Findings Of Fact Upon consideration of the pleadings, stipulations and oral representations of the parties, the following facts are found: During the years in question, petitioner was a corporation organized under the laws of the State of Delaware and was duly qualified and authorized to do business in the State of Florida. Petitioner is the parent corporation of a consolidated group of corporations, two of which (including petitioner) had Florida transactions or were otherwise separately subject to the Florida corporate income tax code. None of the other members of the consolidated group were subject to taxation in Florida. For the fiscal and calendar years 1972 through 1974, Petitioner filed federal and Florida income tax returns on behalf of the parent corporation, which included the returns for the consolidated group of corporations -- both the Florida and non- Florida members. Each member of the group consented to such consolidated filing and the component members of the Florida return group were identical to the members of the federal return group. Respondent issued its proposed deficiencies for the 1972 and 1973 tax years, ruling that for a parent corporation to include all of its subsidiary corporations for the purposes of consolidating its taxable income, it must be incorporated in Florida. For the years 1972, 1973 and 1974, respondent's Rule 12C-1.131(1), F.A.C., contained a definition of a "Florida parent company" as the term is used in the second sentence of Florida Statutes 220.131(1). This rule was amended on August 4, 1975, to delete said sentence defining the term "Florida parent company."
Recommendation Based upon the findings of fact and conclusions of law recited above, it is recommended that: petitioner pay the assessment of $3,786.33 for the year 1972, with interest, as stipulated by petitioner, the proposed assessment for the year 1973 in the amount of $112,281.06 be dismissed and set aside, and the petitioner's method of computing its corporate income tax for the year 1974 be upheld. Respectfully submitted and entered this 21st day of June, 1977, in Tallahassee, Florida. DIANE D. TREMOR Hearing Officer Division of Administrative Hearings Room 530 Carlton Building Tallahassee, Florida 32304 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 21st day of June, 1977. COPIES FURNISHED: M. Lewis Hall, Jr. Hall and Hedrick Greater Miami Federal Building 200 Southeast First Street Miami, Florida E. Wilson Crump, II Assistant Attorney General Department of Legal Affairs Tax Division, Northwood Mall Tallahassee, Florida 32303
The Issue The issue is whether Petitioner is subject to tax based on a lease or license to use real property pursuant to Sections 212.031, 212.054, and 212.55, Florida Statutes.
Findings Of Fact Jack and Joan Peoples bought and began operating a bait and tackle shop/fish camp in Jacksonville, Duval County, Florida, in approximately 1971. The name of the business was Clark's Fish Camp and Seafood. As the business grew, Mr. and Mrs. Peoples began operating a restaurant in the shop. Initially, they lived on the business premises in an apartment adjoining the shop. When the restaurant became more successful, the restaurant was enlarged to include the apartment area and the family bought a home at another location. In January 1990, Mr. and Mrs. Peoples incorporated their business as a Florida Subchapter S Corporation. Pursuant to the organizational minutes, Mr. Peoples was elected president and Mrs. Peoples was elected vice-president and secretary. Petitioner issued common stock to Mr. and Mrs. Peoples as the sole shareholders, each owning a 50 percent interest, in exchange for the good will and name of Clark's Fish Camp and Seafood. Mr. and Mrs. Peoples did not transfer any real property, fixtures, or equipment to Petitioner. At all times material to this case, Mr. and Mrs. Peoples or Mrs. Peoples, in her sole capacity, owned the real property and fixtures utilized by Petitioner in the operation of the restaurant business. At all times relevant here, Mrs. Peoples acted as hostess, cook, and/or manager for the business. She controlled Petitioner's checkbook along with her kitchen manager, Florence Hatfield, and general manager, Steve Morris. During the audit at issue here, Russ Deeter, an accountant, and his associate/former employee, Maxine Downs were responsible for performing all of Petitioner's formal bookkeeping. Mr. Deeter had served as Petitioner's bookkeeper since the early 1970s. He sold his accounting business to Ms. Downs in 1981, but he continued to assist her with the routine bookkeeping for certain clients including Petitioner. Pursuant to the arrangement between Mr. Deeter and Ms. Downs, she created a general ledger in a computer using Petitioner's checkbook, sales receipts, invoices, etc., as source documents. The source documents were then returned to Petitioner. Additionally, Mr. Deeter prepared state and federal tax returns for Petitioner and Mr. and Mrs. Peoples. Mrs. Peoples maintained all of the source documents for Petitioner's business records in a construction trailer/office located behind the restaurant on the property's highest ground. Because the property was prone to flooding, Petitioner placed the source documents and other business records on shelves in the trailer/office. The only file cabinets in the office were used to store restaurant supplies. On or about October 28, 1998, Respondent sent Petitioner a Notice of Intent to Audit Books and Records for sales and use taxes for the period October 1, 1993, to September 30, 1998. The notice also advised Petitioner that Respondent intended to conduct an audit of Petitioner's corporate intangible taxes for the period January 1, 1994, to January 1, 1998. The audit was scheduled to commence some time after December 28, 1998. In the meantime, Mr. Peoples became so ill that Mrs. Peoples closed their home and moved into a mobile home located on the business property. This move allowed Mrs. Peoples to oversee the restaurant business while she nursed her husband. Mr. Peoples died in March 1999. Thereafter, Mrs. Peoples became Petitioner's sole owner. Mrs. Peoples receives a bi-weekly salary from Petitioner in the amount of $3,000. She also makes draws from its bank account to pay business and personal expenses on an as-needed basis. Mrs. Peoples has an eighth grade education. However, she is, in large part, responsible for the success of Petitioner, which during the audit period grossed between $2,500,000 and $3,000,000 a year. Mrs. Peoples asserts that she does not remember signing any tax returns but admits that she signs documents without examining them when requested to do so by Mr. Deeter. By letter dated March 24, 1999, Respondent advised Petitioner that it was rescinding the October 28, 1998, Notice of Intent to Audit Books and Records and replacing it with a new notice. The new Notice of Intent to Audit Books and Records dated March 24, 1999, included an examination of Petitioner's charter city systems surtax for the period March 1, 1994, through February 28, 1999; Petitioner's sales and use tax from March 1, 1994, through February 28, 1999; and Petitioner's intangible personal property tax from January 1, 1995, through January 1, 1999. The new notice stated that the audit would begin on or before May 24, 1999. On May 23, 1999, Petitioner requested a postponement of the audit due to the death of Mr. Peoples. As a result of this request, Respondent postponed the audit until January 10, 2000. On May 25, 1999, Mrs. Peoples signed a Power of Attorney for Mr. Deeter to represent the business during the audit. In anticipation of the audit, Mrs. Peoples and her staff began going through the source documents stored in the trailer/office. Mr. Deeter also gathered pertinent records and computer printouts. All documents required for the audit were placed in boxes or sacks on the floor of the trailer/office. In September of 1999, Petitioner's property flooded due to a hurricane. The water rose above the elevated entrance to the trailer/office. Mrs. Peoples and Petitioner's employees made no effort to protect the documents on the floor of the trailer/office from the floodwaters. Petitioner's September 1999 insurance claims due to flood loss do not contain a claim for loss of documentation. The 1999 flood loss claims were small in comparison to the flood loss claims for 2001 even though the 1999 floodwaters rose high enough to destroy the records. Record evidence indicates that the trailer/office has flooded on more than one occasion. In September 1999, all of the documents on the floor of the office were destroyed. Subsequently, Mrs. Peoples and Ms. Hatfield disposed of the documents, including but not limited to, the printouts of the general ledger, bank statements, and cancelled checks. On January 7, 2000, Petitioner requested another postponement of the audit until July 1, 2000. Petitioner made the request due to the death of Ms. Downs in December 1999. After her death, Mr. Deeter discovered that Ms. Downs' computer and all backup tapes located in her home office were either stolen or otherwise unaccounted for. The missing computer records included Petitioner's bookkeeping records for the audit period at issue here. On January 15, 2000, Petitioner agreed to extend the time for Respondent to perform the audit. The agreement stated that Respondent could issue an assessment at any time before October 28, 2001. On July 6, 2000, Respondent issued a formal demand for Petitioner to produce certain records. The only records available were Mr. Deeter's own work papers, post-September 1999 materials that had not been placed in the trailer/office prior to the flood, or records prepared after the flood and death of Ms. Downs. On July 17, 2000, the parties signed an Audit Agreement. The agreement states that the audit of sales of tangible personal property would be controlled by the sampling method. On July 17, 2000, Mr. Deeter informed Respondent that Petitioner's records covering the period from 1993 through the middle of 1999 were not available because a flood had damaged them in September 1999. However, using his work papers, Mr. Deeter was able to provide Respondent with copies of some of the original federal tax returns that he had prepared for Petitioner and Mr. and Mrs. Peoples. During the hearing, Mr. Deeter asserted that he had delivered the original tax returns to Mr. and Mrs. Peoples who had the responsibility to sign, date, and file them with the U.S. Internal Revenue Service (IRS) at the appropriate times. Mrs. Peoples testified that she could not remember signing any returns. She believed that Mr. Deeter had assumed responsibility for filing the returns. The unsigned and undated copies of the returns that Mr. Deeter provided Respondent on July 17, 2000, included Petitioner's U.S. Income Tax Return for an S Corporation (Form 1120S) for 1996, 1997, and 1998. These returns showed that Petitioner took the following deductions from income for a lease expense: (a) 1996--$225,546; (b) 1997--$332,791; and 1998--$290,493. These are the amounts that Respondent seeks to tax as rent. Mr. Deeter also provided Respondent with an unsigned and undated copy of Mr. and Mrs. Peoples' 1998 U.S. Individual Income Tax Return (Form 1040). The return included both pages of Schedule E showing rents received from Petitioner. On July 28, 2000, Mr. Deeter provided Respondent with revised copies of Petitioner's 1120S forms and revised copies of Mr. and Mrs. Peoples' 1040 forms. The auditor's file does not contain copies of the revised returns because the auditor did not accept them. The record also indicates that Mr. Deeter did not want to leave the revised returns with Respondent because they were not copies of the original returns. During the hearing, Mr. Deeter testified that he furnished Respondent with revised returns to show that there was no difference in the amount of federal income tax due and payable by Mr. and Mrs. Peoples regardless of whether Petitioner reported a lease expense or a distribution of profit on its 1120S forms and regardless of whether Mr. and Mrs. Peoples reported Petitioner's income as rent received or a profit distribution on their 1040 forms. According to Mr. Deeter, he prepared the revised 1120S returns using his pencil copies of the original handwritten returns because he had never used a computer software program to prepare 1120S forms. Mr. Deeter had a computer software program to prepare 1040 forms, so he used that program to generate the revised 1040 returns. However, Mr. Deeter's testimony that the revised returns were drafts showing Petitioner's deduction of a lease expense and Mr. and Mrs. Peoples' receipt of rent is not persuasive. In November 2000, Respondent obtained copies of Petitioner's 1120S forms and Mr. and Mrs. Peoples' 1040 forms for 1994 and 1995 from the IRS. The IRS did not have copies of these returns for the years 1996 through 1999. However, there is record evidence that Mr. and Mrs. Peoples paid some income taxes for all years in question. The record does not contain copies of the 1994 and 1995 returns. Competent evidence indicates that, consistent with Respondent's routine practice, the auditor reviewed the 1040 and 1120S forms and returned them to the IRS without making copies for Respondent's file. Based on the auditor's review of Petitioner's 1120S returns, Respondent seeks to tax Petitioner for lease expense in the amounts of $152,782.24 in 1994 and $220,355.85 in 1995. During the hearing, Mr. Deeter conceded that he prepared Petitioner's 1120S forms for 1994 and 1995 showing deductions for a lease expense and Mr. and Mrs. Peoples' 1040 forms showing rent received from Petitioner. His testimony that he prepared all returns in subsequent years showing no lease expense for Petitioner and profit distributions instead of rent received for Mr. and Mrs. Peoples is not persuasive. In November 2000, Respondent issued a Notice of Intent to Make Audit Changes. The notice made no adjustment with respect to Petitioner's reported taxable sales. The only adjustment was based on lease payments from Petitioner to Mr. and Mrs. Peoples as consideration for the rent of the building and fixtures utilized by Petitioner in the conduct of its business. On January 26, 2001, Mr. Deeter had an audit conference with Respondent's staff. During the conference, Mr. Deeter requested that Respondent review Petitioner's amended 1120S forms for the years 1996, 1997, 1998, and 1999. The amended 1120S returns did not include deductions for a lease expense. Respondent would not accept the amended returns, but informed Mr. Deeter that it would review the amended returns if he could document that they had been filed with the IRS. On March 7, 2001, the IRS stamped the amended 1120S forms for 1996, 1997, 1998 and 1999 as having been received. Mrs. Peoples had signed the returns as Petitioner's president but she did not date her signatures. Mr. Deeter testified that his wife, Roberta Lawson, signed the amended 1120S returns as the tax preparer. Mrs. Lawson's purported signatures on the forms were dated appropriately for each tax year. However, Mrs. Lawson did not testify at the hearing. Mr. Deeter's testimony that the returns filed with the IRS on March 7, 2001, after the audit was completed were, in fact, exact copies of the returns that he and his wife prepared for Petitioner each year and provided to Respondent on July 17, 2000, is not persuasive. After receiving the amended 1120S returns, Respondent decided not to consider them in the audit because they were self-serving. On August 6, 2001, Respondent issued a Notice of Proposed Assessment of sales and use tax and charter transit system surtax. By letter dated October 2, 2001, Petitioner filed a timely informal protest of the proposed assessment. Petitioner asserted that it had never paid any rent to Mr. and Mrs. Peoples. On January 29, 2002, Respondent issued a Notice of Decision upholding the proposed assessments. However, Petitioner never received this notice. Therefore, Respondent reissued the Notice of Decision without any additional changes on August 14, 2002. During discovery, Petitioner provided Respondent with unsigned and undated copies of Mr. and Mrs. Peoples' 1040 forms for 1996, 1997, 1998, and 1999. These returns show taxable income derived from an S corporation on line 17, passive income and losses from Petitioner on page 2 of Schedule E, and depreciation on Form 4562. In other words, the returns reflect corporate distributions of profit from Petitioner and do not reference any income from rental real estate. Mr. Deeter's testimony during hearing that the 1040 returns provided to Respondent during discovery are exact copies of the original 1040 returns is not persuasive. As of December 12, 2002, Mr. and Mrs. Peoples had not filed 1040 returns for the years 2001, 2000, 1999, 1998, 1997, or 1996 with the IRS. The audit at issue here was based on the best information provided at the time of the audit. Respondent completed the audit on or about January 26, 2001. Petitioner does not assert that the calculation of the assessment was in error. Instead, Petitioner protests that any assessment is due. Petitioner could have requested its bank to provide it with copies of its statements and cancelled checks for the relevant period. Petitioner did not make such a request and Respondent was not under an obligation to do so. There is no evidence that a written lease for Petitioner to use Mr. and Mrs. People's property ever existed. However, the greater weight of the evidence indicates that Petitioner leased the restaurant property from Mr. and Mrs. Peoples for all relevant years. Mr. Deeter is an experienced accountant with over 30 years of experience. Petitioner and Mr. and Mrs. Peoples relied upon Mr. Deeter's advice as to what, if any, taxes should be paid on the lease. Armed with all of the necessary information, Mr. Deeter gave Petitioner obviously erroneous advice concerning the tax consequences associated with Petitioner leasing the property and paying 100 percent of its profits as consideration for the lease. To compound the problem, Mrs. Peoples negligently failed to ensure that Petitioner's business records, gathered specifically in anticipation of Respondent's audit, were safely preserved from hurricane floodwaters. Petitioner has had no previous tax compliance difficulties. It has not been subject to prior audits or assessments. Even so, the facts of this case indicate that Petitioner and Mr. and Ms. Peoples did not exercise ordinary care and prudence in complying with the revenue laws of Florida. Mr. Deeter testified that the fair market value or reasonable consideration for the lease is an amount equivalent to Mr. and Mrs. Peoples' depreciation. According to the depreciation schedules, which accompanied the 1040 forms provided to Respondent during discovery, the annual cost for the use of the property and fixtures were as follows: (a) 1996--$98,296; (b) 1997--$104,840; and (c) 1998--$114,106 ($179,554 less a one time extraordinary loss of $65,448 due to flood damage). Mr. Deeter also testified that using the information on the 1040 forms for 1996, the depreciation expense for 1994 and 1995 can be computed as follows: (a) 1994--$63,000 to $67,000; and (b) 1995--$77,000 to $79,000. Mr. Deeter's testimony that the fair market value of the lease is equivalent to the depreciation set forth on 1040 returns never filed with the IRS is not persuasive. Mr. Deeter testified that an estimate of reasonable net profits for a corporation of similar size and make-up could be determined by reference to ratio profiles prepared by Robert Morris and Associates. Mr. Deeter's testimony regarding average profit distributions to shareholders of similarly situated corporations and reasonable profit distributions for Petitioner are speculative and not persuasive.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED: That Respondent enter a final order upholding the tax assessment. DONE AND ENTERED this 4th day of April, 2003, in Tallahassee, Leon County, Florida. SUZANNE F. HOOD Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 4th day of April, 2003. COPIES FURNISHED: David B. Ferebee, Esquire Post Office Box 1796 Jacksonville, Florida 32201-1796 J. Bruce Hoffmann, General Counsel Department of Revenue 204 Carlton Building Post Office Box 6668 Tallahassee, Florida 32314-6668 R. Lynn Lovejoy, Esquire Office of the Attorney General The Capitol, Tax Section Tallahassee, Florida 32399-1050 James Zingale, Executive Director Department of Revenue 104 Carlton Building Tallahassee, Florida 32399-0100
Findings Of Fact Having listened to the testimony and considered the evidence presented in this cause, it is found as follows: Petitioner is a domestic corporation. Petitioner provided medicare services to patients in the 1969-70 fiscal year. An on-site audit by the medicare auditing team was concluded in December of 1971, and petitioner received $56,131.00 of medicare reimbursements in January of 1972, for the services provided in the 1969-70 fiscal year. The petitioner did not file an amended federal income tax return for the fiscal year ending September 30, 1979. The adjusted federal income reported on petitioner's federal income tax return for the fiscal year ending September 30, 1972, included the $56,131.00 of medicare reimbursements received by petitioner in January of 1972. On petitioner's Florida income tax return for its fiscal year ending September 30, 1972, petitioner did not include the $56,131.00 figure in its adjusted federal income. On March 31, 1975, the respondent notified petitioner of a proposed deficiency in the amount of $2,100.99 arising from the petitioner's omission of the medicare reimbursements from its adjusted federal income as shown on its Florida corporate income tax return for the fiscal year ending September 30, 1972. Further correspondence ensued between the petitioner and the Corporate Income Tax Bureau of the respondent and the petitioner filed the present petition requesting a hearing on the issue. 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 my recommendation that there is no legal basis for affording the petitioner any relief from the proposed deficiency and that said deficiency in the amount of $2,100.00 be sustained. Respectfully submitted and entered this 17th day of September, 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: E. Wilson Crump, II, Esquire Assistant Attorney General Department of Legal Affairs Tax Division, Northwood Mall Tallahassee, Florida 32303 Homer E. Ward, N.H.A. Administrator/President University Park Convalescent Center 1818 E. Fletcher Avenue Tampa, Florida 33612
The Issue The issues to be resolved in this proceeding concern whether the Petitioner owes sales and use tax or specifically use tax, on certain purchases of tangible personal property in accordance with the relevant provisions of Chapter 212, Florida Statutes.
Findings Of Fact The Petitioner, Florida Property Care, Inc. (Petitioner, taxpayer), was a Florida "Subchapter-S Corporation" having its home office in Dade City, Florida, at times pertinent hereto. The Petitioner's federal employer identification number was 59-3288869 and its Florida sales tax number was 06-1041158. The Petitioner was engaged in the business of cutting and removing trees, driveway construction, lawn maintenance, and landscaping. The Department of Revenue (Department) is an agency of the State of Florida charged with administering the tax laws of the state in accordance with Section 212 and 213, Florida Statutes. After issuing proper notification to the Petitioner on January 2, 2003, the Department conducted a sales and use tax audit of the Petitioner's business records. The audit covered the period of December 1, 1999 through December 16, 2001. The Petitioner corporation ceased doing business on December 16, 2001. The Department examined purchase invoices, general ledgers, and federal income tax returns of the Petitioner in the course of its audit. The Department elected to examine the records in detail rather than doing a statutorily permissible sample audit, since the assessment period was relatively short. The Petitioner was engaged in the business of making improvements to real property (construction driveways, landscaping, etc.) through the purchase and use of items of tangible personal property, as raw materials, it bought for use in its business. This included the purchase of limerock, plants, sod, mulch and the like for use in maintaining or landscaping real property. Because the Petitioner was engaged in the business of making improvements to real property, and not merely re-selling limerock, mulch, etc., it was generally only liable to pay sales tax on its purchases of items of tangible personal property used in its business, but not to charge and collect sales tax on its landscaping and real property improvement business activities or services for its ultimate customers. See Chapter 212, Fla. Stat. During the audit period, it was determined by the Department that sales tax had not been paid by the Petitioner on some of its purchases of items of tangible personal property used in the conduct of its business, such items as sod, limerock, asphalt, hay, and other products. The Department also found that the Petitioner had not paid sales tax on certain auto repairs that included both parts and labor charges. Accordingly, the Department noticed an assessment to the Petitioner for use tax on the purchases of items of tangible personal property, for which sales invoices produced in the audit, and by the Petitioner, did not indicate that sales tax had been paid when the items had been purchased from the suppliers. The Department calculated the additional tax due by multiplying the taxable amounts taken from the purchase invoices by the applicable tax rate. The Department also gave the Petitioner credit for sales taxes already paid. Specifically, on a purchase invoice for auto repairs, the Department gave the Petitioner credit for sales tax paid on the parts used in the repairs. The Petitioner's witnesses testified that the four purchase invoices identified as Petitioner's Composite Exhibit 2 in evidence, represented freight charges and were not tangible personal property purchase amounts for the limerock involved. Those purchase invoices, however, indicate on their face that they were for limerock. They indicate the total tonnage and the price per ton and do not indicate any portion of the charges representing freight or delivery charges. The price indicated per ton appears reasonable as a price for limerock and not just for freight charges. Moreover, the Petitioner's own witnesses concede that the purchase invoices in composite Exhibit 2 do not indicate any itemization or amount for freight charges. It is determined that these invoices are actually invoices for the purchase of limerock and not merely freight charges. The Petitioner contends that it assumed that the purchase invoices, identified as Petitioner's Exhibits 1, 4, and 7-9, in evidence, included sales tax in the unit price represented on those invoices, even though any sales tax increment of those invoices is not separately stated and itemized. The Petitioner's witness in this regard conceded, however, that he had no way of knowing whether the vendors from whom he purchased the goods actually charged sales tax on the subject invoices, since it was not itemized. He was only assuming that the tax was included in the unit price he paid, as a part of the total number. The Petitioner contends that it is not liable for the sales tax because sales tax was included in the unit price of the tangible personal property that the Petitioner purchased. The Petitioner argues, in the alternative, that it is not liable for sales tax because the vendors were responsible for charging and collecting the sales tax and that they should be held liable for the tax. In consideration of the evidence which shows that the Petitioner bought the limerock, sod, and other items for use in its business of providing landscaping, maintenance, and other improvements to real property, the Petitioner did not provide documentary or other evidence to corroborate its testimonial assumption or belief that the invoices were either not subject to tax or that the invoiced amounts included payment of the tax. Most of the invoices (the only documentary evidence of billing and the amount and category of payment), do not depict an itemization or category for tax on the face of the invoices. The evidence adduced by the Petitioner does show, as to Invoice Number 29, that tax indeed was paid on that purchase in the amount of $679.25. Additionally, with regard to APAC Invoice Number PORT 16175, $73.39 in tax was paid. Any assessment and collection of tax, penalty and interest by the Department upon conclusion of this proceeding should reflect credit to the Petitioner for these amounts. On June 3, 2003, a Notice of Proposed Assessment was issued by the Department to the Petitioner, setting forth deficient sales and use tax in the sum of $1,812.86, with interest through June 3, 2003, in the sum of $354.34, accruing at the rate of $.25 per day as well as a penalty in the sum of $906.44. The Notice of Proposed Assessment became a Final Assessment on August 2, 2003, for purposes of filing a request for formal proceeding before the Division of Administrative Hearings or for contesting the assessment in the circuit court. On September 30, 2003, the Petitioner elected to file a Petition with the Division of Administrative Hearings seeking a formal proceeding and hearing to contest the final assessment in this case.
Recommendation Having considered the foregoing Findings of Fact and Conclusions of Law, the evidence of record, the candor and demeanor of the witnesses and the pleadings and the arguments of the parties, it is, therefore, RECOMMENDED that a final order be entered by the Department of Revenue assessing the tax as depicted in the notice of assessment, in evidence herein, including credit for the tax shown to have been collected on the two invoices referenced in the above Findings of Fact, and assessing interest and penalties in the amounts legally prescribed or as agreed to by the parties. DONE AND ENTERED this 9th day of June, 2004, in Tallahassee, Leon County, Florida. S P. MICHAEL RUFF Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 9th day of June, 2004. COPIES FURNISHED: Carrol Y. Cherry, Esquire Office of the Attorney General The Capitol, Plaza Level 01 Tallahassee, Florida 32399-1050 Charles B. Morrow Jeanne Morrow Post Office Box 659 Astor, Florida 32102 James Zingale, Executive Director Department of Revenue 104 Carlton Building Tallahassee, Florida 32399-0100 Bruce Hoffmann, General Counsel Department of Revenue 204 Carlton Building Tallahassee, Florida 32399-0100
Findings Of Fact The parties have agreed that there are no issues of fact to be determined in this matter, and that the relevant facts are set out in Paragraphs 3 and 4 of the Petition which was received in evidence at the hearing as Hearing Officer's Exhibit 1. This matter involves a determination for Florida corporate income tax purposes of the net income derived by the Petitioner in connection with the purchase, development, and sale of certain property in Dade County, Florida. Petitioner purchased the property prior to January 1, 1972, the date upon which the Florida Income Tax Code became effective. Petitioner expended, through a subsidiary corporation, $369,058 in developing the property. These expenditures also occurred prior to January 1, 1972. For Federal income tax purposes the Petitioner had deducted these expenditures as business expenses during the years that they were incurred. Petitioner sold the property during 1972. Because the Petitioner had deducted the expenditures as business expenses, the expenditures could not properly have been included in the base price of the property for Federal income tax purposes, and the net income for Federal tax purposes was computed by subtracting the original purchase price from the sale price. Since the Florida Income Tax Code was not in effect at the time the expenditures were made, the Petitioner received no Florida tax benefit for the expenditures. In computing the net income for Florida tax purposes derived from the sale, the Petitioner included the expenditures in the base price of the property, and calculated its net income by subtracting the sum of the purchase price of the property and the expenditures from the sale price. The Department, contending that the $369,058 should not have been included in the base price of the property, issued a deficiency assessment which reflected the net income from the sale of property as the difference between the sale price and the purchase price. Petitioner originally contended that it was entitled to add the amount that the property appreciated prior to January 1, 1972 to the base price of the property. Petitioner is no longer contesting the deficiency assessment based upon a disallowance of that addition to the base price of the property. The Department was originally contending that it was entitled to interest at 12 percent per annum calculated retrospectively from the due date of the alleged deficiency. The Department has agreed to abandon its effort to impose that rate of interest. The issue raised in this case is whether the development expenses incurred by the Petitioner and deducted for Federal income tax purposes as business expenses prior to 1972 can be subtracted from Federal taxable income for the purpose of determining taxable income derived from the sale for Florida tax purposes.
The Issue Petitioners' liability for corporate income tax deficiency under Chapter 220, Florida Statutes.
Findings Of Fact Petitioner is a Georgia Corporation doing business as a heavy electrical contractor in Georgia and eight other states including Florida. In 1972, Petitioner submitted a request to the Department of Revenue that it be allowed to use "separate accounting" as the method for determining the amount of its adjusted federal income that was subject to taxation by the State of Florida under Chapter 220,Florida Statutes. By letter of October 3, 1972, T.H. Swindal, Respondent's Chief of the Corporation Income Tax Bureau, denied Petitioner's request with the following language: "The economics of large scale interstate construction operations, as we understand them, necessitate maximum utilization of a company's resources. At particular times and in a particular locale or with respect to particular types of construction activity contracts may be initially or regularly bid upon and undertaken which, on an individual contract basis, will be minimally profitable, if at all. Nevertheless, because these contracts permit cost absorption, continuing use and charge for equipment, trained crews and know-how; permit maximum employment of the company's capital and credit accomo- dations; permit initial entry into a new field of construction activity or a new locale, these contracts indirectly but significantly add to the profitability of the enterprise as a whole. We recognize too, that separate accounting essentially serves management and that management must evaluate competitive tax implications. "Separate accounting" does not, in our view, measure the impact of these cir- cumstances. We are of the opinion that Florida's three factor formula does measure the impact of these circumstances upon profit and thus provides a fairer Florida tax base." (Complaint, Petitioner's Exhibit 1) Respondent however, pursuant to a request of Petitioner, permitted the latter to leave its 1972 return as filed, but instructed it to file in the future utilizing the "three-factor" formula. Accordingly, the Petitioner filed its 1973 and 1974 tax returns utilizing the "three-factor" formula" as directed by the Respondent, and paid the appropriate tax due. By letter, dated September 15, 1975, Mr. Swindal informed Petitioner that examination of its returns for the years 1972 thru 1974 had resulted in a net proposed deficiency of $12,417.60. An accompanying report showed that the primary basis for the deficiency was Respondent's determination that the Florida portion of adjusted federal income for the years 1973 and 1974 should have been increased by the amounts of $87,772.93 and $160,117.83, respectively, based on a "separate accounting" computation. The reason given for this determination was stated as follows in the report: "Florida Statute 214.73(1) says in part that if the apportionment methods of Florida Statute 214.71 and 214.72 do not fairly represent the extent of a taxpayer's base attributable to this state, the department may require separate accounting. The department has determined the taxpayer should use separate accounting in accordance with the above-mentioned, statute." (Complaint and exhibits thereto) Respondent had not notified Petitioner between 1972 and 1975 of its apparent change in position with respect to the required method of accounting. At a conference held on February 19, 1976, between Petitioner's representatives and Mr. William T. Lutschak who represented the Respondent, Petitioner protested the asserted deficiency and requested that the Respondent adhere to its former determination that the "three-factor method" be applied in computing the tax. Petitioner's protest was denied orally at the conference and such denial w-s confirmed by Mr. Swindal's letter of February 24, 1976, as follows in pertinent part: "Careful analysis of the taxpayer's Florida activity and the financial results of that activity clearly demonstrate that the amount of income set forth in the auditor's report for the years at issue are attributable to taxpayer's Florida business and that F.S. 214.73(1), rather than F.S. 214.71, fairly represents the extent of the taxpayer's tax base attributable to this state." (Comp. & Exh. thereto) Respondent's auditor of Petitioner's 1973 and 1974 tax returns found nothing unusual concerning the latter's business operations during the above tax periods and is of the opinion that based on formulary accounting Petitioner's returns "fulfill the letter of the law". He also acknowledged that Petitioner met the criteria of a "unitary business". He testified that he was unable to determine the amount of property used by Petitioner on its various jobs in and out of Florida while at the audit site at Petitioner's home office in Alabama and that without such information it would be impossible to determine Petitioner's tax liability under the "three-factor method" because property is one of the factors. The auditor, after making a request of Petitioner for such figures during his audit, which did not produce immediate results, did not pursue the matter because he "had to go back to Tallahassee". In fact, such information was available in Petitioner's records. Respondent changed its policy with respect to the method of accounting required of Petitioner after consideration of a textbook on the concept of separate accounting and a resulting determination that the contracting business in general is a unique industry warranting special tax treatment. (Testimony of Harnden, Puckett, Malone, Exhibit 1, Pleadings). The alleged deficiency of $12,417.60 is correctly computed and properly due and owing if "separate accounting" is validly required with respect to Petitioner's tax returns. (Stipulation).
Recommendation That Petitioner be relieved from payment of the proposed assessment based on any tax deficiency produced by the requirement of separate accounting under Section 214.73, Florida Statutes. DONE and ENTERED 21st day of July, 1976, in Tallahassee, Florida. THOMAS C. OLDHAM Division of Administrative Hearings Room 530, Carlton Building Tallahassee, Florida 32304 (904) 488-9675 COPIES FURNISHED: E. Wilson Crump, II, Esquire Assistant Attorney General Department of Legal Affairs Tax Division Northwood Mall Tallahassee, Florida 32303 James R. English, Esquire HENRY & BUCHANAN, P.A. P.O. Drawer 1049 Tallahassee, Florida 32302
Findings Of Fact Stipulated Facts Respondent conducted an audit of Petitioner's business records for the period July 1, 1985, through June 30, 1990. Respondent determined a deficiency in sales tax of $174,823.96, including penalty and interest through August 22, 1990. Petitioner objected to the deficiency. Respondent reviewed the audit, and made audit changes that are the subject of this proceeding. The audit changes determined a deficiency in use tax of $76,035.60, including tax ($47,910.10), penalty ($11,977.68), and interest through March 12, 1991 ($16,147.60). Interest accrues daily in the amount of $15.75. A First Revised Notice Of Intent To Make Sales Tax Changes, for the reduced assessment of $76,035.60, was issued on March 21, 1991. A Notice Of Proposed Assessment was issued on July 2, 1991. The Notice Of Proposed Assessment became a Final Assessment on August 31, 1991. Respondent made a prima facie showing of the factual and legal basis for the use tax assessment. Section 120.575(2), Florida Statutes. 1/ The audit and assessment are procedurally correct. Tax, interest, and penalty are correctly computed. Formation Petitioner was incorporated in Florida, in January, 1983, by Mr. B. Theodore Troy, president and sole shareholder. Petitioner's principal place of business is 101 Wymore Road, Suite 224, Altamonte Springs, Florida. Petitioner conducted business as American Advertising Distributors of Central Florida. Mr. Troy and his wife operated the business until liquidating Petitioner's assets in 1992. Operation Petitioner sold direct mail advertising to Florida businesses. Petitioner operated pursuant to a franchise agreement with American Advertising Distributors, Inc., of Mesa, Arizona ("AAD"). AAD was Petitioner's franchisor until AAD filed for bankruptcy in 1990. Petitioner solicited orders from Florida businesses 2/ for advertising coupons designed and printed by AAD in Arizona. AAD mailed the advertising coupons to addressees in Florida who were potential customers for Florida businesses. Florida businesses placed orders with Petitioner on written contracts, or sales agreements, labeled "advertising orders." AAD was not a party to advertising orders. Advertising orders identified "AAD" as American Advertising Distributors of Central Florida, and were imprinted with the name and address of "AAD" in Central Florida. Advertising orders specified the total charges, color and stock of paper, number of addressees, and areas of distribution. Petitioner assisted businesses with rough layout for art work. The rough layout was forwarded to AAD. AAD prepared finished art work and sent copies back to Petitioner for approval by Florida businesses. AAD then printed, collated, and mailed advertising coupons to addressees in Florida, without charge to addressees. Florida businesses paid non-refundable deposits when placing advertising orders. The remaining balance was paid upon approval of final art work. AAD did not submit invoices to Florida businesses. AAD submitted invoices to Petitioner for the amount due from Petitioner. 3/ Petitioner paid AAD 10 days before advertising coupons were mailed. Some advertising coupons were produced by Laberge Printers, Inc., in Orlando, Florida ("Laberge"). Coupons from Laberge were designed, printed, and distributed in the same manner as coupons from AAD. Two types of advertising coupons were provided by AAD and Laberge. The majority of coupons were distributed in coop mailings, or "bonus express" envelopes, containing coupons for up to 20 businesses. Bonus express envelopes were mailed approximately eight times a year. Advertising coupons were also distributed in "solo" mailings. A solo mailing was an individualized, custom printed coupon, or flyer, mailed to individual addressees. The total charges stated in advertising orders included the cost of services provided by Petitioner, AAD, and Laberge. Services included typesetting, art work, printing, inserting envelopes, and mailing. Florida imposed a tax on services, from July 1, 1987, through December 31, 1987. Petitioner collected and remitted tax imposed on the cost of services included in the total charges stated on advertising orders. Except for the services tax, neither Petitioner, AAD, nor Laberge collected and remitted sales or use tax to Florida or to Arizona. Petitioner never utilized resale certificates for any tax other than the tax on services. Collectibility Petitioner was financially able to pay the use tax assessment during 1990 and 1991. No later than August 22, 1990, Mr. Troy knew of the sales tax deficiency of $174,823.96. By March 21, 1991, Mr. Troy knew of the reduced use tax assessment of $76,035.60. During 1990 and 1991, Petitioner made discretionary payments to Mr. Troy of $110,389. Petitioner reported federal taxable income of $58,279 in 1990 and 1991. 4/ In arriving at taxable income, Petitioner deducted payments to Mr. Troy of $59,430 for compensation to officers, management fees, and salary. 5/ From taxable income of $58,279, Petitioner paid approximately $50,959 to Mr. Troy in nondeductible shareholder loans. 6/ Discretionary payments of $110,389, 7/ made to Mr. Troy in 1990 and 1991, were more than adequate to pay the use tax assessment of $76,036.60. At the end of 1991, Petitioner reported fixed assets with a book value of $14,933, a customer list valued at $104,447.72, and retained earnings of $102,605. The book value of intangible assets was $82,943, comprised primarily of the franchise, valued at $35,000, and goodwill of $45,000. Termination Of Operations But Continued Existence AAD petitioned for bankruptcy in 1990. Petitioner subsequently determined that its franchise and goodwill were worthless. In 1992, Petitioner reported a loss of $99,726 for federal tax purposes. All of Petitioner's assets, including its customer lists, were sold or transferred for $1,330 to Florida Mail, Inc. ("Florida Mail"). Florida Mail is a Florida corporation wholly owned by Mr. Troy. Florida Mail sells direct mail advertising; and shares Petitioner's principal place of business. Since 1992, Petitioner has been a shell corporation with $579 in assets.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that Respondent enter a Final Order upholding the assessment of tax and interest and waive all of the penalty included in the assessment. DONE AND ENTERED in Tallahassee, Leon County, Florida, this 2nd day of June, 1994. DANIEL MANRY 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 2nd day of June, 1994.
Findings Of Fact The Petitioner, Integra Corporation, had a dispute with the Florida Department of Revenue with respect to sales or use tax allegedly due in the amount of $605,305.70 on lease payments made on its rental of hotels from their owners. An assessment for taxes due was processed in the normal manner by the Department of Revenue. Integra Corporation filed a Protest of the assessment, and after the Department's Notice of Decision denied the Protest, Integra filed a timely Petition for Reconsideration. Ultimately the Department issued a Notice of Reconsideration which rejected the arguments of Integra Corporation. Integra Corporation agrees that the Notice of Reconsideration was transmitted on April 24, 1990, for it alleges that fact in paragraph 3 of its Petition. The Department's final rejection of the arguments made by Integra Corporation against the assessment of sales and use tax made in the Notice of Reconsideration dated April 24, 1990, prompted Integra Corporation to mail by certified mail, return receipt #P796 304 819, to the Division of Administrative Hearings on June 21, 1990, an original Petition challenging the Department's tax assessment. That petition was captioned Integra Corporation, Petitioner v. Department of Revenue, Respondent, and was filed by the Clerk of the Division of Administrative Hearings on June 25, 1990. No copy of the original Petition was served on the Department of Revenue, or its counsel. The opening paragraph states that Integra Corporation "hereby petitions the Department of Revenue for administrative proceedings. . ." The Clerk of the Division of Administrative Hearings realized that the Petition should not have been addressed to or filed with the Division of Administrative Hearings, and on that same day forwarded the Petition to the appropriate agency, the Department of Revenue, which received the Petition on June 27, 1990.
Recommendation It is RECOMMENDED that the petition filed by Integra Corporation be dismissed as untimely. DONE and ENTERED this 10th day of September, 1990, at Tallahassee, Florida. WILLIAM R. DORSEY, JR. 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 10th day of September, 1990.
