STATE OF FLORIDA
DIVISION OF ADMINISTRATIVE HEARINGS
CLARK'S FISH CAMP & SEAFOOD, INC.,
Petitioner,
vs.
DEPARTMENT OF REVENUE,
Respondent.
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) Case No. 02-4057
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RECOMMENDED ORDER
A formal hearing was conducted in this case on January 29, 2003, in Jacksonville, Florida, before Suzanne F. Hood, Administrative Law Judge with the Division of Administrative Hearings.
APPEARANCES
For Petitioner: David B. Ferebee, Esquire
Post Office Box 1796 Jacksonville, Florida 32201-1796
For Respondent: R. Lynn Lovejoy, Esquire
Office of the Attorney General The Capitol, Tax Section Tallahassee, Florida 32399-1050
STATEMENT OF THE ISSUE
The issue is whether Petitioner is subject to tax based on a lease or license to use real property pursuant to Sections 212.031, 212.054, and 212.55, Florida Statutes.
PRELIMINARY STATEMENT
On January 29, 2002, Respondent Department of Revenue (Respondent) issued a Notice of Decision. The notice advised Petitioner Clark's Fish Camp & Seafood, Inc. (Petitioner) that it was liable for a sales and use tax audit assessment in the amount of $159,050.45. The notice also advised Petitioner that it was liable for a charter county system surtax audit assessment in the amount of $13,254.80. Both assessments related to the audit period beginning March 1, 1994, and ending February 29, 1999. Respondent reissued the Notice of Decision without any additional changes on August 14, 2002.
Petitioner subsequently requested an administrative hearing to contest the above-referenced assessments. Respondent referred Petitioner's request to the Division of Administrative Hearings on October 18, 2002.
On October 31, 2002, the undersigned issued a Notice of Hearing by Video Teleconference. The notice scheduled the hearing for January 13, 2003.
The parties filed a Joint Motion for Continuance on December 18, 2002. The undersigned granted this motion and rescheduled the hearing for January 29, 2003.
During the hearing, Respondent presented the testimony of three witnesses. Petitioner presented the testimony of two
witnesses. The parties submitted 13 joint exhibits, which were accepted into evidence.
A Transcript of the proceeding was filed on February 19, 2003.
On March 3, 2003, Respondent filed an Unopposed Motion for Extension of Time to File Proposed Recommended Orders. An Order dated March 4, 2003, granted this motion.
The parties filed their proposed findings of fact and conclusions of law on March 21, 2003.
FINDINGS OF FACT
Jack and Joan Peoples bought and began operating a bait and tackle shop/fish camp in Jacksonville, Duval County, Florida, in approximately 1971. The name of the business was Clark's Fish Camp and Seafood.
As the business grew, Mr. and Mrs. Peoples began operating a restaurant in the shop. Initially, they lived on the business premises in an apartment adjoining the shop. When the restaurant became more successful, the restaurant was enlarged to include the apartment area and the family bought a home at another location.
In January 1990, Mr. and Mrs. Peoples incorporated their business as a Florida Subchapter S Corporation. Pursuant to the organizational minutes, Mr. Peoples was elected president and Mrs. Peoples was elected vice-president and secretary.
Petitioner issued common stock to Mr. and Mrs. Peoples as the sole shareholders, each owning a 50 percent interest, in exchange for the good will and name of Clark's Fish Camp and Seafood.
Mr. and Mrs. Peoples did not transfer any real property, fixtures, or equipment to Petitioner. At all times material to this case, Mr. and Mrs. Peoples or Mrs. Peoples, in her sole capacity, owned the real property and fixtures utilized by Petitioner in the operation of the restaurant business.
At all times relevant here, Mrs. Peoples acted as hostess, cook, and/or manager for the business. She controlled Petitioner's checkbook along with her kitchen manager, Florence Hatfield, and general manager, Steve Morris.
During the audit at issue here, Russ Deeter, an accountant, and his associate/former employee, Maxine Downs were responsible for performing all of Petitioner's formal bookkeeping. Mr. Deeter had served as Petitioner's bookkeeper since the early 1970s. He sold his accounting business to
Ms. Downs in 1981, but he continued to assist her with the routine bookkeeping for certain clients including Petitioner.
Pursuant to the arrangement between Mr. Deeter and Ms. Downs, she created a general ledger in a computer using Petitioner's checkbook, sales receipts, invoices, etc., as source documents. The source documents were then returned to
Petitioner. Additionally, Mr. Deeter prepared state and federal tax returns for Petitioner and Mr. and Mrs. Peoples.
Mrs. Peoples maintained all of the source documents for Petitioner's business records in a construction trailer/office located behind the restaurant on the property's highest ground. Because the property was prone to flooding, Petitioner placed the source documents and other business records on shelves in the trailer/office. The only file cabinets in the office were used to store restaurant supplies.
On or about October 28, 1998, Respondent sent Petitioner a Notice of Intent to Audit Books and Records for sales and use taxes for the period October 1, 1993, to September 30, 1998. The notice also advised Petitioner that Respondent intended to conduct an audit of Petitioner's corporate intangible taxes for the period January 1, 1994, to January 1, 1998. The audit was scheduled to commence some time after December 28, 1998.
In the meantime, Mr. Peoples became so ill that Mrs. Peoples closed their home and moved into a mobile home located on the business property. This move allowed Mrs.
Peoples to oversee the restaurant business while she nursed her husband. Mr. Peoples died in March 1999. Thereafter,
Mrs. Peoples became Petitioner's sole owner.
Mrs. Peoples receives a bi-weekly salary from Petitioner in the amount of $3,000. She also makes draws from its bank account to pay business and personal expenses on an as-needed basis.
Mrs. Peoples has an eighth grade education. However, she is, in large part, responsible for the success of Petitioner, which during the audit period grossed between
$2,500,000 and $3,000,000 a year. Mrs. Peoples asserts that she does not remember signing any tax returns but admits that she signs documents without examining them when requested to do so by Mr. Deeter.
By letter dated March 24, 1999, Respondent advised Petitioner that it was rescinding the October 28, 1998, Notice of Intent to Audit Books and Records and replacing it with a new notice. The new Notice of Intent to Audit Books and Records dated March 24, 1999, included an examination of Petitioner's charter city systems surtax for the period March 1, 1994, through February 28, 1999; Petitioner's sales and use tax from March 1, 1994, through February 28, 1999; and Petitioner's intangible personal property tax from January 1, 1995, through January 1, 1999. The new notice stated that the audit would begin on or before May 24, 1999.
On May 23, 1999, Petitioner requested a postponement of the audit due to the death of Mr. Peoples. As a result of
this request, Respondent postponed the audit until January 10, 2000.
On May 25, 1999, Mrs. Peoples signed a Power of Attorney for Mr. Deeter to represent the business during the audit.
In anticipation of the audit, Mrs. Peoples and her staff began going through the source documents stored in the trailer/office. Mr. Deeter also gathered pertinent records and computer printouts. All documents required for the audit were placed in boxes or sacks on the floor of the trailer/office.
In September of 1999, Petitioner's property flooded due to a hurricane. The water rose above the elevated entrance to the trailer/office. Mrs. Peoples and Petitioner's employees made no effort to protect the documents on the floor of the trailer/office from the floodwaters.
Petitioner's September 1999 insurance claims due to flood loss do not contain a claim for loss of documentation. The 1999 flood loss claims were small in comparison to the flood loss claims for 2001 even though the 1999 floodwaters rose high enough to destroy the records. Record evidence indicates that the trailer/office has flooded on more than one occasion.
In September 1999, all of the documents on the floor of the office were destroyed. Subsequently, Mrs. Peoples and Ms. Hatfield disposed of the documents, including but not
limited to, the printouts of the general ledger, bank statements, and cancelled checks.
On January 7, 2000, Petitioner requested another postponement of the audit until July 1, 2000. Petitioner made the request due to the death of Ms. Downs in December 1999.
After her death, Mr. Deeter discovered that Ms. Downs' computer and all backup tapes located in her home office were either stolen or otherwise unaccounted for. The missing computer records included Petitioner's bookkeeping records for the audit period at issue here.
On January 15, 2000, Petitioner agreed to extend the time for Respondent to perform the audit. The agreement stated that Respondent could issue an assessment at any time before October 28, 2001.
On July 6, 2000, Respondent issued a formal demand for Petitioner to produce certain records. The only records available were Mr. Deeter's own work papers, post-September 1999 materials that had not been placed in the trailer/office prior to the flood, or records prepared after the flood and death of Ms. Downs.
On July 17, 2000, the parties signed an Audit Agreement. The agreement states that the audit of sales of tangible personal property would be controlled by the sampling method.
On July 17, 2000, Mr. Deeter informed Respondent that Petitioner's records covering the period from 1993 through the middle of 1999 were not available because a flood had damaged them in September 1999. However, using his work papers,
Mr. Deeter was able to provide Respondent with copies of some of the original federal tax returns that he had prepared for Petitioner and Mr. and Mrs. Peoples.
During the hearing, Mr. Deeter asserted that he had delivered the original tax returns to Mr. and Mrs. Peoples who had the responsibility to sign, date, and file them with the
U.S. Internal Revenue Service (IRS) at the appropriate times.
Mrs. Peoples testified that she could not remember signing any returns. She believed that Mr. Deeter had assumed responsibility for filing the returns.
The unsigned and undated copies of the returns that Mr. Deeter provided Respondent on July 17, 2000, included Petitioner's U.S. Income Tax Return for an S Corporation (Form 1120S) for 1996, 1997, and 1998. These returns showed that Petitioner took the following deductions from income for a lease expense: (a) 1996--$225,546; (b) 1997--$332,791; and
1998--$290,493. These are the amounts that Respondent seeks to tax as rent.
Mr. Deeter also provided Respondent with an unsigned and undated copy of Mr. and Mrs. Peoples' 1998 U.S. Individual
Income Tax Return (Form 1040). The return included both pages of Schedule E showing rents received from Petitioner.
On July 28, 2000, Mr. Deeter provided Respondent with revised copies of Petitioner's 1120S forms and revised copies of Mr. and Mrs. Peoples' 1040 forms. The auditor's file does not contain copies of the revised returns because the auditor did not accept them. The record also indicates that Mr. Deeter did not want to leave the revised returns with Respondent because they were not copies of the original returns.
During the hearing, Mr. Deeter testified that he furnished Respondent with revised returns to show that there was no difference in the amount of federal income tax due and payable by Mr. and Mrs. Peoples regardless of whether Petitioner reported a lease expense or a distribution of profit on its 1120S forms and regardless of whether Mr. and Mrs. Peoples reported Petitioner's income as rent received or a profit distribution on their 1040 forms.
According to Mr. Deeter, he prepared the revised 1120S returns using his pencil copies of the original handwritten returns because he had never used a computer software program to prepare 1120S forms. Mr. Deeter had a computer software program to prepare 1040 forms, so he used that program to generate the revised 1040 returns. However, Mr. Deeter's testimony that the revised returns were drafts showing Petitioner's deduction of a
lease expense and Mr. and Mrs. Peoples' receipt of rent is not persuasive.
In November 2000, Respondent obtained copies of Petitioner's 1120S forms and Mr. and Mrs. Peoples' 1040 forms for 1994 and 1995 from the IRS. The IRS did not have copies of these returns for the years 1996 through 1999. However, there is record evidence that Mr. and Mrs. Peoples paid some income taxes for all years in question.
The record does not contain copies of the 1994 and 1995 returns. Competent evidence indicates that, consistent with Respondent's routine practice, the auditor reviewed the 1040 and 1120S forms and returned them to the IRS without making copies for Respondent's file. Based on the auditor's review of Petitioner's 1120S returns, Respondent seeks to tax Petitioner for lease expense in the amounts of $152,782.24 in 1994 and
$220,355.85 in 1995.
During the hearing, Mr. Deeter conceded that he prepared Petitioner's 1120S forms for 1994 and 1995 showing deductions for a lease expense and Mr. and Mrs. Peoples' 1040 forms showing rent received from Petitioner. His testimony that he prepared all returns in subsequent years showing no lease expense for Petitioner and profit distributions instead of rent received for Mr. and Mrs. Peoples is not persuasive.
In November 2000, Respondent issued a Notice of Intent to Make Audit Changes. The notice made no adjustment with respect to Petitioner's reported taxable sales. The only adjustment was based on lease payments from Petitioner to
Mr. and Mrs. Peoples as consideration for the rent of the building and fixtures utilized by Petitioner in the conduct of its business.
On January 26, 2001, Mr. Deeter had an audit conference with Respondent's staff. During the conference,
Mr. Deeter requested that Respondent review Petitioner's amended 1120S forms for the years 1996, 1997, 1998, and 1999. The amended 1120S returns did not include deductions for a lease expense. Respondent would not accept the amended returns, but informed Mr. Deeter that it would review the amended returns if he could document that they had been filed with the IRS.
On March 7, 2001, the IRS stamped the amended 1120S forms for 1996, 1997, 1998 and 1999 as having been received. Mrs. Peoples had signed the returns as Petitioner's president but she did not date her signatures.
Mr. Deeter testified that his wife, Roberta Lawson, signed the amended 1120S returns as the tax preparer.
Mrs. Lawson's purported signatures on the forms were dated appropriately for each tax year. However, Mrs. Lawson did not testify at the hearing. Mr. Deeter's testimony that the returns
filed with the IRS on March 7, 2001, after the audit was completed were, in fact, exact copies of the returns that he and his wife prepared for Petitioner each year and provided to Respondent on July 17, 2000, is not persuasive.
After receiving the amended 1120S returns, Respondent decided not to consider them in the audit because they were self-serving.
On August 6, 2001, Respondent issued a Notice of Proposed Assessment of sales and use tax and charter transit system surtax.
By letter dated October 2, 2001, Petitioner filed a timely informal protest of the proposed assessment. Petitioner asserted that it had never paid any rent to Mr. and
Mrs. Peoples.
On January 29, 2002, Respondent issued a Notice of Decision upholding the proposed assessments. However, Petitioner never received this notice. Therefore, Respondent reissued the Notice of Decision without any additional changes on August 14, 2002.
During discovery, Petitioner provided Respondent with unsigned and undated copies of Mr. and Mrs. Peoples' 1040 forms for 1996, 1997, 1998, and 1999. These returns show taxable income derived from an S corporation on line 17, passive income and losses from Petitioner on page 2 of Schedule E, and
depreciation on Form 4562. In other words, the returns reflect corporate distributions of profit from Petitioner and do not reference any income from rental real estate.
Mr. Deeter's testimony during hearing that the 1040 returns provided to Respondent during discovery are exact copies of the original 1040 returns is not persuasive. As of
December 12, 2002, Mr. and Mrs. Peoples had not filed 1040 returns for the years 2001, 2000, 1999, 1998, 1997, or 1996 with the IRS.
The audit at issue here was based on the best information provided at the time of the audit. Respondent completed the audit on or about January 26, 2001.
Petitioner does not assert that the calculation of the assessment was in error. Instead, Petitioner protests that any assessment is due.
Petitioner could have requested its bank to provide it with copies of its statements and cancelled checks for the relevant period. Petitioner did not make such a request and Respondent was not under an obligation to do so.
There is no evidence that a written lease for Petitioner to use Mr. and Mrs. People's property ever existed. However, the greater weight of the evidence indicates that Petitioner leased the restaurant property from Mr. and
Mrs. Peoples for all relevant years.
Mr. Deeter is an experienced accountant with over
30 years of experience. Petitioner and Mr. and Mrs. Peoples relied upon Mr. Deeter's advice as to what, if any, taxes should be paid on the lease.
Armed with all of the necessary information,
Mr. Deeter gave Petitioner obviously erroneous advice concerning the tax consequences associated with Petitioner leasing the property and paying 100 percent of its profits as consideration for the lease. To compound the problem, Mrs. Peoples negligently failed to ensure that Petitioner's business records, gathered specifically in anticipation of Respondent's audit, were safely preserved from hurricane floodwaters.
Petitioner has had no previous tax compliance difficulties. It has not been subject to prior audits or assessments. Even so, the facts of this case indicate that Petitioner and Mr. and Ms. Peoples did not exercise ordinary care and prudence in complying with the revenue laws of Florida.
Mr. Deeter testified that the fair market value or reasonable consideration for the lease is an amount equivalent to Mr. and Mrs. Peoples' depreciation. According to the depreciation schedules, which accompanied the 1040 forms provided to Respondent during discovery, the annual cost for the use of the property and fixtures were as follows:
(a) 1996--$98,296; (b) 1997--$104,840; and (c) 1998--$114,106
($179,554 less a one time extraordinary loss of $65,448 due to flood damage). Mr. Deeter also testified that using the information on the 1040 forms for 1996, the depreciation expense for 1994 and 1995 can be computed as follows: (a) 1994--$63,000 to $67,000; and (b) 1995--$77,000 to $79,000. Mr. Deeter's testimony that the fair market value of the lease is equivalent to the depreciation set forth on 1040 returns never filed with the IRS is not persuasive.
Mr. Deeter testified that an estimate of reasonable net profits for a corporation of similar size and make-up could be determined by reference to ratio profiles prepared by Robert Morris and Associates. Mr. Deeter's testimony regarding average profit distributions to shareholders of similarly situated corporations and reasonable profit distributions for Petitioner are speculative and not persuasive.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction over the parties and the subject matter of this proceeding. Sections 72.011, 120.569, and 120.57(1), Florida Statutes.
Respondent has the initial burden of proof as outlined in Section 120.80(14)(b), Florida Statutes, which states as follows:
In any administrative proceeding brought pursuant to this chapter as authorized by s. 72.011(1), the taxpayer shall be designated the 'petitioner' and the Department of Revenue shall be designated the 'respondent' . . . .
In any such administrative proceeding, the applicable department's burden of proof, except as otherwise specifically provided by general law, shall be limited to a showing that an assessment has been made against the taxpayer and the factual and legal grounds upon which the applicable department made the assessment.
3.a. Prior to filing a petition under this chapter, the taxpayer shall pay to the applicable department the amount of taxes, penalties, and accrued interest assessed by that department which are not being contested by the taxpayer. Failure to pay the uncontested amount shall result in the dismissal of the action and imposition of an additional penalty of 25 percent of the amount taxed.
b. The requirements of s. 72.011(2) and (3)(a) are jurisdictional for any action under this chapter to contest an assessment or denial of refund by the Department of Revenue . . . .
See also Department of Revenue v. Nu-Life Health and Fitness Center, 623 So. 2d 747, 751 (Fla. 1st DCA 1992) (tax assessments such as the one at issue must be considered prima facie correct, with the burden of showing the contrary on the party against whom the assessment is made.)
Section 212.21(2), Florida Statutes, states in relevant part as follows:
(2) It is hereby declared to be the specific legislative intent to tax each and every sale, admission, use, storage, consumption, or rental levied and set forth in this chapter, except as to such sale, admission, use, storage, consumption, or rental as shall be specifically exempted therefrom by this chapter subject to the conditions appertaining to such exemption.
See also Department of Revenue v. Magazine Publishers of
America, Inc. 565 So. 2d 1304, 1310 (Fla. 1990) ("Section 212.21 makes it unmistakably clear that as between the imposition of the tax or the granting of an exemption, the tax shall prevail.") Petitioner does not assert that it is entitled to an exemption.
Section 212.02, Florida Statutes, states in pertinent part as follows:
212.02 Definitions.--The following terms and phrases when used in this chapter have the meanings ascribed to them in this section, except where the context clearly indicates a different meaning:
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(2) "Business" means any activity engaged in by any person, or caused to be engaged in by him or her, with the object of private or public gain, benefit, or advantage, either direct or indirect. Except for the sales of any aircraft, boat, mobile home, or motor vehicle, the term "business" shall not be construed in this chapter to include occasional or isolated sales or transactions involving tangible personal property or services by a person who does not hold himself or herself out as engaged in business, but includes other charges for the
sale or rental of tangible personal property, sales of services taxable under this chapter, sales of or charges of admission, communication services, all rentals and leases of living quarters, other than low-rent housing operated under
chapter 421, sleeping or housekeeping accommodations in hotels, apartment houses, roominghouses, tourist or trailer camps, and all rentals of or licenses in real
property . . . Any tax on such sales, charges, rentals, admissions, or other transactions made subject to the tax imposed by this chapter shall be collected by the state, county, municipality, any political subdivision, agency, bureau, or department, or other state or local governmental instrumentality in the same manner as other dealers, unless specifically exempted by this chapter.
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(10) "Lease," "let," or "rental" means leasing or renting of living quarters or sleeping or housekeeping accommodations in hotels, apartment houses, roominghouses, tourist or trailer camps and real property, the same being defined as follows:
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"Real property" means the surface land, improvements thereto, and fixtures, and is synonymous with "realty" and "real estate."
"License," as used in this chapter with reference to the use of real property, means the granting of a privilege to use or occupy a building or a parcel of real property for any purpose.
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(12) "Person" includes any individual, firm, copartnership, joint adventure,
association, corporation, estate, trust, business trust, receiver, syndicate, or other group or combination acting as a unit and also includes any political subdivision, municipality, state agency bureau, or department and includes the plural as well as the singular number.
Section 212.06(2)(j), Florida Statutes, states as follows in pertinent part:
The term "dealer" is further defined to mean any person who leases, or grants a license to use, occupy, or enter upon, living quarters, sleeping or housekeeping accommodations in hotels, apartment houses, roominghouses, tourist or trailer camps, real property, space or spaces in parking lots or garages for motor vehicles, docking or storage space or spaces for boats in boat docks or marinas, or tie-down or storage space or spaces for aircraft at airports. The term "dealer" also means any person who has leased, occupied, or used or was entitled to use any living quarters, sleeping or housekeeping accommodations in hotels, apartment houses, roominghouses, tourist or trailer camps, real property, space or spaces in parking lots or garages for motor vehicles or docking or storage space or spaces for boats in boat docks or marinas, or who has purchased communication services or electric power or energy, and who cannot prove that the tax levied by this chapter has been paid to the vendor or lessor on any such transactions. The term "dealer" does not include any person who leases, lets, rents, or grants a license to use, occupy, or enter upon any living quarters, sleeping quarters, or housekeeping accommodations in apartment houses, roominghouses, tourist camps, or trailer camps, and who exclusively enters into a bona fide written agreement for continuous residence for longer than 6 months in duration with any person who leases, lets,
rents, or is granted a license to use such property.
Section 212.031, Florida Statutes, states as follows in relevant part:
(1)(a) It is declared to be the legislative intent that every person is exercising a taxable privilege who engages in the business of renting, leasing, letting, or granting a license for the use of any real property. . . .
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For the exercise of such privilege, a tax is levied in an amount equal to 6 percent of and on the total rent or license fee charged for such real property by the person charging or collecting the rental or license fee. The total rent or license fee charged for such real property shall include payments for the granting of a privilege to use or occupy real property for any purpose and shall include base rent, percentage rents, or similar charges. Such charges shall be included in the total rent or license fee subject to tax under this section whether or not they can be attributed to the ability of the lessor's or licensor's property as used or operated to attract customers . . . .
When the rental or license fee of any such real property is paid by way of property, goods, wares, merchandise, services, or other thing of value, the tax shall be at the rate of 6 percent of the value of the property, goods, wares, merchandise, services, or other thing of value.
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(3) The tax imposed by this section shall be in addition to the total amount of the
rental or license fee, shall be charged by the lessor or person receiving the rent or payment in and by a rental or license fee arrangement with the lessee or person paying the rental or license fee, and shall be due and payable at the time of the receipt of such rental or license fee payment by the lessor or other person who receives the rental or payment.
Likewise, Respondent has promulgated rules corresponding to Section 212.031, Florida Statutes.
Rule 12A-1.070, Florida Administrative Code, states as follows in relevant part:
(1)(a) Every person who rents or leases any real property or who grants a license to use, occupy, or enter upon any real property is exercising a taxable privilege. . . .
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(19)(a) the lease or rental of real property or a license fee arrangement to use or occupy real property between related “persons”, as defined in s. 212.02(12), F.S., in the capacity of lessor/lessee, is subject to tax.
The total consideration, whether direct or indirect, payments or credits, or other consideration in kind, furnished by the lessee to the lessor is subject to tax despite any relationship between the lessor and the lessee.
The total consideration furnished by the lessee to a related lessor for the occupation of real property or the use or entitlement to the use of real property owned by the related lessor is subject to tax, even though the amount of the consideration is equal to the amount of the consideration legally necessary to amortize
a debt owned by the related lessor and secured by the real property occupied, or used, and even though the consideration is ultimately used to pay that debt.
Rule 12A-1.070(4), Florida Administrative Code, states as following in pertinent part:
The tenant or person actually occupying, using, or entitled to use any real property from which rental or license fee is subject to taxation under s. 212.031, F.S., and shall pay the tax to his immediate landlord or other person granting the right to such tenant or person to occupy or use such real property.
The tax shall be paid at the rate of
5 percent prior to February 1, 1988, and 6 percent on or after February 1, 1988, on all considerations due and payable by the tenant or other person actually occupying, using, or entitled to use any real property to his landlord or other person for the privilege of use, occupancy, or the right to use or occupy any real property for any purpose.
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(g)(3) Should the lessor or lessee record the payment as rental income or expense, respectively, but provide sufficient documentation, such as a lease or other tangible evidence, to establish that the payment is for other than the use of the real property, then such payment is not subject to tax.
Section 213.35, Florida Statutes, states as follows:
213.35 Books and records.--Each person required by law to perform an act in the administration of any tax enumerated in Section 72.011 shall keep suitable books and records relating to that tax, such as invoices, bills of lading, and other
pertinent records and papers, and shall preserve such books and records until expiration of the time within which the department may make an assessment with respect to that tax pursuant to
Section 95.091(3).
Section 212.12(5)(b), Florida Statutes, states the following:
(b) In the event any dealer or other person charged herein fails or refuses to make his or her records available for inspection so that no audit or examination has been made of the books and records of such dealer or person, fails or refuses to register as a dealer, fails to make a report and pay the tax as provided by this chapter, makes a grossly incorrect report or makes a report that is false or fraudulent, then, in such event, it shall be the duty of the department to make an assessment from an estimate based upon the best information then available to it for the taxable period of retail sales of such dealer, the gross proceeds from rentals, the total admissions received, amounts received from leases of tangible personal property by such dealer, or of the cost price of all articles of tangible personal property imported by the dealer for use or consumption or distribution or storage to be used or consumed in this state, or of the sales or cost price of all services the sale or use of which is taxable under this chapter, together with interest, plus penalty, if such have accrued, as the case may be. Then the department shall proceed to collect such taxes, interest, and penalty on the basis of such assessment which shall be considered prima facie correct, and the burden to show the contrary shall rest upon the dealer, seller, owner, or lessor, as the case may be.
The local government infrastructure surtax is a discretionary tax that a county may impose after approval of a referendum by the voters in the county. See Section 212.055(2), Florida Statutes. The surtax is imposed in the same manner and on the same transactions that are subject to the sales and use tax. See Section 212.054(2)(a), Florida Statutes. The surtax in Duval County, Florida, is imposed at the rate of one percent.
Respondent met its initial burden of showing the factual and legal grounds of the assessment. Respondent conducted its audit pursuant to its rules and standard procedures, using the best information available. Thus, the burden shifted to Petitioner to show that the assessment was factually or legally incorrect. Petitioner has not met its burden.
A written lease is not necessary to find that a landlord-tenant relationship exists. The character of the relationship between the owner of the land and the business occupying the land is most important. Regal Kitchens, Inc. v.
Florida Department of Revenue, 641 So. 2d 159 (Fla. 1st DCA 1994).
Petitioner concedes that its 1120S returns for 1994 and 1995 reported a deduction for lease expense and that Mr. and Mrs. Peoples' 1040 returns for 1994 and 1995 reported rent received. The landlord-tenant relationship between Mr. and
Mrs. Peoples and Petitioner is further corroborated by 1120S returns for 1996 through 1998 and a 1040 return for 1998, showing money being exchanged for rent. Petitioner has provided no persuasive evidence to the contrary. The greater weight of the evidence indicates that Petitioner leased the restaurant business from Mr. and Mrs. Peoples, who accepted 100 percent of Petitioner's profit in consideration.
Section 213.(3)(a), Florida Statutes, states as follows in pertinent part:
(3)(a) . . . A taxpayer's liability for penalties under any of the chapters specified in s. 72.011(1) may be settled or compromised if it is determined by the department that the noncompliance is due to reasonable cause and not to willful negligence, willful neglect, or fraud.
Rule 12-13.001, Florida Administrative Code, states as follows in relevant part:
12-13.001 Scope of Rules.
The rules set forth in this chapter shall be used by the Executive Director or the Executive Director's designee, as set forth hereinafter, in the exercise of the authority to settle and compromise liability for tax, interest, and penalty granted by s. 213.21, F.S.
Rule 12-13.002, Florida Administrative Code, states as follows in relevant part:
12-13.002 Definitions.
The meanings ascribed to the words and terms listed below shall be applicable, unless a different meaning is clearly indicated by the context in which the word or term is used.
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"Reasonable cause" means a basis for compromise of penalty which has been shown to exist based upon the facts and circumstances of the specific case and which reflects that the taxpayer exercised ordinary care and prudence in complying with a revenue law of this state, as provided in s. 213.21(2) and (3), F.S.
"Revenue law of this state" means any statute listed in s. 72.011(1), F.S., that imposes a tax, penalty or interest, surcharge, permit, or fee collected by the Department.
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(7) In relation to an act or omission which constitutes a violation of the revenue laws of this state, "willful" means with actual knowledge or belief that such act or omission constitutes such violation and with intent nevertheless to commit or cause such act or omission.
Rule 12-13.007, Florida Administrative Code, states as follows in pertinent part:
12-13.007 Grounds for Reasonable Cause for Compromise of Penalties.
(1)(a) The Executive Director or the Executive Director's designee, as enumerated in Rule 12-13.004, F.A.C., will make a determination of whether the taxpayer's noncompliance was due to reasonable cause
and not to willful negligence, willful neglect, or fraud based on the facts and circumstances of the specific case. The standard used in this determination shall be whether the taxpayer exercised ordinary care and prudence and was nevertheless unable to comply.
* * *
Reasonable cause is indicated by the existence of facts and circumstances which support the exercise of ordinary care and prudence on the part of the taxpayer in complying with the revenue laws of this state. Depending upon the circumstances, reasonable cause may exist even though the circumstances indicate that slight negligence, inadvertence, mistake, or error resulted in noncompliance. Consideration will be given to the complexity of the facts and the difficulty of the tax law and the issue involved, and also to the existence or lack of clear rules or instructions covering the taxpayer's situation.
Ignorance of the law or an erroneous belief as to the need to comply with a revenue law constitutes reasonable cause when there are facts and circumstances which indicate ordinary care and prudence was exercised by the taxpayer.
For example, ignorance of the law or an erroneous belief held by the taxpayer is a basis for reasonable cause when the taxpayer has a limited knowledge of business, a limited education, limited experience in Florida tax matters, or advice received from a competent advisor was relied upon in complying with the provisions of a revenue law.
A good faith belief held by a taxpayer with limited business knowledge, limited education, or limited experience with Florida tax matters is a basis for reasonable cause when there is reasonable doubt as to whether compliance is required
in view of conflicting rulings, decisions, or ambiguities in the law.
Reliance upon the erroneous advice of an advisor is a basis for reasonable cause when the taxpayer relied in good faith upon written advice of an advisor who was competent in Florida tax matters and the advisor acted with full knowledge of all of the essential facts. Informal advice, advice based upon insufficient facts, advice received in cases where facts were deliberately concealed, or obviously erroneous advice are not grounds for reasonable cause. To establish reasonable cause based upon reliance on the advice of a competent advisor, the taxpayers shall demonstrate:
That the taxpayer sought timely advice of a person who was competent in Florida tax matters;
That the taxpayer provided the advisor with all of the necessary information and withheld nothing; and
That the taxpayer acted in good faith upon written advice actually received from the advisor.
In this case, Mr. Deeter gave Petitioner and Mr. and Mrs. Peoples obviously erroneous advice concerning the tax consequences of leasing the business to Petitioner. There is no persuasive evidence to support a finding that Petitioner's noncompliance is due to reasonable cause.
Based on the foregoing Findings of Fact and Conclusions of Law, it is
RECOMMENDED:
That Respondent enter a final order upholding the tax assessment.
DONE AND ENTERED this 4th day of April, 2003, in Tallahassee, Leon County, Florida.
SUZANNE F. HOOD
Administrative Law Judge
Division of Administrative Hearings The DeSoto Building
1230 Apalachee Parkway
Tallahassee, Florida 32399-3060
(850) 488-9675 SUNCOM 278-9675
Fax Filing (850) 921-6847 www.doah.state.fl.us
Filed with the Clerk of the Division of Administrative Hearings this 4th day of April, 2003.
COPIES FURNISHED:
David B. Ferebee, Esquire Post Office Box 1796
Jacksonville, Florida 32201-1796
J. Bruce Hoffmann, General Counsel Department of Revenue
204 Carlton Building Post Office Box 6668
Tallahassee, Florida 32314-6668
R. Lynn Lovejoy, Esquire Office of the Attorney General The Capitol, Tax Section
Tallahassee, Florida 32399-1050
James Zingale, Executive Director Department of Revenue
104 Carlton Building Tallahassee, Florida 32399-0100
NOTICE OF RIGHT TO SUBMIT EXCEPTIONS
All parties have the right to submit written exceptions within
15 days from the date of this Recommended Order. Any exceptions to this Recommended Order should be filed with the agency that will issue the final order in this case.
| Issue Date | Document | Summary |
|---|---|---|
| Jun. 30, 2003 | Agency Final Order | |
| Apr. 04, 2003 | Recommended Order | Petitioner liable for sales and use tax and surtax based on lease for restaurant property as evidenced by best information available. |
