vs. ) CASE NO. 81-1601
Respondent. )
Pursuant to notice, an administrative hearing was held before Diane D. Tremor, Hearing Officer with the Division of Administrative Hearings, on October 5, 1981, in Tallahassee, Florida. This case was consolidated for hearing purposes with the case of American Telephone and Telegraph Company vs. State of Florida, Department of Revenue, DOAH Case No. 81-2188R (Final Order entered April 28, 1982), which challenged, pursuant to Section 120.56, Florida Statutes, the validity of two rules of the respondent. The issue for determination in the instant proceeding is whether petitioner is liable for proposed deficiencies in its Florida corporate income taxes for three tax years in the total amount of
$1,131,158.
For Petitioner: Susan B. Werth and
Richard J. Razook Paul & Thompson
For Respondent: E. Wilson Crump, II
Assistant Attorney General Department of Legal Affairs The Capitol, LL04 Tallahassee, Florida 32301
The parties have stipulated to all facts in this proceeding. Those facts found relevant to a determination of the issue are as follows:
Petitioner, American Telephone and Telegraph Company, is a New York corporation and is functionally divided into two divisions: the Long Lines Department and the General Department. Through its Long Lines Department, petitioner is a federally regulated public utility and common carrier which furnishes interstate and international telecommunications services. Long Lines
is responsible generally for the construction, operation and maintenance of a nationwide system of interstate telecommunications facilities and related equipment which serve to interconnect the facilities of over 1700 operating telecommunications companies in the United States as well as telecommunications systems abroad. Some of these facilities extend into and through the State of Florida. In performing this interstate business, Long Lines operates, and thus has property or employees or both in 49 states, including Florida.
Through its General Department, petitioner is the parent corporation of
21 operating telecommunications companies (known as "Associated Companies"), Western Electric Company, Inc. ("Western") and Bell Telephone Laboratories, Inc. ("Bell Labs"). The General Department holds and manages the stock owned in these subsidiaries and two minority owned companies, and provides capital. advice and assistance to them. It conducts these activities principally in New York and New Jersey and conducts no business and has no property or employees in Florida.
The only business activities in the State of Florida during 1972, 1973 and 1974 were conducted through petitioner's Long Lines Department in connection with the operation of the interstate and international long distance telecommunications network. None of the Associated Companies is organized under the laws of Florida or has its headquarters in Florida. The Only Associated Company which conducts business or has property or employees within Florida is the Southern Bell Telephone and Telegraph Company (hereinafter "Southern Bell"), a wholly owned subsidiary of petitioner. Southern Bell files its own separate Florida income tax returns and during the period 1972-1974 paid approximately
$10 million in income tax to Florida. The respondent concurs that petitioner is entitled to deduct 100 percent of the dividends paid by Southern Bell to petitioner. Western, also a wholly owned subsidiary of petitioner, is a manufacturing corporation with its own Board of Directors and officers, doing business in all 50 states. During the period 1972-1974 Western paid approximately $1.7 million in income tax to Florida. The respondent concurs that petitioner is entitled to deduct 100 percent of the dividends paid by Western to petitioner.
For each of the 1972, 1973 and 1974 tax years, petitioner has filed a federal consolidated income tax return, and has made a valid election under Section 243 of the Internal Revenue Code for each of those years. That provision of the federal tax law permits a domestic corporation to deduct 100 percent of the dividends received from its wholly-owned domestic subsidiaries. Petitioner's federal income tax returns were audited by the Internal Revenue Service and the respective tax liabilities were determined and paid for each of the years in question. The Internal Revenue Service did not tax dividends received by petitioner from its affiliates.
Petitioner timely filed its Florida corporate income tax returns for the years ending December 31, 1972, December 31, 1973 and December 31, 1974. Petitioner did not elect and was not required to file a Florida consolidated income tax return under Section 220.131, Florida Statutes. For each of the years in question, petitioner reported on line 1--"federal taxable income (line 30, Form 1120 or corresponding line on related form 1120 series, 990C or 990T)"-
-of its Florida corporation income tax return (Form F-1120) its taxable income for federal income tax purposes computed as if petitioner had filed a separate federal income tax return for each of the years in question and for each preceding taxable year for which it was a member of an affiliated group. These amounts were:
1972 | $ 94,020,281 |
1973 | $213,364,165 |
1974 | $110,770,402 |
On its Florida corporation income tax return for each of the years in question, petitioner made the additions and subtractions required by the form of the return in computing "adjusted federal income" and apportioned this amount by the prescribed three-factor formula to obtain "Florida net income."
The Department of Revenue adjusted the amount of "federal taxable income" and hence "Florida net income" of petitioner for each of the years in question by adding thereto 15 percent of the dividends received from subsidiaries which were deductible for federal income tax purposes under Section
243 of the Internal Revenue Code. On April 10, 1978, the Department issued a notice of proposed deficiency for petitioner's tax years ended December 31, 1972, December 31, 1973 and December 31, 1974. The total amount of the proposed deficiency was $1,131,158, computed as follows:
YEAR | AUDITED TAX | TAX AS FILED | DEFICIENCY |
1972 | $426,468 | $122,365 | $304,103 |
1973 | 668,597 | 281,168 | 387,429 |
1974 | 594,300 | 154,674 | 439,626 |
Total | $1,689,365 | $558,207 | $1,131,158 |
After a timely protest to the proposed deficiencies was filed by the petitioner, correspondence and an informal conference between the parties was had. Finally, on April 16, 1981, the Department issued a letter denying the protest and petitioner petitioned for an administrative hearing.
Through correspondence and discussions with the petitioner, the Department of Revenue has taken the position that it would allow only an 85 percent dividend deduction for the dividends received by petitioner from those affiliates which were not subject to the Florida corporate income tax code. Petitioner is seeking to take a 100 percent deduction of all dividends which it received from its subsidiaries, as it did on its federal income tax returns.
The dividends received by petitioner which the Department is attempting to subject to Florida tax by its proposed deficiency assessment are derived from its equity investment in its subsidiaries and they represent to petitioner a return on such investment. Since the actual capital, however, for that investment is furnished primarily by public investors, the principal use of the dividends received by petitioner is to meet its obligation to its shareholders and bondholders for the payment of dividends and interest. For example, in 1974 petitioner received dividends from the Associated Companies, Western and other affiliates in the amount of $2,538,443,000 and paid dividends to shareholders in the amount of $2,039,800,000 and interest on its long and intermediate term debt of $475,670,000. Petitioner, therefore, serves as the investor interface between the investing public and its subsidiary companies, whereby the purchase of petitioner's stock or debt issues actually represents an investment in the earnings of the Bell System. Petitioner, acting through its General Department, thus provides the avenue by which the subsidiaries pass their net earnings to the investing public.
The income which the Department seeks to tax is derived from dividends received by petitioner primarily from earnings generated by the property and employees of the Associated Companies which are devoted to furnishing intrastate and interstate telecommunications services in their operating territories in
states other than the State of Florida. These earnings are subject to income taxes in all states in which the Associated Companies provide telecommunications services that impose income taxes on corporations.
The dividends received by petitioner do not contribute to the funding of Long Lines since (1) the pervasive regulation under which petitioner's subsidiaries operate limits their earnings to that amount sufficient for the needs of their own operations and effectively prevents those earnings from being available for use in other businesses and (2) earnings paid out as dividends by petitioner's subsidiaries are principally required to be passed to the public investors in the Bell System, through petitioner's General Department, in order to meet dividend and interest obligations to these outside shareholders and bondholders.
During the tax years in question, the Department of Revenue had not promulgated any rule with respect to the disallowance of a deduction for 100 percent of dividends received as provided for under Section 243 of the Internal Revenue Code, and the Florida corporate income tax return forms did not require any such add-back or adjustment.
During the 1980 legislative session, an amendment to Chapter 220, Florida Statutes, was proposed which would have changed the definition of "affiliated group of corporations." Such proposed legislation was not passed and did not become law.
CONCLUSIONS OF LAW
This case involves a dispute over the proper amount of petitioner's Florida net income subject to tax in this State. Basically stated, the issue is whether petitioner is entitled to a 100 percent deduction from income of the dividends it received from its affiliates which are not subject to the Florida corporate income tax code.
It is the petitioner's position that 100 percent of the dividends it received from all its affiliates, whether or not incorporated or doing business in Florida, are deductible for purposes of computing petitioner's "taxable income" within the meaning of the Florida corporate income tax code. This position is based upon the contentions that the statutory language of Chapter 220, Florida Statutes, requires such a deduction; that such a deduction is in keeping with the federal "piggybacking" scheme; that there is no legitimate authority for any other interpretation; that the legislative history of the Florida income tax code illustrates an intent not to add back any part of federally deductible dividends received from affiliates and that any other interpretation would be not only contrary to the legislative mandate, but unconstitutional as well.
The respondent takes the position that the petitioner is entitled to deduct from its income 100 percent of those dividends it received from its affiliated corporations which are subject to the Florida corporation income tax code. As for those affiliated corporations not incorporated, located or engaged in business in the State of Florida, respondent would allow only an 85 percent deduction for the dividends petitioner received. In other words, respondent would add back to petitioner's Florida taxable income an amount equal to 15 percent of the dividends received by petitioner from affiliated corporations which are not subject to the Florida tax even though that income is not taxable income for federal income tax purposes. 1/ Respondent bases this position on the contention that the federal test for dividend deductions must be separately
applied within the context of the Florida system. In other words, since federal law only allows the 100 percent dividend deduction for domestic affiliates, Florida will only allow the 100 percent deduction for dividends received from affiliates subject to the Florida income tax code. For this interpretation, the respondent relies upon the concept of "affiliated group of corporations" contained in various provisions of the Florida Code with respect to the filing of consolidated returns.
A brief walk through the pertinent provisions of the Florida income tax code leads to the conclusion that the respondent's attempt to add back 15 percent of the dividends received by petitioner from non-Florida affiliates, and
100 percent deductible for federal income tax purposes, is not authorized by the statutes or regulations which govern the Department of Revenue.
Throughout the Florida income tax code, the legislative intent to utilize, to the greatest extent possible, concepts of law developed in connection with the federal income tax laws and to "piggyback" the federal scheme of income taxation is clear. Florida Statutes, Sections 220.02(3), 220.02(4), 220.03(2)-(4), and 220.43. Turning now to the mechanics of the Florida code, Section 220.11 imposes a tax of five percent of the taxpayer's net income for the taxable year. "Net income" is defined as that share of a taxpayer's "adjusted federal income" which is apportionable to this State in accordance with other statutory language. Section 220.12, Florida Statutes. "Adjusted federal income" is defined in Section 220.13 as an amount equal to the taxpayer's "taxable income" as defined in Section 63 of the Internal Revenue Code and properly reportable for federal income tax purposes for the taxable year, subject to certain limitations and adjustments not pertinent to this case. The statutorily prescribed adjustments do not include the add-back of any amount of dividends. And finally, "taxable income" for a corporation which is a member of an affiliated group filing a consolidated federal return, but a separate Florida return, such as the petitioner in this proceeding, is defined in Section 220.13(2)(f) as follows:
(f) "Taxable income," in the case of a corporation which is a member of an affiliated group of corporations filing a consolidated income tax return for the taxable year for federal income tax purposes, shall mean taxable income of such corporation for federal income tax purposes as if such corporation had filed a separate federal income tax return for the taxable year and each preceding taxable year for which it was a member of an affiliated group, unless a consolidated return for the taxpayer and others is required or elected under s. 220.131.
In this case, a consolidated return was neither required nor elected to be filed under Section 220.131, Florida Statutes.
Thus, the starting point for determining tax liability underFlorida law is the taxpayer's "taxable income. The definitions of "taxable income" do not include the add-back of 15 percent of dividends received from petitioner's non-Florida affiliates, which dividend are deductible under Section 243 of the Internal Revenue Code. Under Florida law, a taxpayer is permitted to claim
those deductions allowed by Section 63 of the Internal Revenue Code and properly reportable for federal income tax purposes in corrupting "taxable income."
A review of the legislative history of the Florida income tax code, particularly as illustrated by the Report to the House on Proposed Corporate Income Tax Legislation, prepared by Arthur J. England, Jr., Special Tax Counsel (Joint Exhibit 11), demonstrates that a major policy consideration in adopting the Florida Code was the taxation of dividends received. Staff Draft No. 3 contained a definition of "taxable income" which would have disallowed any deduction provided by Section 243 of the Internal Revenue Code. In the form ultimately enacted by the Legislature, Section 220.13(2) does not disallow from the computation of "taxable income" dividend deductions allowable under Section
243 of the Internal Revenue Code. It thus appears that the Legislature clearly expressed its intent to allow the federally allowable 100 percent deduction for dividends received in the computation of Florida "taxable income" in the case of Florida taxpayers filing a separate, unconsolidated return.
Respondent's attempt to rely on the provisions of Section 220.131, Florida Statutes, in support of its position is misplaced. That section pertains to the filing of a Florida consolidated return by a Florida parent company of an affiliated group of corporations. Since petitioner did not and was not required to file a consolidated return, Section 220.131 is simply not relevant to the issues in this case. Nor does it follow that the limitations on the right to file a Florida consolidated return support the taxation of dividend income which is properly deducted from federal taxable income where a separate Florida tax return is being filed.
In conclusion, there is no statutory authority for the respondent's position with respect to the amount of deduction allowable for dividends received by a Florida taxpayer from its non-Florida affiliates (85 percent as opposed to the 100 percent allowable federal deduction). "Taxable income" for Florida purposes means income taxable for federal income tax purposes. The Florida tax code clearly distinguishes between taxpayers filing separately and those filing under a consolidated basis under Section 220.131, Florida Statutes. Therefore, there is no rational basis for engrafting the "Florida affiliated group" concept onto the definition of "taxable income" under Section 220.13(2)(f), Florida Statutes. Section 220.131 has no relevance to the determination of taxable income for a taxpayer filing a separate Florida income tax return.
The undersigned has carefully considered the memoranda of law and proposed findings and conclusions submitted by the parties in this proceeding. To the extent that any proposed findings of fact or conclusions of law are not contained in this Recommended Order, they are rejected as being either irrelevant or immaterial to a determination of the issues in dispute or as lacking in persuasive force.
Based upon the findings of fact and conclusions of law recited herein, it is RECOMMENDED that that portion of the Department's proposed assessment of deficiencies for the 1972, 1973 and 1974 tax years as is based upon dividends received by the petitioner from its affiliates be withdrawn as being contrary to law and invalid.
Respectfully submitted and entered this 28th day of April, 1982.
DIANE D. TREMOR, Hearing Officer Division of Administrative Hearings The Oakland Building
Filed with the Clerk of the Division of Administrative Hearings this 28th day of April, 1982.
1/ This position of the Department of Revenue was challenged as an invalid rule in a separate proceeding filed by petitioner pursuant to Section 120.56, Florida Statutes. American Telephone and Telegraph Company vs. State of Florida, Department of Revenue, DOAH Case No. 812188R. In a Final Order dated April 28, 1982, the undersigned Hearing Officer declared that position to be a "rule" and an invalid exercise of delegated legislative authority since it was never promulgated or adopted in accordance with the requirements of the Administrative Procedure Act. Therefore, the merits of the position asserted by the respondent in this proceeding is entitled to no presumption of validity, and is to be considered only in light of whether or not the statutes and rules of the Department authorize or permit such an interpretation in this proceeding.
Susan B. Werth, Esquire and Richard J. Razook, Esquire PAUL & THOMPSON
E. Wilson Crump, II, Esquire Assistant Attorney General Department of Legal Affairs The Capitol, LL04 Tallahassee, Florida 32301
