STATE OF FLORIDA
DIVISION OF ADMINISTRATIVE HEARINGS
CLEARWATER FEDERAL SAVINGS AND ) LOAN ASSOCIATION, )
)
Petitioner, )
)
vs. ) CASE NO. 76-871
) DEPARTMENT OF REVENUE OF THE ) STATE OF FLORIDA, )
)
Respondent. )
)
RECOMMENDED ORDER
Pursuant to notice, the Division of Administrative Hearings, by its duly designated Hearing Officer, G. Steven Pfeiffer, held a public hearing in this case on July 22, 1976, in Clearwater, Florida.
APPEARANCES
For Petitioner: David E. Platte
Clearwater, Florida
For Respondent: E. Wilson Crump, II
Tallahassee, Florida
On or about May 7, 1976, the Petitioner, Clearwater Federal Savings and Loan Association, filed a Petition for Administrative Hearing with the Respondent, Florida Department of Revenue. The Petition was forwarded by the Department of Revenue to the Division of Administrative Hearings, and was filed on May 11, 1976. The Petitioner is challenging the Department of Revenue's determination that Petitioner was deficient in its payment of Florida Corporate Income taxes or the years ending December 31, 1972; December 31, 1973; and December 31, 1974. The Petition was received in evidence at the hearing as Hearing Officer's Exhibit 1. Paragraph 9 of the Petition is a statement of the Petitioner's legal position respecting the factual allegations contained in the Petition. On June 1, 1976, the Respondent filed an Answer to the Petition. The Respondent admitted all of the allegations of the Petition except for paragraph
The Answer was received in evidence at the hearing as Hearing Officer's Exhibit 2. The final hearing was scheduled to be conducted on July 22, 1976, by notice dated June 15, 1976.
At the hearing the parties agreed and stipulated that the relevant facts involved in this case are as set out in paragraph 5 of the Petition for Administrative Hearing. Neither party called any witnesses. Hearing Officer's Exhibits 1 and 2, and Petitioner's Exhibit 1 were received into evidence. The Petitioner submitted a Memorandum of Law at the hearing. The Respondent filed a Responsive Memorandum thereafter. The Petitioner has submitted two letters to the undersigned which have been received as additional Post Hearing Memoranda.
FINDINGS OF FACT
The parties agreed at the hearing that there were no issues of fact which remained to be determined. The parties stipulated that the relevant facts are as set out in paragraph 5 of the Petition for Administrative Hearing. The following findings are quoted directly from paragraph 5 of the Petition.
Petitioner is a federally chartered savings and loan association.
Petitioner initially employed the cash receipts and disbursements method of accounting for Federal Income Tax purposes. In a desire to more clearly reflect income, Petitioner applied for and received permission from the Internal Revenue Service allowing Petitioner to change its method of tax accounting from the cash to the accrual method, pursuant to Revenue Procedure 70-27. This change was to commence with the calendar year 1971. Consistent with this accounting method change, all net accrued income as of January 1, 1971, was recorded in its entirety in Petitioner's financial statements as of December 31, 1970.
The total net adjustment required to convert to the accrual method was
$758,911.00. Pursuant to an agreement entered into with the Internal Revenue Service, an annual adjustment of $75,891.00 was required. The annual adjustment spread the effect of the accounting change over a 10-year period, despite the fact that all the income was realized prior to January 1, 1971.
On January 1, 1972, the Florida Income Tax Code became effective.
Petitioner timely filed its 1970 and 1971 Florida Intangible Personal Property Tax Returns. Upon subsequent review of Petitioner's records, it became apparent that the intangible tax had been overpaid and a refund claim was submitted. The refund was issued to Petitioner by the State of Florida during the calendar year 1973 and reported in Petitioner's 1973 Federal Corporate Income Tax Return.
On December 16, 1975, Respondent notified Petitioner that Petitioner was deficient in its payment of Florida Corporate Income Tax in the amount of
$25,386.84. The total deficiency consisted of $3,267.00 for the year ended December 31, 1972; $19,202.00 for the year ended December 31, 1973; and
$2,916.84 for the year ended December 31, 1974.
Included in the alleged total deficiency of $25,386.84 is a tax in the amount of $14,696.70 for the year 1973. This tax is attributable to Petitioner's apportionment of a part of its 1973 income to sources outside of the State of Florida. Petitioner is no longer protesting this deficiency.
On February 9, 1976, Petitioner filed its protest against Respondent's determination that a deficiency in tax existed.
By letter dated March 9, 1976, Respondent denied Petitioner's protest filed on February 9, 1976.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction over the parties to this case, and over the subject matter. Florida Statutes, s. 120.57(1).
Prior to November, 1971, the Florida Constitution contained a prohibition against the levying of any tax upon corporate income. Florida Constitution (1968) Article VII, Section 5; In Re Advisory Opinion to the Governor, 243 So.2d 573 (Fla. 1971). During November, 1971, the voters approved a constitutional amendment which eliminated the prohibition against the corporate income tax. Florida Constitution, Article VII, Section 5. The legislature thereupon adopted a corporate income tax law. Chapter 71-984, Laws of Florida. This law has been codified into Florida Statutes, Chapter 220. The legislature therein stated its intent, in pertinent part, as follows:
Florida Statutes, 220.02
"(3) It is the intent of the legislature that the income tax imposed by this code shall utilize, to the greatest extent possible, concepts of law which have been developed in connection with the income tax laws of the United States, in order to:
Minimize the expenses of the department of revenue and difficulties in administering this code;
Minimize the costs and difficulties of taxpayer compliance; and
Maximize, for both revenue and statistical purposes, the sharing of information between
the state and the federal government.
It is the intent of the Legislature that the tax imposed by this code shall be prospective in
effect only. Consistent with this intention and the intent expressed in subsection (3), it is hereby declared to be the intent of the Legislature that:
'Income' for purposes of this code, in- cluding 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."
A tax equal to 5 percent of a corporate taxpayer's net income is imposed under
s. 220.11. "Net income" is defined as the share of the taxpayer's "adjusted federal income" which is apportioned to the State of Florida less a $5,000 exemption. Florida Statutes, s. 220.12(1). "Adjusted federal income" is defined as taxable income under s. 63 of the Internal Revenue Code. 26 U.S.C.A. s. 63. Provision is made for numerous adjustments to a taxpayer's taxable income; however, none of the adjustments specifically include items of income such as are involved in this case.
The Department of Revenue is seeking to impose the Corporate Income Tax upon two specific items of income. Prior to 1971 the Petitioner had used what is known as a cash method of accounting. Commencing with the calendar year 1971 the Respondent switched to the accrual method. The Respondent was therefore left with a large amount of accrued income which had not been reflected in its Federal income tax returns under the cash method of accounting. Pursuant to an agreement with the Internal Revenue Service the Petitioner was permitted to spread this difference over a ten-year period for Federal income tax purposes. All of the income involved was accrued prior to the effective date of the Constitutional Amendment which removed the prohibition against a corporate income tax. Had the Petitioner been following the accrual method of accounting prior to 1971 the amounts involved would clearly have been received prior to the removal of the prohibition and would not have been subject to the tax.
The second item of income against which the Respondent is seeking to impose corporate income tax liability relates to an intangible tax refund received by the Petitioner during 1973. The Petitioner had overpaid its Florida intangible personal property taxes during 1970 and 1971, and the overpayment was refunded during 1973. For Federal income tax purposes the Petitioner had deducted the amount of the intangible tax paid from its Federal income taxes for the 1970 and 1971 tax years. The refund was reflected in the Petitioner's 1973 Federal income tax return as income under Section 111 of the Internal Revenue Code. 26 U.S.C.A. s. 111. Clearly the refund related to matters which antedate the removal of the constitutional prohibition against the corporate income tax. Had the Petitioner not overpaid its intangible property tax during 1970 and 1971 those amounts could clearly have not been taxable under Florida Statutes, s. 220. The amount was necessarily includable as income for Federal tax purposes because the Petitioner had received a Federal tax benefit during 1970 and 1971. No similar Florida tax benefit had been realized since the Florida Corporate Income Tax was not then in effect.
Nothing in Florida Statutes Chapter 220 specifically permits a corporate taxpayer to deduct from its taxable income items of income which are taxable under the Federal tax system, but which were actually accrued prior to the effective date of the statute. To permit a tax to be imposed against such items of income, however, cannot be squared with the expressed legislative intent that the tax imposed under Chapter 220 should be prospective in effect only. To permit the imposition of a tax against such items of income can also not be squared with the fact that at the time the items of income were accrued a corporate income tax was expressly prohibited under the Florida Constitution.
In Leadership Housing, Inc., and Leadership Communities, Inc. v. Department of Revenue of the State of Florida, Case No. 74-6878, 17th Judicial Circuit, it was held that income attributable to the period prior to November 2, 1971, could not, consistent with the Florida constitution, be subject to taxation under Florida Statutes, s. 220. In Cone, Wagner, Nugent, Johnson, and McKeown, P.A. v. Department of Revenue of the State of Florida, Civil Action No. 74-3272 15th Judicial Circuit (order entered June 17, 1976) the court held that where the taxpayer had changed accounting methods under facts which are virtually identical to the change in accounting methods adopted by the Petitioner herein, the annual adjustment cannot be made subject to the tax imposed under Florida Statutes, s. 220. Both of these Circuit Court decisions are on appeal. At this juncture, they are the only judicial decisions on point, and they provide very persuasive authority contrary to the position being taken by the Department of Revenue.
Petitioner should not be required to include as net income for the purposes of determining its tax liability under Florida Statutes, Chapter 220 the annual adjustment of $75,891.00 per year for the calendar years 1972, 1973, and 1974 which reflect the change in the Petitioner's accounting method.
The Petitioner should not be required to include as net income for the purpose of determining its tax liability under Chapter 220 the intangible personal property tax refund in the amount of $35,246.00 which was received in 1973 as a refund of 1970 and 1971 intangible personal property taxes.
RECOMMENDED ORDER
Based upon the foregoing Findings of Fact and Conclusions of Law, it is, hereby,
RECOMMENDED that a final order be entered as follows:
Holding that the proposed corporate income tax deficiencies for the tax years 1972, 1973, and 1974 issued by the Respondent with respect to an annual adjustment of $75,891.00 for each of the tax years which reflects a change in the Petitioner's accounting methods are invalid.
Holding that the proposed deficiency for the 1973 tax year which relates to a refund of Petitioner's intangible personal property taxes for the years 1970 and 1971 is invalid.
RECOMMENDED this 26th day of October, 1976, in Tallahassee, Florida.
G. STEVEN PFEIFFER, Hearing Officer Division of Administrative Hearings Room 530, Carlton Building Tallahassee, Florida 32304
(904) 488-9675
COPIES FURNISHED:
Wilson Crump, II, Esquire Assistant Attorney General Department of Legal Affairs Tax Division, Northwood Mall Tallahassee, Florida 32303
David E. Platte, Esquire RICHARDS, NODINE, GILKEY, FITE,
MEYER & THOMPSON, P.A.
1253 Park Street
Clearwater, Florida 33516
================================================================= AGENCY FINAL ORDER
=================================================================
STATE OF FLORIDA DEPARTMENT OF REVENUE
CLEARWATER FEDERAL SAVINGS AND LOAN ASSOCIATION,
Petitioner,
vs. CASE NO. 76-871
DEPARTMENT OF REVENUE OF THE STATE OF FLORIDA,
Respondent.
/
FINAL ORDER
On or about May 7, 1976, the Petitioner Clearwater Federal Savings and Loan Association, filed a petition for administrative hearing with the Respondent, Florida Department of Revenue. The petition was forwarded by the Department of Revenue to the Division of Administrative Hearings, and was filed on May 11, 1976. The Petitioner is challenging the Department of Revenue's determination that the Petitioner was deficient in its payment of Florida corporate income taxes for the years ending December 31, 1972; December 31, 1973; and December
31, 1974.
Pursuant to notice the Division of Administrative Hearings, by its dully designated hearing officer, G. Steven Pfeiffer, held a public hearing in this case on July 22, 1976, in Clearwater, Florida. The following appearances were entered:
APPEARANCES
For Petitioner: David E. Platte,
Clearwater, Florida,
For Respondent: E. Wilson Crump, II,
Tallahassee, Florida,
The petition was received in evidence at the hearing as Hearing Officer's Exhibit 1. Paragraph (9) of the petition is a statement of the Petitioner's legal position respecting the factual allegations contained in the petition.
The answer of the Respondent, filed on June 1, 1976, admitted all the allegations of the petition except for Paragraph (9). The answer was received in evidence at the hearing as Hearing Officer's Exhibit 2. At the hearing, the parties agreed and stipulated that the relevant facts involved in the case are as set out in Paragraph (5) of the petition for administrative hearing. Neither party called any witnesses. Hearing Officer's Exhibits 1 and 2 and Petitioner's Exhibit 1 were received into evidence. The Petitioner submitted a Memorandum of Law at the hearing. The Respondent filed a memorandum thereafter. The Petitioner has submitted two letters which have been received as additional post hearing memoranda. On October 26, 1976, the Hearing Officer rendered his
"Findings of Fact, Conclusions of Law, and Recommended Order" On November 4, 1976, the Respondent, through Counsel, filed its "Exceptions to Recommended Order".
FINDINGS OF FACT
The Findings of Fact of the Hearing Officer, as reflected by the pleadings, and as accepted by the Respondent are as follows:
Petitioner is a federally chartered savings and loan association.
Petitioner initially employed the cash receipts and disbursements method of accounting for federal income tax purposes. In a desire to more clearly reflect income, Petitioner applied for and received permission from the Internal Revenue Service allowing Petitioner to change its method of tax accounting from the cash to the accrual method pursuant to Revenue Procedure 70-
This change was to commence with the calendar year ending 1971. Consistent with this accounting method change, all net accrued income as of January 1, 1971, was recorded in its entirety in Petitioner's final statements as of December 31, 1970.
The total net adjustment required to convert to the accrual method was
$758,911.00. Pursuant to an agreement entered into with the Internal Revenue Service, an annual adjustment of $75,891.00 was required. The annual adjustment spread the effect of the accounting change over a ten year period, despite the fact that all the income was realized prior to January 1, 1971.
On January 1, 1972, the Florida income tax code became effective.
Petitioner timely filed its 1970 and 1971 Florida Intangible Personal Property Tax Returns. Upon subsequent review of Petitioner's records, it became apparent that the intangible tax had been overpaid and a refund claim was submitted. The refund was issued Petitioner by the State of Florida during the calendar year 1973 and reported in Petitioner's 1973 Federal Corporate Income Tax Return. On December 16, 1975, Respondent notified Petitioner that Petitioner was deficient in its payment of Florida corporate income tax in the amount of $25,386.84. The total deficiency consisted of $3,267.00 for the year ended December 31, 1972; $19,202.00 for the year ended December 31, 1973; and
$2,916.84 for the year ended December 31, 1974.
Included in the alleged total deficiency of $25,386.84 is a tax in the amount of $14,696.70 for the year 1973. This tax is attributable to Petitioner's apportionment of a part of its 1973 income to sources outside of the State of Florida. Petitioner no longer is protesting this deficiency.
On February 9, 1976, Petitioner filed its protest against Respondent's determination that a deficiency in tax existed.
By letter dated March 9, 1976, Respondent denied Petitioner's protest filed on February 9, 1976.
CONCLUSIONS OF LAW
The Division of Administrative Hearings had jurisdiction over the parties to this cause and over the subject matter. Florida Statutes, Section 120.57(1).
Prior to November 1971, the Florida constitution contained a prohibition against levying of any tax upon corporate income. Florida Constitution (1968) Article VII, Section 5; In re Advisory Opinion To The Governor, 243 So.2d 573 (Fla. 1971). During November, 1971, the voters approved a constitutional amendment which eliminated the prohibition against a corporate income tax. Florida Constitution, Article VII, Section 5. The Legislature then thereupon adopted a corporate income tax law. Chapter 71-984, Laws of Florida. This law has been codified in the Florida Statutes, Chapter 220. The legislature therein stated its intent in pertinent part as follows:
Florida Statutes, Section 220.02
It is the intent of the legislature that the income tax imposed by this code
shall utilize to the greatest extent possible, concepts of law which have been developed
in connection with the income tax laws of the United States, in order to:
Minimize the expenses of the Department of Revenue and difficulties in administering this code;
Minimize the cost and difficulties of taxpayer compliance; and
Maximize, for both revenue and statistical purposes the sharing of information between
the state and federal government.
It is the intent of the legislature that
the tax imposed by this code shall be prospective in effect only. Consistent with this intention and 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 in- come 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."
A tax equal to 5 percent of a corporate taxpayer's net income is imposed under Florida Statutes, Section 220.11. "Net Income" is defined as the share of the taxpayer's "Adjusted Federal Income" which is apportioned to the State of Florida less a $5,000.00 exemption. Florida Statutes, Section 220.12(1). "Adjusted Federal Income" is defined as taxable income under Section 63 of the Internal Revenue Code. 26 U.S.C.A. Sec. 63. Provision as made for numerous
adjustments to a taxpayer's taxable income; however, none of the adjustment specifically include items of income such as are involved in this case.
The Department of Revenue is seeking to impose corporate income tax upon two specific items of income. Prior to 1971 the Petitioner had used what is known as the cash method of accounting. Commencing with the calendar year 1971 the Petitioner switched to the accrual method. The Petitioner was therefore left with a large amount of accrued income which it had not reported in its federal income tax returns under the cash method of accounting. Pursuant to an agreement with the Internal Revenue Service the Petitioner was permitted to spread this difference over a ten year period for federal income tax purposes. All of the income involved was accrued prior to the effective date of the constitutional amendment which removed the prohibition against a corporate income tax. Had the Petitioner been following the accrual method of accounting prior to 1971 the amounts involved clearly would have been reported prior to the removal of the prohibition and would not have been subject to tax.
The second item of income upon which the Respondent is seeking to impose corporate income tax liability relates to an intangible tax refund received by the Petitioner during 1973. The Petitioner had overpaid its Florida intangible personal property taxes during 1970 and 1971, and the overpayment was refunded during 1973. For federal income tax purposes the Petitioner had deducted the amount of the intangible tax paid from its federal income taxes for the 1970 and 1971 tax years. The refund was reflected in the Petitioner's 1973 federal income tax return as income under Section 111 of the Internal Revenue Code. 26 U.S.C.A. Section 111. Clearly the refund related to matters which antedate the removal of the constitutional prohibition against the corporate income tax. Had the Petitioner not overpaid its intangible personal property tax during 1970 and 1971 these amounts would clearly have not been taxable under Florida Statutes, Chapter 220. The amount was necessarily includable as income for federal tax purposes because Petitioner had received a tax benefit during 1970 and 1971. No similar Florida tax benefit had been realized since the Florida corporate income tax was not then in effect.
Nothing in Florida Statutes, Chapter 220, specifically permits a corporate taxpayer, to deduct from its taxable income items of income which are taxable under the federal tax system, but which were actually accrued prior to the effective date of the statute. Taxation in this case must be according to the formula prescribed by the legislature. Belcher Oil Co. v. Dade County, 271 So.2d 118 (Fla. 1972); Gaulden v. Kirk, 47 So.2d 567 (Fla. 1950). An administrative agency such as the Florida Department of Revenue has no authority to depart from the legislatively prescribed formula. Moreover, the additional adjustments to adjusted federal income such as those Petitioner requests would frustrate the intention set forth in Florida Statutes, Section 220.02(3) by creating additional expenses and difficulties in administering the code, additional cost and difficulties in taxpayer compliance by requiring additional books and computations, and frustrate information sharing with the federal government by creating deviations from federal taxable income.
Moreover, courts in other states held that, where a state income tax scheme uses federal taxable income as a starting point, inclusions in federal taxable income of items of income accrued prior to the effective date of those states' income tax codes does not amount to a retroactive application, since federal taxable income is the "yard stick" by which the state's tax base is measured, and all that is necessary is that the particular item of income actually be included within the federal income for the corresponding tax year. One case directly on point is that of Commonwealth v. Electrolux Corp., 67 A.2d
105 (Penn. 1949). Other similar cases are Tiedemann v. Johnson, 316 A.2d 359 (Me. 1974), and Katzenberg v. Comptroller of the Treasury, 282 A.2d 465 (Maryland 1975). Admittedly, an opposite result was reached as to items of income included pursuant to a Procedures 70-27 agreement by a Florida circuit court in the case of Cone, Wagner, Nugent, Johnson, and McKeown, P.A. v. Department of Revenue, Civil Action No. 74-3272, 15th Judicial Circuit, 1976. This judgment, however, is on appeal by the Department of Revenue and it is not in a position administratively to accept that decision as being controlling. Likewise, the circuit court decision in Leadership Housing, Inc. vs. Department of Revenue, Broward County Circuit Court Case No. 74-6878 is also on appeal by the Department of Revenue to the Florida Supreme Court, and is not presently accepted by the Department of Revenue.
WHEREFORE, based on the foregoing Findings of Fact and Conclusions of Law it is ordered as follows:
That the proposed corporate income tax deficiencies for the tax years 1972, 1973, and l974 issued by the Respondent with respect to annual adjustments of $75,891.00 for each of the tax years reflecting a change in the Petitioner's accounting method is affirmed.
The proposed deficiency for the 1973 tax year which relates to a refund of Petitioner's intangible personal property taxes for the years 1970 and 1971 is affirmed.
CERTIFICATION
I certify that the foregoing is the Final Order of the Department of Revenue adopted by the Governor and Cabinet on January 6, 1977.
Ed Straughn, Executive Director State of Florida,
Department of Revenue Room 102, Carlton Building Tallahassee, Florida 32304
Dated this 10th day of January, 1977.
| Issue Date | Proceedings |
|---|---|
| Jan. 10, 1977 | Final Order filed. |
| Oct. 26, 1976 | Recommended Order sent out. CASE CLOSED. |
| Issue Date | Document | Summary |
|---|---|---|
| Jan. 06, 1977 | Agency Final Order | |
| Oct. 26, 1976 | Recommended Order | Taxes on Petitioner's pre-1972 income are not allowable, because the collection of corporate income tax was unconstitutional in Florida then. |
