STATE OF FLORIDA
DIVISION OF ADMINISTRATIVE HEARINGS
HEFTLER CONSTRUCTION COMPANY, )
)
Petitioner, )
)
vs. ) CASE NO. 81-1362
) FLORIDA DEPARTMENT OF REVENUE, )
)
Respondent. )
)
RECOMMENDED ORDER
Pursuant to notice, the Division of Administrative Hearings, by its duly designated Hearing Officer, R. L. Caleen, Jr., held a formal hearing in this case on October 27, 1981, in Miami, Florida.
APPEARANCES
For Petitioner: Lewis M. Kanner, Esquire
1000 duPont Building
169 East Flagler Street Miami, Florida 33131
For Respondent: Barbara Staros Harmon, Esquire
Department of Legal Affairs The Capitol, Room LL04 Tallahassee, Florida 32301
ISSUE
Whether the Department of Revenue should assess Heftler Construction Company ("Taxpayer") for Florida corporate income taxes on a claim that:
Taxpayer realized a gain under the Florida Income Tax Code when an asset acquired in 1971 (on liquidation of a joint venture) was sold in 1975 in satisfaction of an outstanding debt; and
Taxpayer's losses created by the subtraction of foreign source income cannot operate to create or increase the Florida portion of the net operating loss carryover.
BACKGROUND
By notice dated November 20, 1980, the respondent Department of Revenue ("Department") notified petitioner Heftler Construction Company ("Taxpayer") of a proposed assessment of Florida corporate income taxes; Taxpayer protested the assessment.
By letter dated March 11, 1981, the Department rejected those protests.
In May, 1981, Taxpayer petitioned for a formal proceeding under Chapter 120, Florida Statutes, to challenge the Department's proposed assessment.
Taxpayer asserted that, contrary to the Department's contentions, it was entitled to: (1) subtract a 1975 capital gain when that gain was realized in 1971, prior to the effective date of Chapter 220, Florida Statutes, the "Florida Income Tax Code," and (2) carryover into subsequent tax years a 1975 loss created by subtraction of foreign source income from taxable income.
On May 11, 1981, Taxpayer's petition was forwarded to the Division of Administrative Hearings for the purpose of conducting the requested hearing.
Since the Department requested at least 90 days to conduct discovery, hearing was set for September 11, 1981. Thereafter, the parties' joint request for a continuance of the hearing was granted and hearing was reset for October 27, 1981.
The facts pertinent to this case are undisputed. At hearing, the parties filed a joint Stipulation of Fact (Joint Exhibit No. 1). In addition, the Department called Lester Begelman, an auditor, as its only witness and offered Exhibits 1 through 3 into evidence, each of which was received.
The Taxpayer called Henry J. Binkowski, its Vice President and chief financial officer, as its only witness and offered Exhibits 1 and 2 into evidence, both of which were received.
The parties were allowed to file proposed findings of fact and conclusions of law within 14 days from the date the transcript of hearing was filed.
Proposed findings and conclusions were timely received by December 8, 1981.
During the pendency Of this proceeding, Chapter 81-178, Section 12, Laws Of Florida, was enacted effective October 1, 1981. This law requires that, in Chapter 120 proceedings, the taxpayer be designated "petitioner," and the Department, "respondent." It did not alter the Department's burden in such proceedings--to establish the factual and legal basis of its proposed assessment. Because this law is procedural in nature, it applies to proceedings pending on the date of its enactment. See, Johnson v. State, 371 So.2d 556 (Fla. 2d DCA 1979). Consequently, the parties to this case have now been redesignated in accordance with Chapter 81-178, Laws of Florida.
Based on the stipulation of the parties and evidence presented, the following facts are determined:
FINDINGS OF FACT
I.
Formation and Liquidation of Joint Venture; Subsequent Sale of Asset
Taxpayer is a New Jersey corporation, authorized to transact business in Florida. Heftler Realty Company ("Realty") is a Florida corporation, and is a subsidiary of Taxpayer.
Taxpayer, for all years material to these proceedings, filed consolidated income tax returns with the Internal Revenue Service of the United States ("IRS"). Pursuant to the applicable provisions of the Internal Revenue Code ("IRC"), Taxpayer included in the income and expenses of its consolidated income tax returns the income and expenses of its operations in Puerto Rico.
Taxpayer, for all years material to these proceedings, timely filed with the Department consolidated income tax returns.
In 1969, Realty formed a joint venture with a company known as GACL, Inc., for the purpose of developing real property in Florida.
Realty, in accordance with its Joint Venture Agreement with GACL, Inc., prior to 1971, contributed to the joint venture the following assets with the following cost basis to Taxpayer on the date of contribution:
ASSET | DATE CONTRIBUTED TO JOINT VENTURE | COST BASIS TO TAXPAYER ON DATE CONTRIBUTED |
Cash | 3-5-69 | $250,000 |
Land | 3-5-69 | 2,000,000 |
In 1971, prior to the effective date of the Florida Income Tax Code ("Florida Code"), Chapter 220, Florida Statutes, the joint venture between Realty and GACL, Inc., was liquidated effective as of January 1, 1971. Pursuant to the plan of liquidation, Realty received, in liquidation of the joint venture, the assets as described in the attached Appendix. These assets had a then cost basis to the joint venture as described in the Appendix.
The assets acquired by Realty in liquidation of the joint venture were subject to the debts described in the Appendix.
Pursuant to the plan of liquidation of the joint venture, Realty agreed to acquire the assets and assume the attendant debts (itemized in the Appendix) as of January 1, 1971.
At the time of the liquidation of the joint venture, Realty had a cost basis for its interest in the joint venture of a negative $285,749. (Realty had a negative basis in the assets because it sustained joint venture losses in excess of its contributions to the joint venture.)
The net gain to Realty as reported upon the federal income tax return of Taxpayer, after adjustment for depreciation, as a result of the liquidation was $1,238,371.
In 1971, Realty reduced its tax basis in the assets acquired in the liquidation. This adjustment (reduction) in the tax basis of the assets acquired by Taxpayer occurred prior to the effective date of the Florida Code.
An asset acquired by Realty in 1971, pursuant to the plan of liquidation of the joint venture, was conveyed by Realty in 1975 to a creditor of Realty in satisfaction of debt.
After adjusting the tax basis of the asset, a comparison of its book basis (to the joint venture) with the tax basis to Taxpayer after liquidation, reflects the following:
Book Basis to | Tax Basis to Tax- payer or After | ||
Joint Venture | Liquidation | Difference | |
Adjusted Basis as of Jan. 1, 1971 | $4,466,764 | $3,055,722 | $1,411,042 |
Accumulated Depreciation to Date of Sale | (587,212) | (414,541) | (172,671) |
Adjusted Basis | $3,879,552 | $2,641,181 | $1,238,371 |
For purposes of its Federal Income Tax, Taxpayer reported the transaction as a sale and computed the gain thereon as follows:
$3,951,708 | |
Expense of Sale | $2,713,337 |
3. Total Gain | $1,238,371 |
Gross Sale Price
Cost or Other Basis and
(The difference between the gross sales price and the adjusted basis referred to in paragraph 13 of $72,156 is an increase to the price due to escrow funds deposited with a mortgagee and assigned to the purchaser of the asset by Realty without Realty receiving reimbursement.)
In computing the Florida income tax, pursuant to the Florida Code, for the fiscal year ending July 31, 1976, Taxpayer took as a subtraction an adjustment on line 8, Schedule II, page 2 of its income tax return. The subtraction was in the amount of the capital gain received upon the sale of the asset received in liquidation in the amount of $1,238,371. Taxpayer subtracted the gain, contending that it was realized prior to the effective date of the Florida Code.
When acquired, the asset received in liquidation had a cost basis to the joint venture of approximately $4,500,000. When the asset was distributed to Taxpayer, after the reduction by Taxpayer to the tax basis referred to in paragraph 11, the basis to Taxpayer of the asset was approximately $3,000,000. The tax basis in the amount of $3,000,000 was evidenced by the debts assumed by Taxpayer upon the liquidation; such assumption of debt is referred to in paragraph 7.
Department contends that the gain on the sale of the asset acquired in liquidation was both realized and recognized in 1975 when the property was sold in satisfaction of a debt; it has issued a proposed assessment on that basis.
Taxpayer contends that the gain was realized by Taxpayer for federal income tax purposes prior to the effective date of the Florida Code and that only the recognition of the gain occurred after the effective date of the Florida Code.
II.
1975 Loss Created by Subtraction of Foreign
Source Income; Attempt to Carryover Loss to Subsequent Years
Taxpayer, in addition to the adjustment referred to above, in reporting income for its fiscal years ending July 31, 1976, July 31, 1977, and July 31, 1978, deducted a net operating loss carry-forward which included an item of $335,037 from its 1975 return (fiscal year ending July 31, 1976) and an item of $916,030 for fiscal year ending July 31, 1978, represented by a subtraction resulting from income earned in Puerto Rico. The subtraction resulted in losses during each of such years, which losses were carried forward by Taxpayer to the next ensuing year.
Department contends that the losses created by the subtraction of foreign source income cannot be carried over to subsequent years to determine income and has issued a proposed assessment on that basis.
Taxpayer contends that it is not the intent of the Florida Legislature to tax income derived from sources outside the United States and that the effect of a denial of the subtraction will result in the taxation, by Florida, of foreign source income received by Taxpayer.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction over the parties and subject matter of this proceeding. 120.57, Fla. Stat. (1981)
The "Florida Income Tax Code," ("Florida Code") Chapter 220, Florida Statutes (1981), imposes an income tax of 5 percent on the corporate taxpayer's "net income for the taxable year." 220.11(2), Fla. Stat. (1981). "Net-income" is defined as apportioned adjusted federal income less the exemption allowed by Section 220.14. 220.12(2), Fla. Stat. (1981). "Adjusted federal income" means an amount equal to the taxpayer's taxable income less specified adjustments. 220.13(1), Fla. Stat. (1981). "Taxable income" for the taxable year means taxable income (subject to specified adjustments) as defined by the United States Internal Revenue Code of 1954 ("IRC"). 220.13(2), Fla. Stat. (1981)
I.
Realization of Gain Upon Disposition of Assets
Section 220.02(4)(a), Florida Statutes, defines "income" which is subject to taxation as:
"Income," for purposes of this Code, indicating 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; (e.s.)
Income is "realized" "when the taxpayer receives actual economic gain from the disposition of the property." S.R.G. Corporation v. Department of Revenue, 365 So.2d 687, 689 (Fla. 1978). Ordinarily, "realization" and "recognition" (when the tax becomes due and payable) occur at the same time, but the two terms have distinct and different meanings. Id.
In Department of Revenue v. Leadership Housing, Inc., 343 So.2d 611, 614 (Fla. 1977), the Florida Supreme Court held that "appreciation in value of capital assets is not income until it is realized," i.e., separated from its
capital; the court endorsed the definition of income announced in Eisner v. Macomber, 252 U.S. 189, 207 (1920):
"Income may be defined as the gain derived from capital, from labor, or from both combined," provided it be understood to include profit gained through a sale or conversion of capital assets . . . .
[It is] not a gain accruing to capital, not a growth or increment of value in the
investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being "derived," that is received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal;--that is income derived from property. Nothing else answers the description.
The Florida Code operates prospectively; it cannot be construed to impose a tax on gain which was "realized" prior to November 2, 1971, the effective date of the taxing statute. S.R.G., supra at 688; 220.02(4), Fla. Stat. (1981).
In the instant case, Taxpayer contends that, by distribution of assets in liquidation of a joint venture in 1971, it realized a gain prior to the effective date of the taxing statute. The Department contends that the gain was not realized until 1975, when the assets were disposed of by conveyance to a creditor in satisfaction of debt. The Department's position is persuasive.
In construing the Florida Code, concepts of law which have been developed in connection with the IRC should be utilized to the greatest extent possible. 220.02(3), Fla. Stat. (1981).
The IRC treats joint ventures as partnerships for taxing purposes. Partnerships are not taxed as separate entities; the partners (or joint ventures) are liable for federal income tax in their separate capacities. 701, IRC. The partners' joint ownership of partnership assets is an essential attribute of a partnership. See, 59 Am. Jur.2d, Partnership, 11, p. 936 (1971).
[A]n ordinary partnership . . . has no entity in the sense that it may own property separate and apart from the ownership of its members. The members, at all times, own the partnership business and the assets employed in it, and are therefore never separated from title there from. Crawford v.
Commissioner of Internal Revenue, 39 B.T.A. 521, 525 (1939)
When partnership assets are completely distributed among its members (such as occurs in liquidation) the distribution is merely an apportioning among them of what they already jointly own.
The dissolution of the partnership in question in no way affected the title to the assets of the partnership fund but the title to such assets, which, ab lnitio had rested in the members, continued in them.
Accordingly, the distribution of assets which took place upon dissolution of the partnership neither added to, nor took from, the economic interests of the partners. The net effect of the process was not to create new interests and values, but merely to apportion and deliver to each member, according to his ratable interest, that which represented his then investment, leaving
him no richer or poorer than he was before the dissolution. Id. at 525. (e.s.)
The IRC recognizes this ownership feature of partnership assets. When partnership assets (other than money) are completely distributed to its members, such as occurred in the instant case, no gain is recognized to the distributed partner. 731, IRC. Treasury Regulation Section 1.731-1 (1980) explicitly provides:
No gain shall be recognized to a distributed partner with respect to a distribution of property (other than money) until he sells or otherwise disposes of the property . . .
The basis of the property (other than money) distributed to a partner in liquidation of the partner's interest is equal to the adjusted basis of that partner's interest in the partnership reduced by any money distributed in the same transaction. 732 (b), IRC. 2/
Taxpayer concedes that it recognized the gain from the distribution of joint venture assets in 1975, but contends that it realized the gain in 1971.
This contention is rejected. The facts do not indicate that Taxpayer realized a gain from the 1971 distribution within the meaning of the Florida Code. See, S.R.G., supra at 689; Leadership Housing, supra at 614. The effect of the distribution was to deliver to Taxpayer, according to its ratable interest, "that which represented . . . [its) then investment, leaving . . . [it] no richer or poorer" than it was before the liquidation. Crawford, supra at 525. All that changed was the form of ownership of the asset involved.
II.
Loss Caused by Subtraction of Foreign Source Income Cannot be Carried Forward to Subsequent Years
In defining "adjusted federal income" to mean the taxpayer's taxable income, the Florida Code authorizes certain adjustments or subtractions:
Section 220.13(1)
* * *
Subtractions.
In computing the net operating loss deduction allowable for federal income tax purposes under section 172 of the Internal Revenue Code for the taxable year, . . . .
there shall be subtracted from taxable income, in order to arrive at adjusted federal income, such amounts as reflect the following limitations:
* * *
c. A net operating loss shall
never be carried back as a deduction to a prior taxable year, but all deductions attributable to such losses shall be deemed net operating loss carryovers and
treated in the same manner, to the same extent, and for the same time periods as
are prescribed for such carryovers in section
172 and section 212, respectively, of the Internal Revenue Code.
There shall be subtracted from such taxable income any amount included therein:
* * *
Which was derived from sales Outside the United States, and from sources outside the United States as interest, as a royalty, or as compensation for technical or other services; (e.s.)
Section 172, IRC, allows the net operating loss carryovers plus the net operating loss carrybacks as a deduction during the taxable year. "Net operating loss" is defined for federal income tax purposes as the excess of the deductions allowed by the IRC over the taxpayer's gross income. 172(c), IRC. Unlike Florida's taxing statute, Section 172 does not allow subtraction or exclusion of foreign source income from federal income.
The Department contends that net operating losses are included in the Florida Code only to the extent allowed by Section 172, IRC; that Section 172 does not provide for exclusion of foreign source income from federal income; that, consequently, the net operating losses caused by exclusion of foreign source income cannot be carried forward for purposes of the Florida tax.
Taxpayer responds, in part, that such a carry-forward is not statutorily prohibited; that such a carry-forward is necessary to purge Taxpayer's taxable income (for Florida purposes) from all affects of foreign source income; and that to deny such a carry-forward would deprive it of its right to fully utilize Section 172, IRC.
The Department's contention is persuasive. The provisions of the Florida Code relating to net operating loss carryovers effectively exempt certain income from Florida's income tax. Tax exemptions are considered "special favors granted by the Legislature and are to be strictly construed against the taxpayer." Housing by Vogue, Inc. v. Department of Revenue, 403 So.2d 478, 480 (Fla. 1st DCA 1981); Accord: State v. Thompson, 101 So.2d 381 (Fla. 1958); U.S. Gypsum Company v. Green, 110 So.2d 409 (Fla. 1959); State ex rel. Szabo Food Service, Inc., of North Carolina v. Dickinson, 286 So.2d 529 (Fla. 1973)
Exemption provisions cannot be enlarged by construction; nor can they rest on implication. Orange State Oil Company v. Amos, 130 So. 707 (Fla. 1930). As the Florida Supreme Court stated in Orange State, supra at 709:
Taxation is the rule; exemption is the exception which must be created by clear and definite terms.
Here, by clear statutory language, the Florida Legislature declared that net operating loss carryovers be "treated in the same manner, [and] to the same extent" as prescribed in Section 172. 220.13(1)(b)1.c., Fla. Stat. (1981). The construction urged by Taxpayer requires enlargement of this limiting language and is rejected as contrary to controlling principles of statutory construction.
The Department's strict construction of Section 220.13 (1)(b)1.c., Florida Statutes (1981), is consistent with its established practice. See, Department final orders entered in Questor Corporation v. Department of Revenue, Case No. 79-1051, and Parkson Corporation v. Department of Revenue, Case No. 81-
074. (Department's Exhibit 3.) Taxpayer has not provided reasons justifying deviation from this practice. See, Outdoor Advertising Art, Inc. v. Florida Department of Transportation, 366 So.2d 114 (Fla. 1st DCA 1979). 120.68(12)(b), Fla. Stat. (1981).
The parties' proposed findings of fact and conclusions of law which are incorporated herein are adopted; otherwise, they are rejected as unnecessary to resolution of the issues, unsupported by the evidence, or contrary to controlling law.
Based on the foregoing, it is RECOMMENDED:
That the Department's proposed assessment of Taxpayer for corporate income tax deficiencies be issued.
DONE AND RECOMMENDED this 21st day of January, 1982, in Tallahassee, Florida.
R. L. CALEEN, JR. Hearing Officer
Division of Administrative Hearings The Oakland Building
2009 Apalachee Parkway
Tallahassee, Florida 32301
(904) 488-9675
Filed with the Clerk of the Division of Administrative Hearings this 21st day of January, 1982.
ENDNOTES
1/ It is now codified as Section 120.575, Florida Statutes (1981)
2/ Correspondingly, the basis of property contributed to a partnership is the adjusted basis of such property to the contributing partner at the time of contribution. 723, IRC.
COPIES FURNISHED:
Lewis M. Kanner, Esquire 1000 duPont Building
169 East Flagler Street Miami, Florida 33131
Barbara Staros Harmon, Esquire Department of Legal Affairs The Capitol, Room LL04 Tallahassee, Florida 32301
Randy Miller, Executive Director Department of Revenue
102 Carlton Building Tallahassee, Florida 32301 Case No. 81-1362
APPENDIX
HEFTLER CONSTRUCTION COMPANY AND SUBSIDIARIES TAX REPORTING - U.S. FORM 1120 - 7/31/71
Tax Basis of Joint Venture Interest 12/31/70
Original Investment, Net of Debt $250,000 Additional Advance 336,277
Withdrawal (13,293)
Losses 1969 $(301,910)
1970 (556,823) (858,733)
Net - Negative Basis (285,749) Taxable
50 percent of Joint Venture Liabilities at 12/31/70 $4,019,554
Liabilities Assumed 3,465,721 Forgiveness $553,833
Tax Basis of Assets Received
Basis in Joint Venture | Liabilities Assumed | Tax Bases Zero | Taxable | |
Criquet Club | $4,470,686 | $3,059,644 | $1,411,042 | |
Land - Condominium 518,000 Office Building and Equipment 48,856 | 274,800 28,000 | 243,200 20,856 | ||
Cash and Notes vs. Current Liabilities 457,832 | 103,277 | -0- | $354,555 | |
TOTALS $5,495,374 | $3,465,721 | $1,675,098 | $354,555 | |
=================================================================
AGENCY FINAL ORDER
=================================================================
STATE OF FLORIDA DEPARTMENT OF REVENUE
HEFTLER CONSTRUCTION COMPANY,
Petitioner,
vs. CASE NO. 81-001362
FLORIDA DEPARTMENT OF REVENUE,
Respondent.
/
FINAL ORDER
Pursuant to notice, the Division of Administrative Hearings, by its duly designated Hearing Officer, R. L. Caleen, Jr., held a formal hearing in this case on October 27, 1981, in Miami, Florida.
APPEARANCES
For Petitioner: Lewis M. Kanner
1000 duPont Building
169 East Flagler Street Miami, Florida 33131
For Respondent: Barbara Staros Harmon
Department of Legal Affairs LL04 The Capitol Tallahassee, Florida 32301
ISSUE
Whether the Department of Revenue should assess Heftler Construction Company ("Taxpayer") for Florida corporate income taxes on a claim that:
Taxpayer realized a gain under the Florida Income Tax Code when an asset acquired in 1971 (on liquidation of a joint venture) was sold in 1975 in satisfaction of an outstanding debt; and
Taxpayer's losses created by the subtraction of foreign source income cannot operate to create or increase the Florida portion of the net operating loss carryover.
Background
By notice dated November 20, 1980, the respondent Department Of Revenue ("Department") notified petitioner Heftler Construction Company ("Taxpayer") of a proposed assessment of Florida corporate income taxes; Taxpayer protested the assessment.
By letter dated March 11, 1981, the Department rejected those protests. In May, 1981, Taxpayer petitioned for a formal proceeding under Chapter
120, Florida Statutes, to challenge the Department's proposed assessment.
Taxpayer asserted that, contrary to the Department's contentions, it was entitled to: (1) subtract a 1975 capital gain when that gain was realized in 1971, prior to the effective date of Chapter 220, Florida Statutes, the "Florida Income Tax Code," and (2) carryover into subsequent tax years a 1975 loss created by subtraction of foreign source income from taxable income.
On May 11, 1981, Taxpayer's petition was forwarded to the Division of Administrative Hearings for the purpose of conducting the requested hearing.
Since the Department requested at least 90 days to conduct discovery, hearing was set for September 11, 1981. Thereafter, the parties' joint request for a continuance of the hearing was granted and hearing was reset for October 27, 1981.
The facts pertinent to this case are undisputed. At hearing, the parties filed a joint Stipulation of Fact (Joint Exhibit No. 1). In addition, the Department called Lester Begelman, an auditor, as its only witness and offered Exhibits 1 through 3 into evidence, each of which was received.
The Taxpayer called Henry J. Binkowski, its Vice President and chief financial officer, as its only witness and offered Exhibits 1 and 2 into evidence, both of which were received.
The parties were allowed to file proposed findings of fact and conclusions of law within 14 days from the date the transcript of hearing was filed.
Proposed findings and conclusions were timely received by December 8, 1981.
During the pendency of this proceeding, Chapter 81-178, Section 12, Laws of Florida, 1/ was enacted effective October 1, 1981. This law requires that, in Chapter 120 proceedings, the taxpayer be designated "petitioner," and the Department, "respondent." It did not alter the Department's burden in such proceedings--to establish the factual and legal basis of its proposed assessment. Because this law is procedural in nature, it applies to proceedings pending on the date of its enactment. See, Johnson v. State, 371 So.2d 556 (Fla. 2d DCA 1979). Consequently, the parties to this case have now been redesignated in accordance with Chapter-81-178, Laws of Florida.
Based on the stipulation of the parties and evidence presented, the following facts are determined:
FINDINGS OF FACT I.
Formation and Liquidation of Joint Venture; Subsequent Sale of Asset
Taxpayer is a New Jersey corporation, authorized to transact business in Florida. Heftler Realty Company ("Realty") is a Florida corporation, and is a subsidiary of Taxpayer.
Taxpayer, for all years material to these proceedings, filed consolidated income tax returns with the Internal Revenue Service of the United States ("IRS") . Pursuant to the applicable provisions of the Internal Revenue Code ("IRC"), Taxpayer included in the income and expenses of its consolidated income tax returns the income and expenses of its operations in Puerto Rico.
Taxpayer, for all years material to these proceedings, timely filed with the Department consolidated income tax returns.
In 1969, Realty formed a joint venture with a company known as GACL, Inc., for the purpose of developing real property
Realty, in accordance with its Joint Venture Agreement with GACL, Inc., prior to 1971, contributed to the joint venture the following assets with the following cost basis to Taxpayer on the date of contribution:
ASSET | DATE CONTRIBUTED TO JOINT VENTURE | COST BASIS TO TAXPAYER ON DATE CONTRIBUTED |
Cash | 3-5-69 | $250,000 |
Land | 3-5-69 | 2,000,000 |
In 1971, prior to the effective date of the Florida Income Tax Code ("Florida Code"), Chapter 220, Florida Statutes, the joint venture between Realty and GACL, Inc., was liquidated effective as of January 1, 1971. Pursuant to the plan of liquidation, Realty received, in liquidation of the joint venture, the assets as described in the attached Appendix. These assets had a then cost basis to the joint venture as described in the Appendix.
The assets acquired by Realty in liquidation of the joint venture were subject to the debts described in the Appendix.
Pursuant to the plan of liquidation of the joint venture, Realty agreed to acquire the assets and assume the attendant debts (itemized in the Appendix) as of January 1, 1971.
At the time of the liquidation of the joint venture, Realty had a cost basis for its interest in the joint venture of a negative $285,749. (Realty had a negative basis in the assets because it sustained joint venture losses in excess of its contributions to the joint venture.)
The net gain to Realty as' reported upon the federal income tax return of Taxpayer, after adjustment for depreciation, as a result of the liquidation was $1,238,37l.
In 1971, Realty reduced its tax basis in the assets acquired in the liquidation. This adjustment (reduction) in the tax basis of the assets acquired by Taxpayer occurred prior to the effective date of the Florida Code.
An asset acquired by Realty in 1971, pursuant to the plan of liquidation of the joint venture, was conveyed by Realty in 1975 to a creditor of Realty in satisfaction of debt.
After adjusting the tax basis of the asset, a comparison of its book basis (to the joint venture) with the tax basis to Taxpayer after liquidation, reflects the following:
Adjusted Basis as of Jan. 1,
Tax Basis to Tax- Book Basis to payer or After
Joint Venture Liquidation Difference
1971 $4,466,764 $3,055,722 $1,411,042
Accumulated Depreciation to
Date of Sale (587,212) (414,541) (172,671)
Adjusted Basis $3,879,552 $2,641,181 $1,238,371
For purposes of its Federal Income Tax, Taxpayer reported the transaction as a sale and computed the gain thereon as follows:
$3,951,708 | |
Expense of Sale | $2,713,337 |
3. Total Gain | $1,238,371 |
Gross Sale Price
Cost or Other Basis and
(The difference between the gross sales price and the adjusted basis referred to in paragraph 13 of $72,156 is an increase to the price due to escrow funds deposited with a mortgagee and assigned to the purchaser of the asset by Realty without Realty receiving reimbursement.)
In computing the Florida income tax, pursuant to the Florida Code, for the fiscal year ending July 31, 1976, Taxpayer took as a subtraction an adjustment on line 8, Schedule II, page 2 of its income tax return. The subtraction was in the amount of the capital gain received upon the sale of the asset received in liquidation in the amount of $1,238,371. Taxpayer subtracted
the gain, contending that it was realized prior to the effective date of the Florida Code.
When acquired, the asset received in liquidation had a cost basis to the joint venture Of approximately $4,500,000. When the asset was distributed to Taxpayer, after the reduction by Taxpayer to the tax basis referred to in paragraph 11, the basis to Taxpayer of the asset was approximately $3,000,000. The tax basis in the amount of $3,000,000 was evidenced by the debts assumed by Taxpayer upon the liquidation; such assumption of debt is referred to in paragraph 7.
Department contends that the gain on the sale of the asset acquired in liquidation was both realized and recognized in 1975 when the property was sold in satisfaction of a debt; it has issued a proposed assessment on that basis.
Taxpayer contends that the gain was realized by Taxpayer for federal income tax purposes prior to the effective date of the Florida Code and that only the recognition of the gain occurred after the effective date of the Florida Code.
II.
1975 Loss Created by Subtraction of Foreign
Source Income; Attempt to Carryover Loss to Subsequent Years
Taxpayer, in addition to the adjustment referred to above, in reporting income for its fiscal years ending July 31, 1976, July 31, 1977, and July 31, 1978, deducted a net operating loss carry-forward which included an item of $335,037 from its 1975 return (fiscal year ending July 31, 1976) and an item of $916,030 for fiscal year ending July 31, 1978, represented by a subtraction resulting from income earned in Puerto Rico. The subtraction resulted in losses during each of such years, which losses were carried forward by Taxpayer to the next ensuing year.
Department contends that the losses created by the subtraction of foreign source income cannot be carried over to subsequent years to determine income and has issued a proposed assessment on that basis.
Taxpayer contends that it is not the intent of the Florida Legislature to tax income derived from sources outside the United States and that the effect of a denial of the subtraction will result in the taxation, by Florida, of foreign source income received by Taxpayer.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction over the parties and subject matter of this proceeding. 120.57, Fla. Stat. (1981).
The "Florida Income Tax Code," ("Florida Code") Chapter 220, Florida Statutes (1981) , imposes an income tax of 5 percent on the corporate taxpayer's "net income for the taxable year." 220.11(2), Flab Stat. (1981). "Net income" is defined as apportioned adjusted federal income less the exemption allowed by Section 220.14. 220.12(2), Fla. Stat. (1981). "Adjusted federal income means an amount equal to the taxpayer's taxable income less specified adjustments. 220.13(1), Fla. Stat. (1981). "Taxable income" for the taxable year means taxable income (subject to specified adjustments) as defined by the United States Internal Revenue Code of 1954 ("IRC"). 220.13(2), Fla. Stat. (1981).
I.
Realization of Gain Upon Disposition of Assets
Section 220.02(4)(a), Florida Statutes, defines "income" which is subject to taxation as:
"Income," for purposes of this Code, indicating 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; (e.s.)
Income is "realized" "when the taxpayer receives actual economic gain from the disposition of the property." S.R.G. Corporation v. Department of Revenue,
365 So.2d 687, 689 (Fla. 1978). Ordinarily, "realization" and "recognition" (when the tax becomes due and payable) Occur at the same time, but the two terms have distinct and different meanings. Id.
In Department Of Revenue v. Leadership Housing, Inc., 343 So.2d 611, 614 (Fla. 1977), the Florida Supreme Court held that appreciation in value of capitar assets is not income until it is realized," i.e., separated from its capital; the court endorsed the definition of income announced in Eisner v.
Macomber, 252 U.S. 189, 207 (1920):
"Income may be defined as the gain derived from capital, from labor, or from both combined," provided it be understood to include profit gained through a sale or conversion of capital assets . . . .
[It is] not a gain accruing to capital, not a growth or increment of value in the
investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being "derived," that is received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal;--that is income derived from property. Nothing else answers the description.
The Florida Code operates prospectively; it cannot be construed to impose a tax on gain which was "realized" prior to November 2, 1971, the effective date of the taxing statute. S.R.G., supra at 688; 220.02(4), Fla. Stat. (1981).
In the instant case, Taxpayer contends that, by distribution of assets in liquidation of a joint venture in 1971, it realized a gain prior to the effective date of the taxing statute. The Department contends that the gain was not realized until 1975, when the assets were disposed of by conveyance to a creditor in satisfaction of debt. The Department's position is persuasive.
In construing the Florida Code, concepts of law which have been developed in connection with the IRC should be utilized to the greatest extent possible. 220.02(3), Fla. Stat. (1981).
The IRC treats joint ventures as partnerships for taxing purposes. Partnerships are not taxed as separate entities; the partners (or joint ventures) are liable for federal income tax in their separate capacities. 701, IRC. The partners' joint ownership of partnership assets is an essential attribute of a partnership. See, 59 Am. Jur.2d, Partnership, 11, p. 936 (1971).
[A]n ordinary partnership . . . has no entity in the sense that it may own property separate and apart from the ownership
of its members. The members, at all times, own the partnership business and the assets employed in it, and are therefore never separated from title there from. Crawford v. Commissioner of Internal Revenue, 39 B.T.A.
521, 525 (1939)
When partnership assets are completely distributed among its members (such as occurs in liquidation) the distribution is merely an apportioning among them of what they already jointly own.
The dissolution of the partnership in question in no way affected the title to the assets of the partnership fund but the title to such assets, which, ab initio had rested in the members, continued in them.
Accordingly, the distribution of assets which took place upon dissolution of the partnership neither added to, nor took from, the economic interests of the partners. The net effect of the process was not to create new interests and values, but merely to apportion and deliver to each member, according to his ratable interest, that which represented his then investment, leaving
him no richer or poorer than he was before the dissolution. Id. at 525. (e.s.)
The IRC recognizes this ownership feature of partnership assets. When partnership assets (other than money) are completely distributed to its members, such as occurred in the instant case, no gain is recognized to the distributed partner. 731, IRC. Treasury regulation Section 1.731-1 (1980) explicitly provides:
No gain shall be recognized to a distributed partner with respect to a distribution of property (other than money) until he sells or otherwise disposes of the property . . .
The basis of the property (other than money) distributed to a partner in liquidation of the partner's interest is equal to the adjusted basis of that partner's interest in the partnership reduced by any money distributed in the same transaction. 732 (b), IRC. 2/
Taxpayer concedes that it recognized the gain from the distribution Of joint venture assets in 1975, but contends that it realized the gain in 1971.
This contention is rejected. The facts do not indicate that Taxpayer realized a gain from the 1971 distribution within the meaning of the Florida Code. See, S.R.G., supra at 689; Leadership Housing, supra at 614. The effect of the distribution was to deliver to Taxpayer, according to its ratable interest, "that which represented . . . [its] then investment, leaving . . . [it] no richer or poorer" than it was before the liquidation. Crawford, supra at 525. All that changed was the form of ownership of the asset involved.
II.
Loss Caused by Subtraction of Foreign Source Income Cannot be Carried Forward to Subsequent Years
In defining "adjusted federal income" to mean the taxpayer's taxable income, the Florida Code authorizes certain adjustments or subtractions:
Section 220.13(1)
* * *
(b) Subtractions.
In computing the net operating loss deduction allowable for federal income tax purposes under section 172 of the Internal Revenue Code for the taxable year, . . . .
there shall be subtracted from taxable income, in order to arrive at adjusted federal income, such amounts as reflect the following limitations:
* * *
A net operating loss shall
never be carried back as a deduction to a prior taxable year, but all deductions attributable to such losses shall be deemed net operating loss carryovers and
treated in the same manner, to the same extent, and for the same time periods as
are prescribed for such carryovers in section
172 and section 212, respectively, of the Internal Revenue Code.
There shall be subtracted from such taxable income any amount included therein:
* * *
b. Which was derived from sales outside the United States, and from sources outside the United States as interest, as a royalty, or as compensation for technical or other services; . . .
Section 172, IRC, allows the net operating loss carryovers plus the net operating loss carrybacks as a deduction during the taxable year. Net operating loss" is defined for federal income tax purposes as the excess of the deductions allowed by the IRC over the taxpayer's gross income. 172(c), IRC. Unlike Florida's taxing statute, Section 172 does not allow subtraction or exclusion of foreign source income from federal income.
The Department contends that net operating losses are included in the Florida Code only to the extent allowed by Section 172, IRC; that Section 172 does not provide for exclusion of foreign source income from federal income; that, consequently, the net operating losses caused by exclusion of foreign source income cannot be carried forward for purposes of the Florida tax.
Taxpayer; responds, in part, that such a carry-forward is not statutorily prohibited; that such a carry-forward is necessary to purge Taxpayer's taxable income (for Florida purposes) from all affects of foreign source income; and that to deny such a carry-forward would deprive it of its right to fully utilize Section 172, IRC.
The Department's contention is persuasive. The provisions of the Florida Code relating to net operating loss carryovers effectively exempt certain income from Florida's income tax. Tax exemptions are considered "special favors granted by the Legislature and are to be strictly construed against the taxpayer. Housing by Vogue, Inc. v. Department of Revenue, 403 So.2d 478, 480 (Fla. 1st DCA 1981); Accord: State v. Thompson, 101 So.2d 381 (Fla. 1958); U.S. Gypsum Company v. Green, 110 So.2d 409 (Fla. 1959); State ex rel. Szabo Food Service, Inc., of North Carolina v. Dickinson, 286 So.2d 529 (Fla. 1973)
Exemption provisions cannot be enlarged by construction; nor can they rest on implication. Orange State Oil Company v. Amos, 130 So. 707 (Fla. 1930). As the Florida Supreme Court stated in Orange State, supra at 709:
Taxation is the rule; exemption is the exception which must be created by clear and definite terms.
Here, by clear statutory language, the Florida Legislature declared that net Operating loss carryovers be "treated in the same manner, [and] to the same extent" as prescribed in Section 172. 220.13(1)(b)l.c., Fla. Stat. (1981). The construction urged by Taxpayer requires enlargement of this limiting language and is rejected as contrary to controlling principles of statutory construction.
The Department's strict construction of Section 220.13 (1)(b)1.c., Florida Statutes (1981), is consistent with its established practice. See, Department final orders entered in Questor Corporation v. Department of Revenue, Case No. 79-1051, and Parkson Corporation v. Department of Revenue, Case No. 81-
074. Taxpayer has not provided reasons justifying deviation from this practice. See, Outdoor Advertising Art, Inc., v. Florida Department of Transportation, 366 So.2d 114 (Fla. 1st DCA 1979). 120.68(12)(b), Fla. Stat. (1981)
The parties' proposed findings of fact and conclusions of law which are incorporated herein are adopted; otherwise, they are rejected as unnecessary to resolution of the issues, unsupported by the evidence, or contrary to controlling law.
BASED ON THE FOREGOING, IT IS ORDERED:
That the Department's proposed assessment of Taxpayer for corporate income tax deficiences be upheld.
DONE AND ENTERED THIS 1st day of April, 1982, in Tallahassee, Florida
Randy Miller Executive Director Department of Revenue State of Florida
I HEREBY CERTIFY that the above Final Order was entered in the records of
the Department of Revenue this 1st day of April, 1982.
Mary L. Ford,
Secretary to the General Counsel
APPENDIX
HEFTLER CONSTRUCTION COMPANY AND SUBSIDIARIES TAX REPORTING - U.S. FORM 1120 - 7/31/71
Tax Basis of joint Venture Interest 12/31/70
Original Investment, Net of Debt $250,000 Additional Advance 336,277
Withdrawal (13,293)
Losses 1969 $(301,910)
1970 (556,823) (858,733)
Net - Negative Basis (285,749) Taxable
50 percent of Joint Venture Liabilities at 12/31/70 $4,019,554
Liabilities Assumed 3,465,721 Forgiveness $553,833
Tax Basis of Assets Received
Basis in Joint Venture | Liabilities Assumed | Tax Bases Zero | Taxable |
Criquet Club $4,470,686 | $3,059,644 | $1,411,042 | |
Land (Condo) 518,000 | 274,800 | 243,200 | |
Office Building | |||
and Equipment 48,856 | 28,000 | 20,856 | |
Cash and Notes vs. | |||
Current Liabilities 457,832 | 103,277 | -0- | $354,555 |
TOTALS $5,495,374 $3,465,721 $1,675,098 $354,555
| Issue Date | Proceedings |
|---|---|
| Apr. 05, 1982 | Final Order filed. |
| Jan. 21, 1982 | Recommended Order sent out. CASE CLOSED. |
| Issue Date | Document | Summary |
|---|---|---|
| Apr. 01, 1982 | Agency Final Order | |
| Jan. 21, 1982 | Recommended Order | Net operating losses caused by exclusion of foreign income cannot be used to defeat the Florida income tax. Assess corporate tax and deficiencies. |
QUESTOR CORPORATION vs. DEPARTMENT OF REVENUE, 81-001362 (1981)
HEFTLER CONSTRUCTION COMPANY AND SUBSIDIARIES vs. DEPARTMENT OF REVENUE, 81-001362 (1981)
STAN MUSIAL AND BIGGIE`S, INC. vs. DEPARTMENT OF REVENUE, 81-001362 (1981)
BUCHWALD ENTERPRISES, INC. vs. DEPARTMENT OF REVENUE, 81-001362 (1981)
SCHINE ENTERPRISES, INC. vs. DEPARTMENT OF REVENUE, 81-001362 (1981)
