STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

ARROWHEAD COUNTRY CLUB, )

)

Petitioner, )

)

vs. ) CASE NO. 79-1839

)

DEPARTMENT OF REVENUE, )

)

Respondent. )

)

RECOMMENDED ORDER

This case was heard pursuant to notice March 26, 1980, in Miami, Florida, by Stephen F. Dean, assigned Hearing Officer of the Division of Administrative Hearings. This case arose on the petition of Arrowhead Country Club for a formal hearing to controvert the assessment of sales taxes assessed by the Respondent Department.

APPEARANCES

For Petitioner: Louis J. Pleeter, Esquire

6200 Stirling Road, Davie Post Office Box 8549 Hollywood, Florida 33024

For Respondent: Linda C. Procta, Esquire

Office of the Attorney General Department of Legal Affairs The Capitol

Tallahassee, Florida 32301

Prior to the hearing the parties entered into a Stipulation, which was filed with the Division of Administrative Hearings. In addition, the Respondent presented additional testimony of its auditor concerning the assessment.

In summary, this case arose upon the assessment of sales tax due by Respondent upon Arrowhead for sales of goods by Arrowhead's lessee, known variously as RST Corporation or Wilval Corporation. RST obtained a tax number and collected and remitted sales tax to the Department of Revenue.

Subsequently, RST ceased to remit sales tax to the Department. When the tax due was assessed, RST was unable to pay the tax. The Department attempted to levy on the goods and equipment of RST but found that RST had no assets. The Department then presented a jeopardy assessment against Arrowhead, asserting that Arrowhead was ultimately responsible for sales taxes due because Arrowhead held the beverage license under which EST was operating contrary to the beverage law. Arrowhead controverts the assessment on the basis that its lease with RST was valid and Arrowhead is in no way responsible for the taxes.

The first issue is whether the lease between RST and Arrowhead was valid.

The second issue, assuming it was not valid, is whether Arrowhead remained

liable for sales tax on sales made by RST. If the lease was valid, the issue is whether the Department may assess sales taxes unpaid by a lessee against a lessor.

FINDINGS OF FACT

1. Arrowhead Country Club (Arrowhead) is a business entity owned by Can Am Company, Ltd., a limited partnership, which held at all times pertinent to this case a beverage license issued by the Division of Beverage.

   
   

2. Can Am Company, Ltd. entered into a lease with EST Corporation (EST) to lease the restaurant and lounge at Arrowhead to EST. Subsequently, RST applied for its corporate charter but was unable to use the name RST. It amended its corporate name to Wilval Corporation (Wilval). RST/Wilval continued to operate the restaurant and lounge under the terms of its lease.

   
   

3. EST/Wilval obtained a sales tax number, collected tax, and remitted taxes for several months, May through October, 1978. Thereafter, RST/Wilval failed to remit sales taxes to the Department of Revenue. RST/Wilval also began to fall behind on its payments to Arrowhead under its lease. This resulted in Arrowhead taking certain charges in payment for monies due under the lease and collecting them from club members. Arrowhead remitted the four percent lease tax but not the sales tax on these collections.

   
   

4. Testimony was submitted by the Department's auditor that there was no evidence of collusion between RST/ Wilval and Arrowhead or indication that they did not deal at arm's length with one another.

   
   

5. The Department audited RST/Wilval and determined that, although the first few months of records were complete, its total records were incomplete. An estimate of sales taxes due was based upon estimates of the sales based upon the records of Arrowhead on the restaurant and lounge operations for the preceding year adjusted for price increases. These estimates, when compared against the records which were maintained by RST/Wilval in its first months of operation, show a close correlation. Based upon these estimates, the sales

   taxes assessed against RST/Wilval were $7,965.14. This assessment was presented to Ralph Williams, the manager of the RST/Wilval operation. Williams, an officer of the corporation, advised that RST/Wilval was unable to pay the taxes.

   
   

6. The Department of Revenue then filed a warrant for collection of delinquent taxes, and the Sheriff of Broward County attempted to levy on the warrant. Williams tendered to Arrowhead a Notice of Termination of the Lease and vacated the premises on March 26, 1979. When the Sheriff attempted to levy the warrant, he found that Williams had left the location and the property on the premises belonged to Arrowhead.

   
   

7. On Nay 18, 1979, the Department presented a jeopardy assessment to Arrowhead, which led to the instant controversy.

   
   

   CONCLUSIONS OF LAW

   
   

8. Whether the lease between RST and Arrowhead was valid is the first issue which must be considered. The Department of Revenue asserts two grounds for invalidity of the lease: RST, the party to the lease, was not the entity chartered as a corporation; and Rule 7A-317, Florida Administrative Code, prohibits such a lease. Both of the grounds asserted by the Department are without merit.

9. The law concerning the organization of a corporation and the legal rights and obligations of a corporation, either de facto or de jure, clearly indicate that the fact the lease was executed in behalf of RST did not invalidate the lease. The procedures for incorporation as outlined in Chapter 607, Florida Statutes, require approval of a proposed corporate name by the Department of State prior to the issuance of a corporate charter. However, Section 607.167, Florida Statutes, provides that a corporation shall commence existence upon filing of its articles with the Department of State. Since the Department of State can only review the proposed corporate name after the filing of the articles, the change of name of the corporation from the name proposed in the articles is not a bar to the creation of corporate existence. Further, if the incorporators substantially comply with the statutory provisions of incorporation, the corporation obtains de facto existence. Contracts executed by a de facto corporation may not be challenged by any of the parties to the contract. See Fla.Jur.2d, Business Relationships, Section 232--238. Assuming arguendo the incorporators failed to attain corporate status, they are then bound as partners in a Partnership to the lease. Therefore, the fact that the corporate charter was ultimately issued in the name of Wilval, whale the lease was executed in behalf of RST, is not fatal to the lease itself.

   
   

10. The Department of Revenue asserts that Rule 7A-3.17, Florida Administrative Code, prohibits a beverage licensee from leasing the licensed premises. The Department argues that this rule invalidates the lease between Arrowhead and RST. When performance of contractual obligations would require a party to the contract to violate the law, public policy calls for the invalidity of the contract. This principle is limited to conduct which is malum in se or specifically prohibited by statute as a means of defining public policy. See 17 Am.Jur.2d, Contracts, Section 216 et seq.

    
    

11. Rule 7A-3.17, supra, provides in pertinent part as follows:

    
    

    All business conduct on the licensed premises under the beverage law shall be managed and controlled at all times by the licensee. .

    . .or his authorized employee or employees.

    
    

    The term "employee," as used herein, shall mean a person who receives a salary or wages for services performed, for and in behalf of a licensee, under the exclusive control and direction of the latter. It does not include a lessee, an independent contractor or any person employed by collateral agreement to independently manage or control the said business on the licensed premises.

    
    

12. The rule quoted above does not prohibit specifically the lease of a licensed premises. It provides for management and control by a licensee of the licensed premises. Reference to the statutes implemented by this rule does not reveal any statute which prohibits a lease of a licensed premises. The statutes do not specifically speak to the licensing of lessees. However, Section 561.17, Florida Statutes, provides that all persons engaging in the sale of alcoholic beverages shall obtain a license for the premises, and that all persons with a direct or indirect interest in the premises must be included in the application. Obviously, a lessee has an interest in the premises end would have to be licensed under the provisions of Section 561.17, Florida Statutes, the statute

    implemented by Rule 7A-3.17, Florida Administrative Code. There is clearly no statutory prohibition reflecting a public policy against the lease of such premises, and such a lease is obviously not malum in se. Therefore, the lease of the premises by Arrowhead was not void against public policy.

    
    

13. The Department argues that even if the lease were valid, then Arrowhead would be responsible for sales taxes on the credit memoranda from RST's customers assigned to Arrowhead for payment of rentals due. This is not correct. Sales taxes become due and subject to collection and remittance to the Department when the goods or services are provided to the customer. The fact that RST assigned the credit memoranda does not alter this concept. Arrowhead properly paid the rental tax on these assigned memoranda and did not assume responsibility for payment of the sales taxes by acceptance of the credit memoranda in payment of RST's debt.

    
    

14. Regarding the argument of collusive conduct, the Department's witness stated at hearing there was no evidence that Arrowhead was in any way involved in a fraud with RST, or that Arrowhead and RST did not deal at arm's length. These facts do not support the Department's argument that the transaction between RST and Arrowhead was fraudulent.

    
    

15. Arrowhead's knowledge of RST's poor financial condition is immaterial insofar as it relieves RST of the obligation to collect and remit sales taxes or creates an obligation by Arrowhead to pay sales taxes for its lessee.

    Acceptance of the credit memoranda in satisfaction of a portion of the rental due is not analogous to the distress sale of a lessee's goods. The taxes become due in that instance because there is a sale by the creditor. In the instant case there was no sale by the creditor, only the transfer of the credit- memoranda in settlement of the debt.

    
    

16. There is no evidentiary basis for awarding Arrowhead attorney's fees and costs, or legal authority for awarding of attorney's fees prior to a final order. The issues in this case, while unique, are not frivolous, and the assessment of the tax does not indicate any bad faith by the Department of Revenue.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of Law the Hearing Officer recommends that the sales taxes due not be assessed against Arrowhead Country Club.

DONE and ORDERED this 30th day of April, 1980, in Tallahassee, Leon County, Florida.

STEPHEN F. DEAN, Hearing Officer Division of Administrative Hearings Room 101, Collins Building Tallahassee, Florida 32301

(904) 488-9675

COPIES FURNISHED:

Linda C. Procta, Esquire Office of the Attorney General Department of Legal Affairs The Capitol

Tallahassee, Florida 32301

Louis J. Pleeter, Esquire 6200 Stirling Road, Davie Post Office Box 8549 Hollywood, Florida 33024

Docket for Case No: 79-001839

Orders for Case No: 79-001839