STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

PERSONAL JET CHARTER, INC., )

)

Petitioner, )

)

vs. ) CASE NO. 95-2527

)

DEPARTMENT OF REVENUE, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, the Division of Administrative Hearings, by its duly designated Hearing Officer, Claude B. Arrington, held a formal hearing in the above-styled case on January 12, 1996, in West Palm Beach, Florida.

APPEARANCES

For Petitioner: Peter W. Mettler, Esquire

Mettler and Matwiczyk

140 Royal Palm Way, Suite 206 Post Office Box 3386

Palm Beach, Florida 33480

For Respondent: Jarrell L. Murchison, Esquire

Office of the Attorney General The Capitol, Tax Section Tallahassee, Florida 32399-1050

STATEMENT OF THE ISSUE

Whether Petitioner is liable for sales or use tax, plus interest and penalties, as asserted by the Respondent's Notice of Decision dated March 16, 1995.

PRELIMINARY STATEMENT

Petitioner owns and operates an air taxi service. In the course of its business, Petitioner uses three Learjets owned by three corporations (owners) unrelated to the Petitioner. The use of each jet is pursuant to an agreement between Petitioner and the respective owner. The Respondent performed an audit of Petitioner's operations and concluded that Petitioner leases these three jets from the owners. Respondent asserts that the payments Petitioner made to the owners during the audit period are lease payments and are taxable.

Petitioner offers three arguments in opposition to Respondent's assertion.

First, Petitioner contends that the agreement it has with each owner does not constitute a lease. Instead, Petitioner characterizes the relationship between itself and each owner as a joint venture and asserts that the agreement is a nontaxable bailment. Second, Petitioner argues that Respondent should be

estopped from claiming that each transaction is taxable based upon written communications it had with Respondent and based on verbal advice received by its CPA. Third, Petitioner asserts that Respondent is taking a transaction that would be otherwise exempt, has tried to fragment it into two separate transactions, and is seeking to tax a portion of it because it is made through an agency or joint venture relationship.

The Notice of Decision dated March 16, 1995, which is the agency action challenged by Petitioner, asserts that Petitioner owes taxes in the amount of

$238,454.24, penalty in the amount of $59,613.55, interest through August 12, 1993, in the amount of $102,633.11, for a total of $400,700.90, plus interest accruing from August 12, 1993, at the rate of $77.46 per day.

Petitioner timely challenged the Notice of Decision, the matter was referred to the Division of Administrative Hearings, and this proceeding followed. Although Petitioner asserts that no tax, interest or penalty is due, it agrees that the amounts reflected in the Notice of Decision were correctly computed.

At the formal hearing, the Respondent presented its case first since it has, pursuant to Section 120.575(2), Florida Statutes, the burden of establishing that an assessment has been made against the taxpayer and has to establish the factual and legal grounds upon which the assessment is made.

Respondent presented the testimony of Cynthia McHale, the person who performed the audit for the Respondent, and offered its exhibits 1-5. Respondent Exhibits

1 and 2 were composite exhibits. Petitioner presented the testimony of Corwin Zimmer, Carol Davis, and Robert J. Dreker. Mr. Zimmer is the owner of the Petitioner, Ms. Davis is an employee of the Petitioner, and Mr. Dreker is the CPA for the Petitioner. Petitioner offered eight exhibits, each of which was accepted into evidence. Included among the Respondent's exhibits were the depositions of Mr. Zimmer, Ms. Davis, and Mr. Dreker. Included among the Petitioner's exhibits were the depositions of the following employees of the Respondent: R. Clay Brower; Amanda McAdams; Rick H. McClure, Esquire; Lisa Echeverri, Esquire; and Melton H. "Buzz" McKown. All exhibits offered by the parties were admitted into evidence. Official recognition was taken of the Petitioner's response to request for admissions.

A transcript of the proceedings has been filed. At the request of the parties, the time for filing post-hearing submissions was set for more than ten days following the filing of the transcript. Consequently, the parties waived the requirement that a recommended order be rendered within thirty days after the transcript is filed. Rule 60Q-2.031, Florida Administrative Code. Rulings on the parties' proposed findings of fact may be found in the Appendix to this Recommended Order.

FINDINGS OF FACT

1. Petitioner is a Florida for-profit corporation whose sole stockholder is Corwin Zimmer. At all times pertinent to this proceeding, Petitioner operated an air taxi charter service out of the Fort Lauderdale, Florida, airport.

   
   

2. Respondent is the agency of the State of Florida charged with the responsibility of enforcing the Florida Revenue Act of 1949, as amended, including the provisions of Chapter 212, Florida Statutes.

3. At the times pertinent to this proceeding, Petitioner utilized three Learjets in its operations. At all times pertinent to this proceedings, each of these three jets was owned by a separate corporation and each corporation was owned by a single shareholder. Each jet was owned by a corporation to limit the liability of the individual shareholder. Each of the following owned one of these three jets: Alamo Jet, Inc., a Florida corporation wholly owned by Charles Schmidt; RLO, Inc., a Florida corporation wholly owned by Richard Owens; and Gulfstream Flight Services, Inc., a Florida corporation wholly owned by Dr. David Brown. These three corporations and their individual shareholders will be collectively referred to as the owners. These owners were unrelated to each other. Except for the agreements at issue in this proceeding, the owners were also unrelated to the Petitioner and Mr. Zimmer.

   
   

4. None of the owners possessed the FAA licensure necessary to transport passengers for hire.

   
   

5. At all times pertinent to this proceeding, each of the three owners had an agreement with Petitioner that was styled "Aircraft Management Agreement" (the agreement). Although written agreements could not be located for all three owners, Mr. Zimmer testified, credibly, that there existed a written agreement for each owner and that there was no material difference between the written agreement that was produced at the formal hearing and the other agreements.

   
   

6. None of the owners fully utilized the jet it owned before entering into the agreement with Petitioner.

   
   

7. As to each agreement, the owner was referred to as "owner" and his jet was described. Petitioner was referred to as "operator". The agreements do not contain the term "lease".

   
   

8. The following are the responsibilities of the Petitioner as the operator pursuant to the agreement between Petitioner and Alamo Jet, Inc.:

   
   

   1. Place the Aircraft on its Air Carrier Certificate Number AT 705264 for the purpose

      of utilizing the aircraft in FAR 135 operations.

   2. Oversee all aircraft maintenance, aircraft records, aircraft time components, in accor-

      dance with the Learjet Model 55 maintenance program, Federal Aviation Regulations, and its operating certificate.

   3. Train flight crews, maintain crew records in accordance with Federal Aviation Regula- tions conduct initial, recurrent, six month proficiency flight checks. Provide the Owner with a flight crew at a rate of $450.00 per day, not to exceed $600.00 per month.

   4. Schedule all Aircraft, flight, crews and passenger activity through its dispatch department.

   5. Reimburse the Owner all moneys received from placing the Aircraft on the Garrett Engine Fleet Operations Program.

   6. Insure the Aircraft on its fleet operators policy and financially participate to recover the additional premium required for FAR 135 operations.

   7. Hanger the Aircraft at its Fort Lauder- dale facility at no charge to the owner.

   8. Provide fuel to the Owner at its Fort Lauderdale facility at $.25 above purchase cost.

   9. Insure that the aircraft [is] maintained in a like new condition with the exception of normal wear.

   10. Pay the Owner $800.00 per flight hour for the aircraft when it is utilized for FAR

       135 operations.

   11. Provide the Owner with an aircraft state- ment and activity report by the 7th of the following month, and payment for the utiliza- tion of the aircraft by the 25th day of the month.

   12. Provide all charts, maps, and expendable storage at no charge to the Owner.

   13. Aggressively market the aircraft for maximum utilization.

       
       

9. The Alamo Jet, Inc. agreement provided the following pertaining to aircraft flight utilization:

   
   

   1. Owner utilization:

      The Owner is responsible for all direct costs incurred from the flight.

   2. Maintenance Test Flights:

      The owner is responsible for all direct costs of operation. There will be no charge for the crew conducting the test flight.

   3. Flight Crew Training:

      The Operator shall be responsible for the direct cost of operation. This includes MSF payment, hourly maintenance cost, [and] fuel.

   4. FAR 135 Air Carrier Flights:

      The Operator is responsible for all cost incurred in addition to the payment of $800.00 per flight hour to the owner.

      
      

10. The Alamo Jet, Inc. agreement provides that the Owner agrees to and is responsible for the following:

    
    

    1. Payment of the insurance premium less the additional amount required for commercial operations.

    2. Cost of maintaining the aircraft.

    3. To coordinate all flights with the Operators dispatch department.

       
       

11. The Alamo Jet, Inc. agreement provides the following general conditions:

    
    

    1. Operator will aggressively market the charter utilization of the aircraft, and estimate its use at 600 hours the first year.

    2. No guarantee as to the amount of aircraft revenue hours are included in this agreement.

12. Generally, Petitioner's flights are in the continental United States.

    
    

13. During the audit period, each owner used its aircraft approximately ten days a month. Each owner could use its aircraft except when it was undergoing a major inspection or was down for maintenance. Other than those times, each owner had a key and unlimited access to its aircraft.

    
    

14. Each owner had bumping privileges with respect to their aircraft. If an owner's aircraft was booked for a flight by Petitioner when the owner wanted to use it, the Petitioner would make the owner's aircraft available to the owner and re-book the passenger on another aircraft. Petitioner provided the pilot and crew when an owner wanted to use its aircraft at a per hour rate that was less than that charged for its taxi service.

    
    

15. When an owner wanted to use his aircraft, he would contact one of Petitioner's employees to coordinate his use with the Petitioner.

    
    

16. Mr. Zimmer testified that he did not intend the agreements with the owners to be leases. From the inception of the agreements, Mr. Zimmer viewed the arrangements as being contracts for the management of the aircraft so that his company and each owner could use its jet but also generate revenue when its jet was being used by Petitioner in its air taxi operations, referred to as FAR

    135 operations.

    
    

17. Mr. Zimmer testified that he intended that his relationship with the owners of the aircraft to be a marriage of operations and aircraft. Petitioner had the air carrier certificate, and the personnel and facilities to maintain the aircraft and provide air taxi service. 1/

    
    

18. During the audit, Mr. Dreker told Mr. Zimmer that the Respondent was treating the payments to the owners as lease payments. Before that time, no one had told Mr. Zimmer that the relationship constituted a lease.

    
    

19. Each agreement required the owner to deliver its aircraft to Petitioner for use pursuant to the terms of the agreement. The owner gave up its exclusive possession, control, and dominion of its aircraft pursuant to the terms of the agreement. Petitioner controlled the use of the aircraft, subject to the terms of the agreement, which set forth the rights of the owner.

    
    

20. Each agreement permitted the owner to fully utilize its jet.

    
    

21. For the years 1987, 1988, 1989, 1990, and 1991, the Petitioner reported for federal income tax purposes in connection with its use of the three jets under the category "cost of goods sold - other costs - Jet Leases" the respective amounts of $650,531.00, $753,181.00, $923,374.00, $899,917.00, and

    $693,603.00.

    
    

22. For the years 1987, 1988, 1989, 1990, and 1991, the Petitioner referred to the payments made to the owners as "Lease Payments".

    
    

23. For the years 1987, 1988, 1989, 1990, and 1991, the Petitioner's books referred to the payments made to the owners as "Lease Payments".

    
    

24. Mr. Zimmer was involved in the operation of the Petitioner from the time it was incorporated. He did not, however, become the sole stockholder until 1982. During 1982, Petitioner leased an airplane from American Jet in St.

    Louis, Missouri. The lease of that airplane is reflected on Petitioner's 1982 Federal income tax return, which was prepared by Rosen and Santini, P.A. Beginning in 1983, after Mr. Zimmer purchased the stock of the Petitioner, Robert J. Dreker, a CPA employed by Schmidt & Co., prepared all of Petitioner's federal tax returns.

    
    

25. Petitioner's books were set up before Mr. Dreker became its CPA. Mr. Dreker did not believe that referring to the payments to owners as lease payments in Petitioner's Federal tax return or in its chart of accounts was significant because the payments were clearly deductible for tax purposes. Consequently, he retained the nomenclature reflected on the 1983 tax return and in the chart of accounts as he found them.

    
    

26. Petitioner's chart of accounts was maintained on a daily basis by a bookkeeper. Three individuals filled the bookkeeper position at different times, none of whom had any special training or experience in tax matters.

    
    

27. Mr. Dreker was of the opinion that referring to the payments to owners as lease payments did not conform to generally accepted accounting principles and mischaracterizes the relationship. Mr. Dreker was of the opinion that the payments to owners should be called management expenses or owner revenue payments. Mr. Dreker or his accounting firm had never been employed to prepare a certified financial statement for the Petitioner.

    
    

28. Respondent audited Petitioner for the period May 1, 1987, through April 30, 1992. The auditor, Cynthia McHale, reviewed Petitioner's books and records, including the agreement with Alamo Jet, and interviewed Mr. Zimmer. Based on that audit the Respondent determined that the agreements between Petitioner and the owners constituted leases and that Petitioner was liable for sales or use taxes on those leases. Ms. McHale understood that Mr. Zimmer and Mr. Dreker did not intend the agreements to be leases. The amounts determined to be due were reflected by the Notice of Decision dated March 16, 1995, which is the agency action challenged by Petitioner. Respondent asserts that Petitioner owes taxes in the amount of $238,454.24, penalty in the amount of

    $59,613.55, interest through August 12, 1993, in the amount of $102,633.11, for a total of $400,700.90, plus interest accruing from August 12, 1993, at the rate of $77.46 per day. Petitioner disputes that the agreements constitute leases and asserts that no tax is due. Petitioner does not challenge the underlying calculation that produced the figures contained in the Notice of Decision dated March 16, 1995.

    
    

29. Pursuant to its agreement with the owners, the Petitioner provided hangar storage space for the storage of the jets. Respondent has not assessed any tax for that storage.

    
    

30. Petitioner did not assess taxes on the charges made by Petitioner to the passengers using its air taxi service since these charges are specifically exempt from taxation.

    
    

31. In 1981, Petitioner corresponded with Respondent about its need to register with Respondent for sales tax purposes. The Respondent's reply, dated July 30, 1981, advised that Petitioner did not need to register for sales tax purposes because the Petitioner's business was a nontaxable service. At about the time the sales tax on services went into effect, Mr. Dreker talked with two employees of the Respondent in separate conversations and described the Petitioner's operations to them. Based on those conversations, Mr. Dreker formed the opinion that Petitioner was not subject to either sales tax or

    service tax. Petitioner did not pay to the Respondent or to the owners a service tax on the payments made to the owners between July 1, 1987, and December 31, 1987, the dates the service tax was in effect in Florida. The 1981 correspondence and Mr. Dreker's telephone conversations are the only evidence that supports Petitioner's estoppel argument. Mr. Dreker did not receive a written response to his telephone inquiry and he did not send a written inquiry to Respondent requesting a Letter of Technical Advice, a request for a Technical Assistance Advisement, or a Declaratory Statement.

    
    

    CONCLUSIONS OF LAW

    
    

32. The Division of Administrative Hearings has jurisdiction of the parties to and the subject matter of this proceeding. See, Sections 120.57(1) and 120.575, Florida Statutes.

    
    

33. The Respondent has the burden of establishing that the subject assessment was made against the Petitioner and the factual and legal grounds upon which it made the assessment. Section 120.572(2), Florida Statutes. Once that showing is made, the burden shifts to the Petitioner to demonstrate by a preponderance of the evidence that the assessment is incorrect. See, Department of Revenue v. Quotron Systems, Inc., 615 So.2d 774, 776 (Fla. 3d DCA 1993) and Department of Revenue v. Nu-Life Health and Fitness Center, 623 So.2d 747, 751- 752 (Fla. 1st DCA 1992.)

    
    

34. Section 212.05, Florida Statutes, is relied upon by the Respondent and provides, in pertinent part, as follows:

    
    

    It is hereby declared to be the legislative intent that every person is exercising a taxable privilege who ... rents or furnishes any of the things or services taxable under this chapter . . .

    (1) For the exercise of such privilege, a tax is levied on each taxable transaction or incident, which tax is due and payable as follows:

    * * *

    (d) At the rate of 6 percent of the lease or rental price paid by a lessee or rentee,

    or contracted or agreed to be paid by a lessee or rentee, to the owner of the tangible per- sonal property.

    
    

35. Section 212.08(13), Florida Statutes, provides, in pertinent part:

    
    

    (13) No transaction shall be exempt from the tax imposed by this Chapter except those expressly exempted herein. . . .

    
    

36. Section 212.02(10)(g), Florida Statutes, provides, in pertinent the following definitions:

    
    

    (g) "Lease", "let" or "rental" also means the leasing or rental of tangible personal property and the possession or use thereof by the lessee or rentee for a consideration,

    without transfer of the title of such prop- erty, except as expressly provided to the contrary herein.

    
    

37. Rule 12A-1.071, Florida Administrative Code, provides, in pertinent part, as follows:

    
    

    (1)(a) For the purpose of this rule, the term "lease" includes any rental or license to use tangible personal property, unless a different meaning is clearly indicated by the context in which it is used. The term

    refers to all transactions that are not bail- ments in which there is a transfer of possession of tangible personal property, without regard to limitations upon the use, for a consideration, without a transfer of title to the property. It is not essential for a transfer of possession of tangible per- sonal property to include the right to move the tangible personal property. It includes a transaction under which a person secures for a consideration the temporary use of tangible personal property which, although not on his premises, is operated by or under the direction or control of the person or

    his employees. All leases of tangible per- sonal property other than conditional-sale type leases as described in paragraph (1)(d) of this Rule, are operating leases. Whether a transaction is a "sale" or a "rental, lease, or license to use" shall be determined in accordance with the provisions of the agreement.

    (b) Transfer of possession with respect to an operating lease means that one of the following attributes of tangible personal property ownership has been transferred:

    1. Custody or possession of the property, actual or constructive;

    2. The right to custody or possession of the property;

    3. The right to use and control or direct the use of the property.

    
    

38. Rule 12A-1.070(22)(b), Florida Administrative Code, provides, in pertinent part, as follows:

    
    

    (b) A bailment is a contractual agreement, oral or written, whereby a person (the bailor) delivers tangible personal property to another (the bailee) and the bailor for the duration of the relationship relinquishes his exclusive possession, control, and dominion over the

    property, so that the bailee can exclude, with- in the limits of the agreement, the possession of the property to all others. If there is no

    such delivery and relinquishment of exclusive possession, and the owner's control and domin- ion over the property is not dependent upon

    the cooperation of the person on whose premises the property is left, and his access thereto

    is in no wise subject to the latter's control, it will generally be held that such person is a tenant, lessee, or licensee of the space upon the premises where the property is left.

    
    

39. The manner in which Petitioner referred to the payments to owners in its books and on its tax returns is not dispositive of this proceeding. The substance of the transaction must be examined to determine whether the transaction is a lease as the term "lease" is defined by statute and, if so, whether the transaction is otherwise exempt from taxation.

    
    

40. Although Mr. Zimmer testified that he did not intend the agreements to constitute leases, there was no evidence that this issue was contemplated by Mr. Zimmer or by the owners before Respondent's audit. There was also no evidence that he consulted a legal or tax professional prior to structuring the agreements with the owners.

    
    

41. The Respondent correctly asserts that the agreements between the owners and the Petitioner constitute leases of tangible personal property. By these agreements, the Petitioner has the right to possess and use the owners' aircraft in its jet taxi service and it pays a valuable consideration for that right. These transactions meet the definition of a lease contained in Section 212.02(10)(g), Florida Statutes, and, consequently, are taxable pursuant to Section 212.05(1)(d), Florida Statutes. Any exemption to taxation would, pursuant to Section 212.08(13), Florida Statutes, have to be provided by statute, not by rule. There is no such statutory exemption. Consequently, it is concluded that the payments made by Petitioner to the owners are not exempt from taxation.

    
    

42. These transactions should not be considered bailments as defined by Rule 12A-1.070(22)(b), Florida Administrative Code, because the owners' control and dominion over the property is not dependent upon the cooperation of the Petitioner or subject to its control. Each owner's rights to its aircraft is protected by contract. The fact that each party benefits from this arrangement does not make it any less a lease.

    
    

43. Petitioner's argument that Respondent is estopped to assert that this arrangement is a lease is without merit as none of the elements of estoppel have been established. See, Glass v. Department of Revenue, 650 So.2d 684 (Fla. 5th DCA 1995) and State Department of Revenue v. Anderson, 403 So.2d 397, 400 (Fla. 1981).

    
    

44. Petitioner's argument that Respondent is attempting to convert a transaction that is otherwise nontaxable by dividing it into segments is likewise without merit. There may be a number of transactions within an agreement which may or may not be taxable. The fact that Petitioner provides a nontaxable service with the aircraft it leases from the owners does not preclude Respondent from imposing a tax on the consideration paid to the owners as lease payments.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that Respondent enter a final order that adopts the findings of

fact and conclusions of law contained herein and sustains the assessments contained in the Notice of Decision dated March 16, 1995, that Petitioner owes taxes in the amount of $238,454.24, penalty in the amount of $59,613.55, interest through August 12, 1993, in the amount of $102,633.11, for a total of

$400,700.90, plus interest accruing from August 12, 1993, at the rate of $77.46 per day.

DONE AND ENTERED this 6th day of May 1996 in Tallahassee, Leon County, Florida.

CLAUDE B. ARRINGTON, 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 6th day of May 1996.

ENDNOTE

1/ The owners did not testify at the formal hearing. Petitioner submitted to Respondent certain affidavits that purport to set forth the intent of the owners. These affidavits are hearsay and cannot be used as the basis of a finding of fact in this proceeding. Ms. McHale did not interview the owners during the audit.

APPENDIX TO RECOMMENDED ORDER, CASE NO. 95-2527

The following rulings are made as to the proposed findings of fact submitted by Petitioner.

1. The proposed findings of fact in paragraphs 1-5, 10-49, 52-55, 61, 62, 64-81, 84-86, 90, and 91 are adopted in material part by the Recommended Order or are subordinate to the findings made.

2. The proposed findings of fact in paragraphs 6-9 are unnecessary as findings of fact, but are addressed as preliminary matters.

3. The proposed findings of fact in paragraphs 50 and 63 are rejected as being unsubstantiated by the evidence.

4. The proposed findings of fact in paragraphs 51, 56-60, 82, 83, and 87-

89 are rejected as being unnecessary to the conclusions reached.

The following rulings are made as to the proposed findings of fact submitted by the Respondent.

1. The proposed findings of fact in paragraphs 1-18, 20, 22, and 23 are adopted in material part by the Recommended Order or are subordinate to the findings made.

2. The proposed findings of fact in paragraphs 19 and 21 are conclusions of law.

COPIES FURNISHED:

Jarrell L. Murchison, Esquire Office of the Attorney General The Capitol, Tax Section Tallahassee, Florida 32399-1050

Peter W. Mettler, Esquire Mettler and Matwiczyk Post Office Box 3386

Palm Beach, Florida 33480

Linda Lettera, General Counsel Department of Revenue

Post Office Box 6668 Tallahassee, Florida 32314-6668

Larry Fuchs, Executive Director Department of Revenue

104 Carlton Building Tallahassee, Florida 32399-0100

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit 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.

Docket for Case No: 95-002527

Orders for Case No: 95-002527