Did the parent company show reasonable cause to stop filing consolidated Florida corporate income tax returns?

Plain-English summary

The Department permitted the parent company to stop filing consolidated Florida corporate income tax returns.

Florida generally requires a group that elects consolidated filing to continue doing so unless the Department consents to separate returns. Here, the company's operating businesses, service offerings, and revenue distribution had changed dramatically since the original election, including an exit from and later reentry into a materially different business. The Department found those changes, together with substantial growth, established reasonable cause.

Permission was subject to four conditions: deconsolidation took effect in a redacted tax year; no intercompany unrealized, unrecognized, or deferred items could disappear from separate returns; the group could not rejoin a Florida consolidated return before a redacted year; and specified deferred federal gains had to be fully reported in the identified transition return.

What this means for you

A consolidated election is not freely revocable. The taxpayer needed Department approval and a substantial, documented change in business—not merely a preference for separate filing.

Common questions

Was reasonable cause established? Yes.

What supported the request? Major shifts in business focus, operating activities, services, growth, and revenue mix since the original election.

Could the group immediately elect consolidation again? No. The ruling imposed a waiting period, but the public copy redacts the ending year.

What happened to deferred items? The conditions prevented unrecognized intercompany items from escaping taxation and required identified deferred gains to be reported in the transition year.

Citations and references

• Fla. Stat. § 220.131(1) and (3).
• Fla. Admin. Code r. 12C-1.0131(3).

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 23C1-003

Original ruling text

Florida Department of Revenue Jim Zingale

EPARTMENT OF REVENUE

Technical Assistance and Dispute Resolution Executive Director
[—)
FLORIDA
5050 West Tennessee Street, Tallahassee, FL 32399 floridarevenue.com
Question: Whether Taxpayer has established sufficient reasonable cause for the Executive
Director to permit it to stop filing consolidated corporate income tax returns
beginning with the tax year ending im .
Answer: Taxpayer has established sufficient reasonable cause for the Executive Director to
grant Taxpayer permission to cease filing consolidated Florida corporate income tax
returns.

June 5, 2023

Via email to:

Re: Technical Assistance Advisement — TAA #: 23C1-003
Corporate Income Tax — Consolidated Criteria
ES (7 2xPayer”)

Section 220.131(1) and (3), Florida Statutes (F.S.)
Rule 12C- 1.0131(3), Florida Administrative Code (F.A.C.)

FC IN:
BPH:

This is in response to your letter dated, NN, requesting this Department’s issuance of a
Technical Assistance Advisement (TAA) pursuant to Section (s.) 213.22, F.S., and Rule Chapter 12-11
F.A.C., regarding the matter discussed below. Your request has been carefully examined, and the
Department finds it to be in compliance with the requisite criteria set forth in Chapter 12-11, F.A.C.
This response to your request constitutes a TAA and is issued to you under the authority of s. 213.22,
F.S.

Technical Assistance Advisement
June 5, 2023
Page 2

ISSUE PRESENTED

Whether Taxpayer has established sufficient reasonable cause for the Executive Director to permit it
to stop filing consolidated corporate income tax returns beginning with the tax year ending

FACTS SUPPLIED BY TAXPAYER

Taxpayer — Parent Company

SS Ll A MS. T0°%2y, Taxpayer operates
through two wholly-owned subsidiaries, i: ( i’ i Si.
SS SS SS Se
es

Taxpayer’s records in Florida date back to jj. Taxpayer elected to file a consolidated Florida return

prior to Jj and

the records available, Taxpayer’s nexus arose from the direct ownership of the building containing
’s headquarters located in Florida. Based on the available facts on or about the time

of the consolidation election, Taxpayer’s J of business included

In J, Taxpayer exited active operations in the MM industry as a result of its sale of
BE . At the time of the disposition of NM, there was no plan by Taxpayer to actively

On NN, Taxpayer acquired the remaining Iggy interest in i as
ee. ti! a Taxpayer held aj passive investment interest in amy,

Therefore, Taxpayer did not directly operate in the MM industry at all between and early
BB. Additionally, Taxpayer’s re-entry into active operations in the J industry was markedly

different, i TS eS GS GS GS el
a.

Technical Assistance Advisement
June 5, 2023

Page 3

while the

In, the I segment comprised approximatel
BM Segment accounted for

As of the end J, the J segment now contributes se the

segment contributes approximately

this trend is projected to continue in Hi.

Technical Assistance Advisement
June 5, 2023
Page 4

Today, Taxpayer is a substantially different company than it was when the initial Florida consolidated
election was made. Taxpayer exited the J business In ,
Taxpayer reentered tha industry with the acquisition of

Technical Assistance Advisement
June 5, 2023
Page 5

Taxpayer's MM and Taxpayer invested heavily in J business.

However, as described in more detail below, Taxpayer now primarily from the
GE =Dusiness and will continue to do so for the foreseeable future.

In IE MEN operated through more thar Jy [lll
approximately Jy i . GM services were available to more than
HM oof the U.S. population and yj of the population. J also had licensed

The segment has changed significantly since the initial Florida consolidated election.

Pe
Specifically, (NNN has been rapidly acquiring i i
SS ee eS
ES SS

. Taxpayer has the intent to continue to acquire

In addition to the acquisitions, i is constantly expanding xy. | a,
entered into a new line of business by providing NM services. These ay
services now account for more than ij i] EM and constitute a
significant growth vehicle for the company. This expansion has significantly diversified the yay
service offerings. NNN services accounted for only iy I ED and
increased to [jy I GER. °v Hi. EE services accounted yy I
and has now JS SS SS

generated in J, on or about the timeframe when the Florida consolidated election was made).

The addition of MM services has resulted in a monumental change to the aay

business.

HE 2s also secured an exclusive contract with a to provide contract

Technical Assistance Advisement
June 5, 2023
Page 6

| | Business

In contrast, the business remains largely unchanged from an operational perspective. Although
the exact percentages of the various services based on revenue has changed, mainly provides
the same services as it did at the time of the initial Florida consolidated election — gy and ay

The J segment is currently the portion of Taxpayer’s business with significant Florida operations.
However, | | was not part of the Taxpayer group at the time of the initial Florida consolidated
election.

Further, the MM industry as a whole has changed drastically in the past few years. Specifically,

changes stemming from the Ill
ee
I. ciscussed below, the [IM segment is grappling
with challenges specific to the . These challenges have put increased pressure on

the EE segment as a result of declining revenue, coupled with increased costs.

Specifically, the J segment of the J industry is experiencing

First, the segment has been particularly sensitive to the

Technical Assistance Advisement
June 5, 2023
Page 7

Although Jj drives a substantial portion of Taxpayer’s

HB, in the last few years J has gone from accounting for ay i]
ee Gee «is is contrasted with growth has experienced in the last

few years where J has gone from accounting for x il]
Bl. hus, currently drives more of Taxpayer’s overall growth
and while at the same time has very minimal nexus creating activity with Florida. Additionally, aay

operates in a highly regulated industry, with significant recent changes to the industry, while gy
WE industry is less regulated. In particular there are three challenges to the Jj business that

the EE business is not faced with: x. [is
ES ee R.A rec of these
constraints put pressure on the MMI revenue streams and which account for a material
es ee
a Ss ee es ee ee
RS es es ee
es es RS ()
es ee

as a result of bad actors in this marketplace. These stark differences in
the J and J industries have caused Taxpayer to focus and invest more heavily in the
BE segment, including but not limited to the recent major acquisitions and expansions into
new services relative to the J business.

Technical Assistance Advisement
June 5, 2023
Page 8

Although J continues to generate the majority of Taxpayer’s total revenue, J contribution
continues to decrease and JJ contribution to total [ijcontinues to increase. For

example, in, EM generated approximately However,
as ee HE Contribution to

Summary of Florida Taxpayers

For taxable years beginning on or after the following legal entities are projected to
have nexus with the state of Florida and would be required to file Florida corporate income tax
returns on a separate company basis if this request is granted:

Again, the above illustrates the entities within the current Florida consolidated return that would
have separate company nexus with Florida. The current Florida consolidated return has an

Technical Assistance Advisement
June 5, 2023
Page 9

apportionment percentage of approximately Jj, which is much greater than any portion of the
GE «Dusiness would have on a standalone basis.

Please note, Taxpayer and subsidiaries will continue to file a consolidated federal income tax
return. Taxpayer estimates that its Florida corporate income tax liability for the tax yea

ona separate return DasIs.

TAXPAYER POSITION:

In summary, the Department should grant this request to discontinue filing consolidated
returns because there has been a significant change in circumstances since Taxpayer initially
elected to file consolidated. These changes include:

e Taxpayer exited the iy Hil] EE via the divestitures of its xy
and businesses.
with the acquisition iy

e In, Taxpayer reentered the
a of a . i cdiately becanc i Criver
and Taxpayer invested heavily in MI business.

e However, Taxpayer now J derives its J from the J business and will

continue to do so for the foreseeable future.
e This change in the overall business operations has resulted in a realignment of aaa

ee 22etween the operating segments, primarily due to the following:

o Diversification of MJ service offerings, specifically, with respect to the

a t: services business by a, which went
from i a es ne

0 Significant acquisitions of am .

o Downward pressure on the i business, x iy
ae es ee
ee

© The (NNN segment now contributes I [ii
ES ES a

Statement

1. Taxpayer and its subsidiaries are not currently under audit with the state of Florida.

2. The issue is not currently under consideration by the Department.

3. The issue is not pending litigation involving Taxpayer and subsidiaries or a person who is
   party to the transaction.

4. Taxpayer and its subsidiaries have no intercompany unrealized or unrecognized items or
   deferred income or expenses that would normally be reported on a consolidated basis but
   may not be included in separately filed corporate income tax returns.

Technical Assistance Advisement
June 5, 2023
Page 10

LAW AND REGULATIONS

Section 220.131, F.S., provides,

(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.

2K KK KK

(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.

• KK

Rule 12C-1.0131(3)(a), F.A.C, provides that,

1.

2.

A group which filed, or was required to file, a consolidated return for the immediately
preceding taxable year is required to file a consolidated return for the taxable year unless it
has permission to discontinue filing consolidated returns under paragraph (b) or (c) of this
subsection; or as long as a federal consolidated return is filed.

The requirement set forth in section 220.131(1), F.S., that the parent company of an affiliated
group must be subject to the Florida Income Tax Code is a condition that is necessary for an
affiliated group to make an election to file a Florida consolidated return. There is no
requirement in section 220.131, F.S., that the parent be subject to the Florida Income Tax
Code in each subsequent year. Therefore, the affiliated group may not break its consolidated

Technical Assistance Advisement
June 5, 2023
Page 11

election because the parent company no longer has nexus with Florida.
Rule 12C-1.0131(3)(b), F.A.C., provides, in part,

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 anendments 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;

Rule 12C-1.0131(3)(d), F.A.C., provides,

(d) If a group has permission under paragraph (b) or (c) of this subsection to discontinue filing
consolidated returns for any taxable year and such group wishes to exercise such election,
then the common parent must file a separate return for such year on or before the last day
prescribed by law including extensions of time for the filing of the consolidated return for
such year.

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."?
Taxpayer contends that the business nature of the affiliated group has changed significantly since its
fiscal year end J, on or about the year for which Taxpayer made its consolidated filing election.

Se

Technical Assistance Advisement
June 5, 2023
Page 12

The information provided by Taxpayer demonstrates that, since prior to J, on or about the time
when Taxpayer began to file its Florida corporate income tax return on a consolidated basis, there
have been significant changes to Taxpayer’s business.

Taxpayer’s overall shift in business focus, to include operating businesses, service offerings, and
overall revenue distribution, have changed dramatically since the initial Florida consolidated election
was made. This shift, along with its substantial growth, taken together, are a sufficient basis for
granting Taxpayer's request for deconsolidation.

CONCLUSION

Taxpayer has established sufficient reasonable cause for the Executive Director to grant Taxpayer
permission to cease filing consolidated Florida corporate income tax returns.

Based on the following four conditions, the Department grants permission to Taxpayer to discontinue
filing consolidated corporate income tax returns beginning with the tax year ending aay

a:

1. That the deconsolidation is effective for the tax year ending im .

2. Taxpayer and its subsidiaries have no intercompany unrealized or unrecognized items or
   deferred income or expenses that would normally be reported on a consolidated basis
   but may not be included in separately filed corporate income tax returns.

3. That Taxpayer's group does not become part of a consolidated Florida corporate income

tax return prior to the tax year ending ms .

4. That any deferred gains which are realized for federal purposes, but which have not yet
   been recognized, must be reported in total, on the income tax return filed by Taxpayer's

group for tax year ending my .

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 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 ten (10) days of the date of this letter.

Technical Assistance Advisement
June 5, 2023
Page 13

If you have any further questions regarding this matter and wish to discuss them, you may
contact me directly at 850-717-6326.

Kind Regards,

Denise L. Smith, MPM
Tax Law Specialist
Technical Assistance & Dispute Resolution

cc:

Technical Assistance Advisement
June 5, 2023
Page 14

Record ID # 7000 949287

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Notification number: 7000949287
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Tax type: Corporate Income Tax
Correspondence type: Technical Assistance

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