J. L. MALONE AND ASSOCIATES, INC. )
vs. ) CASE NO. 76-648
Respondent. )
A hearing was held in the above-captioned matter, after due notice to the parties, at Tallahassee, Florida, on June 16, 1976, before the undersigned Hearing Officer.
For Petitioner: James R. English, Esquire For Respondent: E. Wilson Crump, II, Esquire
Petitioners' liability for corporate income tax deficiency under Chapter 220, Florida Statutes.
Petitioner is a Georgia Corporation doing business as a heavy electrical contractor in Georgia and eight other states including Florida. In 1972, Petitioner submitted a request to the Department of Revenue that it be allowed to use "separate accounting" as the method for determining the amount of its adjusted federal income that was subject to taxation by the State of Florida under Chapter 220,Florida Statutes. By letter of October 3, 1972, T.H.
Swindal, Respondent's Chief of the Corporation Income Tax Bureau, denied Petitioner's request with the following language:
"The economics of large scale interstate construction operations, as we understand them, necessitate maximum utilization of
a company's resources. At particular times and in a particular locale or with respect to particular types of construction activity contracts may be initially or regularly
bid upon and undertaken which, on an individual contract basis, will be minimally profitable, if at all.
Nevertheless, because these contracts permit cost absorption, continuing use and charge for equipment, trained crews and know-how; permit maximum employment of
the company's capital and credit accomo- dations; permit initial entry into a new field of construction activity or a new locale, these contracts indirectly but significantly add to the profitability of the enterprise as a whole. We recognize too, that separate accounting essentially serves management and that management
must evaluate competitive tax implications.
"Separate accounting" does not, in our view, measure the impact of these cir- cumstances. We are of the opinion that
Florida's three factor formula does measure the impact of these circumstances upon profit and thus provides a fairer Florida tax base." (Complaint, Petitioner's Exhibit 1)
Respondent however, pursuant to a request of Petitioner, permitted the latter to leave its 1972 return as filed, but instructed it to file in the future utilizing the "three-factor" formula. Accordingly, the Petitioner filed its 1973 and 1974 tax returns utilizing the "three-factor" formula" as directed by the Respondent, and paid the appropriate tax due. By letter, dated September 15, 1975, Mr. Swindal informed Petitioner that examination of its returns for the years 1972 thru 1974 had resulted in a net proposed deficiency of
$12,417.60. An accompanying report showed that the primary basis for the deficiency was Respondent's determination that the Florida portion of adjusted federal income for the years 1973 and 1974 should have been increased by the amounts of $87,772.93 and $160,117.83, respectively, based on a "separate accounting" computation. The reason given for this determination was stated as follows in the report:
"Florida Statute 214.73(1) says in part that if the apportionment methods of Florida Statute
214.71 and 214.72 do not fairly represent the extent of a taxpayer's base attributable to this state, the department may require separate accounting.
The department has determined the taxpayer should use separate accounting in accordance with the above-mentioned, statute." (Complaint and exhibits thereto)
Respondent had not notified Petitioner between 1972 and 1975 of its apparent change in position with respect to the required method of accounting. At a conference held on February 19, 1976, between Petitioner's representatives and Mr. William T. Lutschak who represented the Respondent, Petitioner protested the asserted deficiency and requested that the Respondent adhere to its former determination that the "three-factor method" be applied in computing the tax. Petitioner's protest was denied orally at the conference and such denial w-s
confirmed by Mr. Swindal's letter of February 24, 1976, as follows in pertinent part:
"Careful analysis of the taxpayer's Florida activity and the financial results of that activity clearly demonstrate that the amount of income set forth in the auditor's report for the years at issue are attributable to taxpayer's Florida business and that F.S.
214.73(1), rather than F.S. 214.71, fairly represents the extent of the taxpayer's tax base attributable to this state." (Comp. & Exh. thereto)
Respondent's auditor of Petitioner's 1973 and 1974 tax returns found nothing unusual concerning the latter's business operations during the above tax periods and is of the opinion that based on formulary accounting Petitioner's returns "fulfill the letter of the law". He also acknowledged that Petitioner met the criteria of a "unitary business". He testified that he was unable to determine the amount of property used by Petitioner on its various jobs in and out of Florida while at the audit site at Petitioner's home office in Alabama and that without such information it would be impossible to determine Petitioner's tax liability under the "three-factor method" because property is one of the factors. The auditor, after making a request of Petitioner for such figures during his audit, which did not produce immediate results, did not pursue the matter because he "had to go back to Tallahassee". In fact, such information was available in Petitioner's records.
Respondent changed its policy with respect to the method of accounting required of Petitioner after consideration of a textbook on the concept of separate accounting and a resulting determination that the contracting business in general is a unique industry warranting special tax treatment. (Testimony of Harnden, Puckett, Malone, Exhibit 1, Pleadings).
The alleged deficiency of $12,417.60 is correctly computed and properly due and owing if "separate accounting" is validly required with respect to Petitioner's tax returns. (Stipulation).
CONCLUSIONS OF LAW
Respondent asserts a tax deficiency against Petitioner under Chapter 220, Florida Statutes.
The legislative intent in requiring a corporate income tax was to subject corporations and other entities to taxation for the privilege of conducting business, deriving income, or existing within the State (Section 220.02(1) ). The general effect of the statute was to impose a tax measured by net income at the rate of 5 percent of apportioned adjusted federal income exceeding the amount of $5,000.00 (Section 220.11). Section 220.12(1) defines net income' as follows:
"(1) For purposes of this code, a taxpayer's net income for a taxable year which commences on or after January 1, 1972, shall be that share of its adjusted federal income for such year which is apportioned to this state under
s. 220.15, less the exemption allowed by s. 220.14."
Section 220.15, in turn, provides that adjusted federal income shall be apportioned in accordance with part IV of Chapter 214 and, in subsection (4), modifies the method of arriving at the "three-factor apportionment fraction" based on property, payroll and sales prescribed in Section 214.71. Section
states in part as follows:
"214.71 Apportionment; general method. - Except as otherwise provided in ss. 214.72 - and 214.73, the base upon which any tax made applicable to this chapter shall be apportioned shall be determined by multiplying same by a fraction the numerator of which is the sum
of the property factor, the payroll factor, and the sales factor and the denominator of which
is 3. In the event any of the factors described in subsections (1), (2), or (3) has a denominator which is zero or is determined by the department- to be insignificant, the denominator of the appor-
tionment fraction shall be reduced by the number of such factors
Section 214.72 provides apportionment methods for special industries, which are insurance and transportation companies. Section 214.73 provides other methods of apportionment in certain cases, as follow:
"214.73 Apportionment; other methods. - If the apportionment methods of ss. 214.71 and
do not fairly represent the extent
of a taxpayer's tax base attributable to this state, the taxpayer may petition for, or the department may require, in respect to all or any part of the taxpayer's tax base, if reason- able:
Separate accounting;
The exclusion of any one or more factors;
The inclusion of one or more additional factors which will fairly represent the taxpayer's tax base attributable to this state; or
The employment of any other method which will provide an equitable apportionment."
The above statutory provisions are implemented by the following pertinent regulation issued by the Department of Revenue and contained in the Florida Administrative Code:
12C-1.15 Apportionment of Adjusted Federal Income.
(4) General Method
(a) Taxpayers who have income from sources within and without Florida are taxable upon the adjusted federal income apportioned to Florida in accordance with Part IV of Chapter 214, F.S.
Where the Florida activities are a part of
- a unitary business carried on within and without
Florida, the portion of the taxpayer's income subject to tax in Florida will generally be determined by a three-factor formula of property, payroll and sales.
The activities of the taxpayer will generally be considered a unitary business if the segments
under consideration are integrated with, dependent upon, or contribute to each other and the operations of the taxpayer as a whole, although the facts of each case will be the major determinant. ...
In all cases where the business is unitary,
some type of formula apportionment will generally be required, not separate accounting. ...
(6) Other Methods of Apportionment: If Section 214.73, F.S., does not fairly represent the extent of a taxpayer's tax base attributable to this state, the taxpayer may petition for, or the Department may require, in respect to all or any part of the taxpayer's tax base, if reasonable:
Separate accounting;
The exclusion of any one or more of the factors;
The inclusion of one or more additional factors which will fairly represent the taxpayer's business activity in this state; or
The employment of any other method to effectuate an equitable apportionment of the taxpayer' s income.
Section 214.73 permits a departure from
the apportionment methods of Sections 214.71 and 214.72, only in limited and specific cases. - where unusual fact situations (which ordinarily will be unique and nonrecurring) produce incongruous results under the apportionment provisions contained in Sections 214.71 and
214.72 (Emphasis supplied).
It thus can be seen that the statutory scheme is to usually require application of the "three-factor" method in apportioning adjusted federal income to arrive at a Florida tax base. Alternate methods of apportionment are authorized in the discretion of the Respondent under Section 214.73, including separate accounting, if the three-factor method does not fairly represent the extent of a taxpayer's tax base attributable to Florida, if such other method is reasonable. That the "three-factor" method is the norm and preferred is emphasized in Rule 12C-1.15(4)(a) which states if the Florida activities are a part of a unitary business, the portion of the taxpayer's income subject to tax in Florida will generally be determined by the three-factor formula of property, payroll, and sales.
There is no dispute that Petitioner's Florida activities are a part of a unitary business as defined in the stated rule. Subsection 6 of the Rule sharply restricts the application of other methods of apportionment to limited and specific cases where unusual fact situations which ordinarily will be unique and nonrecurring produce incongruous results under the normal method.
case by reason of the fact that it would more accurately represent the extent of the Florida tax base for 1973 and 1974. It attempts to buttress this argument by showing simply that Petitioner's Florida tax base for those years under separate accounting is substantially higher than what it would be under the three-factor method. Such an approach falls far short of establishing an "unusual fact situation" that is "unique and nonrecurring" and that produces "incongruous" results under the normal three-factor formula. Certainly, there was no showing that anything unusual concerning the business operations of Petitioner occurred in 1973 and 1974 as compared to 1972 that would justify Respondent's departure from its previously imposed requirement that Petitioner utilize the three-factor formula as set forth in its letter of October 3, 1972. One is forced to conclude that Respondent's policy change' was brought about by a decision to maximize tax revenue by requiring whatever method would produce that result. It may well be that the business activities of the construction industry in general lend themselves to separate accounting procedures in order to reach a more accurate tax base. If this is true, however, either the statute should be amended to include the industry within the special provisions of Section 214.72, or the restrictive wording of Rule 12C-1.15 should be deleted or reviled. Its present form does not permit the singling out of an entire industry or a particular taxpayer within such industry for unusual treatment without clear justification in each specific case. Here Respondent has not shown such justification and it is considered that under the circumstances, the proposed tax assessment would represent an abuse of discretion.
That Petitioner be relieved from payment of the proposed assessment based on any tax deficiency produced by the requirement of separate accounting under Section 214.73, Florida Statutes.
DONE and ENTERED 21st day of July, 1976, in Tallahassee, Florida.
THOMAS C. OLDHAM
Division of Administrative Hearings Room 530, Carlton Building Tallahassee, Florida 32304
E. Wilson Crump, II, Esquire Assistant Attorney General Department of Legal Affairs Tax Division
James R. English, Esquire HENRY & BUCHANAN, P.A.
P.O. Drawer 1049 Tallahassee, Florida 32302
