Findings Of Fact The facts in this cause are essentially undisputed. The Pen Haven Company was a Subchapter "S" corporation for federal income tax purposes and therefore incurred no State income tax liability. It was formed in 1960 and retained its Subchapter "S" status thorough 1976 for federal income tax purposes. In December of 1977, the capital stock of Pen Haven Sanitation Company was sold to the Board of County Commissioners of Escambia County. Inasmuch as the sole corporate stock holder then was no longer an individual, but rather a governmental entity, the corporation Subchapter "S" election for federal income tax purposes was terminated. Escambia County did not wish to own stock in a private corporation so it accordingly liquidated Pen Haven and its assets were distributed to the County's direct ownership. Thereafter the Corporation filed a final corporate income tax return for 1977 which reflected capital gains on the assets of the corporation which had been distributed. Some of those assets had tax bases which had been reduced to zero through reduction by depreciation, most of which had been charged off prior to January 1, 1972, the effective date of the Florida corporate income tax code. All of the depreciation deductions had been taken prior to the termination of the Subchapter "S" status of the Pen Haven Company. On disposition of the Pen Haven assets however, a gain was reported equal to the fair market value or salvage value, less the basis. This gain was accordingly reported on Pen Haven's federal income tax return, and on the 1977 Florida corporate income tax return, albeit under the protest as to the Florida tax return. Inasmuch as Pen Haven had previously deducted depreciation since its inception, and had the benefit thereof for federal tax purposes, it was required by the Internal Revenue Service to recapture the depreciation for federal tax purposes upon its sale and the filing of its tax return in 1977. The same recapture of depreciation treatment was required of West Florida Utilities. Thereafter an application was made by the Petitioner corporations for Florida Corporate Income Tax Refunds asserting that they should have not paid taxes on the amount of gains which represented a recapture of depreciation which had been taken as a deduction prior to the effective date of the Florida corporate income tax on January 1, 1972. In effect the Petitioner is contending that the so- called "income" which is the subject of the tax in question was not realized in 1977, but rather merely "recognized" in that year by the federal tax law and that it represented income actually "realized" during the years when the depreciation was taken as a deduction prior to January 1, 1972. The Petitioners contend that "realization" for federal income tax purposes occurs when the taxpayer actually receives an economic gain. "Recognition" on the other hand refers only to that time when the tax itself becomes actually due and payable. The Petitioners maintain that when the tax became due and payable in 1977 that was merely the point of "recognition" of the subject taxable gain and not "realization" in that the gain was actually realized prior to the Florida Jurisdictional date of January 1, 1972, in the form of the economic benefit derived from those depreciation deductions applied to federal tax liability prior to that date. The Petitioners cite SRG Corporation vs. Department of Revenue, 365 So2d 687 (Fla. 1st DCA 1978), for the proposition that Florida could not tax those gains accruing to the taxpayer prior to Florida's having the constitutional and statutory power to impose a corporate income tax. The Respondent in essence agrees that the question of when the economic benefit to the Petitioners was received by them or was "realized" is the key question in this cause. The Respondent contends, however, that "realization" of a taxable gain occurred when the assets were disposed of by the Petitioners in 1977, well after the date when Florida's power to tax such a gain was enacted. The underlying facts in the case of West Florida Utilities are substantially similar. This corporation, however, was organized in 1962 and has never been clothed with Subchapter "S" corporate status. The only grounds upon which it can therefore claim a refund is its assertion that Florida does not have authority to tax that portion of the capital gains attributable to recapture of depreciation which was originally charged off as a deduction prior to January 1, 1972. The Department of Revenue and the Comptroller of the State of Florida both denied the refund claim made on behalf of the Petitioners, and thereafter they seasonably petitioned for a formal administrative hearing pursuant to Chapter 120.57(1), Florida Statutes.
Recommendation Having considered the foregoing Findings of Fact and Conclusions of Law, the evidence in the record, the candor and demeanor of the witness and pleadings and arguments of counsel it is, therefore RECOMMENDED this 3rd day of September, 1981, in Tallahassee, Leon County, Florida. P. MICHAEL RUFF, 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 3rd day of September, 1981. COPIES FURNISHED: Thurston A. Shell Post Office Box 1831 Pensacola, Florida 32578 Robert A. Pierce, Esquire General Counsel Department of Revenue Tallahassee, Florida 32301 Michael Basile, Esquire Deputy General Counsel Office of Comptroller The Capitol, Suite 1302 Tallahassee, Florida 32301 Wilson Crump, II, Esquire Assistant Attorney General Department of Legal Affairs The Capitol Tallahassee, Florida 32310
The Issue Whether Petitioners are liable for sales and use tax, penalty, and interest as assessed by the Department of Revenue (the Department)?
Findings Of Fact Salma is a Florida corporation with its principal place of business at 2231 Del Prado Boulevard, Cape Coral, Florida, 33990. Gausia is a Florida corporation with its principal place of business at 11571 Gladiolus Drive, Fort Myers, Florida, 33908. Petitioners are in the business of operating gas stations with convenience stores. The Department is an agency of the State of Florida and is authorized to administer the tax laws of the State of Florida. Petitioners were selected for audit because their reported gross sales were less than the total cost of items purchased (inventory) for the audit period. The Department issued Salma and Gausia each a Notice of Intent to Conduct a Limited Scope Audit or Self-Audit, dated April 26, 2013, for sales and use tax, for the period February 1, 2010, through January 31, 2013 (collectively referred to as the Notices). The Notices requested that Petitioners provide the Department: (a) a list of all their vendors for alcohol, tobacco, soda, chips, candy, etc.; (b) their total purchases of alcohol and tobacco, by vendor, for the period July 2010 to June 2011; (c) copies of their federal tax returns for the examination period; (d) purchase receipts for all purchases for the last complete calendar month; and (e) daily register (Z tapes) for the last complete calendar month. The Notices gave Petitioners 60 days to gather the requested documents before the audit was to commence. The Notices also requested that Petitioners complete an attached Questionnaire and Self Analysis Worksheet. In response to the Notices, Petitioners requested a 30- day extension of time until July 18, 2013, to provide the requested documents and to designate a Power of Attorney. Petitioners did not provide the Department any books and records for inspection, nor did they complete and return the questionnaire and self analysis worksheets. As a result, the Department's auditor determined the sales tax due based upon the best information available. To calculate an estimated assessment of sales tax, the Department used the purchase data of Petitioners' wholesalers and distributors of alcoholic beverages and tobacco, for July 1, 2010, through June 30, 2011; the 2010 National Association of Convenience Stores average markups and in-store sales percentages of alcoholic beverage and tobacco products; and historical audit data. After reviewing the purchase data for July 1, 2010, through June 30, 2011, and for July 1, 2011, through June 30, 2012, the Department's auditor determined that the data was missing a few vendors. As a result, the Department's auditor estimated the amount of Petitioners' cigarette purchases, based on historical audit data that shows that cigarette sales are generally 4.31 times more than beer sales. The Department's auditor and audit supervisor testified that the estimated gross sales seemed reasonable and consistent with the national averages and the purchase data for July 1, 2011, through June 30, 2012. The Department estimated gross sales (i.e., the retail sale value of the goods sold) by marking up the taxable sales and exempt sales reported on the sales and use tax returns submitted to the Department by Petitioners. For example, for July 1, 2010, through June 30, 2011, Salma purchased beer from its wholesalers and distributors for $148,826.15, and the Department marked up the purchase price by 27 percent for a retail value of $189,009.21. For July 1, 2010, through June 30, 2011, Gausia purchased beer from its wholesalers and distributors for $132,138.65, and the Department marked up the purchase price by 27 percent for a retail value of $167,816.09. The Department's markup on the alcoholic beverage and tobacco products is reasonable because the Department's auditor testified that he used a combination of 2010 National Association of Convenience Stores average markups and the competitive pricing and information from audits of other convenience stores. The Department determined that the exemption ratio reported on the sales and use tax returns submitted to the Department by Petitioners was extremely high for their industry. The Department used an exemption ratio of 15 percent, based on historical audit data for the industry, to calculate Petitioners' estimated taxable sales. A review of Petitioners' sales and use tax returns revealed that they did not apply the tax bracket system to their taxable sales transactions, as required under sections 212.12(9) and (10), Florida Statutes. Instead, Petitioners remitted sales tax on their taxable sales based on their gross receipts at a flat tax rate. The Department's auditor testified that this method of reporting tax is inappropriate and does not accurately reflect the sales activity of the business. The Department calculated the average effective tax rate of 6.0856 percent, based on historical audit data for the industry. To calculate the estimated tax due, the Department multiplied the effective tax rate by the estimated taxable sales and gave Petitioners credit for any tax remitted with their tax returns. The Department issued Salma a Notice of Intent to Make Audit Changes, dated August 8, 2013, for audit number 200149872. The Department issued Gausia a Notice of Intent to Make Audit Changes, dated August 8, 2013, for audit number 200149749. The Department assessed Petitioners sales tax on their sales of alcoholic beverages and tobacco. The Notice of Intent to Make Audit Changes gave Petitioners 30 days to request a conference with the auditor or audit supervisor, to dispute the proposed changes. Petitioners did not make such a request. The Department issued a Notice of Proposed Assessment (NOPA) to Salma on March 6, 2014, for tax in the sum of $159,282.26; for penalty in the sum of $39,820.57; and interest as of March 6, 2013, in the sum of $27,772.36. The Department issued a NOPA to Gausia on March 6, 2014, for tax in the sum of $213,754.46; for penalty in the sum of $53,438.62; and interest as of March 6, 2013, in the sum of $36,921.79. Additional interest accrues at $30.55 per day until the tax is paid. The NOPAs became final assessments on May 5, 2014. After filing a request for an administrative hearing, Petitioners completed the Questionnaire and Self Analysis Worksheet and produced the following documents to the Department: (a) a list of all of their vendors for alcohol, tobacco, soda, chips, candy, etc.; (b) a list of vendors for alcohol and tobacco, for the examination period of July 2010 to June 2011; (c) a summary of their taxable sales, for the period February 2010 through December 2012; (d) copies of their federal tax returns, for the tax years 2010 through 2013; (e) copies of its purchase receipts for the months of July 2013; and (f) copies of their daily register (Z-tapes) for the month of July 2013. The Department's auditor testified that aside from being untimely, the records and information provided by Petitioners during these proceedings were not reliable because Petitioners did not provide any source documents that would allow the Department to reconcile the reported figures and confirm the supplied information. In addition, the purchase receipts and Z- tapes were not relevant because they were from outside of the audit period. The Z-tapes are also unreliable because the manager of the convenience store testified at the final hearing that employees purposely and routinely entered taxable sales into the cash registers as tax exempt sales. Petitioners argue that the Department did not use the best information available when estimating the taxes due. Petitioners claim that because their businesses are combination gas station/convenience stores, the national data for standalone convenience stores is inapplicable. However, notably absent from Petitioners' testimony or evidence was any alternative data upon which the Department could have relied for more accurate estimates.2/
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department of Revenue enter a final order denying Petitioners' requests for relief and assessing, in full, the Department's assessments of sales tax, penalty, and interest against both Salma and Gausia. DONE AND ENTERED this 9th day of January, 2015, in Tallahassee, Leon County, Florida. S MARY LI CREASY Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 9th day of January, 2015.
The Issue The issue presented is what is Peaches' basis in the Sterling stock?
Findings Of Fact There is no dispute as to the material facts in the instant case, Exhibit 1 presented at the hearing is a composite exhibit which is comprised of the Petitioner's U.S. Corporate Income Tax Return and Florida Corporate Income Tax Return for the fiscal year ending June 30, 1973. Exhibit 3 is the Respondent's document entitled "Income Tax Audit Changes" which reflects the adjustments made by the Respondent based upon a review of the Petitioner's return and the reasons for assessing the deficiency. Exhibit 2 is a composite exhibit comprised of the Petitioner's Amended Protest of the proposed deficiency and the Respondent's letter denying the same. Petitioner's federal return (Exhibit 1) Schedule D, Part II, reflects the 31,500 shares were acquired in 1958 at a cost basis of $10,191.00. These shares were subsequently sold by Peaches in 1972 for $1,160,131.00 or a gain of $1,149,940.00. This gain was reported on line 9(a) of the federal tax return as a portion of the "net capital gains." On its 1973 Florida Corporate Income Tax Return, Petitioner computed the income using the basis for the stock as of January 2, 1972, thereby reducing its reported income by $1,013,040.00 from the federal tax. The $1,013,040.00 reflects the amount of appreciation in the value of the stock between the transferrer's acquisition and January 1, 1972, the effective date of the Florida corporate income tax code. The shares of stock of Sterling Drugs were acquired by Peaches in 1971 from the controlling stockholder who made a contribution to capital to the corporation.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, the Hearing Officer recommends that the Petitioner's petition be denied and that the assessment against the Petitioner in the amount of $29,435.00 together with interest be assessed. DONE and ORDERED this 22nd day of January, 1979, in Tallahassee, Florida. STEPHEN F. DEAN Hearing Officer Division of Administrative Hearings 530 Carlton Building Tallahassee, Florida 32304 (904) 488-9675 COPIES FURNISHED: Edwin J. Stacker Assistant Attorney General Department of Legal Affairs The Capitol Tallahassee, Florida 32304 James S. Moody, Jr., Esquire Trinkle and Redman, P.A. 306 West Reynolds Street Plant City, Florida 33566 ================================================================= AGENCY FINAL ORDER ================================================================= STATE OF FLORIDA, DEPARTMENT OF REVENUE TALLAHASSEE, FLORIDA PEACHES OF FLORIDA, INC. Petitioner, vs. CASE NO. 78-1433 STATE OF FLORIDA, DEPARTMENT OF REVENUE, Respondent. / NOTICE TO: JAMES S. MOODY, JR., ESQUIRE ATTORNEY FOR PETITIONER TRINKLE AND REDMAN, P. A. 306 WEST REYNOLDS STREET PLANT CITY, FLORIDA 33566 E. WILSON CRUMP, II, ESQUIRE ATTORNEY FOR RESPONDENT ASSISTANT ATTORNEY GENERAL POST OFFICE BOX 5557 TALLAHASSEE, FLORIDA 32304 You will please take notice that the Governor and Cabinet of the State of Florida, acting as head of the Department of Revenue, at its meeting on the 5th day of April, 1979, approved the Recommended Order of the Hearing Officer dated January 22, 1979, with paragraph 3 of the "Findings of Fact" therein amended to read as follows: "The shares of stock of Sterling Drugs were acquired by Peaches in 1972 from the controlling stockholder who made a contribution to capital to the corporation", in accordance with Stipulation of the Petitioner and Respondent filed in the case on March 1, 1979. This constitutes final agency action by the Department of Revenue. JOHN D. MORIARTY, ATTORNEY DIVISION OF ADMINISTRATION DEPARTMENT OF REVENUE STATE OF FLORIDA ROOM 104, CARLTON BUILDING TALLAHASSEE, FLORIDA 32304 CERTIFICATE OF SERVICE I HEREBY CERTIFY that a true and correct copy of the foregoing Notice was furnished by mail to James S. Moody, Jr., Esquire, Trinkle and Redman, P. A., 306 West Reynolds Street, Plant City, Florida 33566, Attorney for Petitioner; by hand delivery to Wilson Crump, II, Esquire, Assistant Attorney General, Post Office fox 5557, Tallahassee, Florida 32304, Attorney for Respondent and Stephen F. Dean, Hearing Officer, Division of Administrative Hearings; Room 530, Carlton Building, Tallahassee, Florida this 5th day of April, 1979. JOHN D. MORIARTY, ATTORNEY
Findings Of Fact FMCC is a corporation organized and existing under Delaware law. FMCC maintains its principal place of business in Dearborn, Michigan. FMCC is a wholly owned subsidiary of Ford Motor Company. FMCC qualified and is authorized to do business in the State of Florida pursuant to the foreign corporation provisions of Chapter 607, Florida Statutes, and has continuously maintained a registered office and agent in this state during the audit years at issue. During the tax years 1980-1982, inclusive, FMCC and Ford filed corporate tax returns in Florida and paid the taxes due thereon under the Florida Income Tax Code; FMCC maintained 7 to 8 branch offices and employed approximately 200 people in Florida; and Ford had contractual relationships with approximately 130 to 150 authorized Ford dealers in Florida. A copy of a representative agreement between Ford and the dealers is Exhibit 3 to this Stipulation. FMCC's principal business is financing the wholesale and retail sales of vehicles manufactured by Ford Motor Company. During the audit period FMCC provided financing for the purchase of vehicles as authorized by Ford dealers from Ford Motor Company. FMCC also: provided financing for the purchase of automobiles by the public from the dealers; and engaged in commercial, industrial and real estate financing, consumer loan financing, and leasing company financing in the State of Florida as well as other states. Attached as Composite Exhibit 4 are sample documents utilized by FMCC in the above financing. The majority of the intangibles in question are accounts receivables held by FMCC and owned by Florida debtors in connection with the purchase of tangible personal property shipped to or located in the State of Florida. FMCC is the holder of security agreements executed by thousands of Florida debtors. These security agreements gave FMCC a lien on tangible personal property located in the State of Florida. The Florida Secretary of State's Office was utilized by FMCC during the assessment period to perfect and protect its liens created under these security agreements with Florida debtors by the filing of U.C.C. financing statements. None of the original notes are stored in Florida. During the assessment period, FMCC utilized or could have utilized the Florida Courts to recover sums due by Florida debtors on delinquent accounts receivable. In addition, FMCC utilizes the Florida Department of Highway Safety and Motor Vehicles to perfect its liens on motor vehicles pursuant to Chapter 319, Florida Statutes. In 1983, the Department conducted an audit of the FMCC intangible tax returns for tax years 1980 through 1982, inclusive. On June 3, 1983, the Department proposed an assessment of tax, penalty and interest in the total amount of $2,560,379.00. See Exhibit 5. FMCC filed a timely protest. On October 8, 1984, the Department issued a Notice of Decision. See Exhibit 2. On December 12, 1984, the Department acknowledged receipt of FMCC's timely November 8, 1984 Petition for Reconsideration. On February 18, 1985, the Department issued a Notice of Reconsideration. See Exhibit 6. FMCC elected to file a Petition for Formal Proceedings, which was received on April 8, 1985. On the basis of the revised audit report, the Department of Revenue imposed the intangible tax on FMCC for the tax years 1980 through 1982, inclusive, in the following categories, and in the taxable amounts listed as follows: 1/1/80 1/1/81 1/1/82 Commercial Finance Receivables-- $342,892,615 $403,061,571 $486,412,164 Retail Commercial Finance Receivables-- 218,591,180 241,993,462 228,303,569 Wholesale Simple Interest Lease Receivables-- 66,345,902 75,978,095 71,315,777 Retail Lease Finance Receivables N/A N/A N/A Capital Loan Receivables 3,112,877 2,064,698 2,419,770 Consumer Loan Receivables 10,144,531 14,122,666 18,578,699 Service Equipment Financing--Dealer I.D. 481,869 368,186 422,108 Receivables Ford Rent-A-Car Receivables 27,825,283 26,179,377 20,362,896 Ford Parts & Service Receivables -0- 10,499,401 10,800,313 (10) Accounts Receivables--Customers & Others 3,452,194 4,581,629 4,952,234 (11) Accounts Receivables--Affiliate 1,617,880 2,914,094 4,438,849 (12) C.I.R. Receivables 23,243,257 27,387,938 24,222,621 TOTAL FLORIDA RECEIVABLES------ 697,707,588 809,151,117 872,229,000 TAX AT 1 MILL---- 697,708 809,151 872,229 LESS ORIGINAL TAX PAYMENT------ 312,703 351,976 339,142 LESS PETITION PAYMENT ON AGREED CATEGORIES------ 51,069 53,567 44,586 TOTAL REMAINING TAX ASSESSED------ $333,936 $403,608 $488,501 TOTAL TAX FOR ALL YEARS----- $1,226,045 REVISED ASSESSMENT FIGURES DOES NOT INCLUDE $1,386.18 OF THE PETITION PAYMENT At the time it filed its petition for a formal hearing, FMCC agreed to and paid the 1 mill tax, but no interest or penalty, on the following amounts. The taxability of these items is no longer in dispute, only penalty and interest. 1980 1981 1982 (8) Ford Rent-A-Car 27,825,283 26,179,377 20,362,896 Receivables (12) CIR 23,243,257 27,387,938 24,222,621 Receivables Capital Loan Receivables (item 5 of paragraph 11) reflect amounts of money owed by Ford dealers to FMCC. The obligation arises from loans made to Ford dealers located in Florida to expand showroom or other facilities and for working capital. The items located as (10) Accounts Receivable - Customers and Others and (11) Accounts Receivables - Affiliates in paragraph 11 reflect only the amount of accrued interest to which FMCC is entitled on notes from non-affiliates and affiliates, respectively, from the last settlement date prior to year end until the end of each respective year. The principal amounts owed on these notes, which are not secured by realty, are included in other categories. The Department does not assess a tax for similar interest when the amount owed is secured by realty. Wholesale and retail intangibles were created and handled in 1980, 1981 and 1982 by FMCC in the manner set forth in Exhibit 7. The Department of Revenue has imposed penalties in the amount of $543,968 composed of $330,051 as the 25% delinquent penalty imposed pursuant to Fla. Stat. Section 199.052(9)(a) (1983), and $15,886 as the 15% undervalued Property penalty imposed pursuant to Section 199.052(9)(d)(1983), Florida Statutes. The Department offered abatement of the 15% omission penalty ($198,031) imposed pursuant to Fla. Stat. Section 199.052(9)(c) (1983). The closing agreement required pursuant to Fla. Stat. Section 213.21 reflecting this reduction of penalty was not signed by petitioner. FMCC's intangible tax returns have been audited on prior occasions. The manner of reporting was identical to the manner in which FMCC reported its intangibles for tax years 1980 through 1982. The 1973-1975 and the 1976-1978 audits were "no change" audits. FMCC's method of reporting receivables generated from Florida sales was challenged by the Department of Revenue. The challenge was dropped because the Department of Revenue did not have the statutory authority to assess sales of tangible personal property with an f.o.b. point other than Florida. Chapter 77-43, Laws of Florida amended Section 199.112, Fla. Stat. to allow tangible personal property (sic) [to be taxed] regardless of the f.o.b. point of sale. This amendment applied to the January 1, 1978 taxable year. There was a 1978-1980 "no change" audit. Ford Motor Company has filed refund claims for certain categories for the tax year 1981 and 1982. Ford Motor Company claims that it inadvertently paid intangible tax on accounts receivable owned by FMCC. As presented in the Notice of Decision, no refund will be made as it will be handled as a credit against taxes due by Ford Motor Company. While not an announced policy, the Department of Revenue drafted and utilized proposed rules relating to compromising penalties. These rules are not final. Attached as Exhibit 8 are the proposed rules. A copy of these rules was provided to Petitioner by letter dated July 28, 1986. In addition, while not an announced policy the Department of Revenue utilized guidelines established by the Internal Revenue Service and federal court for compromising penalties.
Findings Of Fact Based upon the agreement of the parties as to the relevant facts in this case, the following facts are found: For the calendar years ending December 31, 1972 and 1973, petitioner filed its federal corporate income tax returns reporting gross income from dividends in excess of its taxable income before the special deduction of 85 percent of the dividends received, limited to 85 percent of taxable income. As a result, a maximum of 15 percent of its net income was included in its taxable income on the federal tax returns. The federal returns for calendar years ending December 31, 1972 and 1973 reflected the deduction of net capital losses incurred and carried forward from years ending prior to January 1, 1972, the effective date of the Florida corporate income tax code. For its calendar years 1972 and 1973, petitioner filed its Florida corporation income tax returns reporting no Florida net income. The respondent examined the returns and determined deficiencies of $374.49 for 1972 and $566.40 for 1973. Such determination was based primarily on the additions to income of net capital losses carried forward from years ending prior to January 1, 1972.
Recommendation Based upon the findings of fact and conclusions of law recited above, it is recommended that there is no basis for affording petitioner relief from the proposed deficiency and that said deficiencies of corporate income tax of $374.49 and $556.40 for 1972 and 1973 respectively, be sustained. Respectfully submitted and entered this 22nd day of June, 1976, in Tallahassee, Florida. DIANE D. TREMOR, Hearing Officer Division of Administrative Hearings Room 530, Carlton Building Tallahassee, Florida 32304 (904) 488-9675 COPIES FURNISHED: Mr. T.H. Swindal Chief, Corporate Income Tax Bureau Department of Revenue Post Office Box 3906 Tallahassee, Florida 32303 Mr. Robert Fried Suite 210, Professional Centre 9000 Southwest 87th Court Miami, Florida 33176 Attorney for Petitioner Mr. Stephen E. Mitchell Assistant Attorney General Office of Legal Affairs The Capitol Tallahassee, Florida 32304 Attorney for Respondent
Findings Of Fact The parties have stipulated to all facts in this proceeding. Those facts found relevant to a determination of the issue are as follows: Petitioner, American Telephone and Telegraph Company, is a New York corporation and is functionally divided into two divisions: the Long Lines Department and the General Department. Through its Long Lines Department, petitioner is a federally regulated public utility and common carrier which furnishes interstate and international telecommunications services. Long Lines is responsible generally for the construction, operation and maintenance of a nationwide system of interstate telecommunications facilities and related equipment which serve to interconnect the facilities of over 1700 operating telecommunications companies in the United States as well as telecommunications systems abroad. Some of these facilities extend into and through the State of Florida. In performing this interstate business, Long Lines operates, and thus has property or employees or both in 49 states, including Florida. Through its General Department, petitioner is the parent corporation of 21 operating telecommunications companies (known as "Associated Companies"), Western Electric Company, Inc. ("Western") and Bell Telephone Laboratories, Inc. ("Bell Labs"). The General Department holds and manages the stock owned in these subsidiaries and two minority owned companies, and provides capital. advice and assistance to them. It conducts these activities principally in New York and New Jersey and conducts no business and has no property or employees in Florida. The only business activities in the State of Florida during 1972, 1973 and 1974 were conducted through petitioner's Long Lines Department in connection with the operation of the interstate and international long distance telecommunications network. None of the Associated Companies is organized under the laws of Florida or has its headquarters in Florida. The Only Associated Company which conducts business or has property or employees within Florida is the Southern Bell Telephone and Telegraph Company (hereinafter "Southern Bell"), a wholly owned subsidiary of petitioner. Southern Bell files its own separate Florida income tax returns and during the period 1972-1974 paid approximately $10 million in income tax to Florida. The respondent concurs that petitioner is entitled to deduct 100 percent of the dividends paid by Southern Bell to petitioner. Western, also a wholly owned subsidiary of petitioner, is a manufacturing corporation with its own Board of Directors and officers, doing business in all 50 states. During the period 1972-1974 Western paid approximately $1.7 million in income tax to Florida. The respondent concurs that petitioner is entitled to deduct 100 percent of the dividends paid by Western to petitioner. For each of the 1972, 1973 and 1974 tax years, petitioner has filed a federal consolidated income tax return, and has made a valid election under Section 243 of the Internal Revenue Code for each of those years. That provision of the federal tax law permits a domestic corporation to deduct 100 percent of the dividends received from its wholly-owned domestic subsidiaries. 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. The Internal Revenue Service did not tax dividends received by petitioner from its affiliates. Petitioner timely filed its Florida corporate income tax returns for the years ending December 31, 1972, December 31, 1973 and December 31, 1974. Petitioner did not elect and was not required to file a Florida consolidated income tax return under Section 220.131, Florida Statutes. For each of the years in question, petitioner reported on line 1--"federal taxable income (line 30, Form 1120 or corresponding line on related form 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. These amounts were: 1972 $ 94,020,281 1973 $213,364,165 1974 $110,770,402 On its Florida corporation income tax return for each of the years in question, petitioner made the additions and subtractions required by the form of the return in computing "adjusted federal income" and apportioned this amount by 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 subsidiaries which were deductible for federal income tax purposes under Section 243 of the Internal Revenue Code. On April 10, 1978, the Department issued a notice of proposed deficiency for petitioner's tax years ended December 31, 1972, December 31, 1973 and December 31, 1974. The total amount of the proposed deficiency was $1,131,158, computed as follows: YEAR AUDITED TAX TAX AS FILED DEFICIENCY 1972 $426,468 $122,365 $304,103 1973 668,597 281,168 387,429 1974 594,300 154,674 439,626 Total $1,689,365 $558,207 $1,131,158 After a timely protest to the proposed deficiencies was filed by the petitioner, correspondence and an informal conference between the parties was had. Finally, on April 16, 1981, the Department issued a letter denying the protest and petitioner petitioned for an administrative hearing. Through correspondence and discussions with the petitioner, the Department of Revenue has taken the position that it would allow only an 85 percent dividend deduction for the dividends received by petitioner from those affiliates which were not subject to the Florida corporate income tax code. Petitioner is seeking to take a 100 percent deduction of all dividends which it received from its subsidiaries, as it did on its federal income tax returns. The dividends received by petitioner which the Department is attempting to subject to Florida tax by its proposed deficiency assessment are derived from its equity investment in its subsidiaries and they represent to petitioner a return on such investment. Since the actual capital, however, for that investment is furnished primarily by public investors, the principal use of the dividends received by petitioner is to meet its obligation to its shareholders and bondholders for the payment of dividends and interest. For example, in 1974 petitioner received dividends from the Associated Companies, Western and other affiliates in the amount of $2,538,443,000 and paid dividends to shareholders in the amount of $2,039,800,000 and interest on its long and intermediate term debt of $475,670,000. Petitioner, therefore, serves as the investor interface between the investing public and its subsidiary companies, whereby the purchase of petitioner's stock or debt issues actually represents an investment in the earnings of the Bell System. Petitioner, acting through its General Department, thus provides the avenue by which the subsidiaries pass their net earnings to the investing public. The income which the Department seeks to tax is derived from dividends received by petitioner primarily from earnings generated by the property and employees of the Associated Companies which are devoted to furnishing intrastate and interstate 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 Associated Companies provide telecommunications services that impose income taxes on corporations. The dividends received by petitioner do not contribute to the funding of Long Lines since (1) the pervasive regulation under which petitioner's subsidiaries operate limits their earnings to that amount sufficient for the needs of their own operations and effectively prevents those earnings from being available for use in other businesses and (2) earnings paid out as dividends by petitioner's subsidiaries are principally required to be passed to the public investors in the Bell System, through petitioner's General Department, in order to meet dividend and interest obligations to these outside shareholders and bondholders. During the tax years in question, the Department of Revenue had not promulgated any rule with respect to the disallowance of a deduction for 100 percent of dividends received as provided for under Section 243 of the Internal Revenue Code, and the Florida corporate income tax return forms did not require any such add-back or adjustment. During the 1980 legislative session, an amendment to Chapter 220, Florida Statutes, was proposed which would have changed the definition of "affiliated group of corporations." Such proposed legislation was not passed and did not become law.
Recommendation Based upon the findings of fact and conclusions of law recited herein, it is RECOMMENDED that that portion of the Department's proposed assessment of deficiencies for the 1972, 1973 and 1974 tax years as is based upon dividends received by the petitioner from its affiliates be withdrawn as being contrary to law and invalid. Respectfully submitted and entered this 28th day of April, 1982. 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.
Findings Of Fact In the original corporate income tax report submitted by Florida Power Corporation for the 1973 tax year the tax was computed using the federal income tax base. This included various depreciation methods and schedules in which accelerated depreciation had been claimed for federal tax purposes by Petitioner in years prior to 1972 and the initiation of the Florida Corporate Income Tax Law. By using accelerated depreciation schedules authorized by the federal tax laws, higher depreciation is allowed in the early years of an asset's useful life, leaving a lesser amount of depreciation to be charged off for tax purposes in the latter years of an asset's life. Essentially, Petitioner here contends that depreciable assets acquired prior to the effective date of the Florida Corporate Income Tax law were depreciated on accelerated schedules for federal tax purposes, but upon the effective date of the Florida Corporate Income Tax Law had value in excess of that shown on the federal tax schedule. By requiring taxpayers to use the same depreciation schedules for Florida taxes that are required for federal taxes Petitioner contends it is being penalized for the accelerated depreciation taken before the Florida income tax became constitutional. As an example of Petitioner's position it may be assumed that a depreciable asset was acquired for $100,000 with a useful life of 10 years, three years before the Florida Income Tax Law was passed. Also assume that during this three-year period from acquisition a double declining balance depreciation was taken for computing federal income taxes. Depreciation taken for the first year would be $20,000, for the second year $16,000 and for the third year $12,800, leaving a basis for further depreciation of $41,200 for this asset with seven years useful life remaining. For federal tax purposes Petitioner takes depreciation each year based upon initial cost less accumulated depreciation. Because this value decreased rapidly for the first three years in the assumed example and the excess depreciation thereby generated was not usable in reducing Florida taxes, Petitioner contends it is discriminated against in being required to, in effect, use the book value for federal tax purposes in computing its Florida income tax. Petitioner presented additional examples of reported income for federal income tax purposes which it claims should be exempt from Florida Income Tax. The specific deductions from which the $619,697 refund was computed were not broken down to show how much resulted from the accelerated depreciation schedules which commences prior to January 1, 1972, and how much was derived from these additional examples, some of which were given simply as an example of deferring income for tax purposes. Prior to January 1, 1972, Petitioner purchased some of its bonds prior to maturity and at a discount. As an example if Petitioner purchases $1,000,000 face value of these bonds for $800,000, it has realized a $200,000 gain which it must report as income for federal income tax purposes. These same federal tax rules allow Petitioner to elect to pay the income tax in the year received or spread it equally over the succeeding ten year period. Petitioner elected to spread the income over the succeeding ten year period and each year add $20,000 to its reported income for federal income tax purposes. Since the income was realized before January 1, 1972, Petitioner contends this is not subject to federal tax purposes. With respect to overhead during construction of depreciable assets the taxpayer is allowed to charge these costs off as an expense in the year incurred or capitalize these expenses. If the taxpayer elects to capitalize these expenses they are added to the cost of the constructed asset and recovered as depreciation as the asset is used. Petitioner elected to charge these expenses in the year incurred rather than capitalize them. Had they been capitalized originally, Petitioner would, in 1973, have been entitled to recover these costs in its depreciation of the asset. In its amended return it seeks to treat these costs as if they had been capitalized rather than expenses prior to January 1, 1972. Although apparently not involved in the amended return, Petitioner also presented an example where changes in accounting procedures can result in a gain to the taxpayer which is treated as income to the taxpayer, which he may elect to spread over future years in equal increments until the total gain has been reported.
Findings Of Fact Based upon all of the evidence, the following findings of fact are determined: Background Petitioner, Gainesville Amateur Radio Society, Inc. (GARS or petitioner), a Florida non-profit corporation, was incorporated on December 31, 1975. Its stated purpose is to promote an interest in amateur radio operation. Among other things, GARS provides preparation for Federal Communication Commission licensing examinations, supports community activities with free communication services, and encourages public awareness of ham radio activities through the publication of a monthly newsletter called the GARS-MOUTH. Respondent, Department of Revenue (DOR), is charged with the responsibility of administering and implementing the Florida Revenue Act of 1949, as amended. It has the specific task of collecting sales taxes and enforcing the state tax code and rules. By law, certain transactions are exempt from the state sales and use tax. Among these are sales or lease transactions involving "scientific organizations." In order for an organization to be entitled to an exemption, it must make application with DOR for a consumer's certificate of exemption and demonstrate that it is a qualified scientific organization within the meaning of the law. Once the application is approved, the certificate entitles the holder to make tax exempt purchases that are otherwise taxable under Chapter 212, Florida Statutes. In the case of petitioner, a certificate would enable it to save a hundred or so dollars per year. Claiming that it was entitled to a certificate of exemption as a charitable organization, GARS filed an application with DOR on December 21, 1993. After having the application preliminarily disapproved by DOR on the ground it did not expend "in excess of 50.0 percent of the . . . organization's expenditures toward referenced charitable concerns, within (its) most recent fiscal year," a requirement imposed by DOR rule, GARS then amended its application to claim entitlement on the theory that it was a scientific organization. Although DOR never formally reviewed the amended application, it takes the position that GARS still does not qualify for a certificate under this new theory. Is GARS a Scientific Organization? Under Section 212.08(7)(o)2.c., Florida Statutes, a scientific organization is defined in relevant part as an organization which holds a current exemption from the federal income tax under section 501(c)(3) of the Internal Revenue Code. A DOR rule tracks this statute almost verbatim. Accordingly, as a matter of practice, in interpreting this statutory exemption, DOR simply defers to the final determination of the Internal Revenue Service (IRS). If the IRS grants an organization a 501(c)(3) status based on the determination that it is a scientific organization, then DOR accepts this determination at face value. DOR does not make an independent determination whether the organization is "scientific" or question the decision of the IRS. This statutory interpretation is a reasonable one and was not shown to be erroneous or impermissible. GARS received a federal income tax exemption from the IRS regional office in Atlanta, Georgia by letter dated August 12, 1993. The record shows that GARS was granted an "exempt organization" status as a "charitable organization" and as an "educational organization" under Treasury Regulation Section 1.501(c)(3). However, GARS did not receive an exempt status as a "scientific organization" nor did the IRS make that determination. Therefore, GARS does not qualify as a scientific organization within the meaning of the law. While petitioner submitted evidence to show that it engages in what it considers to be a number of scientific endeavors, these activities, while laudable, are irrelevant under Florida law in making a determination as to whether GARS qualifies for a sales tax exemption as a scientific organization. Therefore, the application must be denied.
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that respondent enter a final order denying petitioner's application for a consumer certificate of exemption. DONE AND ENTERED this 23rd day of June, 1995, 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 23rd day of June, 1995. APPENDIX TO RECOMMENDED ORDER, CASE NO. 94-1200 Petitioner: 1-2. Partially accepted in finding of fact 4. 3. Partially accepted in finding of fact 6. 4. Partially accepted in finding of fact 1. 5. Rejected as being irrelevant. 6. Rejected as being unnecessary. 7. Partially accepted in finding of fact 5. 8-9. Partially accepted in finding of fact 7. 10. Partially accepted in finding of fact 5. 11. Partially accepted in finding of fact 7. 12. Partially accepted in finding of fact 6. 13. Rejected as being unnecessary. 14. Partially accepted in finding of fact 6. Respondent: 1. Partially accepted in finding of fact 1. 2. Partially accepted in finding of fact 2. 3. Rejected as being unnecessary. 4. Rejected as being cumulative. 5-12. Partially accepted in finding of fact 7. 13-14. Partially accepted in finding of fact 4. 15. Partially accepted in finding of fact 3. 16. Covered in preliminary statement. 17. Partially accepted in finding of fact 4. 18-19. Partially accepted in finding of fact 6. 20-21. Rejected as being unnecessary. 22. Partially accepted in finding of fact 5. 23-24. Partially accepted in finding of fact 6. Note - Where a proposed finding has been partially accepted, the remainder has been rejected as being irrelevant, unnecessary for a resolution of the issues, not supported by the evidence, cumulative, subordinate, 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 Sidney Schmukler, Esquire 3922 N. W. 20th Lane Gainesville, Florida 32605-3565 Olivia P. Klein, Esquire Department of Legal Affairs The Capitol-Tax Section Tallahassee, Florida 32399-1050
Findings Of Fact Having considered the pleadings, evidence and legal arguments presented in this cause, the following facts are found: Petitioner is a corporation duly organized under the laws of the State of New Jersey and qualified to do business is one State of Florida. Two of the subsidiaries of Petitioner are Island Properties, Inc., formerly known as Heftler International, Inc., and Island Land Corporation, formerly known as Heftler Construction Company of Puerto Rico, Inc. These corporations are organized under the laws of the State of Florida and the State of New Jersey respectively and maintain principal places of business in Puerto Rico. For the fiscal years ending July 31, 1972 and July 31, 1973, petitioners properly included losses from the operations of the Puerto Rico corporations in their consolidated income tax returns filed with the Internal Revenue Service. For the fiscal years ending July 31, 1972, and July 31, 1973, petitioners timely filed with the respondent consolidated income tax returns including therein the operations of the Puerto Rico corporations. After a timely audit, the respondent excluded, for the purposes of computing adjusted federal income as defined by 220.13, the losses sustained by the Puerto Rico corporations. The respondent also excluded from the computation of the apportionment factors defined in F.S. s. 214.71 and 220.15 the value of the property, payroll and sales utilized in the operations of the Puerto Rico corporations. The respondent cited F.S. ss. 220.13(1)(b)2.b, 220.15(3) and 214.71 as its authority. The adjustments made by the respondent results in a net proposed deficiency of $75,076.46 for the two fiscal years in question. After attempts by the parties to resolve the issues by informal means failed, the petitioner requested a formal hearing and the respondent requested the Division of Administrative Hearings to conduct the hearing.
Recommendation Based upon the above findings of fact and conclusions of law, it is recommended that there is no basis for affording petitioners any relief from the proposed deficiency and that said deficiency in the amount of $75,076.46 be sustained. Respectfully submitted and entered this 20th day of November, 1975, in Tallahassee, Florida. DIANE D. TREMOR, Hearing Officer Division of Administrative Hearings Room 530, Carlton Building Tallahassee, Florida 32304 (904) 488-9675 COPIES FURNISHED: Lewis M. Kanner, Esquire WILLIAMS, SALOMON, KANNER DAMIAN 1003 du Pont Building Miami, Florida 33131 E. Wilson Crump, II, Esquire Assistant Attorney General Department of Legal Affairs Tax Division, Northwood Mall Tallahassee, Florida 32303 Mr. J. Ed Straughn Executive Director Department of Revenue Tallahassee, Florida 32304
Findings Of Fact The Surf Club, Inc. is a corporation which in the taxable year commencing on or after January 1, 1972, earned a received income in the State of Florida and was a resident or citizen of this state. In December, 1972, The Surf Club filed an exempt organization business income tax return with the Department of Treasury, Internal Revenue Service, using Form 990-T. The taxpayer also filed a Florida Corporate Tax Return showing a tax due of $447.00. See Exhibit 1. Subsequently, the taxpayer filed an amended tax return for the year ending September 30, 1972, with the Department of Treasury, Internal Revenue Service, using Form 1120. Schedule D of Form 1120 reports a long-term capital gain in the amount of $54,601.00. Form 4797, page two, indicates that this capital gain was realized from the sale of an apartment building and land for a gross sales price of $1,496,184.00. The adjusted basis was $741,583.00 and the total gain was $754,601.00. The taxpayer filed an Amended Florida Corporation Income Tax Return, Form 1120X. Part II of this amended return reported the $754,601.00 sale of the real property. Attached to the federal tax return was an addendum showing the change of status of Surf Club from a social club exempt under the provisions of Section 501(c)(7) to a nonexempt organization. See Exhibit 2. The Department of Revenue controverted the amended return on the basis that the $754,601.00 in capital gains was deducted from taxable income by the taxpayer because the taxpayer had eliminated the value of the property accruing prior to the imposition of the Florida corporate income tax. Because the date of the sale closely approximated the date or the imposition of the tax, the taxpayer had deducted the total amount of the income derived from the sale. The tax due is $10,203.00. Exhibit 3. Introduced as Exhibit 4 was a revocation agreement whereby the exempt status of The Surf Club was revoked for all years beginning on or after October 1, 1970. The Surf Club did not have exempt status or assert exempt status as of the date that it filed its amended federal tax return for the year ending September 30, 1972.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, the Hearing Officer recommends that the corporate income tax in the amount of $10,203.00 be assessed against Surf Club. DONE and ORDERED this 25th day of October, 1978, in Tallahassee, Florida. STEPHEN F. DEAN Hearing Officer Division of Administrative Hearings 530 Carlton Building Tallahassee, Florida 32304 (904) 488-9675 COPIES FURNISHED: Patricia Turner, Esquire Department of Legal Affairs The Capitol Tallahassee, Florida 32304 Dan Paul, Esquire 1300 Southeast First National Bank Building Miami, Florida 33131
