on November 30, 1977, in Room 103 of the Collins Building, Tallahassee, Florida. The parties had previously entered into a stipulation of facts and, at the hearing, presented oral argument on the legal issues involved.
For Petitioner: Gerald T. Hart
For Respondent: E. Wilson Crump, II
Assistant Attorney General Department of Legal Affairs Post Office Box 5377 Tallahassee, Florida 32301
The issue in this proceeding is whether the Florida Corporate Income Tax Code subjects to taxation items realized for federal income tax purposes prior to the effective date of the Code but recognized for federal purposes after the effective date of the Florida Code.
In a joint stipulation filed with the Hearing Officer, the parties stipulated to the relevant facts of this proceeding. Findings (1) through (6) listed below are quoted directly from that stipulation of facts.
In 1965 MORRIS TRADING CORPORATION (whose name at that time was Morris Grain Corporation) exchanged certain property used in its trade or business with Continental Grain Company for six thousand seven hundred twenty three (6,723) acres of real estate located in Florida a description of which is attached
hereto and made a part hereof as Exhibit 1 containing a layout of the ranch acreage acquired by MORRIS TRADING CORPORATION from Continental Grain Company, including the nine hundred fifty eight (958) acre parcel sold in the fiscal year ending in 1968, the one thousand (1,000) acre parcel sold in the fiscal year ending in 1969, and the remaining acreage sold in the fiscal year ending in 1973, as well as a small parcel of property retained by the Corporation.
Although MORRIS TRADING CORPORATION realized income for federal tax purposes in 1965 when it exchanged a grain elevator and other property for real estate described on Exhibit 1, the Corporation did not recognize any income for federal tax purposes in 1965 pursuant to Section 1031 of the Internal Revenue Code of 1954 as amended.
The real estate acquired in exchange for the property traded by MORRIS TRADING CORPORATION had a fair market value in 1965 of ONE MILLION SIX HUNDRED THIRTEEN THOUSAND FIVE HUNDRED TWENTY AND NO/100 DOLLARS ($1,613,520.00), or TWO HUNDRED FORTY AND NO/100 DOLLARS ($240.00) per acre.
The tax cost basis of the property given up by MORRIS TRADING CORPORATION in the exchange was TWO HUNDRED SIXTY SEVEN THOUSAND EIGHT HUNDRED THIRTY TWO AND SIXTY SIX/100 DOLLARS ($267,832.66).
MORRIS TRADING CORPORATION paid TWENTY THOUSAND FOUR HUNDRED FIFTY THREE AND FIFTY FIVE/100 DOLLARS ($20,453.55) in cash for the purchase of mineral rights to the four thousand six hundred five (4,605) acres sold during the fiscal year ending in 1973 and there were ONE HUNDRED SIXTY TWO THOUSAND FIVE HUNDRED TWENTY TWO AND FIFTY FIVE/100 DOLLARS ($162,522.55) of costs connected with the sale of the property consisting of commissions of ONE HUNDRED THIRTY THREE THREE HUNDRED AND NO/100 DOLLARS ($133,300.00), attorneys fees of EIGHTEEN THOUSAND AND NO/100 DOLLARS ($18,000.00), and documentary" stamps and miscellaneous expenses of ELEVEN THOU- SAND TWO HUNDRED TWENTY TWO AND FIFTY FIVE/100 DOLLARS ($11,222.55).
MORRIS TRADING CORPORATION sold four thousand six hundred five (4,605) acres-of the property acquired in the exchange in 1965 during its fiscal year ending May 31, 1973, for a gross sales price of TWO MILLION NINE HUNDRED SIXTY ONE THOUSAND EIGHT HUNDRED SEVEN AND NINETY SIX/100 DOLLARS ($2,961,807.96).
On its Florida corporate income tax return for the fiscal year ending May 31, 1973, Petitioner excluded income from the 1973 sale of the 4,605 acres, although this income was reported as recognized on its federal income tax return. The Respondent, Department of Revenue, issued its proposed deficiency for the 1973 fiscal year assessing Petitioner $121,389.33. This assessment was based upon the gain received by Petitioner for the 1973 transaction, said gain being measured by the difference between the original cost of the property exchanged in 1965 and the adjusted sales price of the property sold in 1973.
The Petitioner filed a protest against the proposed deficiency. An informal conference failed to resolve the matter and the Petitioner thereafter filed its petition for an administrative hearing. On August 4, 1976, the parties entered into a joint motion for stay of proceedings pending the Florida Supreme Court's resolution of the case of Dept. of Revenue v. Leadership Housing, Inc. and Leadership Communities, Inc., 343 So.2d 611 (Fla. 1977). Thereafter, a prehearing conference was held to narrow and define the issues, briefs were filed and a hearing was held to receive oral argument on the legal issues involved.
CONCLUSIONS OF LAW
Recapping in summary form the facts of this case, Petitioner exchanged certain property in 1965. For this exchange, Petitioner realized income for federal income tax purposes in 1965. However, due to the nature of the exchange and pursuant to Section 1031 of the Internal Revenue Code, said income was not recognized for federal tax purposes in 1965, and was not so recognized for federal purposes until the subsequent sale in 1973.
There were originally two issues involved concerning the amount of tax due for Petitioner's fiscal year ending May 31, 1973. Petitioner originally contended that the Department erred in including accruals in value of the property prior to November of 1971 the effective date of the Florida Corporate Income Tax Code. Petitioner now concedes that this issue has been resolved in favor of Respondent by the case of Dept. of Revenue v. Leadership Housing, Inc.
, 343 So.2d 611 (Fla. 1977)
The remaining issue is whether' the gain realized in 1965 for federal income tax purposes, but not recognized prior to the effective date of the Florida Corporate Income Tax Code, is taxable by Florida. It is Petitioner's contention that Florida may only impose a tax upon income realized for federal purposes after the effective date of the Florida Code. Respondent contends that the starting point for Florida taxation is adjusted federal income. F.S. Section 220.12(1). Therefore, reasons Respondent, since none of the statutory adjustments permit a subtraction from reported federal income for amounts previously realized, the amount reported by Petitioner as federal income in 1973 is taxable by Florida. Stated differently, Respondent argues that the amount reported on the federal return is the amount to be taxed by Florida and that such taxation would not be a retroactive tax. In short, the Petitioner is relying upon the realization of income doctrine and the Respondent is relying upon the doctrine of recognition of income.
The parties' contentions on this issue both find some support in the statutory language embodied in Chapter 220, Florida Statutes. It is true that the Florida Code does not contain a specific adjustment for income previously realized, but not recognized, for federal tab purposes. However, the entire Code must be interpreted to give effect to the legislative intent expressly stated in Section 220.02. Subsection (4) of Section 220.02 provides as follows:
It is the intent of the legislature that the tax imposed by this code shall be prospective in effect only. Consistent with this intention end the intent expressed in subsection (3), it is hereby declared to be the intent of the legislature that:
"Income" for purposes of this code, including gains from the sale, exchange, or other disposition of property, shall be deemed to be created for Florida income tax
purposes at such time as said income is realized for federal income tax purposes;
No accretion of value, no accrual of gain and no acquisition of a right to receive or accrue income which has occurred or been generated prior to November 2, 1971, shall be deemed to be "property," or an interest in property, for any purpose under this code; and
All income realized for federal income tax
purposes after November 2, 1971, shall be subject to taxation in full by this state and shall be taxed in the manner and to the extent provided
in this code.
This statutory language contains an explicit statement of legislative intent, consistent with the prior constitutional prohibition against income taxation, that Florida will impose a tax only upon income realized for federal income tax purposes after the effective date of the Florida Code. When interpreting other provisions of the Code, the stated legislative intent must dominate.
The clear language of 220.02(4) indicates that realization is the test for whether or not a transaction is subject to the Florida tax. It would have been a simple matter to add or substitute the word "recognition" had the legislature so intended. To tax the Petitioner on gains federally realized in 1965 would violate the clear mandate of the Florida Code that "the tax imposed by this code shall be prospective in effect only." F.S. Section 220.02(4)
There are three appellate court decisions on the issue of when a taxpayer has income within the meaning of Chapter 220, F.S. The Florida Supreme Court's Leadership Housing case, supra, held in summary that
"Appreciation becomes income only upon
the sale, exchange, or other disposition of the capital asset together with the accretions thereto, and that such realized gain is income in the year of disposition regardless of when it accrued."
343 So.2d 611, 615.
Here, the year of disposition of Petitioner's property exchanged for the Florida real estate was 1965. The amount realized in this exchange is thus income in the year of disposition, 1965, regardless of when it was recognized for federal tax purposes.
Citing the Leadership Housing case, the Second District Court of Appeal specifically held that income realized prior to the effective date of the Florida Code, although not recognized until thereafter, was not taxable in Florida. That Court also specifically rejected the exact arguments proposed by Respondent in this proceeding. Clearwater Federal Savings and Loan Association
v. Dept. of Revenue, 350 So.2d 1134 (Fla. App. 2nd, 1977).
In Dept. of Revenue v. Cone Wagner, Nugent, Johnson and McKeown, P.A.,
349 So.2d 1240 (1977) , the Fourth District Court of Appeal affirmed a decision of the Palm Beach Circuit Court (Civil Action No. 74-3272) holding that Florida may only tax that income realized for federal purposes after the effective date of the Florida Code.
Holding that Florida would follow the federal concept of recognition, the Circuit Court of Leon County ruled in favor of the respondent's position herein in the case of S.R.G. Corporation v. Dept. of Revenue (Case No. 77- 1210). Both the S.R.G. case, and the Clearwater Federal case are currently on appeal.
Pursuaded by the appellate decisions cited above and the specific language embodied as the legislative intent of Chapter 220, F.S., the undersigned Hearing Officer concludes in favor of the Petitioner herein.
