STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

BRIDGESTONE/FIRESTONE, INC., )

)

Petitioner, )

)

vs. ) CASE NO. 92-2483

)

DEPARTMENT OF REVENUE, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, the above matter was heard before the Division of Administrative Hearings by its duly designated Hearing Officer, Donald R. Alexander, on April 29 and 30, 1993, in Tallahassee, Florida.

APPEARANCES

For Petitioner: Benjamin K. Phipps, Esquire

Post Office Box 1351 Tallahassee, Florida 32302

For Respondent: Leonard F. Binder, Esquire

Jarrell L. Murchison, Esquire Department of Legal Affairs The Capitol-Tax Section

Tallahassee, Florida 32399-1050

STATEMENT OF THE ISSUE

The ultimate issue is whether a sales/leaseback agreement between The Firestone Tire and Rubber Company, as predecessor to Bridgestone/Firestone, Inc., and Firestone Real Estate Leasing Corporation should be treated as a financing agreement and is thus not subject to the sales and use tax.

PRELIMINARY STATEMENT

This matter began after an audit was conducted by respondent, Department of Revenue (DOR), of the taxes paid by petitioner, Bridgestone/Firestone, Inc., during the period June 1, 1985, through December 31, 1988. The principal issue in the audit is whether a transaction between the predecessor of petitioner and Firestone Real Estate Leasing Corporation should be treated as a financing arrangement or a lease. On the premise that the transaction was a lease, DOR has proposed to make a substantial assessment on petitioner. After various informal appeals were unsuccessful, petitioner filed its petition for formal hearing challenging the proposed assessment. The parties have agreed that the total amount of taxes, interest and penalties in dispute are $1,004,848.27.

The matter was referred by respondent to the Division of Administrative Hearings on April 23, 1992, with a request that a hearing officer be assigned to conduct a formal hearing. By notice of hearing dated May 11, 1992, a final hearing was scheduled on September 22, 1992, in Tallahassee, Florida. At the parties' request, the matter was rescheduled to December 1, 1992, and then again to March 2, 1993. By agreement of the parties, the matter was again rescheduled to April 15 and 16, 1993, and finally to April 29 and 30, 1993, at the same location.

At final hearing, petitioner presented the testimony of Dr. William A. Hillison, a professor at the Florida State University (FSU) school of business and accepted as an expert in the analysis of financial transactions from accounting standards; Donald J. Weidner, a professor and dean of the FSU school of law and accepted as an expert in factors to be considered in making a determination as to whether a transaction is a sale or a mortgage; David F. Seele, petitioner's tax comptroller; and Donald T. Allen, supervisor of petitioner's tax department. Also, it offered petitioner's exhibits 1-7. All exhibits were received in evidence except exhibit 6. Respondent presented the testimony of Richard Unen, a DOR tax auditor; Peter J. Steffens, DOR revenue opportunity research administrator; and Joseph R. Boyd, a Tallahassee attorney and board certified in real property law. Also, it offered respondent's exhibits 1-10 and 11A-11J. All exhibits were received in evidence.

The transcript of hearing (four volumes) was filed on May 26, 1993.

Proposed findings of fact and conclusions of law were originally due on June 26, 1993. By agreement of the parties, this time was extended to July 2, 1993, and the parties timely filed their proposed orders on that date. A ruling on each proposed finding has been made in the Appendix attached to this Recommended Order.

FINDINGS OF FACT

Based upon all of the evidence, the following findings of fact are determined:

1. Background

   
   

   1. Petitioner, Bridgestone/Firestone, Inc. (petitioner or Firestone), is a foreign corporation doing business in Florida. During the relevant time period, it owned more than one thousand retail outlets throughout the country, including thirty-nine in Florida, which sold tires and provided additional automotive services. Petitioner was then known as The Firestone Tire and Rubber Company.

      
      

   2. Respondent, Department of Revenue (DOR), is the state agency charged with the responsibility of enforcing the Florida Revenue Act of 1949, as amended. Among other things, DOR performs audits on taxpayers to insure that all taxes due have been correctly paid. To this end, a routine audit was performed on petitioner covering the audit period from June 1, 1985, through December 31, 1988.

      
      

   3. During the course of the audit, a DOR field auditor reviewed a transaction that had occurred on October 22, 1985, between Firestone and Firestone Real Estate Leasing Corporation (FIRELCO). In very broad terms, the agreement provided for the sale of a substantial number of assets (land and buildings) to FIRELCO and a leaseback of the assets by Firestone. After concluding that this agreement was a lease arrangement between the two corporations, DOR issued a notice of decision on February 19, 1992, wherein it

      proposed to assess petitioner $1,233,942.67 in unpaid taxes, interest and penalties. Of this amount, Firestone did not contest $229,094.67. Therefore,

      $1,004,848.27 is in dispute. In the notice of decision, DOR concluded that "the sale/leaseback agreement between Bridgestone/Firestone, Inc. and Firestone Real Estate Leasing Corporation is a lease of real property rather than a mere financing arrangement, and the transaction is subject to the sales and use tax." Petitioner then filed its request for hearing contending generally that DOR had misunderstood the true nature of the transaction, the agreement was a financing arrangement rather than a leasing arrangement for both federal and state tax purposes, and the payments under the lease should not be subject to the commercial rental tax as DOR has proposed. Accordingly, petitioner has asked that the assessment be rescinded or withdrawn.

      
      

2. The Transaction and its Genesis

   
   

   1. In 1979 Firestone hired as president an executive from outside the company for the first time. Previously, only members of the Firestone family or career Firestone employees had held that position. Deciding that Firestone should de-emphasize its manufacturing operations and concentrate on its retail operations, the new president quickly closed seven tire plants and opened a number of new retail outlets with an emphasis on stores in the Sunbelt states. A decision was also made to finance this expansion by using the real estate as collateral.

      
      

   2. The first group of stores was paid for by selling them to a real estate investment trust (REIT) known as One Liberty Firestone. This form of financing had been recommended for several reasons by Merrill Lynch, Firestone's investment banker. First, it gave Firestone "access to the public market". Second, it allowed Firestone to use off-balance sheet financing, that is, it removed the debt associated with the financing from Firestone's balance sheet and thus improved its debt-equity ratio. Finally, Firestone retained operations of the stores through a lease with the REIT. For financial reporting and state and federal tax purposes, the transaction was treated as a true sale. The payments by Firestone to the REIT were treated as rent on the books of both corporations.

      
      

   3. Because Firestone had lost the benefit of the appreciation of the value of the stores under the REIT form of financing, it decided to find a better form of financing for its next acquisition of retail outlets. After considering several alternatives, Firestone's then treasurer, Jack Rooney, and its manager of domestic financing, Suzanne Palmer, concluded that the new financing must meet several objectives, including retaining of appreciation in value of the new properties, using the lowest cost of financing available, continuing off-balance sheet financing so that the assets and debt would not be carried on Firestone's balance sheet, and using the real estate as security for the financing. To meet these objectives, Rooney and Palmer selected a sale/leaseback form of transaction to be structured so that (a) it could be reported off-balance sheet,

      (b) it would be financed through the sale of commercial paper (unsecured promissory notes), and (c) the control of the properties would be retained by Firestone. To get the lowest rate possible for the commercial paper, it was necessary to have the issuance of the paper backed by a letter of credit issued by a bank with a very high rating. Ultimately, the Canadian Imperial Bank of Commerce (bank) was chosen. A credit agreement was prepared which set forth the obligations of the bank with respect to the issuance of the letter of credit. A depository agreement was also prepared naming Manufacturers Hanover Trust Company as the depository agent to handle the issuance and payment of the

      commercial paper as it was issued and reissued. The agreement was designed to protect the interest of the commercial paper note holders.

      
      

   4. In addition to the foregoing documents, a security agreement was created which provided the security for the bank by giving it an interest in the flow of funds to repay the debt, and ultimately gave it an indirect interest in the real estate. This was accomplished through the assignment of the lease and all rents to the bank.

      
      

   5. To achieve Firestone's goal of off-balance sheet financing, a separate, independent corporation named Firestone Real Estate Leasing Corporation (FIRELCO) was created. All of the stock of the corporation was owned by Case Western Reserve University, located in Cleveland, Ohio. When initially established, FIRELCO was a shell company with no assets, it had no working employees, and it had only the minimum number of directors required by law. It was not controlled by or related to Firestone since any common ownership between the two entities would have required Firestone to file consolidated financial statements. As a part of this transaction, Firestone transferred bare legal title in the properties to FIRELCO in return for cash (received by FIRELCO from the issuance of commercial paper), and under a lease agreement between the two, Firestone leased back the retail outlets from FIRELCO. Since all documents were executed on the same day, October 22, 1985, Firestone retained continuous physical possession of the stores.

      
      

   6. To summarize the transaction in simpler terms, FIRELCOinitially issued

      $35 million of commercial paper (short-term notes of thirty to one hundred eighty days duration) to investors. The letter of credit issued by the Canadian Imperial Bank of Commerce provided assurances to the investors that their funds would be returned. This was important since FIRELCO had no assets. The proceeds from the sale of the paper were used to purchase the properties of Firestone, who then immediately leased back the properties from FIRELCO pursuant to a lease agreement. FIRELCO assigned all of its rights to lease payments to the bank, as collateral agent. Thus, Firestone made periodic payments by wire transfer to the Canadian Imperial Bank of Commerce (as assignee of the lease payments), and pursuant to the depository agreement, the bank provided these funds to Manufacturers Hanover Trust Company, acting as fiduciary for the investors. Ultimately, the investors were repaid for their investment in the commercial paper. Since the transaction was an open ended one, additional properties were added by Firestone as late as 1987. By the end of that year, FIRELCO had issued paper in excess of $150 million as a financing tool for Firestone.

      
      

   7. By structuring the transaction in this manner, Firestone was able to secure "virtually 100 percent financing" for an interest rate on the commercial paper of less than that of passbook savings. Also, it was able to secure off- balance sheet financing; that is, it ended up with only cash on its books while transferring the fixed assets (land and buildings) and substantial debt to the books of FIRELCO, thus improving its balance sheet. Finally, it was able to retain control of the retail stores.

      
      

   8. The sale/leaseback form of financing was fairly common in the 1980's and had a number of advantages over other types of financing. First, it permitted the entity using that type of financing to maintain a good debt to equity ratio since the debt was shifted to the lessor. Also, commercial paper enjoyed a lower interest rate than a long-term mortgage, thus allowing the entity to realize savings in interest costs. In addition, unlike the typical

      mortgage, this type of financing allowed the entity to obtain 100 percent financing. Finally, the lessee was able to retain control of all of its assets.

      
      

3. DOR's Audit and Conclusions

   
   

   1. As a part of the audit, a DOR field auditor visited Firestone's offices and examined all of the relevant documents pertaining to the lease. At that time, the auditor was told by a member of Firestone's tax department that the payments made by Firestone to FIRELCO were "rental payments". In addition, Firestone's records contained a monthly rental schedule indicating the "monthly rent" paid by each store. Further, these payments were characterized as rental payments in handwritten notes maintained in petitioner's "real property files." Finally, the Firestone representative never stated that the transaction was a "mortgage." Based on these considerations, the auditor recommended that the transaction be treated as a lease and that Firestone be liable for the sales tax associated with the lease payments. These taxes amounted to approximately

      $680,000.

      
      

   2. A subsequent review of Firestone's records by Tallahassee DOR personnel revealed that while Firestone had been assessed documentary stamp taxes on the assignment of rent portion of the transaction in 1987, and a notice of decision and closing agreement had been entered into by the parties after having reached an agreement as to how the total transaction would be apportioned to Florida, it had never paid intangible personal property tax or documentary stamp tax on the lease itself. This constituted further evidence to DOR that the transaction was a lease and not a financing arrangement since such taxes would be due on a mortgage.

      
      

   3. In further support of its position, DOR relied upon the various Form 10-K's filed by Firestone with the Securities and Exchange Commission (SEC) in which the reports referred to "rent payments for operating leases" and characterized the transaction as an "operating lease" as opposed to a capital or financing lease. Thus, DOR asserts the assessment is correct since the documents reviewed in the audit spoke of a "lease", "rental payments" and the like, there was a representation by Firestone that "rental payments" were being made under the lease, and Firestone had paid no documentary or intangible tax on the lease.

      
      

   4. Finally, DOR offered the testimony of a board certified real estate attorney who examined the one hundred eight page lease and noted some twenty provisions which he opined would be typically found in a lease agreement and not a mortgage. The expert concluded that the lease in form was also a lease in substance.

      
      

4. The Relevance of FASB 13

   
   

   1. For financial reporting purposes, Firestone recorded the transaction on its financial statements and other external reports in accordance with generally accepted accounting principles, the source of which includes, among other things, the standards issued by the Financial Accounting Standards Board (FASB). That board establishes accounting standards, which at last count numbered one hundred fourteen, to be used by the accounting profession in preparing financial statements. Among them is FASB 13, which is applicable to this controversy and, at the time the transaction occurred, governed the accounting for leases. Under FASB 13, a lease must be reported as a debt of the

      "lessee" on its balance sheet if any one of four conditions exists. Put another way, a lease will not be reported as a debt unless all four of the following tests are met:

      
      

      1. The lease transfers ownership of the property to the lessee.

      2. The lease contains a bargain purchase option.

      3. The lease term is equal to 75 percent or

         more of the estimated life of the leased property.

      4. The present value of the minimum lease payments equals or exceeds 90 percent of the fair value of the leased premises.

         
         

         As can be seen in the following discussion, none of these criteria were met. Therefore, Firestone was obliged to report the transaction as a lease in a footnote to its financial statements. For Firestone to have recorded the transaction in any other manner for financial reporting purposes would have contravened FASB 13 and generally accepted accounting principles.

         
         

   2. Under the terms of the lease agreement by Firestone and FIRELCO, Firestone retained the option to repurchase all of the leased properties at the end of a five year period for $137 million. Since the transfer of properties was not automatic, the first criterion requiring that "the lease transfers ownership of the property to the lessee" was not met.

      
      

   3. Under the second criterion, "the lease (must) contain a bargain purchase option." Since the purchase option in the lease agreement was for the unamortized portion of the debt, which was the book value, and a purchase at book value cannot be a bargain purchase, this part of FASB 13 was not met.

      
      

   4. Third, in order for the lease to be reported as a debt on the books of Firestone, "the lease term (must be) equal to 75 percent or more of the estimated life of the leased property." In this case, the lease called for a five year term. This is less than 75 percent of the estimated life of the improved real property since new retail stores have a probable useful life of 35 years or more. Therefore, this part of the test was not met.

      
      

   5. Finally, the lease called for the debt to be amortized at the rate of

      3 percent per year or a total of 15 percent over the five year period of the lease. This left an unamortized debt of 85 percent at the end of the five year term. This meant that the minimum (and maximum) lease payments equaled only 15 percent of the value of the property at the end of the lease term. Since the fourth criterion requires that "the present value of the minimum lease payments equals or exceeds 90 percent of the fair value of the leased premises," the final part of the test was not met.

      
      

   6. Because none of the four tests of FASB 13 were met, the transaction had to be recorded in a footnote, as a lease, rather than on Firestone's balance sheet as a debt. This was consistent with generally accepted accounting principles. Therefore, in its 1984, 1985, 1986 and 1987 Form 10-K's, which are annual reports filed with the SEC, Firestone reported the lease in footnotes, and not as a balance sheet debt.

      
      

   7. In 1988, or after the transaction occurred, FASB 98 was issued. Had it not had prospective application only, the new standard would have required

      this transaction to be reported as a debt or liability on the balance sheet of the financial statements of Firestone.

      
      

5. An Analysis of the Transaction

   
   

   1. Although a document may be called a lease on its face, this in itself is not dispositive of the issue. Rather, in order to properly determine the true nature of the transaction, it is necessary to examine the intention of the parties and the substance of the agreement. In this case, the more credible and persuasive evidence supports a finding that the sale/leaseback agreement between Firestone and FIRELCO was a financing transaction rather than a lease.

      
      

   2. Initially, it is noted that a taxpayer can treat an item one way for financial reporting purposes and another way for tax purposes. A common example is depreciation, where a taxpayer can properly use straight line depreciation for book purposes and accelerated depreciation for tax purposes. Similarly, in cases such as this, a taxpayer can report a transaction as a lease in its financial statements but as a financing transaction for tax purposes. Thus, in accordance with FASB 13, Firestone was obligated to use such terms as "operating lease" and "rental payments" in its Form 10-K's filed with the SEC and to characterize the transaction as a lease in the footnotes to its financial statements. It could, however, treat the matter differently for tax purposes.

      
      

   3. Firestone established that its tax returns were prepared to reflect that no sale had occurred between Firestone and FIRELCO, and therefore the retail stores continued to be treated as depreciable assets of Firestone for all tax purposes. In doing so, Firestone relied upon advice from its tax counsel. Further, the monthly payments made to the bank were treated as principal and interest for all tax purposes, and not as rental payments. In addition, for internal accounting purposes, the transaction was treated in exactly the same way as for tax reporting purposes, that is, with the real estate remaining on Firestone's books as depreciable assets and with the payments being treated as payments of principal and interest, and not rent.

      
      

   4. Although DOR's expert found some twenty provisions in the agreement which are typically found in a lease, the greater weight of evidence supports a finding that the sale/leaseback here was used to effect a mortgage substitute through a deed absolute with collateral documents. For example, sections 4.1- 4.4, 5.2, 6.1, 7.1, 7.3, 8.1, 8.2, 9.1, 9.2, 10.1, 11.1, 11.3, 11.8, 12.1-12.3, 13.1, 15.1-15.4, 18.1, 23.3, 24.1, 25.1, 28.1, 28.2, 30.1, 31.1, and 31.2 of the lease are clear indicia that in reality the transaction was a financing arrangement for Firestone. Indeed, it was Firestone's primary aim in this transaction, as well as the intention of the parties, to raise money so that Firestone could acquire new retail outlets. By way of illustration, there are provisions in the lease which provide that the rent is tied to FIRELCO's carrying costs and not a reasonable return on the fair market of property (s. 4.1), Firestone bears the burden of making all repairs to the property, including major structural repairs (s. 5.2), the obligations of the tenant continue even in the event of termination such as condemnation (s. 6.2), the tenant must make all reports on the property required by law (s. 7.1), FIRELCO must grant any easements that Firestone determines are necessary (s. 8.2), in the event of an insurable loss, the insurance proceeds go to the tenant (s. 11.3), the landlord warrants that it will report to the federal government that the tenant owns the property and hence the tenant receives all federal tax benefits such as depreciation (s. 17.2), upon transfer of title, the landlord's liabilities are relieved and it has no liabilities under the lease (s. 23.3), the tenant reserves the right to substitute any retail properties and the

      replacement property can be no less than the unamortized cost of the substituted property (s. 24.1), and at the end of the lease, any accumulated equity in the property is paid to Firestone as a management fee (s. 28.1).

      
      

   5. In determining the practical business substance of the transaction, it is also necessary to determine if the buyer is a single purpose financing corporation, if the short and long term risks and benefits associated with ownership pass to the so-called buyer, and if the seller's aim is to borrow money. In this regard, the evidence shows that FIRELCO can properly be called a single purpose financing corporation since it existed only for the purpose of this transaction. That is, its sole purpose was to facilitate the issuance of commercial paper, and it was prohibited by the collateral documents from engaging in any other business or corporate activity. Further, FIRELCO did not enjoy any long or short-term benefits associated with ownership of property, it did not assume possession of the property, and the risks associated with ownership of the property did not pass to the lessor but rather remained with Firestone. Finally, as noted in the preceding paragraph, when it entered into the transaction, Firestone's principal aim was to borrow money. All of these considerations support a finding that the practical business substance of the transaction was that of financing new acquisitions for Firestone.

      
      

   6. In summary, FIRELCO was a single purpose financing corporation totally lacking in economic substance. The various deeds from Firestone to FIRELCO were "deeds absolute" and the various other documents, that is, the credit agreement, security agreement, depository agreement, purchase and sale agreement, lease, and assignment of rents and lease, were "collateral documents." In this regard, it should be noted that the parties did not intend for the deeds absolute to embody the whole agreement but rather for the agreement to include both the deeds and the collateral documents together. No sale actually occurred and FIRELCO held naked legal title for the sole purpose of providing security.

      There was no economic substance to the lease beyond insuring amortization of the debt. Further, the practicalities of the situation and specific provisions of the lease insure that Firestone was at all times the actual owner of the property. Firestone treated the transaction as a financing arrangement for federal and state income tax purposes, for ad valorem tax purposes, for state sales and documentary tax purposes, and for internal accounting purposes. In compliance with FASB 13, however, Firestone reported the transaction as a lease for financial reporting purposes. Therefore, the transaction is found to be in the nature of a mortgage or financing arrangement.

      
      

6. Estoppel

1. During the field audit phase of this proceeding, a Firestone employee initially characterized the payments made by Firestone to FIRELCO as rental payments and did not refer to the document as a mortgage. As noted in an earlier portion of this order, there were also several documents shown to the auditor which contained the words "lease", "rental payments" and the like. At that point, the DOR auditor was inclined to treat the "monthly rent" under the lease as constituting rent for sales tax purposes and to make corresponding audit adjustments. Firestone disagreed, however, with the auditor's preliminary analysis and argued that the payments should be characterized as a "financing arrangement" rather than a true lease. Firestone also furnished the auditor with a copy of the opinion letter from its tax counsel which concluded that the transaction was not a lease. In determining whether to accept this assertion, the field auditor contacted his supervisor, and together they checked with the assistant bureau chief of multi-state audits. The field auditor testified at hearing that he knew this was a precedent setting case, other taxpayers had

   taken the same position as Firestone, and at that time he and his supervisor had already decided to treat the transaction as taxable. That position was approved by the assistant bureau chief. Thus, before the field audit was concluded and preliminary action taken, DOR was aware of Firestone's position on this issue.

   Therefore, DOR cannot claim that during the audit it was misled as to Firestone's position or that Firestone subsequently changed its position after the audit was completed. Moreover, DOR suffered no detriment by virtue of its reliance on Firestone's announced position.

   
   

   CONCLUSIONS OF LAW

   
   

2. The Division of Administrative Hearings has jurisdiction of the subject matter and the parties hereto pursuant to Sections 120.57 and 120.575, Florida Statutes.

   
   

3. As provided for in Subsection 120.575(2), Florida Statutes, the agency's "burden of proof...shall be limited to a showing that an assessment has been made against the taxpayer and the factual and legal grounds upon which the (agency) has made the assessment". See also, Department of Revenue v. Quotron Systems, Inc., 615 So.2d 774, 776 (Fla. 3d DCA 1993). Once that showing is made, the burden shifts to the taxpayer to demonstrate by a preponderance of the evidence that the assessment is incorrect.

   
   

4. In construing the taxing statutes, the undersigned is obliged to honor the long-established principle that tax laws are to be strongly construed in favor of the taxpayer and against the government. See, e. g., Maas Brothers, Inc. v. Dickinson, 195 So.2d 193, 198 (Fla. 1967). The statutory authority for the assessment is found in Subsection 212.031(1)(a), Florida Statutes. That subsection reads in relevant part as follows:

   
   

   (1)(a) It is declared to be the legislative intent that every person is exercising a taxable privilege who engages in the business of renting, leasing, or letting any real property . . .

   
   

   On the theory that the transaction is a lease within the meaning of the foregoing statute, and no taxes have been paid, DOR proposes to tax Firestone, as the tenant, since by law a tenant is liable for any sales tax not paid by its landlord.

   
   

5. The central issue in this proceeding is whether the sale/leaseback agreement executed by the parties is a lease or a financing agreement. In resolving this issue, it is helpful to refer not only to relevant tax decisions, but also to real estate cases arising under Subsection 697.01(1), Florida Statutes, which have determined whether instruments not denominated as a mortgage are nonetheless treated as such. As to this latter body of law, DOR contends it is irrelevant since the purpose of a taxing statute is to raise revenues while section 697.01 ostensibly deals with due process rights in foreclosure and quiet title actions. While not arising under chapter 212, these cases nonetheless provide guidance in determining whether an instrument is in the nature of a lease or a mortgage, and they utilize the same type of reasoning as the federal courts have used in confronting this same issue in federal tax disputes. Therefore, the undersigned deems this body of substantive law to be persuasive in resolving the ultimate issue.

6. Subsection 697.01(1) reads in pertinent part as follo ws:

   
   

   (1) All . . . instruments in writing convey- ing or selling property, either real or personal, for the purpose or with the inten- tion of securing the payment of money . . . shall be deemed and held mortgages. . .

   
   

   In other words, the statute provides that even though a transaction is not necessarily denominated as a "mortgage", if it was executed for the purpose of securing money, it shall be treated as such. Cases arising under this statute discuss when a "deed absolute", as was given in this case, will be deemed to be a mortgage, and the facts and circumstances leading to such a result. In making a determination when a deed absolute should be considered in conjunction with other agreements, whether written or oral, parole evidence is admissible and does not violate the parole evidence rule because the deed absolute does not embody, and was not intended to embody, the whole agreement of the parties. In Markell, et al. v. Hilbert, et al., 140 Fla. 842, 192 So. 392 (1939), the supreme court stated the general rule on this subject as follows:

   
   

   It appears that this court, many years ago, .

   . . held generally, independent of this statute (s. 697.01), that parole evidence is admissible in equity to show that a deed of conveyance, absolute upon its face, was intended as a mortgage, and where it is shown that such a conveyance has been executed to secure the payment of money, equity will treat

   it as a mortgage. The court looks at substance rather than form, makes inquiry and hears evidence beyond the terms of the instrument to the very heart of the transaction so as to determine the intent of the parties and all admissible evidence bearing upon this equitable principle is received and considered by the court, whether written or oral, as it is the intention of equity to promote justice and

   to prevent fraud and imposition.

   
   

   Id. at 398.

   
   

   Under the foregoing rule, all of the documents (including the collateral documents) which have been introduced in this case, and the relevant testimony of the witnesses, must be considered in determining how the transaction is to be treated. In doing so, and contrary to respondent's assertion, there is no violation of the parole evidence rule.

   
   

7. In determining the facts and circumstances which will govern whether the transaction is to be deemed a mortgage, the primary rule of construction is the intention of the parties. This intent is established not only from the face of the instruments, but also from the situation of the parties and the nature and object of the transaction. Boyette v. Carden, 347 So.2d 759 (Fla. 1st DCA 1977). In plainer terms, one must examine substance rather than form. The rule in Florida is that an instrument must be considered a mortgage, regardless of its form, if, when taken alone or in connection with surrounding facts, it appears to have been given for the purpose of securing money. First Mortgage Corp. of Stuart v. deGive, 177 So.2d 741 (Fla. 2nd DCA 1965). See also, Watkins

   et ux. v. Burnstein, 152 Fla. 828, 14 So.2d 569 (1943)(deed and lease with option to purchase considered a single transaction constituting a mortgage); Thomas v. Thomas, 96 So.2d 771 (Fla. 1957)(absence of a promissory note evidencing debt did not prohibit transaction from being classified as a mortgage); Sommer v. Pennisi, 48 Fla. Supp. 2d 197 (15th Cir. Ct. 1990)(a recitation in a deed that it represents an absolute conveyance and not a mortgage is not determinative of the issue); Hialeah, Inc. v. Dade County, 490 So.2d 998 (Fla. 3rd DCA 1986)(where burdens and obligations of ownership rest with the lessee, a sale/leaseback will be considered a mortgage).

   
   

8. Based upon the established facts that the sale/leaseback was executed solely for the purpose of securing money to finance Firestone's acquisitions, the parties intended the transaction to be a financing arrangement for taxing purposes, and the burdens and obligations of ownership rested with the lessee, it is concluded that the sale/leaseback here was used to effect a mortgage substitute through a deed absolute with collateral documents. In other words, when stripped of all legal titles and denominations, the transaction must be deemed to be a mortgage.

   
   

9. The same result is reached when applying principles from relevant federal tax decisions. DOR asserts, however, that federal case law is irrelevant since chapter 212 (unlike chapter 230) does not "piggyback" federal income tax law. That is to say, since there is no federal sales tax, federal tax decisions would be of no assistance in resolving a state sales tax dispute. But no matter what type of tax is involved, be it state or federal, the same basic principles should apply in determining whether a sale/leaseback transaction is a true lease or a financing arrangement. Since the federal courts have been faced with the identical issue presented here, and those decisions constitute the only judicial precedent on this issue, the undersigned deems the federal cases to be helpful in resolving this dispute.

   
   

10. In the case of Frank Lyon Company v. United States, 435 U. S. 561, 98

    S. Ct. 1291, 55 L.Ed.2d 550 (1978), the court was required to determine whether a sale/leaseback transaction was a lease or a financing arrangement for tax purposes. Among other things, the court recognized the general rule that a transaction may be treated one way for financial accounting purposes and another way for tax purposes. More specifically, the court held:

    
    

    . . . we are mindful that the characteriza- tion of a transaction for financial accounting

    purposes, on the one hand, and for tax purposes, on the other need not necessarily be the same. [citations omitted] Accounting methods or descriptions, without more, do not lend subs- tance to that which has no substance.

    
    

    435 U. S. at 577.

    
    

    In that case, and unlike the factual scenario presented here, the court found the lessor retained significant and genuine attributes of the traditional lessor status, and thus the form of the transaction governed for tax purposes. The cases of Hilton v. Commissioner of Internal Revenue, 74 T.C. 305 (1980), aff'd per curiam, 671 F.2d 316 (9th Cir. 1982), cert. denied, 459 U.S. 907 (1982), and Sun Oil Company v. Commissioner of Internal Revenue, 562 F.2d 258 (3rd Cir.

    1977), cert. denied, 436 U.S. 944 (1978), are of particular assistance since they provide an analysis of factors to be considered in determining whether a transaction is a true sale/leaseback or a financing transaction. In both cases,

    the courts used an analysis similar to that used by the Florida courts in determining whether the underlying transaction, in substance, is really in the nature of a mortgage. The courts also focused on the business substance of the buyer-lessor to determine if it is a single purpose financing corporation whose sole purpose is to act as a conduit through which the funds flow to the seller- lessee. The Sun Oil case comes closest factually to the case at bar. In that case, the taxpayer entered into a sale/leaseback agreement with an unrelated exempt trust wherein it conveyed 320 parcels of unimproved service station sites at cost to the trust and simultaneously leased them back. Unlike DOR's position here, the government there contended the transaction was a financing transaction and not a true sale and thus the taxpayer could not deduct rental payments as a business expense. In analyzing this transaction, the court noted that:

    
    

    We deem much more significant the relation- ships of the parties after the transfer of the properties as a result of the burdens, benefits, and risks imposed on each of them by the terms and conditions of their lease agreements. In determining whether the sale/leaseback transac- tions in the instant case created the tradition- ally bargained for business relationships bet- ween the owner and lessee or whether Sunray

    in fact retained an equity in the real estate despite the conveyances, we look to the economic realities of the leases and not to the labels applied by the parties.

    
    

    Id. at 263.

    
    

    Although the court found some provisions in the lease which when viewed independently would not brand the transaction as a financing arrangement, it found a number of other important features which had the cumulative effect of depriving the lessor of any significant ownership interest. Finding that the lessee "bore the burdens, risks, and responsibilities for the properties, . . . (t)he lessee also controlled important benefits traditionally reserved to the owner of the property, . . . the rents (had) no visible connection with the economic value of the property but (were) evidently related to a fixed interest return on the advances, . . . (and) the options to acquire the property at the end of the primary term at the value to the lessor (was) a form of equity", the court found the sale/leaseback to be in substance a financing arrangment for tax purposes. Id. at 269.

    
    

11. Under the factual analyses of the federal decisions, this transaction would be deemed to be one in which FIRELCO was a single purpose financing corporation totally lacking in economic substance, that no sale actually occurred and FIRELCO held naked legal title for the sole purpose of providing security, that there was no economic substance to the lease beyond insuring amortization of the debt, and that the practicalities of the situation and specific provisions of the lease insure that Firestone is the actual owner of the property. Therefore, it must be concluded that the transaction is a financing arrangement and not a lease. The assessment should accordingly be withdrawn.

    
    

12. Finally, citing Greenhut Construction Co. v. Knott, 247 So.2d 517 (Fla. 1st DCA 1971) and its progeny, DOR has raised the issue of estoppel and argues that Firestone is equitably estopped from denying that the document in

    question is a lease. For estoppel to apply in this case, the following facts must be present:

    
    

    1. Firestone must have made a representation to DOR that the transaction was a lease;

    2. DOR relied on that representation; and

    3. Firestone later made a change in position

    as to the nature of the transaction which was detrimental to DOR, caused by the represen- tation and reliance thereon.

    
    

    The evidence shows that during the course of the field audit, and before any preliminary action was taken, DOR was fully aware of Firestone's position as to the nature of the transaction. Since no change in position occurred after the audit was completed and the assessment made, and DOR suffered no detriment, the claim of estoppel will not lie.

    
    

13. In conjunction with the estoppel argument, DOR has also relied heavily on the case of Zero Food Storage v. Department of Revenue, 330 So.2d 765 (Fla. 1st DCA 1976) for the proposition that DOR is entitled to rely on a taxpayer's books and records presented during audit. In Zero, the taxpayer's "corporate books" carried an entry reflecting rental payments to its parent corporation. The taxpayer contended, however, that no tenancy relationship existed between it and the parent corporation and that the payments were actually cash contributions rather than rent. Even so, the trial court found the monthly payment made by Zero to its parent was rent. While the appellate court affirmed the trial court's decision, there is no language in the opinion which cites the proposition urged by DOR. Even if such a blanket rule could arguably be inferred from that opinion, the facts in this case are distinguishable from Zero for at least two reasons. First, the more credible and persuasive evidence shows that Firestone did not treat the transaction as a lease for tax or internal accounting purposes but instead treated it as a financing arragnement. Second, it is a well-established principle that a taxpayer can treat a transaction one way for financial reporting purposes and another way for tax purposes. This is especially true where as here a sale/leaseback is involved. Therefore, Zero does not prohibit Firestone from taking the position, as it rightfully has, that the transaction is a mortgage substitute for tax purposes.

RECOMMENDATION

Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that respondent enter a final order rescinding or withdrawing

the assessment against petitioner.

DONE AND ENTERED this 10th day of August, 1993, in Tallahassee, Florida.

DONALD R. ALEXANDER

Hearing Officer

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-1550

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 11th day of August, 1993.

APPENDIX TO RECOMMENDED ORDER, CASE NO. 92-2483

Petitioner:

1. Partially accepted in finding of fact 3.

2. Covered in preliminary statement.

17. Rejected as being unnecessary.

18-20. Partially accepted in finding of fact 10.

21-28. Partially accepted in findings of fact 16-22.

1. Partially accepted in finding of fact 9.

2. Covered in preliminary statement and finding of fact 26. 31-40. Partially accepted in findings of fact 23-28.

1. Rejected as being unnecessary.

2. Partially accepted in finding of fact 25.

3. Partially accepted in finding of fact 9.

4. Partially accepted in finding of fact 28. 45-47. Partially accepted in finding of fact 25.

48. Partially accepted in finding of fact 13.

Respondent:

1. Partially accepted in finding of fact 3.

2. Partially accepted in findings of fact 3 and 8.

3. Partially accepted in finding of fact 3.

4. Partially accepted in findings of fact 6 and 7. 5-9. Partially accepted in finding of fact 12.

10-11. Partially accepted in finding of fact 29.

1. Partially accepted in finding of fact 13.

2. Partially accepted in finding of fact 14.

3. Partially accepted in finding of fact 12.

4. Partially accepted in finding of fact 3. 16-22. Partially accepted in finding of fact 13.

23. Partially accepted in finding of fact 6. 24-25. Rejected as being unnecessary.

1. Partially accepted in finding of fact 14.

2. Partially accepted in findings of fact 14 and 22.

3. Partially accepted in finding of fact 24.

29-31. Rejected as being contrary to the more credible and persuasive evidence.

1. Rejected as being unnecessary.

2. Rejected as being irrelevant.

3. Rejected as being a conclusion of law.

4. Rejected as being contrary to the more credible and

persuasive evidence.

36-37. Rejected as being unnecessary.

38-41. Rejected. See finding of fact 26.

1. Rejected as being unnecessary.

2. Rejected as being contrary to the more credible and persuasive evidence.

44-49. Rejected. See finding of fact 26.

50. Partially accepted in finding of fact 27. 51-53. Rejected as being unnecessary.

Note - Where a proposed finding has been partially accepted, the remainder has been rejected as being unnecessary, irrelevant, cumulative, subordinate, contrary to the evidence, or a conclusion of law.

COPIES FURNISHED:

Mr. Larry Fuchs Executive Director Department of Revenue

104 Carlton Building Tallahassee, FL 32399-0100

Linda Lettera, Esquire General Counsel Department of Revenue

204 Carlton Building Tallahassee, FL 32399-0100

Benjamin K. Phipps, Esquire

P. O. Box 1351 Tallahassee, FL 32302

Leonard F. Binder, Esquire Jarrell L. Murchison, Esquire Department of Legal Affairs The Capitol-Tax Section Tallahassee, FL 32399-1050

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit to the agency written exceptions to this Recommended Order. All agencies allow each party at least ten days in which to submit written exceptions. Some agencies allow a larger period within which to submit written exceptions. You should contact the agency that will issue the Final Order in this case concerning agency rules on the deadline for filing exceptions to this Recommended Order. Any exceptions to this Recommended Order should be filed with the agency that will issue the Final Order in this case.

=================================================================

AGENCY FINAL ORDER

=================================================================

STATE OF FLORIDA DEPARTMENT OF REVENUE

BRIDGESTONE/FIRESTONE, INC. )

)

Petitioner, )

)

v. ) CASE NUMBER 92-2483

)

DEPARTMENT OF REVENUE )

)

Respondent. )

)

FINAL ORDER

This cause came on before the Department of Revenue for the purpose of issuing a final order. The Hearing Officer assigned by the Division of Administrative Hearings submitted a Recommended Order. A copy of the Recommended Order is attached to this Final Order. Petitioner timely filed Petitioner's Exception To Recommended Order. Respondent timely filed Respondent's Exceptions To Recommended Order And Supporting Memorandum of Law; DOR's Reply To Petitioner's Proposed Substituted Order And Supporting Memorandum Of Law; and DOR's Proposed Substituted Order. A copy of these documents are attached to this Final Order.

Pursuant to Chapter 120, Florida Statutes, the Department has jurisdiction of this cause.

At issue is whether a real property lease in "form," which constituted part of a sale/leaseback transaction between The Firestone Tire and Rubber Company, as predecessor to Bridgestone/Firestone, Inc., and Firestone Real Estate Leasing Corporation (FIRELCO) should be treated as a mortgage in "substance" not subject to the sales and use tax.

The Hearing Officer in his Recommended Order recommended that the Department enter a Final Order withdrawing the sales and use tax assessment against Petitioner.

The Department, after a thorough review of the entire record in this case, adopts the recommendation of the Hearing Officer that a Final Order be entered withdrawing the assessment against Petitioner. However, the Department makes certain rejections and modifications of the Hearing Officer's Statement of the Issue, Preliminary Statement, Findings of Fact, and Conclusions of Law.

STATEMENT OF THE ISSUES

The Department adopts and incorporates in this Final Order the Statement of the Issue as expressed in DOR's Proposed Substituted Order filed by Respondent.

In rejecting the Hearing Officer's Statement of the Issue the Department is in essence substituting the word "mortgage" for the term "financing statement" as used by the Hearing Officer.

PRELIMINARY STATEMENT

Department adopts the Preliminary Statement of DOR's Proposed Substituted Order filed by Respondent. In rejecting the Hearing Officer's Preliminary Statement the Department is again substituting the word "mortgage" for the term "financing statement" as used by the Hearing Officer. This modification is made on the basis that the term "mortgage" is given a statutory definition as expressed in s. 697.01, F.S., whereas the term financing arrangement" has no precise meaning.

FINDINGS OF FACT

The Department adopts and incorporates in this Final Order all of the Findings of Fact 1 through 12 in the Recommended Order.

The Department modifies Finding of Fact 13 to correctly identify FIRELCO rather than Fires one in line 2 as the entity which had been assessed documentary stamp taxes, and to identify FIRELCO rather than Firestone in lines 4 and 5 as the party who received a notice of decision, and entered into a closing agreement.

The Department adopts and incorporates in this Final Order Findings of Fact

14 through 29 in the Recommended Order.

CONCLUSIONS OF LAW

The Department adopts and incorporates in this Final Order Conclusions of Law 30 through 32 in the Recommended Order.

The Department rejects Conclusions of Law 33 in the Recommended Order and adopts Conclusion of Law 33 as it appears in DOR's Proposed Substituted Order. The Department rejects the Hearing Officer's conclusion because of the interchangeable use of the terms "mortgage" and "financing arrangement" rather than the use of the term "mortgage" which is statutorily defined. Also, the Department takes exception to the phrase "sale/leaseback agreement" finding that no document was entered into evidence bearing that title. Further, the Department takes exception to the Hearing Officer's recommendation that the Department look to federal income tax case law for additional guidance.

The Department adopts Conclusions of Law 34, 35, and 36 in the Recommended Order.

The Department rejects Conclusions of Law 37, 38, and 39 in the Recommended Order because these conclusions suggest the Department look to federal income tax case law in administering the tax imposed in Chapter 212, Florida Statutes. In substitution, the Department adopts a new Conclusion of Law 37 as expressed in DOR's Proposed Substituted Order because Chapter 212, F.S., does not "piggyback" federal income tax law as does Chapter 220, Florida Statutes.

Further, the cases construing what constitutes a "mortgage" under s.

697.01, F.S., provides a better basis for determining what constitutes a "lease" under Chapter 212, F.S, than does federal income tax law. Upon these bases the Department rejects the Hearing Officer's recommendation of reliance on the

principles, reasoning, and factual analysis found in federal tax law and adopts the new Conclusion of Law 37 which appears in DOR's Proposed Substituted Order.

The Department adopts and incorporates in this Final Order the Hearing Officer's Conclusions of Law 40.

With the exception of a modification of the second sentence the Department adopts and incorporates Conclusion of Law 41 in this Final Order. The second sentence shall read: While DOR is entitled to rely on such books and records to the extent as allowed by law, it is apparent in Zero, the taxpayer's "corporate books" carried an entry reflecting rental payments to its parent corporation."

Ruling on Petitioner's Exception to Recommended Order

The Department rejects Petitioner's exception to the Hearing Officer's Findings of Fact 13. First, the Department restates what appears above in the modification of Findings of Fact 13 that FIRELCO rather than Firestone should be identified in this finding. Further, the question as to whether the payment of documentary stamp tax on a document other than the lease is to be considered as a bar to the same tax on the lease was not before the Hearing Officer.

Rulings on Respondent's Exceptions to Recommended Order

The Department adopts Respondent's exception to the Hearing Officer's Finding of Fact 13 and states that this exception corrects a clerical error in that FIRELCO rather than Firestone should have been identified as the entity which had been issued an assessment for documentary stamp tax. The Department adopts Respondent's exceptions to the Hearing Officer's Conclusions of Law 33, 37, 38, 39. The Department adopts Respondent's new Conclusion of Law 37.

CONCLUSION

After a thorough review of the entire record, in which it is determined that the document at issue was a mortgage, the Department notes that no finding in this matter concludes that all similar agreements are to be characterized as mortgages, and it reserves determination of the taxability of future sale and leaseback transactions based on the facts of such transactions and consideration of the applicable law.

Based upon the foregoing, it is ORDERED:

The recommendation of the Hearing Officer that the assessment against Petitioner be rescinded or withdrawn is sustained.

Notice of Rights

Any party to this Final Order has the right to seek judicial review of the Final Order as provided in Section 120.68, Florida Statutes, by filing of a Notice of Appeal as provided in Rule 9.110, Florida Rules of Appellate Procedure, with the Clerk of the Department in the Office of General Counsel, Post Office Box 6668, Tallahassee, Florida 32314-6668 and by filing a copy of the Notice of Appeal, accompanied by the applicable filing fees, with the appropriate District Court of Appeal. The Notice of Appeal must be filed within

30 days from the date this final order is filed with the Clerk of the Department.

DONE AND ENTERED IN TALLAHASSEE, LEON COUNTY, FLORIDA this 5th day of November, 1993.

STATE OF FLORIDA DEPARTMENT OF REVENUE

L.H. FUCHS EXECUTIVE DIRECTOR

Certificate of Filing

I HEREBY CERTIFY that the foregoing FINAL ORDER has been, filed in the official records of the Department this 5th day of November, 1993.

COPIES FURNISHED:

L.H. Fuchs Executive Director

Department of Revenue Carlton Building, Room 104

Tallahassee, Florida 32399-0100

Donald Alexander Hearing Officer

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-1550

Jeffery M. Dikman, Esquire Jarrell L. Murchison, Esquire Department of Legal Affairs The Capitol - Tax Section

Tallahassee, Florida 32399-1050

Linda Lettera, Esquire General Counsel Department of Revenue

201 Carlton Building Tallahassee, Florida 32399-0100

Benjamin K. Phipps, Esquire

Fine Jacobson Schwartz Nash & Block Post Office Box 1351

Tallahassee, Florida 32302

Attachments:

Hearing Officer's Recommended Order DOR's Proposed Substituted Order

Respondent's Exceptions to Recommended Order and Supporting Memorandum of Law Petitioner's Exception to Recommended Order

DOR's Reply to Petitioner's Proposed Substituted Order and Supporting Memorandum of Law

Docket for Case No: 92-002483

Orders for Case No: 92-002483