STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

FLORIDA MINING AND MATERIALS ) CORPORATION, )

)

Petitioner, )

)

vs. ) CASE NO. 76-1599

) STATE OF FLORIDA, DEPARTMENT OF ) REVENUE, and OFFICE OF THE )

COMPTROLLER, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, the Division of Administrative Hearings, by its duly designated Hearing Officer, K. N. Ayers, held a public hearing in the above styled case on November 15, 1976 at Tampa, Florida.

APPEARANCES

For Petitioner: James E. Holmes, Esquire

13228 North Central Avenue Tampa, Florida

For Respondent: E. Wilson Crump II, Esquire

Assistant Attorney General Department of Legal Affairs Tax Division, Northwood Mall Tallahassee, Florida 32303

By petitions filed September 3, 1976 and October 28, 1976, Florida Mining and Materials Corporation (Florida Mining or Petitioner) seeks relief from Florida corporate income taxes assessed against it for $50,494.75 resulting from capital gains on the sale of real property; $8,896.50 assessed against it in the recapture of depreciation occurring in the acquisition of Kelly Builders, Inc.; and for refund of $14,238.78 plus interest paid under protest by Petitioner when its claim for recaptured depreciation in the acquisition of Thomas Concrete Company was denied.

At the beginning of the hearing the attorney representing the Department of Revenue stated that he was not authorized to represent the Comptroller as a formal request for such representation in the manner prescribed by the Attorney General had not been received. Since the Comptroller was served with the petition originally filed against the Department of Revenue, as well as by a subsequent petition to the Comptroller and had, by letter of October 8, 1976, requested the Assistant Attorney General to represent the Comptroller in these proceedings, the Comptroller was joined as a party.

FINDINGS OF FACT

1. The facets herein are undisputed. On May 31, 1973 Petitioner purchased Thomas Concrete Company, and on February 28, 1973 Petitioner purchased Kelly Builders, Inc. Both companies were forthwith liquidated and federal income tax returns were filed in which depreciation in excess of fair value of the properties was recaptured for federal tax purposes. In his state corporate income tax returns Petitioner claimed deduction for that portion of the recaptured depreciation which occured prior to November 2, 1971, the effective date of the Florida Corporate Income Tax Statute. These deductions were disallowed by the Department of Revenue, that portion of the tax relating to Thomas Concrete Company was paid under protest, the portion relating to Kelly Builders, Inc. was not paid, and this petition was filed.

   
   

2. In 1974 Petitioner sold real property on which it made a substantial capital gain. In computing its federal income tax the full capital gain was reported. However, that portion of its capital gain accruing prior to November 2, 1971 was excluded from its Florida corporate income tax and the assessment of

   $50,494.75 was levied against Petitioner by Respondent, Department of Revenue for the full amount of the capital gain as income received in 1974.

   
   

3. The two issues here involved are whether Petitioner is taxable under Chapter 220 F.S. on depreciation taken prior to the effective date of Chapter 220, and subsequently recaptured, and whether Petitioner is taxable under Chapter 220, F.S. for the full amount of capital gain realized on property held prior to the effective date of Chapter 220 where part of appreciation occurred prior to the effective date of the Florida Corporate Income Tax law.

   
   

   CONCLUSIONS OF LAW

   
   

4. Prior to November, 1971, the Florida Constitution contained the 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 the corporate income tax. Florida Constitution Article VII, Section 5. The Legislature thereupon adopted the Corporate Income Tax Law. Chapter 71-984, Laws of Florida. This law has been codified in 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:

   1. Minimize the expenses of the Department of Revenue and difficulties in administering this code;

   2. Minimize the cost and difficulties of taxpayer compliance; and

   3. Maximize for both revenue and statistical purposes, the sharing of information between the State and the Federal Government.

      1. 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:

         1. '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;

         2. 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

         3. 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 a 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 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 exemption. Florida Statutes, s. 220.12(1). "Adjusted federal income" is defined as taxable income under Section 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.

      
      

5. In carrying out the intent of the Legislature with respect to reference to federal determination s. 220.43 F.S. provides in pertinent part:

   
   

   "(1) To the extent not inconsistent with the provisions of this code or forms or regulations prescribed by the Department, each taxpayer making a return under this code shall take into account the items of income, deduction, and exclusion on such return in the same manner

   and amounts as reflected in such taxpayer's federal income tax return for the same taxable year."

   
   

6. While the expressed intent of the Legislature is that the tax imposed by Chapter 220, F.S. be prospective only, the Legislature clearly intended that income, as defined in that chapter, is to be taxed in the year in which received. Section 220.02(4)(b) above quoted appears somewhat inconsistent with subsections (a) and (c) on either side of it, and rules of statutory construction require that these sections, if possible, be interpreted so that the legislative intent apply equally to each. While it may be said that the property here in question evidently increased in value between the time it was purchased and November 2, 1971, no evidence was presented regarding this increase. Furthermore and more important, no gain had accrued and no acquisition of a right to receive or accrue income from this property arose

   prior to the time the property was sold in 1974. Subsection (b) speaks of "property" or an interest in property while subsections (a) and (c) speak of income. The tax imposed by Chapter 220 is on income and not on property.

   
   

7. With respect to the capital gain on the sale of real property in 1974, section 220.02(4)(a) F.S. above quoted clearly includes this as taxable income in the year realized. Since there was no "income" or realizable gain on this property before it was sold, there is no basis for applying "appreciation" to the property between the time it was purchased and November 2, 1971. Accordingly, the assessment on the taxable gain as reported on Petitioner's federal income tax return was proper.

   
   

8. Those assessments relating to recaptured depreciation in excess of fair value fall into the same category as gains on the sale of real property. While this depreciation was taken for federal tax purposes prior to the time of the Constitutional amendment leading to the enactment of Florida's corporate income tax law, still no gain was realized nor could it be realized until the corporations were sold. This "income" falls squarely in the definition contained in Section 220.02(4)(a) F.S. above quoted and therefore deemed created for Florida income tax purposes at the time it is realized income for federal income tax purposes.

   
   

9. From the foregoing it is concluded that the entire capital gain on the sale of real property is income for Florida corporate income tax purposes in the year it is realized income for federal income tax purposes without deduction for any appreciation in value that may have occurred between the original purchase of the property and November 2, 1971.

   
   

10. It is further concluded that the depreciation taken prior to November 2, 1971, may not be excluded in computing Florida income subject to tax when recaptured for federal income tax purposes. It is, therefore,

RECOMMENDED that the Petition be dismissed.

DONE and RECOMMENDED this 9th day of December, 1976, in Tallahassee, Florida.

K. N. AYERS, Hearing Officer Division of Administrative Hearings Room 530, Carlton Building Tallahassee, Florida 32304

(904) 488-9675

COPIES FURNISHED:

James E. Holmes, Esquire 13228 North Central Avenue Tampa, Florida

E. Wilson Crump II, Esquire Assistant Attorney General Department of Legal Affairs Tax Division, Northwood Mall Tallahassee, Florida 32303

Docket for Case No: 76-001599

Orders for Case No: 76-001599