vs. ) CASE NO. 76-2212
Respondent. )
Pursuant to notice, the Division of Administrative Hearings, by its duly designated Hearing Officer, James E. Bradwell, held a public hearing in this cause on May 27, 1977, in West Palm Beach, Florida.
For Petitioner: David S. Meisel, Esquire
For Respondent: E. Wilson Crump, II, Esquire
Assistant Attorney General Department of Legal Affairs Tax Division, Northwood Mall Tallahassee, Florida 32303
Roger Dean Enterprises, Inc. (Petitioner herein) filed a petition with the Department of Revenue (herein sometimes called the Department) which seeks to review certain proposed Florida Corporate Income Tax deficiencies for the 1972 and 1973 tax years in the respective amounts of $19,086.25 and $1,086.79.
Pursuant to a stipulation, the following facts are found. Petitioner is a West Virginia corporation, organized under the laws of that state on January 4, 1958. Prior to June 1, 1962, it operated an automobile dealership in Huntington, West Virginia. On June 1, 9162, Petitioner exchanged assets of its automobile dealership for fifty (50 percent) percent of the capital stock of Dutch Miller Chevrolet, Inc., a West Virginia corporation organized to succeed the automobile dealership formerly operated by the Petitioner. Prior thereto, in 1961, the Petitioner had acquired one hundred percent (100 percent) of the capital stock in Palm Beach Motors (the name of which was changed on August 10, 1961 to Roger Dean Chevrolet, Inc.). Roger Dean Chevrolet, Inc. is a wholly owned subsidiary of the Petitioner which operated on property owned by the Petitioner. The years involved herein are the fiscal years ending December 31, 1972 and 1973, during which years the Petitioner's principal income (except for the gain involved herein) consisted of rents received from Roger Dean Chevrolet,
Inc. Petitioner and its subsidiary filed consolidated returns for the years involved. During the fiscal year ending December 31, 1972, Petitioner sold its stock in Dutch Miller Chevrolet, Inc. to an unrelated third party for a gain determined by the Respondent to be in the amount of $349,217.00, which, although the sale took place out of the State of Florida, the Respondent has determined to be taxable under the Florida Income Tax Code* (Chapter 220, Florida Statutes).
In the fiscal years ending December 31, 1972 and 1973, Petitioner included in Florida taxable income, the amounts of $76.00 and $6,245.00, respectively, from the sale of property on April 23, 1971, such gain being reported for federal income tax purposes on the installment method under Section
453 of the Internal Revenue Code of 1954.
Roger H. Dean, individually or by attribution during the years involved herein, was the owner of one hundred (100 percent) percent of the stock of Roger Dean Enterprises, Inc. and seventy-five (75 percent) percent of the stock of Florida Chrysler-Plymouth, Inc. The remaining twenty-five (25 percent) percent of Florida Chrysler-Plymouth, Inc. was owned by Robert S. Cuillo, an unrelated person. The Respondent disallowed the $5,000.00 exemption to the Petitioner in computing its Florida corporate income tax for each of the years in question on the theory that the two corporations were members of a controlled group of corporations, as defined in Section 1563 of the Internal Revenue Code of 1954.
By letter dated April 13, 1976, the Respondent advised Petitioner of its proposed deficiencies for the fiscal years ending December 31, 1972 and 1973, in the respective amounts of $19,086.25 and $1,086.79. Within sixty (60) days thereafter (on or about May 10, 1976), Petitioner filed its written protest in response thereto. By letter dated May 27, 1976, the Respondent rejected the Petitioner's position as to the stock sale gain and exemption issues.
Thereafter on September 17, 1976, a subsequent oral argument was presented at a conference held between the parties' representatives in Tallahassee, and by letter dated September 23, 1976, Respondent again rejected Petitioner's position on all pending issues raised herein.
The issues posed herein are as follows:
Whether under the Florida Corporate income tax code, amounts derived as gain from a sale of intangible personal property situated out of the State of
*Herein sometimes referred to as the Code.
Florida are properly included in the tax base of a corporation subject to the Florida code.
Whether amounts derived as installments during tax years ending after January 1, 1972, from a sale made prior to that
date are properly included in the tax base for Florida corporate income tax purposes.
Whether two corporations one of whose
stock is owned 100 percent by the same person who owns 75 percent of the stock in the other, with the remaining 25 percent of the stock in the second corporation being owned by an
unrelated person, constitute members of
a control group of corporations as defined by Section 1563 of the Internal Revenue Code of 1954.
Many states, in determining corporate income tax liability, utilize a procedure generally referred to a "allocation" to determine which elements of income may be assigned and held to a particular jurisdiction, where a corporation does business in several jurisdictions. By this procedure, non- business income such as dividends, investment income, or capital gains from the sale of intangibles are assigned to the state of commercial domicile. This approach was specifically considered and rejected when Florida adopted its corporate income tax code. Thus, in its report of transmittal of the corporate income tax code to the legislature, at page 215, it was noted:
"The staff draft does not attempt to allocate any items of income to the commercial domicile of a corporate taxpayer. It endeavors to apportion
100 percent of corporate net income, from whatever source derived, and to attribute to Florida its apportionable share of all the net income."
Additional evidence of the legislature's intent in this area can be seen by noting that when the corporate income tax code was adopted, Florida repealed certain provisions of the Multi-state Tax Compact (an agreement for uniformity entered into among some twenty-five states). Thus, Article IV, Section (6)(c), a contained in Section 213.15, Florida Statutes, 1969, which previously read:
"Capital gains and losses from sales of intangible personal property are allocable to this state if the taxpayer's commercial domicile is in this state",
was repealed by Chapter 71-980, Laws of Florida, concurrently with the adoption of the Corporate Income Tax Code. This approach has survived judicial scrutiny by several courts. See for example, Johns-Mansville Products Corp. v.
Commissioner of Revenue Administration, 343 A.2d 221 (N.H. 1975) and Butler v. McColgan, 315 U.S. 501 (1942).
Respecting its constitutional argument that amounts derived as installments during tax years subsequent to January 1, 1972, from a sale made prior to the enactment of the Florida Corporate Income Tax Code, the Petitioner concedes that the Code contemplates the result reached by the proposed assessment. However, it argues that in view of the constitutional prohibition which existed prior to enactment of the Code, no tax should now be levied based on pre-Code transactions. The Florida Supreme Court in the recent case of the Department of Revenue v. Leadership Housing, So.2d (Fla. 1977), Case No. 47,440 slip opinion p. 7 n. 4, cited with apparent approval the decision in Tiedmann v. Johnson, 316 A.2d 359 (Me. 1974). The court in Tiedmann, reasoned that the legislature adopted a "yard-stick" or measuring device approach by utilizing federal taxable income as a base, and reasoned that there was no retroactivity in taxing installments which were included currently in the federal tax base for the corresponding state year even though the sale may have been made in a prior year.
The Respondent denied the Petitioner a $5,000.00 exemption based on its determination that the two corporations herein involved were members of a controlled group of corporations as defined in Section 1563 of the Internal Revenue Code. Chapter 220.14(4), Florida Statutes, reads in pertinent part that:
"notwithstanding any other provisions of this code, not more than one exemption under this section shall be allowed to the Florida members of a controlled group
of corporations, as defined in Section 1563 of the Internal Revenue Code with respect
to taxable years ending on or after December 31, 1972, filing separate returns under
this code."
Petitioner's reliance on the case of Fairfax Auto Parts of Northern Virginia, 65 T.C. 798 (1976), for the proposition that the 25 percent ownership of an unrelated third party in one of the corporations precluded that corporation and the Petitioner from being considered a "controlled group of corporations" within the meaning of Section 1563 of the Internal Revenue Code, is misplaced in view of the recent reversal on appeal by the Fourth Circuit. Fairfax Auto Parts of Northern Virginia v. C.I.R., 548 F.2d 501 (4th C.A. 1977). Based thereon, it appears that the Respondent correctly determined that the Petitioner and Florida Chrysler-Plymouth, Inc., were members of the same controlled group of corporations as provided in Section 1563 of the Internal Revenue Code and therefore properly determined that Petitioner was not entitled to a separate exemption.
Based on the legislature's specific rejection of the allocation concept and assuming arguendo, that Florida recognized allocation income for the sales of intangibles, it appears that based on the facts herein, Petitioner is commercially domiciled in Florida. Examination of the tax return submitted to the undersigned revealed that the Petitioner has no property or payroll outside the state of Florida. Accordingly, it is hereby recommended that the proposed deficiencies as established by the Respondent, Department of Revenue, be upheld in its entirety.
RECOMMENDED this 7th day of July, 1977, in Tallahassee, Florida.
JAMES E. BRADWELL
E. Wilson Crump, II, Esquire Assistant Attorney General Department of Legal Affairs Tax Division, Northwood Mall Tallahassee, Florida 32303
David S. Meisel, Esquire
Thomas M. Mettler, Esquire
