are applicable to an affiliated group of corporations filing a consolidated return under s. 220.131 and that losses derived from Puerto Rican operations are not includable in adjusted federal taxable income for Florida purposes.
Having considered the pleadings, evidence and legal arguments presented in this cause, the following facts are found:
Petitioner is a corporation duly organized under the laws of the State of New Jersey and qualified to do business is one State of Florida.
Two of the subsidiaries of Petitioner are Island Properties, Inc., formerly known as Heftler International, Inc., and Island Land Corporation, formerly known as Heftler Construction Company of Puerto Rico, Inc. These corporations are organized under the laws of the State of Florida and the State of New Jersey respectively and maintain principal places of business in Puerto Rico.
For the fiscal years ending July 31, 1972 and July 31, 1973, petitioners properly included losses from the operations of the Puerto Rico corporations in their consolidated income tax returns filed with the Internal Revenue Service.
For the fiscal years ending July 31, 1972, and July 31, 1973, petitioners timely filed with the respondent consolidated income tax returns including therein the operations of the Puerto Rico corporations.
After a timely audit, the respondent excluded, for the purposes of computing adjusted federal income as defined by 220.13, the losses sustained by the Puerto Rico corporations. The respondent also excluded from the computation of the apportionment factors defined in F.S. s. 214.71 and 220.15 the value of the property, payroll and sales utilized in the operations of the Puerto Rico corporations. The respondent cited F.S. ss. 220.13(1)(b)2.b, 220.15(3) and
214.71 as its authority.
The adjustments made by the respondent results in a net proposed deficiency of $75,076.46 for the two fiscal years in question.
After attempts by the parties to resolve the issues by informal means failed, the petitioner requested a formal hearing and the respondent requested the Division of Administrative Hearings to conduct the hearing.
CONCLUSIONS OF LAW
The Florida income tax code imposes upon corporations an excise or privilege tax measured by net income. F.S. s. 220.11(2). Florida net income
is defined as "adjusted federal income", apportioned where necessary in accordance with F.S. s. 220.15, less the annual exemption allowed by s. 220.14.
F.S. s. 220.12(1). Thus, "adjusted federal income" is the beginning point for computing tax liability under the Florida Code.
There are two sections of Ch. 220 pertaining to adjusted federal income. The first is s. 220.13 which defines it as federal taxable income, subject to certain limitations on loss and expense carry-overs, adjusted in accordance with specified additions and subtractions. The second is s. 220.131 which allows an affiliated group of corporations to file a consolidated return.
This latter section provides that
"The computation of consolidated taxable income ... shall be made in the same manner and under the same procedures ... as are required for consolidating the incomes of affiliated corporations for the taxable year for federal income tax purposes ..., and the
amount shown as consolidated taxable income shall be the amount subject to tax under this Code." F.S. s. 220.131(4).
Based upon this language, it is petitioners' contention, inter alia, that the adjusted federal income definition of s. 220.13 is not applicable to affiliated groups filing consolidated returns, whose tax for Florida purposes would be identical to the federal tax. A reading and consideration of these two statutes leads the undersigned to conclude that petitioners' contention in this regard is without merit.
First, there would appear to be no rational reason why the adjustments prescribed by F.S. s. 220.13 (which defines "adjusted federal income" for the purposes of determining a taxpayer's net income) would be applicable to one corporation, but would not be applicable to two or more corporations filing as an affiliated group. Second, it must be remembered that the tax imposed by Ch.
220 is a tax measured by net income. Net income is defined in terms of adjusted federal income. The opening sentence of s. 220.13, defining adjusted federal income, provides that it means an "amount equal to the taxpayer's taxable income... or said taxable income of more than one taxpayer as provided in s. 220.131, adjusted..." by certain additions and subtractions. (Emphasis supplied). It thus seems clear that although a Florida parent may file a consolidated Florida return with its instate affiliates and a Florida parent and all of its federal corporate affiliates may elect under certain conditions to file their federal consolidated return in Florida, the net income subject to the Florida income tax is the adjusted federal income as defined by s. 220.13. Also see F.A.C. Rule 12C-1.131(4)(c), which provides that
"The limitations described in Section 220.13(1)(b) in respect to net capital losses and excess contributions deductions shall be taken into account in the computation of consolidated items."
This then brings us to the issue of whether profits or losses derived from operations in Puerto Rico come within what is known as the foreign source income exclusion or subtraction of s. 220.13(1)(b) 2.b. That section provides that there shall be subtracted from taxable income any amount included therein which was derived from sales outside of the United States, and from sources
outside the United States as interest, as a royalty or as compensation for technical or other services. While the Florida corporate income tax code does not define the term "United States", the legislative history and a reading of other statutes and rules and regulations leads to the conclusion that the legislature intended the term "United States" to mean only the fifty states and the District of Columbia.
Construction of a statute by the administrative agency charged with its enforcement and interpretation is entitled to great weight. State v. Florida Development Commission, 211 So.2d 8 (Fla. 1968); Gay v. Canada Dry Bottling Co., 59 So.2d 788 (Fla. 1952); Commissioner v. South Texas Lumber Company, 333 U.S. 496, 92 L.Ed. 831, 68 S. Ct. 695 (1948). The administrative interpretation of the foreign source exclusion is set forth in F.A.C. Rule 12C- 1.13(1)(b)2, which states
"... income derived from sources within a possession or territory of the United States shall be treated as income derived from sources outside the United States."
There is a further consideration, which also goes to the third issue raised in this proceeding - whether the property, payroll and sales of the Puerto Rican operations are excludable from the denominator of the taxpayer's apportionment formula. According to F.S. s. 220.15, adjusted federal income is to be apportioned to Florida in accordance with Part IV of F.S. Ch. 214, specifically s. 214.71. The apportionment factors of s. 214.71 are partially defined by s. 220.15. As originally promulgated, s. 220.15(3) defined "everywhere" for purpose of computing the denominator of the apportionment factor, to mean
"in all other states of the United States, the District of Columbia, the commonwealth of Puerto Rico, any territory or possession of the United States, or any political subdivision of
the foregoing." Laws of Florida 1971, Ch. 71-984.
That section was amended by Ch. 72-278, s. 5, Laws of Florida 1972, by deleting references to Puerto Rico and any territory or possession of the United States. Thus, "everywhere" is now defined to mean "in all states of the United States, the District of Columbia, or any political subdivision of the foregoing". F.S.
s. 220.15(3). This amendment clearly illustrates the legislative intent to exclude Puerto Rican sales, property and payroll from the denominator in the apportionment formula. If Puerto Rican income and operations were to be taxed by Florida, it would have been necessary to include these elements in the apportionment formula. Having excluded these elements, it seems clear that the Florida legislature considered Puerto Rican income and losses as foreign source income and losses to be subtracted from adjusted federal income.
In conclusion, it is my interpretation of the statutes in question that affiliated groups are subject to the adjustments to taxable income prescribed by F.S. s. 220.13; that profit or losses derived from operations in Puerto Rico come within the foreign source exclusion or subtraction of F.S. 220.13(1)(b) 2.b.; and that property, payroll and sales from Puerto Rican operations are to be excluded from the denominator of corporations apportioning their income between Florida and other jurisdictions.
