Florida Concludes that Consolidated Group Ceases to Exist Upon Acquisition

October 28, 2016

Consolidated groups may be required to deconsolidate and file separate returns under certain circumstances, including transactions such as acquisitions and restructurings.

By Alissa Graffius, SALT senior associate

State may permit or require taxpayers to file using one or more of the following methodologies: separate returns, combined (unitary) returns, and/or consolidated returns. The rules for when a particular filing methodology is permitted or required and how tax is computed may differ by state. In addition, a transaction may automatically require a taxpayer or group of taxpayers to change its current filing method to a different one. Recently, Florida issued a Technical Assistance Advisement(“TAA”) in which it ruled that a taxpayer and its affiliated group must cease filing a consolidated return on the date that the taxpayer was acquired by another corporation. [1]

Prior to the acquisition, the taxpayer was the common parent of an affiliated group who had properly elected to file, and did file with its affiliated group, a Florida consolidated income tax return on an annual basis. However, a new company acquired 100 percent of the taxpayer’s stock, effectively making the taxpayer a wholly-owned subsidiary of the new company. The new company and its affiliated group members filed a federal consolidated return, but each member had consistently filed separate Florida income tax returns. [2] Thus, the question arose as to whether or not the taxpayer and its affiliated group would continue filing a consolidated income tax return or if it should deconsolidate, with each member determining whether it has Florida income tax nexus and therefore must file a separate Florida income tax return.

In Florida, the parent of an affiliated group may elect to file a consolidated return if the parent has Florida income tax nexus, all subsidiary members of the affiliated group (whether or not each has nexus for Florida income tax purposes on a standalone basis) consent to the election and the group consists of the same members that file a federal consolidated return. [3] Once a group files a consolidated return, it must continue to do so on an annual basis. However, Florida allows an affiliated group to request permission to deconsolidate or may require deconsolidation under certain circumstances, including changes in the law or other circumstances. [4] Otherwise, Florida follows the Federal Income Tax Regulations regarding whether a group remains in existence for the taxable year. [5] As a general rule, a group remains in existence for a tax year if the common parent remains as the common parent and at least one subsidiary that was affiliated with it remains with the common parent throughout the tax year. [6]

In this case, Florida concluded that on the date of the acquisition, the taxpayer was no longer the common parent of its affiliated group, and therefore, the affiliated group ceased to exist. The taxpayer and its subsidiaries became bound under its new parent’s filing methodology, which was separate returns. Thus, Florida required the taxpayer to file a short year consolidated income tax return for the period ending on the date of the acquisition and to immediately recognize for that short taxable year all deferred gains (including intercompany deferrals). Going forward, each member of the group must file on a separate company basis if it has Florida income tax nexus.

As this TAA demonstrates, taxpayers must consider the effects of any restructuring, acquisition or other transaction on its current filing method and the resulting tax consequences. Aprio’s SALT team can assist you with that analysis to make sure that you are fully informed about the state income tax consequences of any transaction that you undertake. We will continue to monitor these and other SALT developments, and we will include any significant updates in future issues of the Aprio SALT Newsletter.

Contact Alissa Graffius, SALT senior associate, at [email protected] or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at [email protected] for more information.

[1] Florida Technical Assistance Advisement 16C1-001 (July 21, 2016).

[2] Only those members of the group with Florida income tax nexus would be required to file.

[3] F.S. 220.131(1).

[4] Rule 12C-1.031 F.A.C.

[5] Id.

[6] Treas. Reg. 1.1502.75-(d)(1); Rev. Rul. 69-163, 1969-1 CB 217.

This article was featured in the October 2016 SALT Newsletter. To view the newsletter, click here.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.