STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

AMERICAN TELEPHONE AND TELEGRAPH ) COMPANY, )

)

Petitioner, )

)

vs. ) CASE NO. 81-2188RX

) STATE OF FLORIDA, DEPARTMENT OF ) REVENUE, )

)

Respondent. )

)

FINAL ORDER

Pursuant to notice, an administrative hearing was held before Diane D. Tremor, Hearing Officer with the Division of Administrative Hearings, on October 5, 1981, in Tallahassee, Florida. This case was consolidated for hearing purposes with the case of American Telephone and Telegraph Company vs. State of Florida, Department of Revenue, DOAH Case No. 81-1601, which involved the issue of whether petitioner is liable for deficiencies with respect to its Florida corporate income taxes for the years 1972, 1973 and 1974. That case is the subject of a separate Recommended Order entered on April 28, 1982.

The instant case was instituted pursuant to Section 120.56, Florida Statutes, and challenges the validity of two unpromulgated statements of the Department of Revenue. These two statements are:

1. Federal income tax terms and definitions need not be used in the same manner, or given the same meaning by the Department, as they are under federal law.

2. Petitioner and all similarly situated taxpayers are required to include in 'adjusted federal income' dividend income that is not taxable income for federal income tax purposes.

APPEARANCES

For Petitioner: Susan B. Werth and

Richard J. Razook Paul & Thompson

1300 Southeast First National Bank Building

Miami, Florida 33131

For Respondent: E. Wilson Crump, II

Assistant Attorney General Department of Legal Affairs The Capitol, LL04 Tallahassee, Florida 32301

FINDINGS OF FACT

The parties executed and filed a Prehearing Stipulation in this proceeding stipulating to the facts and agreeing that there were no issues of fact which remain to be litigated. Based upon the stipulation of facts, the facts found relevant to the issues in this rule challenge proceeding are as follows:

1. Petitioner, American Telephone and Telegraph Company, is the parent corporation of the "Bell System," a group of corporations consisting of twenty- three associated operating telephone companies and other related corporations.

   
   

2. For the 1972, 1973 and 1974 tax years, petitioner and its qualified subsidiaries filed a consolidated return for federal income tax purposes.

   Having made a valid election of the 100 percent dividend received deduction under Section 243 of the Internal Revenue Code, the Internal Revenue Service did not tax dividends received by petitioner from its affiliates. Petitioner's federal income tax returns were audited by the Internal Revenue Service and the respective tax liabilities were determined and paid for each of the years in question.

   
   

3. For the same 1972, 1973 and 1974 tax years, petitioner filed Florida income tax returns on a separate unconsolidated basis. Petitioner did not elect and was not required to file a Florida consolidated income tax return under Section 220.131, Florida Statutes. Having timely made a valid election of the

   100 percent dividend received deduction under Section 243 of the Internal Revenue Code for the 1972, 1973 and 1974 tax years, such dividends were excluded from taxable income on petitioner's Florida income tax returns.

   
   

4. For each of the tax years in question, petitioner reported on line 1 -- "federal taxable income (line 30, Form 1120 or corresponding line on related form in 1120 series, 990C or 990T)" -- of its Florida corporation income tax return (Form F-1120) its taxable income for federal income tax purposes computed as if petitioner had filed a separate federal income tax return for each of the years in question and for each preceding taxable year for which it was a member of an affiliated group. Petitioner, on its Florida corporation income tax return for each of the years in question, made the additions and subtractions required by the return in computing "adjusted federal income" and apportioned this amount of the prescribed three-factor formula to obtain "Florida net income." The Department of Revenue adjusted the amount of "federal taxable income" and hence "Florida net income" of petitioner for each of the years in question by adding thereto 15 percent of the dividends received from petitioner's affiliates which were deductible for federal income tax purposes under Section 243(a)(3) of the Internal Revenue Code.

   
   

5. The income which the respondent seeks to tax is derived from dividends received by petitioner primarily from earnings generated by the property and employees of petitioner's affiliates which are devoted to furnishing intrastate and inter- state telecommunications services in their operating territories in states other than the State of Florida. These earnings are subject to income taxes in all states in which the petitioner's affiliates provide telecommunications services that impose income taxes on corporations.

6. On April 10, 1978, the Department of Revenue issued a notice of proposed deficiency for petitioner's tax years ended December 31, 1972, December 31, 1973 and December 31, 1974, representing a potential tax liability to the petitioner in the amount of $304,103 for 1972, $387,429 for 1973, and $439,626 for 1974, plus accrued interest on each proposed deficiency. Petitioner timely filed a protest to the proposed deficiencies, an informal conference was held and, on April 16, 1981, the respondent Department of Revenue issued a final notice of proposed deficiency. This document applied the policies which are being challenged in this proceeding so as to add back to petitioner's taxable income an amount equal to 15 percent of the dividends received by petitioner from affiliated corporations which were not incorporated, located or engaged in business in the State of Florida. Stated differently, the respondent's policy is to allow the 100 percent dividend received deduction for those dividends received from subsidiaries or affiliates subject to the Florida tax, but to allow only an 85 percent deduction on those dividends received from subsidiaries which are not subject to the Florida tax. This policy has been applied to other similarly situated taxpayers in Florida and it has not been promulgated as a rule.

   
   

7. The Florida corporate income tax forms in use for 1972, 1973 and 1974 did not require taxpayers to add back any amount of dividends received from affiliates. There is no existing statute or rule which specifically imposes such a requirement.

   
   

   CONCLUSIONS OF LAW

   
   

8. Pursuant to Section 120.56, Florida Statutes, petitioner has challenged the following two policies of the Department of Revenue as constituting invalid exercises of delegated legislative authority:

   
   

   1. Federal income tax terms and definitions need not be used in the same manner, or given the same meaning by the Department of Revenue, as they are under federal law; and

   2. Petitioner and all similarly situated taxpayers are required to include in "adjusted federal income" dividend income that is not taxable income for federal income tax purposes. Stated differently, this second policy is that the Department will require a taxpayer

      to "add back" to its taxable income

      an amount equal to 15 percent of the dividends received from affiliated corporations

      not incorporated, located or engaged in business in the State of Florida.

      
      

9. In order to prevail in a rule-challenge proceeding, a petitioner must demonstrate that it is substantially affected by the challenged agency statement, that the challenged statement is a "rule" within the meaning of the Administrative Procedure Act (APA) and, if so, that the rule constitutes an invalid exercise of delegated legislative authority on the grounds that either it was not properly promulgated in accordance with the requirements of the APA or that its contents exceed or are in derogation of the statutory authority of the agency.

10. As stipulated by the parties and as illustrated by the findings of fact above, the petitioner in this proceeding is substantially affected by the two challenged policies or statements of the respondent. The respondent has applied these policies against the petitioner in issuing its notice of proposed deficiencies in the total amount of $1,131,158 for the 1972, 1973 and 1974 tax years. As such, petitioner has adequately demonstrated its standing to challenge these policies as invalid rules pursuant to Section 120.56, Florida Statutes.

    
    

11. It has been stipulated that neither of the challenged policies or statements have been adopted or promulgated in accordance with the procedures set forth in Section 120.54, Florida Statutes. The next determination which must be made is whether the challenged policies constitute "rules" within the meaning of Section 120.52(14), Florida Statutes, and are thus subject to the rule-making and promulgation requirements of the APA. With certain exclusions not applicable to the facts in this case, a "rule" is defined as an "agency statement of general applicability that implements, interprets, or prescribes law or policy As further defined by the case law, "rules" are "virtually self- executing" and "intend by their own effect to create rights, or to require compliance, or otherwise to have the direct and consistent effect of law." McDonald v. Department of Banking and Finance, 346 So.2d 569, 581 (Fla. 1st DCA, 1977); Florida State University v. Dann,400 So.2d 1304 (Fla. 1st DCA, 1981). Applying these statutory and judicial definitions of a "rule" to the agency statements or policies under challenge in this proceeding, it is concluded that the first statement regarding the application of federal income tax terms is not a "rule", but the second statement regarding dividend income is a "rule" within the meaning of the APA.

    
    

12. The first statement or policy challenged by the petitioner is simply a non-specific statement that the Department of Revenue need not apply the same meaning to federal income tax terms as does the federal law. It is not a "statement of general applicability" as it has no applicability until combined with another statement. Without designating which federal term it will differentiate from in connection with the application of a particular statutory or regulatory requirement, it has no specific meaning. While the challenged statement may be utilized in a particular instance to implement or interpret another policy, statement, rule or statute, by itself, it has no particular or specific meaning. It is not self-executing and it does not, standing alone, create rights, require compliance or otherwise have the direct and consistent effect of law.

    
    

13. The second statement or policy is not non-specific. It prescribes for all taxpayers similarly situated to the petitioner a method for computing "adjusted federal income" for Florida corporate income tax purposes. It requires such taxpayers to include as taxable income amounts which are deductible for federal income tax purposes. By itself, that agency statement of general applicability prescribes law, is self-executing, requires compliance and leaves little or no room for discretionary application. There is no existing rule or statute which requires the addition to "adjusted federal income" of 15 percent of the dividends received from non-Florida affiliates even through those dividends have been deducted for federal income tax purposes. This agency statement regarding the inclusion as taxable income for Florida purposes dividends received from affiliated corporations not incorporated, located or engaged in business in Florida, is a "rule" within the meaning and intent of the APA.

14. To be valid and enforceable, an agency "rule" must be noticed, must contain a detailed economic impact statement and must be subject to a public hearing if requested by any affected person prior to its adoption and implementation by an agency. Section 120.54, Florida Statutes. Failure to comply with the rulemaking and adoption procedures contained in the APA renders the challenged rule an invalid exercise of delegated legislative authority.

    
    

15. Whether or not the contents of the respondent's "rule" regarding dividend income received from non-Florida affiliates are in excess or in derogation of the authority granted the Department of Revenue by the Legislature need not be decided in this proceeding. The challenged rule is invalid because it was not properly promulgated and is therefore an invalid exercise of delegated legislative authority. The application of the policy embodied in the rule to the petitioner is the subject of a separate Recommended Order in petitioner's proceeding filed pursuant to Section 120.57, Florida Statutes, which challenges the respondent's notice of proposed deficiencies for the 1972, 1973 and 1974 tax years. American Telephone and Telegraph Company v. State of Florida, Department of Revenue, DOAH Case No. 81-1601 (Recommended Order entered April 28, 1982).

FINAL ORDER

Based upon the findings of fact and conclusions of law recited herein, it is ORDERED THAT

1. The policy of the Department of Revenue that "Federal income tax terms and definitions need not be used in the same manner, or given the same meaning by the Department of Revenue, as they are under federal law" is not, by itself a "rule" within the meaning of the APA. Therefore, the petitioner's challenge to this policy is DISMISSED.

   
   

2. The policy of the Department of Revenue that "Petitioner and all similarly situated taxpayers are required to include in 'adjusted federal income' dividend income that is not taxable income for federal income tax purposes is a "rule" within the meaning of the APA. Because this "rule" was not promulgated and adopted in accordance with Section 120.54, Florida Statutes, the "rule" constitutes an invalid exercise of delegated legislative authority.

DONE and ORDERED this 28th day of April, 1982, in Tallahassee, Florida.

DIANE D. TREMOR, Hearing Officer Division of Administrative Hearings The Oakland Building

2009 Apalachee Parkway

Tallahassee, Florida 32301

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 28th day of April, 1982.

COPIES FURNISHED:

Susan B. Werth, Esquire and Richard J. Razook, Esquire PAUL & THOMPSON

1300 Southeast First National Bank Building

Miami, Florida 33131

E. Wilson Crump, II, Esquire Assistant Attorney General Department of Legal Affairs The Capitol, LL04 Tallahassee, Florida 32301

Randy Miller Executive Director Department of Revenue

102 Carlton Building Tallahassee, Florida 32301

Carroll Webb Executive Director

Administrative Procedure Committee

120 Holland Building Tallahassee, Florida 32301

Liz Cloud, Bureau Chief Administrative Code Section Department of State

1802 The Capitol IL Tallahassee, Florida 32301

Docket for Case No: 81-002188RX

Orders for Case No: 81-002188RX