STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

ARVIV CORPORATION, )

)

Petitioner, )

)

vs. ) CASE NO. 75-1220

)

STATE OF FLORIDA, )

DEPARTMENT OF REVENUE, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to agreement between the parties and there being no material facts in dispute in this cause, the parties submitted to the undersigned Hearing Officer legal memoranda in support of their respective legal positions on the issue in dispute.

APPEARANCES

For Petitioner: Mr. Robert Fried

Suite 210, Professional Centre 9000 Southwest 87th Court Miami, Florida 33176

For Respondent: Mr. Stephen E. Mitchell

Assistant Attorney General Office of Legal Affairs The Capitol

Tallahassee, Florida 32304 ISSUE

The issue in this cause is whether petitioner, for the purposes of computing taxation under the Florida Income Tax Code, should be permitted to carry forward any net capital loss incurred prior to January 1, 1972, in order to offset taxable income. Stated differently, the issue is whether, in order to determine adjusted federal income, pre-1972 net capital losses are to be subtracted before or after federal taxable income is determined.

FINDINGS OF FACT

Based upon the agreement of the parties as to the relevant facts in this case, the following facts are found:

1. For the calendar years ending December 31, 1972 and 1973, petitioner filed its federal corporate income tax returns reporting gross income from dividends in excess of its taxable income before the special deduction of 85 percent of the dividends received, limited to 85 percent of taxable income. As

   a result, a maximum of 15 percent of its net income was included in its taxable income on the federal tax returns.

   
   

2. The federal returns for calendar years ending December 31, 1972 and 1973 reflected the deduction of net capital losses incurred and carried forward from years ending prior to January 1, 1972, the effective date of the Florida corporate income tax code.

   
   

3. For its calendar years 1972 and 1973, petitioner filed its Florida corporation income tax returns reporting no Florida net income.

   
   

4. The respondent examined the returns and determined deficiencies of

   $374.49 for 1972 and $566.40 for 1973. Such determination was based primarily on the additions to income of net capital losses carried forward from years ending prior to January 1, 1972.

   
   

   CONCLUSIONS OF LAW

   
   

5. It is petitioner's contention that respondent erred in adding to petitioner's income the full amount of the pre-1972 net capital loss deducted on its federal return. Petitioner argues that the amount of the adjustments arising from the pre-1972 net capital loss carried forward should be only 15 percent of such loss, the same amount as would have been included in federal taxable income had the loss not been claimed on the federal return. It is claimed that any other result prejudices a corporation which suffered an actual economic loss prior to January 1, 1972.

   
   

6. Respondent contends that no net capital losses incurred prior to January 1, 1972, can be carried forward to offset taxable income and that the amount of such carry forward must be added to federal taxable income in order to compute adjusted federal income.

   
   

7. Having considered the legal positions of the parties, the undersigned Hearing Officer concludes that the plain language of the Florida corporate income tax code commands the result propounded by respondent.

   
   

8. The Florida code imposes upon corporations an excise or privilege tax measured by net income. F.S. 220.11(2). Florida net income is defined as "adjusted federal income", apportioned where necessary, less the annual exemption allowed by 220.14. F.S. 220.12(1). "Adjusted federal income" is defined as federal taxable income, subject to certain limitations on loss and expense carry overs and adjusted in accordance with specified additions and subtractions. F.S. 220.13. Thus, it appears that federal taxable income is the starting point for computing adjusted federal income for Florida income tax purposes. The specified additions and subtractions appear in F.S. 220.13. Pertinent to this case is F.S. 220.13(1)(b)(1)(a) which provides that:

   
   

   "(1) "Adjusted federal income" shall mean an amount equal to the taxpayer's taxable income as defined in subsection (2). . .adjusted as follows:

   (a) . . .

   (b) Subtractions.

   1. In computing. . .the net capital loss allowable for federal income tax purposes under section 1212 of the Internal Revenue Code for the taxable year. . .there shall be subtracted

      from taxable income, in order to arrive at adjusted federal income, such amounts as reflect the following limitations:

      1. No deduction shall be allowed for. . .net capital losses. . .which are carried forward from taxable years ending prior to January 1, 1972. . ."

   
   

   A literal reading of the above statutory language makes it clear that any carry over of net capital losses from years prior to 1972 is proscribed. While net capital losses give rise to federal tax carry over benefits and it was the legislative intent to adopt federal principles of taxation, Florida specifically adopted a different procedure with regard to operating and capital losses. The reason for the adoption of this different procedure has been explained as conformance to the state constitutional mandate for an annually balanced budget and in recognition of the constitutional ban on state income taxation prior to November 2, 1971. "Corporate Income Taxation in Florida: Background, Scope and Analysis," Arthur J. England, Jr., The Florida State University Law Review, April, 1972. Another reason may have been to prevent taxpayers from reducing taxable income earned in 1972 by deducting losses carried forward from years in which income taxation was prohibited in Florida.

   
   

9. In conclusion, it is found that the plain statutory language of 220.13 prohibits deductions for net capital losses which are carried forward from taxable years ending prior to January 1, 1972. Carry over losses from pre-1972 tax years cannot be used to offset post-1972 income for Florida taxation purposes. While this interpretation may present an inequitable result in certain circumstances as here where a corporation has both a pre-1972 capital loss carried forward and a dividend - received deduction limited by net income, the plain language of 220.13(1)(b) commands this result. Pre-1972 net capital losses carried forward must be subtracted from federal taxable income in the computation of adjusted federal income for Florida taxation purposes.

RECOMMENDATION

Based upon the findings of fact and conclusions of law recited above, it is recommended that there is no basis for affording petitioner relief from the proposed deficiency and that said deficiencies of corporate income tax of

$374.49 and $556.40 for 1972 and 1973 respectively, be sustained.

Respectfully submitted and entered this 22nd day of June, 1976, in Tallahassee, Florida.

DIANE D. TREMOR, Hearing Officer Division of Administrative Hearings Room 530, Carlton Building Tallahassee, Florida 32304

(904) 488-9675

COPIES FURNISHED:

Mr. T.H. Swindal

Chief, Corporate Income Tax Bureau Department of Revenue

Post Office Box 3906 Tallahassee, Florida 32303

Mr. Robert Fried

Suite 210, Professional Centre 9000 Southwest 87th Court Miami, Florida 33176

Attorney for Petitioner

Mr. Stephen E. Mitchell Assistant Attorney General Office of Legal Affairs The Capitol

Tallahassee, Florida 32304 Attorney for Respondent

Docket for Case No: 75-001220

Orders for Case No: 75-001220