STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

PASADENA BOATYARD, INC., )

)

Petitioner, )

)

vs. ) CASE NO. 92-2593

)

DEPARTMENT OF REVENUE, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, final hearing in the above-styled case was held in Tampa, Florida, on March 18, 1993, before Robert E. Meale, Hearing Officer of the Division of Administrative Hearings.

APPEARANCES

The parties were represented at the hearing as follows: For Petitioner: Clifford Hunt

Julie Kirk

Riden, Earl & Kiefner, P.A.

100 2d Avenue South, Suite 400N St. Petersburg, Florida 33701

For Respondent: Leonard F. Binder

Assistant Attorney General Office of the Attorney General The Capitol, Tax Section Tallahassee, Florida 32399-1050

STATEMENT OF THE ISSUE

The issue in this case is whether Petitioner is liable for intangible taxes, interest, and penalties, and, if so, how much.

PRELIMINARY STATEMENT

By Petition for Formal Hearing dated April 20, 1992, Petitioner requested a formal hearing as to the Notice of Reconsideration dated February 21, 1992, by which Respondent indicated that Petitioner was liable for taxes, interest, and penalties for its failure to pay certain intangible taxes assessed against shareholder loans.

At the hearing, Petitioner called three witnesses and offered into evidence four exhibits. Respondent called two witnesses and offered into evidence one exhibit. All exhibits were admitted.

The transcript was filed April 1, 1993. Each party filed a proposed recommended order. All proposed findings are adopted or adopted in substance.

FINDINGS OF FACT

1. Petitioner was incorporated in October, 1985. An S corporation, the original shareholders of Petitioner were Thomas Riden, who has practiced law in the Tampa Bay area for 25 years; Hal Lyons, who is experienced in the recreational business; Gus Stavros and Walter Loebenberg, who are established businessmen in the Tampa Bay area.

   
   

2. The original business of Petitioner was boat-repairing. The first business location was the Pasadena property located in St. Petersburg. Petitioner derived its name from this property.

   
   

3. The boat-repair business did not prosper. By December, 1985, Mr. Lyons wanted to sever his relationship with the company and did so at that time or shortly thereafter. This left the three other shareholders to run the business. Mr. Riden is a practicing attorney, who heads a 17-person law firm in Tampa.

   The other shareholders are prominent businessmen and investors, who were unavailable to handle the day-to-day responsibilities of the new company.

   
   

4. In early 1986, the three remaining shareholders decided that they needed to hire someone with considerable experience in the boatyard business. They found a good general manager at another boatyard in the area. In negotiating with this individual, the shareholders decided that Petitioner needed to expand into boat sales in order to make the company prosper.

   
   

5. Thus, on April 1, 1986, the shareholders caused Petitioner to acquire the assets of the other boatyard business, including the general manager with whom they had been negotiating. The results of the acquisition were that Petitioner now operated boatyards in Naples and Sarasota, as well as St. Petersburg, and sold boats from several prominent and predominantly expensive lines, such as Hatteras and Bertran. Some of these boats, such as the 77-foot Hatteras, retail for $4 million.

   
   

6. Petitioner owned all of the boatyards except for the Sarasota location, which had been leased by the company which had sold its assets to Petitioner. Later in 1986, the land underlying the Sarasota boatyard was foreclosed, and Petitioner bought the assets of a nearby boatyard business in order to maintain a Sarasota presence.

   
   

7. As hindsight later disclosed, Petitioner's dramatic business expansion was ill-timed, as 1986 was the last good year in the luxury boat market. The 1986 Tax Reform Act removed many tax advantages to owning or leasing luxury craft or boatyard businesses. Shortly thereafter, the crisis in the lending community associated with the savings and loan bail-out chilled lending, both as to prospective purchasers of luxury boats and of the boatyard business itself. Later, a special federal tax was imposed upon luxury boats of the type that Petitioner was marketing. And all of these events took place against a backdrop of declining real estate values, largely as a result of the some of the same reasons.

   
   

8. For the reasons set forth in the preceding paragraph, Petitioner performed poorly. On gross receipts of $20.5 million in taxable year 1986, Petitioner showed a tax loss of $451,255. On gross receipts of $23.9 million in taxable year 1987, Petitioner showed a tax loss of $963,974. On gross receipts

   of $25.4 million in taxable year 1988, Petitioner showed a tax loss of $1.2 million. On gross receipts of $22.5 million in taxable year 1989, Petitioner showed a tax loss of $2.9 million. On gross receipts of $19.8 million in taxable year 1990, Petitioner showed a tax loss of $1.4 million. On gross receipts of $7.8 million in taxable year 1991, Petitioner showed a tax loss of

   $2.3 million.

   
   

9. The financial statements similarly depict a financially stressed corporation. The balance sheet for the year ending December 31, 1986, shows a total shareholders' equity of ($103,344). For the year ending December 31, 1987, the balance sheet shows a total shareholder's equity of ($994,918). For the year ending December 31, 1988, the balance sheet shows a total shareholders' equity of ($1.7 million). For the year ending December 31, 1989, the balance sheet shows a total shareholders' equity of ($4.6 million). For the year ending December 31, 1990, the balance sheet shows a total shareholders' equity of ($7.1 million).

   
   

10. None of the financial statements is audited because the corporation has not qualified as a going concern since its inception. The corporation has survived solely on the basis of the ongoing shareholder loans that it has received. The corporation ceases to exist as soon as the shareholders refuse to make more loans. Likewise, the shareholder debt, which is the intangible property that is the subject of the present proceeding, remains viable only as long as the shareholders are willing to continue to fund the corporation; in other words, the debt to the shareholders presently cannot be repaid from any source other than the shareholders.

    
    

11. In starting Petitioner, as well as in acquiring the assets described above, the shareholders committed substantial sums of money to the company, either in the form of cash or, more frequently, personal guarantees so as to enable the new corporation to obtain bank loans for which it would not otherwise have been eligible.

    
    

12. The practice of Petitioner and its shareholder was to treat the shareholder advances to the company as shareholder advances. These loans were undocumented and carried no interest. These loans are subordinated to all other debt of the corporation.

    
    

13. As time passed, instead of obtaining repayment of their loans, the shareholders had to meet the constant demands of the business for more money. Although, in retrospect, it might have been prudent to cut losses early and sell the business assets for whatever they could get, the shareholders continued to fund the business. Their motivation in doing so varied. At first, they poured more money into the business in the hope that business would recover. Later, they continued to bail out the business in order to meet such basic obligations as inventory acquisition, payroll, and mortgage debt in the hope that, if they maintained the business until business and economic conditions improved sufficiently, they could at least cover outstanding debt with the sale proceeds.

    
    

14. For varying reasons related to their backgrounds and standing in their respective communities, the bankruptcy of individuals is a particularly unappealing prospect. Given the extent of shareholder guarantees, the bankruptcy of the corporation would not assist the shareholders in addressing their financial situations.

    
    

15. After an audit, Respondent proposed an assessment of intangible tax based on the value of the shareholder loans for taxable years 1986 through 1989.

    Valuing these loans at their face value, the assessed intangible taxes totaled for each of the four years, respectively, $301.01, $2869.75, $998.51, and

    $1175.98. The assessed penalties for each of the four years are, respectively,

    $120.40, $1247.90, $499.41, and $570.40. The assessed interest for each of the four years is, respectively, $137.56, $967.07, $216.33, and $113.67. The grand total is $9217.99.

    
    

16. Petitioner has proved that the fair value of the shareholder debt was considerably less than the face value of the debt. The debts were subordinated to all other debt of Petitioner. The financial condition of Petitioner, as well as prevailing business and economic conditions, decreased the value of these debts well below their face value. Additional shareholder loans, which were made for business and personal reasons, were worth less than their face amount immediately after being made due to the above-described factors. On top of the rest of these factors, there is no market for shareholder loans to a closely held corporation, especially when the loans are undocumented and the corporation can most generously be described as ailing.

    
    

17. However, the fair value of the shareholder loans bear some speculative value, which, given the decline in fortunes during the years in question, itself declines over the four years. The fair value of the shareholder loans pertaining to taxable year 1986 are 25 percent of the face value. The fair value of the shareholder loans pertaining to taxable years 1987-1989 are 10 percent of the face value. Therefore, the intangible tax and related interest should be correspondingly reduced by 75 percent for 1986 and 90 percent for the remaining three years.

    
    

18. The failure to pay the portion of intangible taxes finally determined to be due was due to reasonable cause and not wilful negligence, wilful neglect, or fraud.

    
    

    CONCLUSIONS OF LAW

    
    

19. The Division of Administrative Hearings has jurisdiction over the subject matter and the parties. Sections 72.011(1) and 120.57(1), Florida Statutes. (All references to Sections are to Florida Statutes.)

    
    

20. Section 199.032 imposes an annual tax of 1.5 mills on each dollar of the "just valuation of all intangible personal property "

    
    

21. Section 199.103 states that all intangible personal property shall be subject to the annual tax at its "just valuation" as of January 1 of each year. Section 199.103(6) adds that notes and other obligations shall have a value equal to their unpaid balance as of January 1 "unless the taxpayer can establish a lesser value "

    
    

22. Section 213.21(3) authorizes the abatement of a penalty if the taxpayer's noncompliance is due to "reasonable cause and not to willful negligence, willful neglect, or fraud."

    
    

23. Respondent has made a prima facie showing that the intangible tax, interest, and penalties are due. However, Petitioner has shown that the fair value of the subject intangible property was, at the relevant time, considerably less than the assessed value. The tax and interest must therefore be reduced by the above-stated percentages to reflect the actual fair value of the intangibles in question. Petitioner has also shown that the conditions do not justify the imposition of any penalty.

RECOMMENDATION

Based on the foregoing, it is hereby

RECOMMENDED that the Department of Revenue enter a final order determining that Petitioner owes intangible taxes and interest on the shareholder loans whose value has been reduced by 75 percent for 1986 and 10 percent for 1987-1989 and that Petitioner owes no penalties.

ENTERED on April 13, 1993, in Tallahassee, Florida.

ROBERT E. MEALE

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 on April 13, 1993.

COPIES FURNISHED:

Dr. James Zingale, Executive Director Department of Revenue

104 Carlton Building Tallahassee, FL 32399-0100

Linda Lettera, General Counsel Department of Revenue

204 Carlton Building Tallahassee, FL 32399-0100

Clifford Hunt Julie Kirk

Riden, Earl & Kiefner, P.A.

100 2d Avenue South, Ste 400N St. Petersburg, FL 33701

Leonard F. Binder Assistant Attorney General

Office of the Attorney General The Capitol, Tax Section Tallahassee, FL 32399-1050

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions to this Recommended Order. All agencies allow each party at least 10 days in which to submit written exceptions. Some agencies allow a larger period within which to submit written exceptions. You should contact the agency that will issue the final order in this case concerning agency rules on the deadline for filing exceptions to this Recommended Order. Any exceptions to this Recommended Order should be filed with the agency that will issue the final order in this case.

Docket for Case No: 92-002593

Orders for Case No: 92-002593