STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

METROCARE, INC., and )

SUBSIDIARIES, )

)

Petitioner, )

)

vs. ) CASE NO. 79-167

) STATE OF FLORIDA DEPARTMENT OF ) REVENUE, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, an administrative hearing was held before Diane D. Tremor, on October 21, 1980, in the Pinellas County Judicial Building, St. Petersburg, Florida. The issue for determination at the hearing was whether petitioner is entitled to a refund of Florida corporate income taxes in an amount resulting from the inclusion of certain expenditures in the adjusted cost basis of property when deductions for those same expenditures were taken for federal tax purposes prior to January 1, 1972. More simply stated, the issue is whether expenses can be taken for Florida tax purposes in a different tax year than the one in which they are taken for federal purposes.

APPEARANCES

For Petitioner: Steven R. Andrews

Battaglia, Ross, Hastings, Dicus and Campbell

8405 North Himes Avenue, Suite 206

Tampa, Florida 33614

For Respondent: E. Wilson Crump, II

Assistant Attorney General Department of Legal Affairs The Capitol

Tallahassee, Florida 32301 FINDINGS OF FACT

Upon consideration of the pleadings and the oral and documentary evidence adduced at the hearing, the following relevant facts are found:

1. Petitioners are corporations doing business in the State of Florida, principally involved in the building of condominiums. During the fiscal year ending January 31, 1975, one of the petitioners sold certain improved real estate and realized a gain on those sales. In years prior to January 31, 1972, petitioner had deducted as expenses, for federal income tax purposes, real estate taxes, interest, certain overhead costs, certain indirect labor and other development expenses involved in the property sold in the 1974-75 fiscal year.

   A total of $556,312.00 for such expenses was claimed to have been taken for federal tax purposes in the tax year ending January 31, 1972, and possibly earlier tax years. The testimony was not clear as to the actual year the federal deductions were claimed.

   
   

2. On its original Florida Corporate Income Tax Return filed for the tax year ending January 31, 1975, petitioner apparently sought to use as a basis for the properties sold that year their alleged value as of January 1, 1972, rather than the federal tax basis. The Department of Revenue proposed deficiencies in the amount of tax attributable to the use of the lower federal basis. Seeking to have the proposed deficiencies set aside, petitioner requested an administrative hearing. Hearing Officer K. N. Ayers stated in his Recommended Order that:

   
   

   The sole issue here presented is the effect of the appreciation in the value of property between time of acquisition an November 2, 1971 when such property is sold subsequent to January 1, 1972 and a capital gain is realized thereon. Metrocare, Inc. et al. v. Florida Department of Revenue, Case No. 76- 1992, July 26, 1977.

   
   

   Following the case of Dept. of Revenue v. Leadership Housing, Inc. et al., 343 So.2d 611 (Fla. 1977), the Hearing Officer denied the petition and held the capital gains on sales subsequent to January 1, 1972, constitute income for Florida corporate income tax purposes in the year the asset is sold without any diminution for appreciation in value occurring prior to November 2, 1971. The Department of Revenue adopted this Recommended Order, no appeal was taken and the deficiency was paid by the petitioner.

   
   

3. On or about October 30, 1978, the petitioners filed an Amended Corporation Income Tax Return for the fiscal year ending January 31, 1975. This amended return sought to subtract $518,232.00 from its adjusted federal income, and sought a refund of $15,099.00. The $518,232.00 figure is composed of development expenses previously deducted for federal tax purposes prior to January 31, 1972. The Department denied this request for a refund, and the petitioners filed the instant request for a hearing. Prior to the hearing, the respondent filed Affirmative Defenses asserting that any relief the petitioners might have was barred by the doctrines of collateral estoppel and estoppel by judgment because of the earlier administrative proceeding (DOAH Case No. 76- 1992) regarding the same tax year.

   
   

   CONCLUSIONS OF LAW

   
   

4. By way of an affirmative defense, respondent first takes the position that the doctrines of collateral estoppel or estoppel by judgment preclude petitioners from any relief. Respondent contends that the same issues were involved in an earlier proceeding concerning the petitioners' 1975 tax year. A review of the Recommended Order entered in the case of Metrocare, Inc. et al. v. Florida Department of Revenue, Case No. 76-1992 (July 26, 1977), reveals that the sole issue considered by the Hearing Officer in that case was

   
   

   . . . the effect of the appreciation in the value of property between time of acquisition and November 2, 1971 when such property is

   sold subsequent to January 11, 1972 and a capital gain is realized thereon.

   
   

   Deciding that this issue had been resolved by the case of Dept. of Revenue v. Leadership Housing, Inc. et al., 343 So.2d 611 (Fla. 1977), it was held that capital gains on sales occurring subsequent to January 1, 1972 are income for Florida purposes in the year the asset is sold without any diminution for appreciation in value occurring prior to November 2, 1971. Thus, it appears that the issue involved in the prior case was the broader issue of appreciation in value. Here, we are only concerned with the issue of whether development expenses taken as deductions for federal purposes in years prior to 1972 can later be subtracted from adjusted federal income for Florida tax purposes in later years.

   
   

5. Turning now to the merits, petitioners contend that the federal adjusted cost basis of property sold during the 1975 tax year should be increased by certain development expenses, even though those expenses were incurred and reported as deductions in petitioners' federal tax returns prior to 1972. In support of this position, petitioners cite the case of Buchwald Enterprises, Inc. v. Florida Department of Revenue, 375 So.2d 861 (Fla. 3d DCA 1979). The respondent takes the position that no expenses can be taken for Florida corporate income tax purposes in a different year than the one in which they are taken for federal purposes absent specific statutory authority or unless the result would be to tax income realized prior to the effective date of Florida's corporate income tax. In support of its position, respondent cites the cases of S.R.G. Corp. v. Department of Revenue, 365 So.2d 687 (Fla. 1978); Roger Dean Enterprises, Inc. v. Department of Revenue, 387 So.2d 358 (Fla. 1980); and Florida Power Corp. v. Lewis, 381 So.2d 1193 (Fla. 2d DCA 1980).

   
   

6. A careful review of the Florida Corporate Income Tax Code, particularly Sections 220.02(3), 220.42(1) and 220.43(1), Florida Statutes, as well as the relevant case law, leads the undersigned to conclude that the respondent's position is correct in this case. There is no specific authority for subtracting development expenses from the taxpayer's adjusted federal income. The imposition of Florida's tax upon the full amount of gain realized from a sale occurring in the 1975 tax year is not retroactive taxation.

   
   

7. Chapter 220, Florida Statutes, illustrates a clear legislative intent to "piggyback" the Federal Internal Revenue Code. Subject to specific enumerated adjustments, the Florida taxpayer is required to report and pay taxes on the same income under both jurisdictions. Here, the disputed development expenses were taken as deductions on petitioners' federal income tax returns in years prior to 1972. While this served to reduce its federal income tax for those years, petitioners realized no income as a result of such deductions. The realization of gain came, for Florida corporate income tax purposes, when the property was sold during the 1975 fiscal year. The Florida corporate income tax base is grounded upon the taxpayer's federal tax base for the corresponding tax year.

   
   

8. The Hearing Officer is not unmindful of the case of Buchwald Enterprises, Inc. v. Fla. Dept. of Revenue, supra, which supports the petitioners' claim in this proceeding. However, that case appears to rely upon a case from the Second District Court of Appeal, 1/ which is distinguishable in facts from both this case and the Buchwald case. Also, the Second District Court of Appeal has more recently entered a decision more on point which is supportive of respondent's position herein. In Florida Power Corp v. Lewis, 381 So.2d 1193 (Fla. 2d DCA 1980), the Court upheld a Hearing Officer's decision

   that income for federal tax purposes forms the basis for computing Florida income taxes for the same year, even though the taxpayer took accelerated depreciation rather than capitalizing expenses for federal tax purposes in years prior to the effective date of the Florida Corporate Income Tax Code. The Court state that

   
   

   . . .the hearing officer had ample basis to reject petitioner's claims based upon its accelerated depreciation and capital outlay expense practices. Neither determines nor affects the date on which income is earned or received, which we believe to be the primary consideration for determining whether or not the income was taxable.

   
   

   There being an apparent conflict between the Buchwald Enterprises case from the Third District and the Florida Power Corp. case, from the Second District, the undersigned concludes that the case, from the Second District, (Florida Power) which is later in time and which is more reflective of the case law regarding the realization of income approach should prevail. Dept. of Revenue v.

   Leadership Housing, Inc., 343 So.2d 611 (Fla. 1977).

   
   

9. In summary, it is concluded that the development expenses incurred and deducted for federal income tax purposes prior to 1972 can not be subtracted from federal taxable income for the purpose of determining Florida taxable income derived form sales of property in the 1975 tax year.

RECOMMENDATION

Based upon the findings of fact and conclusions of law recited herein, it is RECOMMENDED that petitioners' request for a refund of corporate income taxes for the year ending January 31, 1975, be DENIED.

DONE AND ORDERED in Tallahassee, Leon County, Florida, this 14th day of January, 1981.

DIANE D. TREMOR

Hearing Officer

Division of Administrative Hearings

101 Collins Building Tallahassee, Florida 32301 (904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 14th day of January, 1981.

ENDNOTE

1/ Clearwater Federal Savings and Loan Association v. Dept. of Revenue, 250 So.2d 1134 (Fla. 2d DCA, 1977), affd. 366 So.2d 1164 (Fla. 1979).

COPIES FURNISHED:

Steven R. Andrews Battaglia, Ross, Hastings,

Dicus and Campbell Suite 206

8405 North Himes Avenue Tampa, Florida 33614

E. Wilson Crump, II Assistant Attorney General Department of Legal Affairs The Capitol

Tallahassee, Florida 32301

Robert A. Pierce General Counsel Department of Revenue

104 Carlton Building Tallahassee, Florida 32301

Docket for Case No: 79-000167

Orders for Case No: 79-000167