings of approximately XXXX, or XXXX percent of its previous costs
under the original contract, as compared to XXXX.

Technical Assistance Advisement
Page 3
Taxpayer also plans to expand its XXXX that assists Taxpayer’s customers in managing and
pricing their XXXX.
In addition, Taxpayer has completed several acquisitions which are projected to add an
additional XXXX. Taxpayer’s diversification through acquisition has already resulted in an
increase of XXXX, up from XXXX (an increase of approximately XX percent).
ISSUE
Whether Taxpayer has established sufficient reasonable cause for the Executive Director to
permit it and its subsidiaries to stop filing consolidated Florida corporate income tax returns?
LAW
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.

(2) 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.

Technical Assistance Advisement
Page 4
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., provides:
(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 has a substantial
   adverse effect on the consolidated tax liability of the 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.

Technical Assistance Advisement
Page 5
ANALYSIS
Taxpayer 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."2 Taxpayer contends that the business focus of the affiliated group has changed
significantly since XXXX, the year in which Taxpayer made its initial consolidated filing
election.
Since its initial election, Taxpayer has experienced substantial changes in the way that it
conducts its business. The change to Taxpayer’s supply chain has allowed it to achieve cost
efficiencies and control over how it XXXX, resulting in significant cost savings that did not exist
previously.
Taxpayer has also experienced significant changes to its administrative functions. Taxpayer went
from XXXX exclusive agreements XXXX as well as certain corporate administrative services,
such as payroll and employee benefits, human resources, risk management, tax, and accounting,
etc., to Taxpayer either developing these functions within the company or sourcing them through
relationships with third parties XXXX.
In addition to changes in its administrative functions, Taxpayer also experienced a substantial
change in its XXXX, which accounted for approximately XX percent of Taxpayer’s annual
revenue in XXXX. This incident prompted Taxpayer to take significant steps not only to change
its business strategy by continuing to grow its XXXX business but also to diversify its product
offerings and customer base. Taxpayer’s recent acquisitions have allowed it to expand its XXXX
business as well as gain entry into the growing XXXX market.
Since completing several other acquisitions, in addition to the acquisitions listed above,
Taxpayer has increased XXXX services revenue, from XXXX, by approximately XX percent.
Furthermore, Taxpayer has continued to evolve into a company that develops solutions for its
customers, namely through its XXXX.
The information provided by Taxpayer shows major growth and change in its lines of business
and its declining reliance on its XXXX for goods and services. Since Taxpayer made its initial
consolidated filing election in XXXX, its acquisition activities and its expanded product lines,
have grown exponentially between XXXX. As a result, Taxpayer’s overall business focus, along
with its substantial growth, taken together, is a sufficient basis for granting the taxpayer’s request
for deconsolidation.

2

The taxpayer estimates that the net operating loss carryover utilized for Florida corporate income tax, for the
XXXX tax year, on a separate return basis will be approximately XXXX it would have been on a consolidated basis.

Technical Assistance Advisement
Page 6
CONCLUSION
Based on the following five conditions, the Department grants Taxpayer permission to
discontinue filing consolidated corporate income tax returns beginning with tax year ended
XXXX:

1. That the deconsolidation is effective for the year ending on XXXX.
2. That Taxpayer has no realized but unrecognized income or expense items that may be
   recognized at a later date.
3. That Taxpayer group does not become part of a consolidated Florida corporate income
   tax return prior to the tax year ending XXXX.
4. That any deferred gains which are realized for Federal tax purposes, but which have not
   yet been recognized, are required to be reported in total, on the income tax returns filed
   by the taxpayers, for the period ending XXXX.
5. That an allocation of the net operating loss carryover in accordance with Rule 12C1.013(15)(g)1., F.A.C., be attached to the returns filed by the taxpayers for the period
   ending XXXX.
   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 predicated 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 documents are public records
   under Chapter 119, F.S., which are subject to disclosure to the public under the conditions of s.
   213.22, F.S. Your name, address, and any other details, which might lead to identification of the
   taxpayer, must be deleted before disclosure. In an effort to protect the confidentiality of such
   information, we request you provide the undersigned with an edited copy of your request for
   Technical Assistance Advisement, backup material and response within fifteen days of the date
   of this advisement.
   Sincerely,

Suzanne C. Paul
Tax Law Specialist
Technical Assistance and Dispute Resolution
(850) 717-6794
SCP/
Control No.: 194951