STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

PEACHES OF FLORIDA, INC., )

)

Petitioner, )

)

vs. ) CASE NO. 78-1433

)

STATE OF FLORIDA, )

DEPARTMENT OF REVENUE, )

)

Respondent. )

)

RECOMMENDED ORDER

This case was heard pursuant to notice on December 14, 1978, in Tampa, Florida, by the undersigned Hearing Officer of the Division of Administrative Hearings.

This case was presented upon the petition of Peaches of Florida, Inc. for a formal hearing pursuant to Section 120.57(1), Florida Statutes, to controvert the proposed deficiency assessed by the Department of Revenue against Peaches' corporate income tax return for the year 1972.

The Petitioner and Respondent were in agreement regarding the operative facts in this case. In summary, these facts were that the controlling stockholder in Peaches transferred 31,500 shares of Sterling Drugs, Inc. stock in which the stockholder's basis was $10,191.00 to Peaches as a contribution to capital. At the time of this transfer, the Sterling stock had a fair market value of approximately $1,060,000.00. Subsequently, Peaches sold the stock for approximately $1,160,000.00. In filing its federal income tax return, Peaches computed the income from the sale of the Sterling stock using the transferrer's basis of $10,191.00. In reporting its income for Florida corporate income tax purposes, Peaches took as its basis the fair market value of the Sterling stock as of January 2, 1972. Upon audit of Peaches' return, the Department assessed the deficiency in the income tax paid asserting that the income from the sale of the stock was the sale price less the stockholder's-transferrer's basis and not the difference between the fair market value as of January 2, 1972 and sale price.

APPEARANCES

For Petitioner: James S. Moody, Jr.

305 West Reynolds Street Post Office Drawer TT Plant City, Florida 33566

For Respondent: Edwin Stacker

Assistant Attorney General Department of Legal Affairs The Capitol

Tallahassee, Florida 32304

ISSUE PRESENTED

The issue presented is what is Peaches' basis in the Sterling stock?

FINDINGS OF FACT

1. There is no dispute as to the material facts in the instant case, Exhibit 1 presented at the hearing is a composite exhibit which is comprised of the Petitioner's U.S. Corporate Income Tax Return and Florida Corporate Income Tax Return for the fiscal year ending June 30, 1973. Exhibit 3 is the Respondent's document entitled "Income Tax Audit Changes" which reflects the adjustments made by the Respondent based upon a review of the Petitioner's return and the reasons for assessing the deficiency. Exhibit 2 is a composite exhibit comprised of the Petitioner's Amended Protest of the proposed deficiency and the Respondent's letter denying the same.

   
   

2. Petitioner's federal return (Exhibit 1) Schedule D, Part II, reflects the 31,500 shares were acquired in 1958 at a cost basis of $10,191.00. These shares were subsequently sold by Peaches in 1972 for $1,160,131.00 or a gain of

   $1,149,940.00. This gain was reported on line 9(a) of the federal tax return as a portion of the "net capital gains." On its 1973 Florida Corporate Income Tax Return, Petitioner computed the income using the basis for the stock as of January 2, 1972, thereby reducing its reported income by $1,013,040.00 from the federal tax. The $1,013,040.00 reflects the amount of appreciation in the value of the stock between the transferrer's acquisition and January 1, 1972, the effective date of the Florida corporate income tax code.

   
   

3. The shares of stock of Sterling Drugs were acquired by Peaches in 1971 from the controlling stockholder who made a contribution to capital to the corporation.

   
   

   CONCLUSIONS OF LAW

   
   

4. The issue presented in this case is what is Peaches' basis in the Sterling Drug stock.

   
   

5. Petitioner argues that the transfer of the stock by the stockholder to Peaches was a sale, exchange, or other disposition of the stock of such nature that it would have been a taxable transaction under Florida law had the stockholder been a corporation; and that, therefore, Peaches is entitled to take as a basis for Florida income tax purposes the fair market value of the stock as the date of the transfer. This argument is grounded on Peaches' assertion that the increased basis was realized at the time of the transfer to Peaches by the stockholder; and that, contrary to the Department's argument that the Florida tax is "piggybacked" on the federal return, the federal law assessing the tax at the point of recognition of the gain does not prohibit Peaches from taking the "realized" basis in the stock for Florida corporate income tax purposes.

   
   

6. The Respondent, as mentioned above, argues that the Florida tax is "piggybacked" on the federal tax code and the principals of law surrounding it.

   
   

7. The "piggybacked" principal is not always applicable as pointed out in several recent appellate decisions. However, in this instance the federal law and legal principals surrounding it are dispositive of the question of what Peaches' basis in the stock was.

8. Section 363(c), IRC, clearly provides that property acquired by a corporation after June 22, 1954, as a contribution to capital shall have the same basis which the transferrer had. This section was adopted to prevent avoidance of the income tax on the appreciated value of property transferred as a contribution to capital by prohibiting the corporate transferee to acquire the property at its appreciated basis. This concept is engrafted into the Florida tax law and application of the tax.

   
   

9. In addition, under Florida law the definition of income in Section 220.02(4)(a), Florida Statutes, provides that income is the gain from sale, exchange or other disposition of property. At the point that the Sterling stock was transferred from the stockholder to Peaches as a contribution to capital, there was no gain under Florida or federal law. To adopt the Petitioner's argument would classify that transfer as a taxable transaction, a concept foreign to federal law and contrary to Florida law.

   
   

10. Income, or gain, was not realized or recognized until Peaches sold the stock subsequent to its transfer. Under both federal and Florida law, the income gained would be measured by the sale price less the stockholder's- transferrer's basis in the stock. In this case, the difference between the sale price, $1,160,131.00, and the transferrer's basis, $10,191.00 was income realized on the sale in the amount of $1,149,940.00. Therefore, the deficiency assessed upon the Department in the amount of $29,435.00 together with interest is proper.

RECOMMENDATION

Based upon the foregoing Findings of Fact and Conclusions of Law, the Hearing Officer recommends that the Petitioner's petition be denied and that the assessment against the Petitioner in the amount of $29,435.00 together with interest be assessed.

DONE and ORDERED this 22nd day of January, 1979, in Tallahassee, Florida.

STEPHEN F. DEAN

Hearing Officer

Division of Administrative Hearings

530 Carlton Building Tallahassee, Florida 32304 (904) 488-9675

COPIES FURNISHED:

Edwin J. Stacker

Assistant Attorney General Department of Legal Affairs The Capitol

Tallahassee, Florida 32304

James S. Moody, Jr., Esquire Trinkle and Redman, P.A.

306 West Reynolds Street Plant City, Florida 33566

================================================================= AGENCY FINAL ORDER

=================================================================

STATE OF FLORIDA, DEPARTMENT OF REVENUE TALLAHASSEE, FLORIDA

PEACHES OF FLORIDA, INC.

Petitioner,

vs. CASE NO. 78-1433

STATE OF FLORIDA, DEPARTMENT OF REVENUE,

Respondent.

/

NOTICE TO: JAMES S. MOODY, JR., ESQUIRE

ATTORNEY FOR PETITIONER TRINKLE AND REDMAN, P. A.

306 WEST REYNOLDS STREET PLANT CITY, FLORIDA 33566

E. WILSON CRUMP, II, ESQUIRE ATTORNEY FOR RESPONDENT ASSISTANT ATTORNEY GENERAL POST OFFICE BOX 5557 TALLAHASSEE, FLORIDA 32304

You will please take notice that the Governor and Cabinet of the State of Florida, acting as head of the Department of Revenue, at its meeting on the 5th day of April, 1979, approved the Recommended Order of the Hearing Officer dated January 22, 1979, with paragraph 3 of the "Findings of Fact" therein amended to read as follows: "The shares of stock of Sterling Drugs were acquired by Peaches in 1972 from the controlling stockholder who made a contribution to capital to the corporation", in accordance with Stipulation of the Petitioner and Respondent filed in the case on March 1, 1979. This constitutes final agency action by the Department of Revenue.

JOHN D. MORIARTY, ATTORNEY DIVISION OF ADMINISTRATION DEPARTMENT OF REVENUE STATE OF FLORIDA

ROOM 104, CARLTON BUILDING TALLAHASSEE, FLORIDA 32304

CERTIFICATE OF SERVICE

I HEREBY CERTIFY that a true and correct copy of the foregoing Notice was furnished by mail to James S. Moody, Jr., Esquire, Trinkle and Redman, P. A.,

306 West Reynolds Street, Plant City, Florida 33566, Attorney for Petitioner; by hand delivery to Wilson Crump, II, Esquire, Assistant Attorney General, Post Office fox 5557, Tallahassee, Florida 32304, Attorney for Respondent and Stephen F. Dean, Hearing Officer, Division of Administrative Hearings; Room 530, Carlton Building, Tallahassee, Florida this 5th day of April, 1979.

JOHN D. MORIARTY, ATTORNEY

Docket for Case No: 78-001433

Orders for Case No: 78-001433