vs. ) CASE NO. 79-1669
Respondent. )
Pursuant to notice, the Division of Administrative Hearings, by its duly designated Hearing Officer, James E. Bradwell, held a public hearing in this case on April 22, and July 18, 1980, in St. Petersburg and Tampa, Florida, respectively. A transcript of the proceedings was received by the Division of Administrative Hearings on July 24, 1980.
For Petitioner: Steven A. Crane, Esquire
For Respondent: Shirley W. Ovletrea, Esquire and
E. Wilson Crump, II, Esquire Assistant Attorney General Department of Legal Affairs The Capitol, LL04 Tallahassee, Florida 32301
The issue posed for decision herein is whether or not the Petitioner, Adwell Corporation, is entitled to separate accounting in computing its Florida corporate income tax based on the nature of its Florida operations.
Based upon my observation of the witnesses and their demeanor while testifying, the documentary evidence received, the arguments of counsel and the entire record compiled herein, the following relevant facts are found.
The Petitioner, Adwell Corporation, is an Illinois corporation which is actively engaged in the business of farming approximately twelve thousand (12,000) acres of farmland near Jacksonville, Illinois; owns and leases ten (10) acres of real property under a "triple net lease" arrangement for a shopping mall in Minnesota and operates a two-hundred unit (200) apartment complex called the Yacht Basin Apartments (YBA) in Clearwater, Florida.
An audit of Petitioner's books during 1978 resulted in a report of income tax audit changes dated July 28, 1978, for Petitioner's Florida income tax returns for fiscal years ending May 31, 1975; 1976 and 1977. The deficiency adjustment as proposed by the Respondent amounted to $1,248.00 for fiscal year ending May 31, 1975; $10,042.00 for fiscal year ending 1976 and $11,238.00 for fiscal year 1977.
As originally filed, Petitioner, computing its Florida corporate income tax, based it on a separate accounting of its Florida activities on its claim that it is not a unitary business and that to combine its total corporate income of Florida, Illinois and Minnesota would unfairly represent the extent of its tax base attributable to Florida. Thus, Petitioner contends that the formula apportionment called for in Florida Statutes Sections 220.15 and 214.71 should not be applied. Instead, Petitioner contends that it is entitled to the exceptions to the general method of formula apportionment as set forth in Sections 214.72 and 214.73, Florida Statutes.
PETITIONER'S ILLINOIS OPERATIONS
As stated, Petitioner farms approximately twelve thousand (12,000) acres of agricultural land utilizing two methods of farming: the "direct" farming method and the "landlord/tenant" arrangement. During the years in question, the "direct" farming operation was used on approximately one-third (4,000 acres) of Petitioner's agricultural land. Under the "direct" method, in addition to the land, Petitioner provides the equipment, fertilizer, chemical, seed, and weed and pest control. Under the "direct" farm method, Petitioner retains an operator who is paid a flat fee for his services which is negotiated on a yearly basis.
The remaining two-thirds (approximately 8,000 acres) of the agricultural land is farmed using the "landlord/tenant" method. Under this method, Petitioner, in addition to providing the land, provides the tenant farmer 50 percent of the seed, fertilizer and chemicals for weed and pest control. The crop is divided equally between the farmer and the Petitioner.
In both farming methods, Petitioner determines with the crop will be planted; the type of crop and fertilizer and its method of application; the type chemicals for both pest and weed control and decides when and how the crop will be planted and harvested.
Prior to 1970, Petitioner's headquarters (for the Illinois farming) was situated in Chicago, Illinois. In 1970, corporate headquarters were moved to Jacksonville, Illinois, based on the corporate decision that "absentee" ownership was not conducive to efficient and productive business operations.
During 1970, Petitioner invested in real property in Florida and Minnesota using income realized from the forced sale of real estate under threat of governmental condemnation.
PETITIONER'S FLORIDA OPERATIONS
In Florida, Petitioner purchased the real property under the Yacht Basin Apartments which was simultaneously leased to the Yacht Basin Apartment owners. The Minnesota real property lay under and was leased to owners of a shopping center. Both leases were "triple net leases", thereby relieving Petitioner of the responsibilities of taxes, maintenance and the other activities associated with land ownership. During 1973, Adwell Corporation
purchased the Yacht Basin Apartments and other related improvements which were situated on the Clearwater property. From 1973 through November of 2974, Adwell retained the services of an independent property management firm to manage the Yacht Basin Apartments. However, during this period (November of 1974), Petitioner relocated an accountant, Steve McClellan, who was then employed by Petitioner as an accountant in Jacksonville, Illinois to manage YBA. After Mr. McClellan became familiar with the management operations of the Yacht Basin Apartments, the arrangement was severed with the independent management contractor and Petitioner authorized Mr. McClellan to do virtually all that was necessary to efficiently manage and operate the Yacht Basin Apartments.
Examples of the authority given and exercised by Mr. McClellan included hiring and firing employees; negotiating leases; expending large capital outlays for improvements and repairs, including for example, replacement of kitchen cabinets in several apartments, total roof repair and replacement, replacement of the master T.V. antenna and replacement of all windows. (See Petitioner's Exhibits
1 through 5.)
Mr. McClellan was assigned the goal of operating the Florida apartments on the rent receipts, which goal was realized. Petitioner maintains what is referred to as an internal accounting procedure which requires that all checks be signed by the operation's President, Donald R. Pankey. Evidence adduced during the hearing reveals that Mr. McClellan was given almost complete control over the operation and management of the Florida property and in no instance was any recommended expenditure by him rejected by President Pankey.
Evidence also reveals that Petitioner maintains separate accounts for each of its operations in Florida, Illinois and Minnesota. The Florida operations are not integrated with or dependent upon nor contribute to the other business operations of Petitioner in Illinois and Minnesota. The Florida property as stated compromises approximately ten (10) acres of reality plus the improvements.
During the period in question, the Florida operation employed approximately twelve (12) to fifteen (15) employees. Aside from its Florida employees, Petitioner only employs the President and his secretary in Jacksonville, Illinois.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction over the subject matter and the parties to this action. Section 120.57(1), Florida Statutes.
The parties were duly noticed pursuant to the notice provisions of Chapter 120, Florida Statutes.
The authority of the Respondent is derived from Chapters 214 and 220, Florida Statutes, and Rule Chapter 12C, Florida Administrative Code.
A multi-state corporation which transacts business in a number of states is generally required and is subject to income tax in each state. In that regard, Section 220.15, Florida Statutes, provides in pertinent part that:
"Apportionment of adjusted federal income.--Adjusted federal income as defined in Section 220.13 shall be apportioned to this state in
accordance with part IV of Chapter 214, "
The apportionment formula is set forth in Section 214.71, Florida Statutes, and provides in pertinent part that:
"Apportionment; general method.-- Except as otherwise provided in Sections 214.72 and 214.73, the base upon which any tax made applicable to this chapter shall be apportioned shall be determined by multiplying same by a fraction the numerator of which is the sum
of the property factor, the payroll factor, and the sales factor and the denominator of which is 3. "
The Florida formula provides that the taxpayer's adjusted federal income is divided by a fraction representing the ratio of property held in-state to total property held, payroll in-state to total payroll, and sales in-state to total sales. Section 214.71, Florida Statutes.
Exceptions to the general method of formula apportionment are set forth in Sections 214.72 and 214.73, Florida Statutes. Section 214.72, Florida Statutes, deals with the special apportionment problems of insurance and transportation companies. Section 214.73, Florida Statutes, reads in pertinent part:
Apportionment: other methods.-- if the apportionment methods of Section
and 214.72 do not fairly represent the extent of the taxpayer's tax base attributable to this state, the taxpayer may petition for, or
the department may require, in respect to all or any part of the taxpayer's base, if reasonable:
Separate accounting;
The exclusion of any one or more factors;
The inclusion of one or more additional factors which will fairly represent the taxpayer's tax base attributable to this state; or
The employment of any other method which will produce an equitable apportionment."
In furtherance of and in order to illustrate the provisions which justify the circumstances wherein separate accounting may or may not be applied, the Department of Revenue promulgated certain administrative rules which deal with the question. Rule 12C-1.15(4)(a), Florida Administrative Code, provides in pertinent part:
"GENERAL METHOD.
Taxpayers who have income from
sources within and without Florida are taxable upon the adjusted federal income apportioned to Florida in accordance with part IV of Chapter 214, F.S.
Where the Florida activities are a part of unitary business carried
on within and without Florida, the portion of the taxpayer's income subject to tax in Florida will generally be determined by a three-factor formula of property, payroll and sales.
The activities of the taxpayer will generally be considered a unitary business if the segments under consideration are integrated with, dependent upon, or contribute to
each other and the operations of the taxpayer as a whole, although the facts of each case will be the major determinant. A strong presumption of a unitary business is created by the presence of any of the following factors:
Same type of business.
A taxpayer is generally engaged in a unitary business when all of its activities are in the same general line. For example, a taxpayer which operates a chain of retail grocery stores will almost always be engaged in a unitary business.
Steps in a vertical process.
A taxpayer is almost always engaged in a unitary business when its various divisions or segments are
engaged in different steps in a large, vertically structured enterprise.
For example, a taxpayer which explores for and mines copper ores; concentrates, smelts and refines
the copper into consumer products is engaged in a unitary business, regardless of the fact that the various steps in the process are operated substantially independent of each other with only general supervision from the taxpayer's executive officers.
Strong centralized management.
A taxpayer which might otherwise be considered as engaged in more than one trade or business is primarily considered as engaged in a unitary business when there is a strong central management, coupled with
the existence of centralized departments for such functions as financing, advertising, research or purchasing. Thus, some conglomerates may properly be considered as
engaged in a unitary business when the central executive officers are normally involved in the operations of the various divisions and there are centralized officers which perform for the divisions the normal matters which a truly independent business would perform for itself, such as accounting, personnel, insurance, legal, purchasing, advertising or financing.
Where the activities carried on within the state are separate from the activities carried on outside the state, the income subject to
tax may be determined upon a separate accounting of the Florida activities.
In all cases where the business is unitary, some type of formula of apportionment will generally be required, not separate accounting.
Except as otherwise provided in Sections 214.72 and 214.73, F.S., adjusted federal income shall be apportioned to this state by multiplying same by a fraction composed of a property factor representing 25 percent of the fraction, a payroll factor representing 25 percent of this fraction and a sales factor representing 50 percent of the fraction."
Also, Rule 12C-1.15(6), Florida Administrative Code, in tracking the language of Section 214.73, Florida Statutes, provides in pertinent part that:
"Section 214.73 permits a departure from the apportionment methods of
Sections 214.71 and 214.72, only in limited and specific cases. Section
214.73 may be invoked only in specific cases where unusual fact situations . . . produce incongruous results under the apportionment provisions contained in Sections 214.72 and 214.72."
An examination of the three-part formula set forth in Sections 214.71 and 220.15, Florida Statutes, is helpful as it relates to Petitioner.
Evidence adduced during the hearing does not show that the Petitioner is engaged in the same type of business. Although a general statement may be made that Petitioner is in some way engaged in the rental of real property, a closer observation reveals that its Florida operations deal solely with the lease and rental of the Yacht Basin Apartments in Clearwater, Florida. Petitioner does not own or lease apartments in any of its other operations outside Florida in either Illinois or Minnesota.
Nor was there any evidence adduced during the hearing to support a finding or conclusion that Petitioner's operations in Florida, Minnesota and Illinois evidence a vertically structured enterprise. It leases land in Minnesota, operates and manages farmland in Illinois and, of course, rents apartments in Florida. There is no inter-relationship or inter-dependency among the Florida, Minnesota or Illinois operations.
The facts also reveal that while there are internal accounting procedures employed by Petitioner, during the years in question Mr. McClellan had complete control over the day-to-day operations of the Yacht Basin Apartments. As stated above in the facts sections herein, he (McClellan) hired and fired employees; expended large sums for capital improvements with little, if any, input from Petitioner's corporate offices; Petitioner maintained separate and independent accounts for each of the three operations in Florida, Minnesota and Illinois and Mr. McClellan only transferred disbursement requisitions to the corporate headquarters in keeping with the internal accounting procedures employed by Petitioner. At no time was Mr. McClellan's management decisions or recommendations questioned or rejected. Based thereon, these factors hardly evince a "strong centralized management".
The Respondent concedes that the payroll factor does not result in producing or reflecting a reasonable measure of Petitioner's Florida income. Noteworthy also is the great disparity in the basis for tax purposes of the Florida properties as contrasted with the out-of-state properties (See the parties' joint stipulation as to property valuation.) To combine these for Florida corporate income tax purposes would result in incongruity when the Florida operations are contrasted with the operations in Illinois and Minnesota. For example, the Florida operations employe twelve (12) to fifteen (15) employees at any given time, whereas there are no employees in Minnesota and only two (2) employees in Illinois. Also, Petitioner's Florida operation comprises approximately ten (10) acres, whereas the Illinois operation comprises approximately twelve thousand (12,000) acres. Finally, the purchase price of the Florida property hardly compares with the purchase price of Petitioner's other properties in Illinois and Minnesota. The three-part formula of real property, sales and payroll, when applied to Adwell's total operations, results in an inequitable apportionment and should not be required. Section 214.73, Florida Statutes. For all of the above reasons, it appears when Petitioner qualifies to invoke the relief provisions provided in Section 214.73, Florida Statutes, based on its unusual fact situation. Separate accounting provides a more equitable result. These unique and non-recurring fact situations as to Petitioner's operations, entitle it to compute its Florida corporate income tax upon a separate accounting of its Florida activities. I shall so recommend.
That the Petitioner is entitled to and should be allowed to separately account its Florida corporate income tax as it originally filed its Florida corporate income tax returns for the tax years 1975, 1976 and 1977.
Accordingly, it is therefore RECOMMENDED that the Respondent withdraw the Report of Income Tax Audit Changes dated July 28, 1978.
RECOMMENDED this 12th day of September, 1980, in Tallahassee, Florida.
JAMES E. BRADWELL, Hearing Officer Division of Administrative Hearings
Filed with the Clerk of the Division of Administrative Hearings this 12th day of September, 1980.
Steven A. Crane, Esq. Post Office Box 3324 Tampa, Florida 33601
Shirley W. Ovletrea, Esq. and
E. Wilson Crump, II, Esq. Assistant Attorneys General Department of Legal Affairs The Capitol, LL04 Tallahassee, Florida 32301
Robert A. Pierce, Esq. General Counsel Department of Revenue
