STATE OF FLORIDA
DIVISION OF ADMINISTRATIVE HEARINGS
MURRAY KRAMER CORPORATION, INC., )
)
Petitioner, )
)
vs. ) CASE NO. 88-4100
) STATE OF FLORIDA DEPARTMENT ) OF REVENUE, )
)
Respondent. )
)
RECOMMENDED ORDER
Upon due notice, this cause came on for formal hearing on February 13, 1989, in Tallahassee, Florida, before Ella Jane P. Davis, a duly assigned Hearing Officer of the Division of Administrative Hearings.
APPEARANCES
For Petitioner: Milton P. Weiss, C.P.A.
as Qualified Representative of Petitioner 686 Hampstead Avenue
West Hampstead, New York 11552
For Respondent: Jeffrey M. Dikman, Esquire
Assistant Attorney General Tax Section
Department of Legal Affairs The Capitol
Tallahassee, Florida 32399-1050
Sharon A. Zahner, Esquire Assistant General Counsel Department of Revenue
Room 204, Carlton Building Post Office Box 6668
Tallahassee, Florida 32314-6668 STATEMENT OF THE ISSUE
Is the Respondent's assessment for corporate income tax and interest for the tax years ending 12/31/78, 12/31/79, and 12/31/80 appropriate, and may it be properly imposed upon Petitioner?
PRELIMINARY STATEMENT
At the commencement of formal hearing, Milton P. Weiss, C.P.A., was examined and determined on the record to be both authorized and qualified to represent Petitioner, pursuant to Rule 22I-6.008, F.A.C. To this end, one exhibit was admitted as HO-A.
Official recognition was taken of certain statutes and rules and a number of motions were disposed of upon the record and need not be revisited here.
Respondent presented the oral testimony of Frank J. Siska and had admitted in evidence Exhibits R-1, R-2A, R-2B, R-3, R-4, R-5, and R-7. There was no R-6.
Petitioner presented the oral testimony of Milton P. Weiss and had admitted Exhibits P-1, P-2, P-3, P-9, and P-10. Exhibits P-6, P-7, and P-8 were not admitted in evidence.
A transcript was filed, and all timely-filed proposed findings of fact have been ruled upon in the Appendix to this Recommended Order, pursuant to Section 120.59(2), F.S.
FINDINGS OF FACT
The instant dispute between the parties arose out of how the substantial business interests of Petitioner Murray Kramer Corp. are to be defined and by what accounting method its corporate income tax assessments are to be made. Milton P. Weiss, C.P.A., is Petitioner's accountant and qualified representative for purposes of this proceeding. He is neither an internal bookkeeper for the corporation nor a corporate officer thereof.
At all times material, Petitioner was conducting business, deriving income, or existing within the State of Florida, pursuant to Chapter 220, F.S.
Petitioner invests primarily through partnerships. Among Petitioner's holdings and investments is ownership of an orange grove in the State of Florida from which it derived income by way of the sales of citrus fruit grown in Florida during the taxable years at issue: 1978, 1979, and 1980. The orange grove constitutes real and tangible property in Florida for purposes of Florida's corporate income tax.
Petitioner has consistently filed Florida corporate income tax returns on a "separate accounting" basis since the inception of Florida's Corporate Income Tax Law on January 1, 1972. Petitioner used this method for the years at issue: 1978, 1979, and 1980. It did so without petitioning the Respondent Department of Revenue for permission at or before the filing of the returns to use the "separate accounting" method to determine the Florida tax base. Accordingly, Petitioner did not receive prior written permission from the Department to use the "separate accounting" method for those years, and the Department did not require that the Petitioner use the "separate accounting" method in those years. Nonetheless, Petitioner asserts that its pattern of using the "separate accounting" method for six years put the Department on sufficient notice that the corporate taxpayer would continue to use that method indefinitely and further asserts that it was therefore entitled to use such a "separate accounting" method on the basis of its prior consistent usage.
Petitioner's Florida corporate returns declare investment income from dividends, interest, gains from securities, partnership income, and income from its orange grove located in Florida. In each of the disputed tax years, Petitioner entered its federal taxable income on Line 1 of the Florida Corporation Income Tax Return, FORM F-1120. This amount is not at issue and is accepted as a "given" by both parties.
However, in each of the disputed tax years, Petitioner did not complete the apportionment schedule on Page 3 of the respective returns. Instead of using the apportionment method, Petitioner computed what it characterized as "Florida Profit" or "Florida Income" on a schedule it attached, based totally on the profits it derived from the Florida orange grove and then inserted that amount on Line 6, Florida Portion of Adjusted Federal Income, of the "Computation of Florida Tax Liability" on the Florida return. This entry did not relate computationally to the amount of federal taxable income reported federally on Line 1.
All gross receipts from the sale of citrus fruit by Petitioner were derived from sales made to Zellwood Fruit Distributors. This dollar amount is also undisputed. Petitioner received payment from its Florida orange grove operation in the form of checks drawn by Zellwood.
Approximately June 20, 1983, Respondent Department of Revenue made an initial audit of Petitioner's books and records for the taxable years in question. Respondent's auditor assigned at that time had full and free access to Petitioner's books and records. He and his supervisor memorialized their view that the "separate accounting" method employed by Petitioner was proper, but this judgment call (by the auditor on June 29, 1983 and by his supervisor on July 1, 1983) was in the nature of free-form agency action and was neither accepted nor formalized by their superiors within the agency who ultimately determined that the Petitioner should have employed the "apportionment" method and that the burden was upon the Petitioner even under the apportionment method to establish that one hundred percent of its income was not derived in Florida.
The Respondent Department therefore determined the tax owed by Petitioner upon the basis of 100% of Petitioner's income as opposed to the yearly percentages that Petitioner had unilaterally assigned to its orange grove, and issued its Revised Notice of Intent to Make Corporate Income Tax Audit Changes on November 7, 1983.
Florida's apportionment formula is a three-factor function which takes selected business activities of the taxpayer and computes the portion of that activity attributable to Florida, divided by that activity everywhere. A composite of the subtotal of those three measures (payroll, sales, and property) of business activity are used to compute Florida's share of the "everywhere" base that would be available under the adjusted federal taxable income base. See, Section 214.71(1), F.S.
The Department calculated the tax using the three statutorily recognized apportionment factors of payroll, sales, and property. Concerning the first apportionment factor, payroll, Petitioner had federally reported no amount of payroll, and therefore this factor was determined by the Department to be zero, and pursuant to Section 220.15, F.S., the payroll factor was eliminated and the other two factors were used exclusively. Concerning the sales factor, all gross receipts of the orange grove were considered to be derived within the State of Florida, and all gross income attributable to intangible personal property was excluded from the sales factor, pursuant to Section 220.15(1), F.S. Concerning the property factor, the Department determined that all real and tangible personal property was within the State of Florida. The situs of the intangible property was not established by the taxpayer. Therefore, because Section 214.71, F.S. limits the construction of the property factor to include only "real and tangible personal property," it was thus determined to exclude intangible property.
The Respondent Department of Revenue issued its Notice of Proposed Assessment on November 16, 1983, showing a balance of $10,596.00 ($7308.00 tax,
$275.00 penalty, and $3,013.00 interest computed through October 31, 1983, plus notice of daily interest of $2.40 per day from November 1, 1983 until paid.)
Petitioner timely availed itself of informal protest procedures, and the Department issued its Notice of Decision on March 15, 1985. By its June 21, 1988 Notice of Reconsideration, the Department concluded its informal proceedings and denied Petitioner's assertion of the right to use a "separate accounting" method and further denied Petitioner's challenge to the Department's assessment by the "apportionment" method, which in this instance had not made any apportionment for "outside Florida" activities.
The situs of intangible personal property was not sufficiently demonstrated by the Petitioner at formal hearing. The Petitioner also did not establish that it owns real or tangible personal property outside Florida.
Zellwood Fruit Distributors provided Petitioner Murray Kramer with letters attesting that, based upon information received from Winter Gardens Citrus Products Cooperative, Winter Gardens' sales percentages in the State of Florida were as follows:
1979 1980
18.60% 21.07%
Zellwood provided no such figures to Petitioner for the year 1978. Petitioner contends, on the basis of the after the fact Zellwood letters, that Zellwood was a member of Winter Gardens, a cooperative, and Murray Kramer was an associate grower of Zellwood. At formal hearing, no one from Zellwood or Winter Gardens testified; no contract between Petitioner Murray Kramer and either Zellwood or Winter Gardens was introduced to prove agency; no bills of lading, sales slips, corporate documents, or other connective link among the three entities was offered in evidence; nor was any primary, direct, non-hearsay evidence of sales amounts or situs of Winter Gardens' sales offered by Petitioner.
Milton Weiss, Petitioner's accountant, asserted that if a straight "apportionment" (not "separate accounting") calculation had been made for the income derived in Florida by Petitioner, percentages would be:
1978 | 1979 | 1980 |
24.03% | 15.31% | 15.01% |
These percentages rely in part on what are clearly the out-of-court statements of Zellwood's correspondent, relaying further out-of-court statements from Winter Gardens Citrus. (See the immediately preceding Finding of Fact).
Neither of these out-of-court hearsay statements is such as may be used to supplement or explain direct evidence, since no direct, primary source evidence of these sales or income has been presented before the undersigned in this de novo proceeding. See, Section 120.58(1), F.S.
Petitioner has not directly paid wages during the tax years at issue.
Petitioner has not produced any federal partnership tax returns nor other persuasive proof to account for the return on its investments through partnership channels.
During the tax years at issue, Petitioner was not a member of a Florida cooperative, as that term, "cooperative," is used in Section 214.71(3)(a)2, F.S. (See Finding of Fact 15).
Petitioner was unable, by evidence of a type commonly relied upon by reasonably prudent persons in the conduct of their affairs, to establish that all amounts other than the percentages of gross income Petitioner had assigned by either of the alternative accounting methods was generated outside of the State of Florida. In so finding, the undersigned specifically rejects Petitioner's assertion that the initial audit report of June 1983 could, by itself alone, legally or factually establish that only the orange grove income was Florida income, that Petitioner's Florida income was solely from the orange grove, that the interest, dividends, and gains on securities sales were not derived in Florida, that the Petitioner taxpayer received rent income from partnerships, that the partnership real estate which gave rise to the rent income was 100% outside Florida, or that the Respondent's initial audit "verified" the figures needed to compute the sales factor, the figures for the property factor, and the figures for the payroll factor of the "apportionment" method for the following reasons: In addition to the first auditor's report being free-form agency action which was ultimately rejected by the agency, and in addition to the failure of either the first auditor or his supervisor to testify in the instant Section 120.57(1) de novo proceeding as to the accuracy of the underlying primary documentation which Petitioner Murray Kramer claimed the first auditor had apparently reviewed, Petitioner did not offer in evidence at formal hearing any such direct evidence documentation which it claimed had been reviewed by the auditors. Further, Respondent's successive auditor, Mr. Siska, testified that it is auditor practice to only examine those books and records individual auditors believe to be necessary to complete the audit. This discretionary element eliminates any guarantee of what the initial auditor relied upon.
For the same reasons, Petitioner's assertion that the Internal Revenue Service (IRS) audit of its books and records for the year 1979 "verifies" that the Petitioner's books and records accurately reflect the transactions that took place, is rejected. Petitioner Murray Kramer had admitted a letter (P-10) notifying the corporation that the IRS' "examination of ... tax returns for the above periods shows no change as required in the tax reported. The returns are accepted as filed." The tax period indicated on this exhibit is "7912", which is not helpful, and even if it means, as Mr. Weiss testified, that the 1979 federal tax return which is part of the Florida Corporate Tax Return is accurate under federal law, this IRS letter alone does not verify all the underlying documentation for all three years in question.
Also, specifically with regard to investments made through other entities, Mr. Weiss' testimony suggests that the wages paid and partnership returns of these other entities never were in the possession of, nor accessible by, this Petitioner.
Petitioner's reliance on its federal returns is apparently based, in part, at least, upon its assertion that it is a "financial institution" as defined in Sections 214.71(3)(b) and 220.15(2), F.S., but the presentation quality of evidence in this case does not permit of such a finding, either.
Petitioner has paid no portion of the assessed taxes.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction over the parties and subject matter of this cause. See, Section 120.57(1), F.S.
The initial order of proof approved in this type of assessment proceeding is for the Department of Revenue to establish that the agency was appropriately and procedurally correct in the assessment. At that point, the order and burden of proof shifts to the Petitioner to establish the inaccurateness of the agency's assessment with regard to the liability for, and amount of tax, interest, and penalties claimed. See, Section 214.06, F.S.
The Respondent agency met its initial prima facie burden of proof. Petitioner failed to demonstrate that the assessment was in error.
Petitioner Murray Kramer first contended that the assessment was in error because Petitioner is entitled to use a "separate accounting" procedure pursuant to Section 214.73(1), F.S., which separate accounting method it had employed from 1972 to 1978 (six consecutive years) without requesting prior approval to do so from the Respondent Department of Revenue. Petitioner's argument in support of this proposition is somewhere between asserting that the agency was "on notice" since the agency had accepted this method for six years before denying it in 1978, 1979, and 1980, and "estoppel" for the same reason. The Respondent agency contends that prior written agency approval of the use of such a method must be sought and obtained by the taxpayer, pursuant to Section 214.73, F.S. That statute provides, in pertinent part, as follows:
If the apportionment methods of ss. 214.71 and 214.72 do not fairly represent the extent of a taxpayer's tax base attributable to this state, the taxpayer may petition for, or the department may require, in respect to all or any part of the taxpayer's tax base, if reasonable:
Separate accounting;
Petitioner Murray Kramer admittedly did not get such formal approval prior to filing the returns in question, but Respondent has failed to show that the statute clearly mandates Respondent's reading that prior written agency approval is required. On the other hand, the Petitioner has not demonstrated any case law to support its position re: "notice equals estoppel and/or approval."
Assuming, but not ruling, that an estoppel theory of some kind would permit Petitioner to continue to file its returns using the "separate accounting" method, the Respondent Department was nonetheless entitled at any time within the specified statutory period, to return and audit the Petitioner's corporate returns so as to determine their accuracy and appropriateness.
In this instant situation, before the audit was finally approved, the Department of Revenue considered the opinion in Roger Dean Enterprises, Inc. v. Florida Department of Revenue, 387 So.2d 358 (Fla. 1980), which created a very strong presumption in favor of the apportionment method of accounting, and the Department then conducted its assessment on that basis. The pertinent directions in Roger Dean are as follows:
There is a very strong presumption in favor of normal 3-factor apportionment and against
the applicability of the relief provisions. See Donald M. Drake Co. v. Department of Revenue, 263 Or. 26, 500 P.2d 1041 (1972).
The relief provision should be used where the statute reaches arbitrary or unreasonable results so that its application could be attacked successfully on constitutional grounds...
Section 214.73, Florida Statutes (1973), gives the Department of Revenue discretion to alter the apportionment formula in very rare instances, but does not vest any discretion in the Department to modify federal taxable income.
Petitioner did not establish any rare circumstances to warrant acceptance of the separate accounting procedure over the regular three-factor apportionment method provided in Section 214.71(1), F.S. See, also, Section 220.53, F.S.
Petitioner did not present the necessary underlying documentation to support its "separate accounting" figures.
Petitioner alternatively and ultimately suggested that the three- factor apportionment formula should have different numbers plugged into it than the Department of Revenue had used. The thrust of Petitioner's presentation at formal hearing was in this direction and this alternative position also failed upon a lack of credible supporting evidence. It appears that all of such full documentation was never in the possession of Petitioner, so the agency also is not estopped by its considerable delay (5 years) during the informal resolution process.
Most commonly, a corporation uses its own property, payroll, and sales to calculate apportionment between in-Florida and out-of-state activities. Murray Kramer argued that certain amounts allegedly paid to employees of certain limited partnerships (by the limited partnerships) should be included in the payroll factor of its apportionment formula. Murray Kramer asserts that it is a limited partner of these limited partnerships and that its distributive share of the partnership's factors should be included in its apportionment. The Department denied this assertion because the federal partnership tax returns were not produced and the requisite federally determined amounts were not presented so as to perfect Murray Kramer's opportunity to obtain factor adjustments based upon its alleged interests in partnerships.
However, 12C-1.022(2), F.A.C. provides:
Every Florida partnership having any partner subject to the Florida Corporate Income Tax Code is required to make an information return...
(b) The corporate taxpayer-partner filing Form F-1120, Florida Corporation Income Tax Return, may use FORM 1065 to report its distributive share of partnership income and its share of the apportionment factors of a
partnership with joint venture which is not a Florida partnership.
Example: Corporation W is subject to the Florida Income Tax Code and is also a partner in partnership UVW, an Ohio partnership, that does no business in Florida and is not required to file a Florida Partnership Information Return. However, W may use FORM F-1065, Florida Partnership Information Return, to report its share of the partnership income adjustments and the partnership apportionment factors for partnership UVW.
At formal hearing, Petitioner did not offer in evidence federal partnership returns from its partners, or even self-serving Florida 1065's based on such federal returns, and has instead relied on figures computed from inadmissible or not credible hearsay sources.
"Financial organizations" may claim the right, pursuant to Section 214.71(3)(b)2, F.S., to use the gross profits (interest and dividends) arising from ownership of stocks, bonds, or other securities as part of the sales factor, but herein, there is insufficient credible direct evidence to pronounce Petitioner a "financial organization" or to establish that its stocks, bonds, and securities have a business situs outside of Florida. Although the initial auditors may have, as Petitioner's sole witness asserted, examined books and records including bank statements and broker statements which could have established that the interest, dividends, and gains on securities sales and rental income were from partnerships outside of Florida, these primary sources were not introduced at formal hearing, which is a de novo hearing, and therefore these were not before the undersigned.
Section 220.15(1), F.S. excludes interest and dividends from the sales factor to be used by sellers of tangible personal property, i.e., citrus fruit. Rule 12C-1.015(4)(d)6, F.A.C. excludes income arising from the sales factor unless geographic situs is established. It was not.
Section 214.71(3)(a)2, F.S. permits use of an alternative sales factor only when citrus fruit is delivered by a cooperative for a grower member, by a grower member to a cooperative, or by a grower-participant to a Florida processor. Petitioner sold all its orange grove produce to Zellwood which was not established to be a cooperative, and Petitioner admittedly was not a cooperative itself. Without an agency agreement or something more than the unsupported hearsay statements in Zellwood's letters, Petitioner cannot qualify for this calculation credit/formula. Moreover, Section 214.71(3)(a), F.S. (1980) was not available for Petitioner's 1978 calendar year tax return.
Based upon the foregoing findings of fact and conclusions of law, it is RECOMMENDED that the Department of Revenue enter a Final Order which
dismisses the Petition and affirms the assessment.
DONE and ORDERED this 26th day of June, 1989, in Tallahassee, Leon County, Florida.
ELLA JANE P. DAVIS
Hearing Officer
Division of Administrative Hearings The DeSoto Building
1230 Apalachee Parkway
Tallahassee, Florida 32399-1550
(904) 488-9675
Filed with the Clerk of the Division of Administrative Hearings this 26th day of June, 1989.
APPENDIX TO RECOMMENDED ORDER, CASE NO. 88-4100
The following constitute rulings, pursuant to Section 120.59(2), F.S. upon the parties' respective proposed findings of fact (PFOF).
Petitioner's PFOF:
1, 6. Accepted.
2, 9, 10, 11, 17, 19. Rejected for the reasons set out in the Recommended Order.
3, 5, 7, 8, 12, 14, 16. Accepted but not dispositive of any material issue for the reasons set forth in the Recommended Order. With regard to item 8, specifically, this determination is non-binding in the de novo proceeding.
4. Rejected upon the citation given as not proved or applicable as stated.
13. Accepted in part and rejected in part as not proved or applicable as stated. See Conclusions of Law 11-12.
15, 18. Rejected as out of context and misleading upon the record as a whole, and as not dispositive of any material issue, and as subordinate and unnecessary to the facts as found.
Respondent's PFOF:
1, 2, 3, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 18. Accepted.
4, 5. Accepted in part; what is not adopted is subordinate or unnecessary to the facts as found.
17. Accepted, but by itself is not dispositive of any material issue at bar, for the reasons set out in the Recommended Order.
COPIES FURNISHED:
Milton P. Weiss, C.P.A. 686 Hampstead Avenue
West Hampstead, New York 11552
Jeffrey M. Dikman, Esquire Assistant Attorney General Tax Section
Department of Legal Affairs The Capitol
Tallahassee, Florida 32399-1050
Sharon A. Zahner, Esquire Assistant General Counsel Department of Revenue
Room 204, Carlton Building Post Office Box 6668
Tallahassee, Florida 32314-6668
William D. Townsend, Esquire General Counsel
203 Carlton Building Tallahassee, Florida 32399
Katie D. Tucker, Executive Director Department of Revenue
102 Carlton Building Tallahassee, Florida 32399-0100
Milton P. Weiss, C.P.A. 3091 North Course Drive
Pompano Beach, Florida 33069
=================================================================
AGENCY FINAL ORDER
=================================================================
STATE OF FLORIDA DEPARTMENT OF REVENUE
MURRAY KRAMER CORPORATION, INC.,
Petitioner,
vs. CASE NO. 88-4100
STATE OF FLORIDA DEPARTMENT OF REVENUE,
Respondent.
/
FINAL ORDER
Upon due notice, this cause came on for formal hearing on February 13, 1989, in Tallahassee, Florida, before Ella Jane P. Davis, a duly assigned Hearing Officer of the Division of Administrative Hearings.
APPEARANCES
For Petitioner: Milton P. Weiss, C.P.A.
as Qualified Representative of Petitioner
686 Hampstead Avenue
West Hampstead, New York 11552
For Respondent: Jeffrey M. Dikman, Esquire
Assistant Attorney General Tax Section
Department of Legal Affairs The Capitol
Tallahassee, Florida 32399-1050
Sharon A. Zahner, Esquire Assistant General Counsel Department of Revenue
Room 204, Carlton Building Post Office Box 6668
Tallahassee, Florida 32314-6668
Hearing Officer Davis subsequently entered a recommended Order on June 26, 1989. On July 21, 1989, the Attorney General, on behalf of the Department of Revenue, timely filed an exception to one conclusion of law contained within the recommended Order but did not take exception to the findings of fact contained within the Recommended Order. The exception taken by the Department was merely for purposes of clarification, was consistent with the conclusions of law rendered by the Hearing Officer, and is hereby adopted. With this one change the Recommended Order is adopted verbatim.
STATEMENT OF THE ISSUE
Is the Respondent's assessment for corporate income tax and interest for the tax years ending 12/31/78, 12/31/79, and 12/31/80 appropriate, and may it be properly imposed upon Petitioner?
PRELIMINARY STATEMENT
At the commencement of formal hearing, Milton P. Weiss, C.P.A., was examined and determined on the record to be both authorized and qualified to represent Petitioner, pursuant to Rule 22I-6.008, F.A.C. To this end, one exhibit was admitted as HO-A.
Official recognition was taken of certain statutes and rules and a number of motions were disposed of upon the record and need not be revisited here.
Respondent presented the oral testimony of Frank J. Siska and had admitted in evidence Exhibits R-1, R-2A, R-2B, R-3, R-4, R-5, and R-7. There was no R-6.
Petitioner presented the oral testimony of Milton P. Weiss and had admitted Exhibits P-1, P-2, P-3, P-9, and P-10. Exhibits P-6, P-7, and P-8 were not admitted in evidence.
A transcript was filed, and all timely-filed proposed findings of fact have been ruled upon in the Appendix to this Respondent's Proposed Substituted Order, pursuant to Section 120.59(2), F.S.
FINDINGS OF FACT
The instant dispute between the parties arose out of how the substantial business interests of Petitioner Murray Kramer Corp. are to be defined and by what accounting method its corporate income tax assessments are to be made. Milton P. Weiss, C.P.A., is Petitioner's accountant and qualified representative for purposes of this proceeding. He is neither an internal bookkeeper for the corporation nor a corporate officer thereof.
At all times material, Petitioner was conducting business, deriving income, or existing within the State of Florida, pursuant to Chapter 220, F.S.
Petitioner invests primarily through partnerships. Among Petitioner's holdings and investments is ownership of an orange grove in the State of Florida from which it derived income by way of the sales of citrus fruit grown in Florida during the taxable years at issue: 1978, 1979, and 1980. The orange grove constitutes real and tangible property in Florida for purposes of Florida's corporate income tax.
Petitioner has consistently filed Florida corporate income tax returns on a "separate accounting" basis since the inception of Florida's Corporate Income Tax Law on January 1, 1972. Petitioner used this method for the years at issue: 1978, 1979, and 1980. It did so without petitioning the Respondent Department of Revenue for permission at or before the filing of the returns to use the "separate accounting" method to determine the Florida tax base. Accordingly, Petitioner did not receive prior written permission from the Department to use the "separate accounting" method for those years, and the Department did not require that the Petitioner use the "separate accounting" method in those years. Nonetheless, Petitioner asserts that its pattern of using the "separate accounting" method for six years put the Department on sufficient notice that the corporate taxpayer would continue to use that method indefinitely and further asserts that it was therefore entitled to use such a "separate accounting" method on the basis of its prior consistent usage.
Petitioner's Florida corporate returns declare investment income from dividends, interest, gains from securities, partnership income, and income from its orange grove located in Florida. In each of the disputed tax years, Petitioner entered its federal taxable income on Line 1 of the Florida Corporation Income Tax Return, FORM F-1120. This amount is not at issue and is accepted as a "given" by both parties.
However, in each of the disputed tax years, Petitioner did not complete the apportionment schedule on Page 3 of the respective returns. Instead of using the apportionment method, Petitioner computed what it characterized as "Florida Profit" or "Florida Income" on a schedule it attached, based totally on the profits it derived from the Florida orange' grove and then inserted that amount on Line 6, Florida Portion of Adjusted Federal Income, of the "Computation of Florida Tax Liability" on the Florida return. This entry did
not relate computationally to the amount of federal taxable income reported federally on Line 1.
All gross receipts from the sale of citrus fruit by Petitioner were derived from sales made to Zellwood Fruit Distributors. This dollar amount is also undisputed. Petitioner received payment from its Florida orange grove operation in the form of checks drawn by Zellwood.
Approximately June 20, 1983, Respondent Department of Revenue made an initial audit of Petitioner's books and records for the taxable years in question. Respondent's auditor assigned at that time had full and free access to Petitioner's books and records. He and his supervisor memorialized their view that the "separate accounting" method employed by Petitioner was proper, but his judgment call (by the auditor on June 29, 1983 and by his supervisor on July 1, 1983) was in the nature of free-form agency action and was neither accepted nor formalized by their superiors within the agency who -ultimately determined that the Petitioner should have employed the "apportionment" method and that the burden was upon the Petitioner even under the apportionment method to establish that one hundred percent of its income was not derived in Florida.
The Respondent Department therefore determined the tax owed by Petitioner upon the basis of 100% of Petitioner's income as opposed to the yearly percentages that Petitioner had unilaterally assigned to its orange grove, and issued its Revised Notice of Intent to Make Corporate Income Tax Audit Changes on Novemeber 7, 1983.
Florida's apportionment formula is a three-factor function which takes selected business activities of the taxpayer and computes the portion of that activity attributable to Florida, divided by that activity everywhere. A composite of the subtotal of those three measures (payroll, sales, and property) of business activity are used to compute Florida's share of the "everywhere" base that would be available under the adjusted federal taxable income base. See, Section 214.71(1), F.S.
The Department calculated the tax using the three statutorily recognized apportionment factors of payroll, sales, and property. Concerning the first apportionment factor, payroll, Petitioner had federally reported no amount of payroll, and therefore this factor was determined by the Department to be -zero, and pursuant to Section 220.15, F.S., the payroll factor was eliminated and the other two factors were used exclusively. Concerning the sales factor, all gross receipts of the orange grove were considered to be derived within the State of Florida, and all gross income attributable to intangible personal property was excluded from the sales factor, pursuant to Section 220.15(1), F.S. Concerning the property factor, the Department determined that all real and tangible personal property was within the State of Florida. The situs of the intangible property was not established by the taxpayer. Therefore, because Section 214.71, F.S. limits the construction of the property factor to include only "real and tangible personal property," it was thus determined to exclude intangible property.
The Respondent Department of Revenue issued its Notice of Proposed Assessment on November 16, 1983, showing a balance of $10,596.00 ($7308.00 tax,
$275.00 penalty, and $3,013.00 interest computed through October 31, 1983, plus notice of daily interest of $2.40 per day from November 1, 1983 until paid.)
Petitioner timely availed itself of informal protest procedures, and the Department issued its Notice of Decision on March 15, 1985. By its June 21,
1988 Notice of Reconsideration, the Department concluded its informal proceedings and denied Petitioner's assertion of the right to use a "separate accounting" method and further denied Petitioner's challenge to the Department's assessment by the apportionment" method, which in this instance had not made any apportionment for "outside Florida" activities.
The situs of intangible personal property was not sufficiently demonstrated by the Petitioner at formal hearing. The Petitioner also did not establish that it owns real or tangible personal property outside Florida.
Zellwood Fruit Distributors provided Petitioner Murray Kramer with letters attesting that, based upon information received from Winter Gardens Citrus Products Cooperative, Winter Gardens' sales percentages in the State of Florida were as follows:
1979 1980
18.60% 21.07%
Zellwood provided no such figures to Petitioner for the year 1978. Petitioner contends, on the basis of the after the fact Zellwood letters, that Zellwood was a member of Winter Gardens, a cooperative, and Murray Kramer was an associate grower of Zellwood. At formal hearing, no one from Zellwood or Winter Gardens testified; no contract between Petitioner Murray Kramer and either Zellwood or Winter Gardens was introduced to prove agency; no bills of lading, sales slips, corporate documents, or other connective link among the three entities was offered in evidence; nor was any primary, direct, non-hearsay evidence of sales amounts or situs of Winter Gardens' sales offered by Petitioner.
Milton Weiss, Petitioner's accountant, asserted that if a straight "apportionment" (not "separate accounting") calculation had been made for the income derived in Florida by Petitioner, percentages would be:
1978 | 1979 | 1980 |
24.03% | 15.31% | 15.01% |
These percentages rely in part on what are clearly the out-of-court statements of Zellwood's correspondent, relaying further out-of-court statements from Winter Gardens Citrus. (See the immediately preceding Finding of Fact). Neither of these out-of-court hearsay statements is such as may be used to supplement or explain direct evidence, since no direct, primary source evidence of these sales or income has been presented before the undersigned in this de novo proceeding. See, Section 120.58(1), F.S.
Petitioner has not directly paid wages during the tax years at issue.
Petitioner has not produced any federal partnership tax returns nor other persuasive proof to account for the return on its investments through partnership channels.
During the tax years at issue, Petitioner was not a member of a Florida cooperative, as that term, "cooperative," is used in Section 214.71(3)(a)2, F.S. (See Finding of Fact 15).
Petitioner was unable, by evidence of a type commonly relied upon by reasonably prudent persons in the conduct of their affairs, to establish that all amounts other than the percentages of gross income Petitioner had assigned by either of the alternative accounting methods was generated outside of the
State of Florida. In so finding, the undersigned specifically rejects Petitioner's assertion that the initial audit report of June 1983 could, by itself alone, legally or factually establish that only the orange grove income was Florida income, that Petitioner's Florida income was solely from the orange grove, that the interest, dividends, and gains on securities sales were not derived in Florida, that the Petitioner taxpayer received rent income from partnerships, that the partnership real estate which gave rise to the rent income was 100% outside Florida, or that the Respondent's initial audit "verified" the figures needed to compute the sales factor, the figures for the property factor, and the figures for the payroll factor of the "apportionment" method for the following reasons: In addition to the first auditor's report being free-form agency action which was ultimately rejected by the agency, and in addition to the failure of either the first auditor or his supervisor to testify in the instant Section 120.57(1) de novo proceeding as to the accuracy of the underlying primary documentation which Petitioner Murray Kramer claimed the first auditor had apparently reviewed, Petitioner did not offer in evidence at formal hearing of any such direct evidence documentation which it claimed had been reviewed by the auditors. Further, Respondent's successive auditor, Mr.
Siska, testified that it is auditor practice to only examine those books and records individual auditors believe to be necessary to complete the audit. This discretionary element eliminates any guarantee of what the initial auditor relied upon.
For the same reasons, Petitioner's assertion that the Internal Revenue Service (IRS) audit of its books and records for the year 1979 "verifies" that the Petitioner's books and records accurately reflect the transactions that took place, is rejected. Petitioner Murray Kramer had admitted a letter (P-10) notifying the corporation that the IRS' "examination of ... tax returns for the above periods shows no change as required in the tax reported. The returns are accepted as filed." The tax period indicated on this exhibit is "7912", which is not helpful, and even if it means, as Mr. Weiss testified, that the 1979 federal tax return which is part of the Florida Corporate Tax Return is accurate under federal law, this IRS letter alone does not verify all the underlying - documentation for all three years in question.
Also, specifically with regard to investments made through other entities, Mr. Weiss' testimony suggests that the wages paid and partnership returns of these other entities never were in the possession of, nor accessible by, this Petitioner.
Petitioner's reliance on its federal returns is apparently based, in part, at least, upon its assertion that it is a "financial institution" as defined in sections 214.71(3)(b) and 220.15(2), F.S., but the presentation quality of evidence in this case does not permit of such a finding, either.
Petitioner has paid no portion of the assessed taxes.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction over the parties and subject matter of this cause. See, Section 120.57(1), F.S.
The initial order of proof approved in this type of assessment proceeding is for the Department of Revenue to establish that the agency was appropriately and procedurally correct in the assessment. At that point, the order and burden of proof shifts to the Petitioner to establish the
inaccurateness of the agency's assessment with regard to the liability for, and amount of tax, interest, and penalties claimed. See, Section 214.06, F.S.
The Respondent agency met its initial prima facie burden of proof. Petitioner failed to demonstrate that the assessment was in error.
Petitioner Murray Kramer first contended that the assessment was in error because Petitioner is entitled to use a "separate accounting" procedure pursuant to Section 214.73(1), F.S., which separate accounting method it had employed from 1972 to 1978 (six consecutive years) without requesting prior approval to do so from the Respondent Department of Revenue. Petitioner's argument in support of this proposition is somewhere between asserting that the agency was "on notice" since the agency had accepted this method for six years before denying it in 1978, 1979, and 1980, and "estoppel" for the same reason. The Respondent agency contends that prior written agency approval of the use of such a method must be sought and obtained by the taxpayer, pursuant to Section 214.73, F.S. That statute provides, in pertinent part, as follows:
If the apportionment methods of ss. 214.71 and 214.72 do not fairly represent the extent of a taxpayer's tax base attributable to this state, the taxpayer may petition for, or the department may require, in respect to all or any part of the taxpayer's tax base, if reasonable:
Separate accounting;
Petitioner Murray Kramer admittedly did not get such formal approval prior to filing the returns in question, but Respondent has failed to show that the statute clearly mandates Respondent's reading that prior written agency approval is required. On the other hand, the Petitioner has not demonstrated any case law to support its position re: "notice equals estoppel and/or approval."
Assuming, but not ruling, that an estoppel theory of some kind would permit Petitioner to continue to file its returns using the "separate accounting" method, the Respondent Department was nonetheless entitled at any time within the specified statutory period, to return and audit the Petitioner's corporate returns so as to determine their accuracy and appropriateness.
In this instant situation, before the audit was finally approved, the Department of Revenue considered the opinion in Roger Dean Enterprises, Inc. v. Florida Department of Revenue, 387 So.2d 358 (Fla. 1980), which created a very strong presumption in favor of the apportionment method of accounting, and the Department then concluded its assessment on that basis. The pertinent directions in Roger Dean as are follows:
There is a very strong presumption in favor of normal 3-factor apportionment and against the applicability of the relief provisions. See Donald M. Drake Co. v. Department of Revenue, 263 Or. 26, 500 P.2d 1041 (1972).
The relief provision should be used where the statute reaches arbitrary or unreasonable results so that its application could be attacked successfully on constitutional grounds...
Section 214.73, Florida Statutes (1973), gives the Department of Revenue discretion to alter the apportionment formula in very rare instances, but does not vest any discretion in the Department to modify federal taxable income.
Petitioner did not establish any rare circumstances to warrant acceptance of the separate accounting procedure over the regular three-factor apportionment method provided in Section 214.71(1), F.S. See, also, Section 220.53, F.S.
Petitioner did not present the necessary underlying documentation to support its "separate accounting" figures.
Petitioner alternatively and ultimately suggested that the three-factor apportionment formula should have different numbers plugged into it than the Department of Revenue had used. The thrust of Petitioner's presentation at formal hearing was in this direction and this alternative position also failed upon a lack of credible supporting evidence. It appears that all of such full documentation was never in the possession of Petitioner, so the agency also is not estopped by its considerable delay (5 years) during the informal resolution process.
Most commonly, a corporation uses its own property, payroll, and sales to calculate apportionment between in-Florida and out-of-state activities. Murray Kramer argued that certain amounts allegedly paid to employees of certain limited partnerships (by the limited partnerships) should be included in the payroll factor of its apportionment formula. Murray Kramer asserts that it is a limited partner of these limited partnerships and that its distributive share of the partnership's factors should be included in its apportionment. The Department denied this assertion because the federal partnership tax returns were not produced and the requisite federally determined amounts were not presented so as to perfect Murray Kramer's opportunity to obtain factor adjustments based upon its alleged interests in partnerships.
However, 12C-1.022(2), F.A.C. provides:
Every Florida partnership having any partner subject to the Florida Corporate Income Tax Code is required to make an information return...
(b) The corporate taxpayer-partner filing Form F-1120, Florida Corporate Income Tax Return, may use FORM 1065 to report its distributive share of partnership income
and its share of the apportionment factors of a partnership with joint venture which is not a Florida partnership.
Example: Corporation W is subject to the Florida Income Tax Code and is also a partner in partnership UVW, an Ohio partnership, that does no business in Florida and is not required to file a Florida Partnership Information Return. However, W may use FORM F-1065, Florida Partnership Information Return, to
report its share of the partnership income adjustments and the partnership apportionment factors for partnership UVW.
At formal hearing, Petitioner did not offer in evidence federal partnership returns from its partners, or even self-serving Florida 1065's based on such federal returns, and has instead relied on figures computed from inadmissible or not credible hearsay sources.
"Financial organizations" may claim the right, pursuant to Section 214.71(3)(b)2, F.S., to use the gross profits (interest and dividends) arising from ownership of stocks, bonds, or other securities as part of the sales factor, but herein, there is insufficient credible direct evidence to pronounce Petitioner a "financial organization" or to establish that its stocks, bonds, and securities have a business situs outside of Florida. Although the initial auditors may have, as Petitioner's sole witness asserted, examined books and records including bank statements and broker statements which could have established that the interest, dividends, and gains on securities sales and rental income were from partnerships outside of Florida, these primary sources were not introduced at formal hearing, which is a de novo hearing, and therefore these were not before the undersigned.
Section 220.15(1), F.S. excludes interest and dividends from the sales factor to be used by sellers of tangible personal property, i.e., citrus fruit. Rule 12C-1.015(4)(d)6, F.A.C. excludes income attributable to intangibles from the sales factor unless geographic situs is established. Situs was not established.
Section 214.71(3)(a)2, F.S. permits use of an alternative sales factor only when citrus fruit is delivered by a cooperative for a grower member, by a grower member to a cooperative, or by a grower-participant to a Florida processor. Petitioner sold all its orange grove produce to Zellwood which was not established to be a cooperative, and Petitioner admittedly was not a cooperative itself. Without an agency agreement or something more than the unsupported hearsay statements in Zellwood's letters, Petitioner cannot qualify for this calculation credit/formula. Moreover, Section 214.71(3)(a), F.S. (1980) was not available for Petitioner's 1978 calendar year tax return.
Any Party to this Order has the right to seek judicial review of the Order pursuant to Section 120.68, F.S., by the filing of a Notice of Appeal pursuant to Rule 9.110, Florida Rules of Appellate Procedure, with the clerk of the Department in the Office of General Counsel, Post Office Box 6668, Tallahassee Florida 32314-6668 and by filing a copy of the Notice of Appeal accompanied by the applicable filing fees with the appropriate District Court of Appeal. The Notice of Appeal must be filed within 30 days from the date this Order is filed with the clerk of the Department.
Based upon the foregoing findings of fact and conclusions of law, it is ORDERED that the assessment be affirmed and that the Petition be dismissed.
DONE and ORDERED this 20th day of September 1989, in Tallahassee, Leon County, Florida.
KATIE D. TUCKER
Executive Director Department of Revenue Post Office Box 6668
Tallahassee, Florida 32314-6668
(904)488-5050
Filed with the Clerk of the Department of Revenue this 20th day of September, 1989.
APPENDIX TO RESPONDENT'S PROPOSED SUBSTITUTED ORDER IN CASE NO. 88-4100
The following constitute rulings, pursuant to Section 120.59(2), F.S. upon the parties' respective proposed findings of fact (PFOF).
Petitioner's PFOF:
1, 6. Accepted.
2, 9, 10, 11, 17, 19. Rejected for the reasons set out in the Respondent's Proposed Substituted Order.
3, 5, 7, 8, 12, 14, 16. Accepted but not dispositive of any material issue for the reasons set forth in the Respondent's Proposed Substituted Order. With regard to item 8, specifically, this determination is non-binding in the de novo proceeding.
4. Rejected upon the citation given as not proved or applicable as stated.
13. Accepted in part and rejected in part as not proved or applicable as stated. See Conclusions of Law 11-12.
15, 18. Rejected as out of context and misleading upon the record as a whole, and as not dispositive of any material issue, and as subordinate and unnecessary to the facts as found.
Respondent's PFOF:
1, 2, 3, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 18. Accepted.
4, 5. Accepted in part; what is not adopted is subordinate or unnecessary to the facts as found.
17. Accepted, but by itself is not dispositive of any material issue at bar, for the reasons set out in the Respondent's Proposed Substituted Order.
COPIES FURNISHED:
Milton P. Weiss, C.P.A. 686 Hampstead Avenue
West Hampstead, New York 11552
Jeffrey M. Dikman, Esquire Assistant Attorney General Tax Section
Department of Legal Affairs The Capitol
Tallahassee, Florida 32399-1050
Sharyn L. Smith, Director
Division of Administrative Hearings The DeSoto Building
1230 Apalachee Parkway
Tallahassee, Florida 32399-1550
Sharon A. Zahner, Esquire Assistant General Counsel Department of Revenue
Room 204, Carlton Building Post Office Box 6668
Tallahassee, Florida 32314-6668
William D. Moore, Esquire General Counsel
Room 203, Carlton Building Post Office Box 6668
Tallahassee, Florida 32314-6668
Katie D. Tucker, Executive Director Department of Revenue
102 Carlton Building Tallahassee, Florida 32399-0100
Milton P. Weiss, C.P.A. 3091 North Course Drive
Pompano Beach, Florida 33069
Ella Jane P. Davis Hearing Officer
Division of Administrative Hearings The DeSoto Building
1230 Apalachee Parkway
Tallahassee, Florida 32399-1550
| Issue Date | Proceedings |
|---|---|
| Jun. 26, 1989 | Recommended Order (hearing held , 2013). CASE CLOSED. |
| Issue Date | Document | Summary |
|---|---|---|
| Sep. 20, 1989 | Agency Final Order | |
| Jun. 26, 1989 | Recommended Order | Convoluted family businesses, trusts, and citrus investments combined with disagreement over account procedures resulted in affirmed assessment. |
