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 In 1962, the Corporation decided to relocate its corporate offices from Newark, New Jersey, to the State of Florida. Implementing this decision, the Corporation secured a twenty year leasehold interest of an entire floor in the Universal Marion Building in Jacksonville, Florida, under which it was obligated to pay an annual rental of $52,000.00. Within a few months during the year 1962, the decision to relocate was rescinded. During the tax year in question, the Corporation retained a part-time employee in Florida for the sole purpose of attempting to either locate a purchaser of the leasehold interest or to avoid further obligations under the lease by negotiations and settlement with the landlord. This part-time employee received his directions from the corporate offices in Newark, New Jersey. Other than these efforts to relieve the burden of the unused leased premises, the Corporation conducted no commercial activities in the State of Florida during the tax year 1973. Although the Corporation's headquarters were ultimately moved to Jacksonville, in January 1976, the Corporation has never occupied the leased premises in question. In fact, in 1974, the Corporation entered into a sublease with the State of Florida for the duration of the lease. Pursuant to audit, DOR assessed the Corporation an additional $12,616.89 in income tax for the year ended December 31, 1973, using the three-factor formula method of apportionment.
The Issue The issues in this case are (1) whether mailing lists, when stored as digital data on magnetic tapes, constitute “tangible personal property” subject to the Florida sales and use tax, and, if so, then (2) whether a list reseller is entitled to claim the “sale for resale” exemption when it acquires a mailing list as digital data on magnetic tape but delivers the list to its customer either (a) as digital data on a different removable medium such as a diskette or (b) in alphabetic format, printed on pressure-sensitive labels, Cheshire labels, or 3 x 5 cards.
Findings Of Fact The Parties Petitioner Dunhill International List Co., Inc. (“Dunhill”) is a Florida corporation having its home office and principal place of business in Boca Raton, Florida. Respondent Department of Revenue (“Department”), an agency of the State of Florida, is authorized to administer the state’s tax laws. Dunhill’s Business Dunhill is engaged in the business of furnishing mailing lists to direct-mail marketers, telemarketers, and e-mail marketers. Instead of owning an inventory of mailing lists, Dunhill obtains them, as and when needed, from list owners and suppliers. Dunhill acquires the various lists its customers request pursuant to leases that customarily authorize a particular customer of Dunhill’s to use the owner’s list for just one mailing.1 Essentially a middleman, Dunhill subleases the mailing lists, in which it has but a limited leasehold interest, to its customers.2 Dunhill does not make personal use of the mailing lists it secures for and on behalf of its clients; to Dunhill, the lists are commodities. At all times relevant to this case, Dunhill’s suppliers (the list owners) frequently delivered the mailing lists to Dunhill as digital data stored on magnetic tapes from which the data could be transferred into Dunhill’s computer.3 Once the data comprising a particular mailing list were loaded into Dunhill’s computer, Dunhill would cause the list to be printed in alphabetic format onto the medium of its customer’s choosing, e.g. pressure-sensitive labels, Cheshire labels, or 3 x 5 cards. Sometimes Dunhill delivered a mailing list to its client as digital data stored on a diskette or other removable medium besides magnetic tape. Occasionally, the magnetic tape itself was delivered to Dunhill’s customer. Dunhill’s suppliers charged Dunhill a fee for the magnetic tape, which was payable in addition to the rent for use of the mailing list stored thereon. During the relevant period of time this fee was $25. Dunhill, in turn, charged its customers an additional fee for whichever medium was used to deliver them the lists they had ordered. For Dunhill and its suppliers, however, the commercially valuable properties that drove these transactions——the goods without which none of these deals would have occurred——were the mailing lists, not the magnetic tapes. The parties have stipulated that Dunhill collected and remitted to the Department all sales taxes due and payable on the transactions between Dunhill and its customers. Dunhill did not, however, pay sales tax on any part of the cost of the mailing lists that it leased from its suppliers. Instead, Dunhill provided duly issued resale certificates to its suppliers, thereby relieving the suppliers of the obligation to collect sales taxes. The Audit and Protest Beginning in April 2001, the Department conducted a sales and use tax audit of Dunhill’s business records for the period from March 1, 1996 through February 28, 2001. Due to the voluminous nature of Dunhill’s records, the parties agreed that the Department could employ a sampling method to calculate the amount of tax owed, if any, based on a representative sample of Dunhill’s business documents. On December 5, 2001, the Department issued a Notice of Proposed Assessment in which Dunhill was informed of the Department’s conclusion that the aggregate amount of $69,481.00 was due and payable as a tax on the total consideration paid for each mailing list-containing magnetic tape that Dunhill allegedly had used and consumed in those transactions where, as often happened, Dunhill’s customer was provided a mailing list via some medium besides magnetic tape. The Department also sought to collect $24,105.56 in interest through December 5, 2001, plus interest accruing after that date at the rate of $21.10 per day, and to impose a penalty of $34,740.57. On January 31, 2002, Dunhill filed a letter with the Department protesting its liability for the proposed assessment.4 This led the Department to issue a Notice of Decision, on July 9, 2002, which sustained the assessment in full. Thereafter, Dunhill timely initiated the instant administrative proceeding.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department enter a final order withdrawing the tax assessment against Dunhill. DONE AND ENTERED this 27th day of May, 2003, in Tallahassee, Leon County, Florida. JOHN G. VAN LANINGHAM 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 27th day of May, 2003.
The Issue The issue is whether respondent's license as a public adjuster should be revoked, suspended, or otherwise disciplined after his conviction for aiding in the preparation of a false tax return in violation of 26 U.S.C. Section 7206(2).
Recommendation It is RECOMMENDED that Mr. Lesser be found guilty of violation of Section 626.611(7), Florida Statutes (1987), and that his licensure as a public adjuster be suspended for a period of six months. DONE AND ENTERED in Tallahassee, Leon County, Florida, this 28th day of December, 1989. 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 28th day of December, 1989. APPENDIX TO RECOMMENDED ORDER DOAH CASE NO. 89-0502 Rulings on findings proposed by the Department: 1 and 2. Adopted in finding of fact 3. Adopted in finding of fact 4. Implicit in findings of fact 5 and 6. Adopted in finding of fact 6. Adopted in finding of fact 8. Adopted in finding of fact 8. Adopted in finding of fact 8. Implicit in finding of fact 11. Rulings on findings proposed by Mr. Lesser: 1-11. Inapplicable. Adopted in finding of fact 3. Adopted in finding of fact 3, to the extent necessary. Rejected as unnecessary. Adopted in finding of fact 5. Adopted in finding of fact 5. Adopted in finding of fact 5, though finding of fact 5 includes certain logical deductions or inferences. Made more specific in findings of fact 5 and 6. Adopted as modified in finding of fact 7. Rejected. Not only were the laundering transactions illegitimate because they allowed Benevento Maneri to mischaracterize the source of their income, they also created false expenses for Lesser and Company, Inc., which artificially lowered the income of Lesser and Company, Inc., by the amount of the expense. Adopted as modified in finding of fact 7. It is difficult to determine what Mr. Lesser actually thought the source of the money was, but he knew it was illicit. See, finding of fact 7. Adopted as modified in finding of fact 8. Adopted as modified in finding of fact 9. 25 and 26. Adopted as modified in finding of fact 9. Adopted as modified in finding of fact 10 The extent of Mr. Lesser's danger cannot be determined from this record, although he was in some danger. Covered in finding of fact 9 Adopted as modified in finding of fact 11. Rejected. See, finding of fact 8. The IRS first contacted Mr. Lesser. He then went to Mr. Weinstein to set matters straight. Adopted as modified in finding of fact 11. Adopted as modified in finding of fact 4. Adopted as modified in finding of fact 12. Adopted as modified in finding of fact 12. A light sentence implies the factors set out in finding of fact 35, were taken into consideration, but does not prove that they were all the reasons the U.S. District Judge took into consideration. To the extent necessary, mentioned in finding of fact 12. Rejected as procedural. 38-51. Covered in findings of fact 13 and 14. The proposed findings are subordinate to the findings made in findings of fact 13 and 14. COPIES FURNISHED: S. Marc Herskovitz, Esquire Robert V. Elias, Esquire Office of Legal Services 412 Larson Building Tallahassee, Florida 32399-0300 William W. Corry, Esquire Jack M. Skelding, Jr., Esquire Patrick J. Phelan, Jr., Esquire Parker, Skelding, Labasky & Corry 318 North Monroe Street Post Office Box 669 Tallahassee Florida 32301 Honorable Tom Gallagher State Treasurer and Insurance Commissioner Department of Insurance and Treasurer The Capitol, Plaza Level Tallahassee, Florida 32399-0300 Don Dowdell, General Counsel Department of Insurance and Treasurer The Capitol, Plaza Level Tallahassee, Florida 32399-0300
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
The Issue The issue in this case is whether a tax on a warranty deed is an allowable property cost, as claimed in Petitioner’s Medicaid cost report.
Findings Of Fact Venice operates Sunset Lake, a licensed nursing facility that participates in the Florida Medicaid program as an institutional provider. AHCA is the agency responsible for administering the Florida Medicaid program. On or about June 1, 2005, Venice (or an affiliate, which need not be distinguished from Venice for purposes of this proceeding) purchased the nursing facility that is now known as Sunset Lake from Bon Secours-Venice Healthcare Corporation. Venice filed its initial Medicaid cost report with AHCA for the fiscal period ending December 31, 2005. The initial Medicaid cost report for a nursing facility is used to set the per diem rates at which the Medicaid program will reimburse the facility, both retroactively for the initial period of operations, and prospectively until the next cost report is filed and used to set a new per diem rate. AHCA contracted with an outside auditing firm to audit Venice’s initial cost report. The auditing firm produced an audit report, which identified proposed adjustments to Venice’s cost report. The audit report was reviewed by AHCA analyst Steven Diaczyk before it was finalized and sent to Venice. Venice initially contested 17 adjustments in the final audit report. Before the final hearing, Venice withdrew its challenge to 16 of the 17 adjustments. The only remaining dispute to be resolved in this proceeding is whether audit adjustment number four, which disallowed $49,540.00 of costs in the category of “Property Taxes – Real Estate,” should be reduced by $12,203.80. The disallowed $12,203.80 represents one-half of the tax assessed pursuant to section 201.02, Florida Statutes (2005),1/ on the warranty deed conveying the Sunset Lake real property (including the land, land improvements, and the building) to Venice. Venice claimed one-half of the tax on its cost report because that is the amount paid by Venice; the other half was paid by the seller. Venice contends that this tax is an ad valorem tax and/or a property tax,2/ which is an allowable property cost on the Medicaid cost report. AHCA contends that the tax on the warranty deed is an excise tax, not a property tax, and, therefore, not an allowable property cost. The audit report did not explain the reason for disallowing the $12,203.80 tax, as part of the $49,540.00 adjustment. Instead, the audit report explained the entire $49,540.00 adjustment as necessary to “disallow unsupported costs,” suggesting a lack of documentation. However, no non- hearsay evidence was offered at hearing to prove that Venice failed to give the auditors sufficient documentation of the costs disallowed in adjustment number four. At least with respect to the disallowed $12,203.80 item, sufficient documentation was offered at hearing to support the cost as an actual cost incurred by Venice. The question is whether the documented cost is allowable as an ad valorem tax or property tax, as Venice claims. Documentation for the $12,203.80 tax on the warranty deed is found in the buyer/seller closing statement and on the face of the warranty deed. The closing statement sets forth the total purchase price of $7,500,000.00, which is also the amount of a mortgage loan from Bank of America. The closing statement allocates the total purchase price to the land ($477,000.00), land improvements ($496,500.00), the building ($2,513,250.00), FFE--furniture, fixtures, and equipment ($992,250.00), and personal property ($3,021,000.00). The closing statement also shows a separate category called credits and/or prorations, to appropriately account for items accruing over the calendar year. The first line item in this category is for “Ad Valorem Taxes.” If ad valorem taxes were due for calendar year 2005, they would have been prorated. However, the amount is shown to be zero. As confirmed at hearing, no ad valorem taxes were due for the Sunset Lake property in 2005, because as of January 1, 2005, the property was owned by a not-for-profit entity, making the property exempt from ad valorem taxes. The second line item in this category, for “Non-Ad Valorem Assessments,” for which there was no exemption, shows a total amount for 2005 of $8,235.29, which was prorated to credit the buyer for $3,270.65. The closing statement proration had the effect of charging the seller with its share of the assessments for the part of the year prior to closing.3/ A separate category on the closing statement addresses “Recording Fees.” The first line item in this category is for “Transfer Tax-snf [skilled nursing facility].” The taxable amount is shown as $3,486,800.00. The tax of $24,407.60 is split equally between buyer and seller, with $12,203.80 charged to each. The next line is for “Stamp Tax on mtg. [mortgage].” The taxable amount is shown as $7,500,000.00, the amount of the mortgage loan. The tax of $26,250.00 is charged to the buyer. Another line item is shown for “Intangible Tax on mtg.” Again, the taxable amount is shown as $7,500,000.00, and the tax of $15,000.00 is charged to the buyer. The top right corner of the warranty deed conveying the Sunset Lake property contains the following printed or stamped text in the space marked “(Space reserved for Clerk of Court):” RECORDED IN OFFICIAL RECORDS INSTRUMENT # 2005117710 7 PGS 2005 JUN 01 05:01 PM KAREN E. RUSHING CLERK OF THE CIRCUIT COURT SARASOTA COUNTY, FLORIDA MMARSH Receipt#635187 Doc Stamp-Deed: 24,407.60 [Bar/Scan Code with instrument number] As Venice’s representative confirmed, the reference on the face of the warranty deed to “Doc Stamp-Deed: 24,407.60,” affixed by the clerk of the court in the official records entry, means that a documentary stamp tax on the deed in the amount of $24,407.60 was paid. Because the tax was split between buyer and seller, Venice actually paid $12,203.80. Although the closing statement shows that the tax at issue was called a transfer tax and categorized as a “recording fee,” and not an “ad valorem tax,” Venice contends here that the documentary stamp tax on the deed was an ad valorem property tax, because the tax was assessed on the value of the property. As Venice summarized its position: That irrespective of whether the transfer tax is called an excise tax, a doc stamp tax or any other type of tax, the fact that it is based solely on the value of the assets makes it an ad valorem tax, which is considered by the state of Florida in all cases under Medicaid cost reporting purposes [sic] as a property tax. (AHCA Exh. 3, p. 14). AHCA disagrees. AHCA contends that the documentary stamp tax on the deed is an excise tax, assessed on the consideration for the property transferred by the deed. The parties do agree that the documentary stamp tax rate, applied to either the value of the property or the consideration for the property, was 70 cents per $100.00.4/ The parties also agree that the “property” at issue, which was conveyed by the warranty deed, includes the land, land improvements, and the building. That being the case, it appears from the closing statement that the “taxable amount” used to determine the documentary stamp tax on the deed (referred to as the “transfer tax-snf”) was the sum of the purchase price allocations for the land ($477,000.00), land improvements ($496,500.00), and the building ($2,513,250.00).5/ The documentary stamp tax on the warranty deed was based on the consideration for the property stated in the closing statement.6/ Venice asserts that the documentary stamp tax was based on the “assessed value of the property (land, land improvements and the building) [of] $3,486.750.00[.]” (Venice PRO at ¶ 24, n. 1). However, Venice offered no evidentiary support for this assertion. The amount Venice calls the “assessed value” is actually the amount of the total purchase price allocated in the closing statement to the land, land improvements, and the building. In contrast, the “assessed value” for this property in 2005, according to the Sarasota County Tax Collector’s bill, was $3,724,300.00. The documentary stamp tax on the warranty deed was not based on the assessed value of the property. Venice also contends that subsequent action by the Department of Revenue supports Venice’s position that the documentary stamp tax on the deed was based on the value of the property and not on the consideration for the property. Venice offered in evidence portions of correspondence between representatives of Venice’s parent company with the Department of Revenue in 2008 that resulted in a determination that Venice owed additional documentary stamp tax on the Sunset Lake warranty deed. According to Venice, “the Department [of Revenue] did not agree with the value of assets that Venice had reported and paid taxes on.” (Venice PRO at ¶ 32). Contrary to Venice’s characterization, the portions of correspondence with the Department of Revenue in evidence confirm that the documentary stamp tax on the Sunset Lake warranty deed was based on the consideration for the real property (i.e., the land, land improvements, and the building). The Department of Revenue sought additional information from Venice to establish what the consideration was. The Department of Revenue “Official Request for Information” form asked for “Total Consideration (Purchase/Transfer Price)” for the property conveyed by warranty deed. The form completed on Venice’s behalf reported that the consideration was $3,486,750.00--the purchase price allocation in the closing statement to the land, land improvements, and the building. Along with the completed form, a letter of explanation on Venice’s behalf (with attachments not offered in evidence) went into great detail in an attempt to justify these purchase price allocations, and ended on the following note: We are hopeful that the enclosed documentation and the foregoing explanation of the purchase price allocations will provide sufficient information for the Department to determine that the correct amount of documentary stamp taxes was paid on each of the deeds, based in each case on the agreed consideration paid for the respective real estate assets. Thus, from the evidence offered by Venice, the focus of the Department of Revenue inquiry, as well as the Venice response to the inquiry, was entirely on the consideration paid for the property. The fact that the Department of Revenue ultimately determined that Venice owed more documentary stamp taxes on the warranty deed than was paid is not evidence that the tax was assessed on the “value” of the real property, as Venice argues. Instead, the material suggests that the Department of Revenue disagreed with what Venice contended was the total consideration and/or with Venice’s allocation of the total purchase price to the real property (the land, land improvements, and the building) and to the other assets acquired in the transaction, including furniture, equipment, and personal property. Venice also takes the position that the tax on the warranty deed is an allowable cost pursuant to two provisions in the federal Provider Reimbursement Manual (PRM), which is one of the sources used to determine allowable costs. First, PRM section 2122.1 provides the “general rule” that “taxes assessed against the provider, in accordance with the levying enactments of the several States and lower levels of government and for which the provider is liable for payment, are allowable costs.” Next, PRM section 2122.2 provides in pertinent part: Certain taxes . . . which are levied on providers are not allowable costs. These taxes are: * * * C. Taxes in connection with financing, refinancing, or refunding operations, such as taxes on the issuance of bonds, property transfers, issuance or transfer of stocks, etc. Generally, these costs are either amortized over the life of the securities or depreciated over the life of the asset. They are not, however, recognized as tax expense. Venice contends that the documentary stamp tax paid on the warranty deed must be allowed because it is a tax that meets the general rule in section 2122.1, and it is not an excluded tax under section 2122.2(C). The documentary stamp tax paid by Venice on the warranty deed satisfies the general elements of section 2122.1; AHCA does not contend otherwise. Instead, AHCA contends that the documentary stamp tax must be considered an excluded tax under section 2122.2(C). AHCA is correct that the documentary stamp tax on warranty deeds transferring real property is essentially a transfer tax. However, it is not a tax in connection with financing, refinancing, or refunding operations. An example of such a tax would be the documentary stamp tax that Venice paid on the mortgage on Sunset Lake, because it was a tax in connection with the financing for the property. Venice correctly points out that, grammatically, section 2122.2(C) suggests that the only taxes excluded under that subsection are taxes in connection with financing, refinancing, or refunding operations. The use of the phrase “such as” suggests that everything that follows that phrase must be considered an example of what precedes the phrase. AHCA acknowledges that consideration of the grammatical structure of section 2122.2(C) alone would support Venice’s interpretation. However, AHCA’s expert testified, reasonably and without contradiction, that Venice’s interpretation would render the phrase “property transfers” meaningless. As AHCA’s expert explained, a tax on a property transfer is not a tax on financing, refinancing, or refunding operations. Therefore, despite the grammatical structure, taxes on property transfers must be considered a separate type of excluded tax under section 2122.2(C). As further support for this interpretation, AHCA’s expert pointed to the second sentence, providing that the excluded costs referred to in the first sentence “are either amortized over the life of the securities or depreciated over the life of the asset.” AHCA’s expert explained that taxes on financing, refinancing, or refunding operations would all be amortized, whereas taxes on property transfers would be depreciated over the life of the depreciable assets transferred (i.e., the land improvements and the building). Venice relies solely on the grammatical structure of section 2122.2(C), offering no response to AHCA’s reasoning for interpreting the subsection in a way that is contrary to the meaning suggested only by grammatical structure. Venice did not explain how a tax on property transfers could be considered a tax on financing, refinancing, or refunding operations (so as to give meaning to the phrase “property transfers”), nor did Venice explain when taxes on financing, refinancing, or refunding operations would be depreciated over the life of the asset (so as to give meaning to that phrase in the second sentence).
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Agency for Health Care Administration enter a Final Order disallowing $12,203.80 claimed as a property tax expense in Venice’s initial Medicaid cost report. DONE AND ENTERED this 25th day of July, 2014, in Tallahassee, Leon County, Florida. S ELIZABETH W. MCARTHUR 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 25th day of July, 2014.
The Issue The issue in this proceeding is whether the Department of Revenue's denial of a refund of intangible tax should be upheld.
Findings Of Fact Petitioner, First Alachua Banking Corporation, is a Florida corporation engaged in the business of banking. On February 25, 2000, Petitioner filed a Florida intangible personal property tax return in which it reported intangible assets in Florida worth $42,829,500.64. Petitioner paid intangible tax in the amount of $61,617.47. Due to a change in the law, banks became exempt from intangible tax effective for taxes due on or after July 1, 1999.2/ On June 23, 2003, Petitioner filed an application for refund with the Department requesting a refund of intangible tax in the amount of $46,576.98. The reason given on the application for refund is "taxpayer exempt under Fla statute," citing Subsection 199.185(5), Florida Statutes. The application for refund was prepared by Mr. Bevis. Petitioner filed four applications for refund for the years 2000 through 2003. The Department issued refunds to Petitioner for 2001, 2002, and 2003. However, on July 7, 2003, the Department issued a Notice of Intent to Make Tax Refund Claim Changes showing a proposed refund due of $0 for 2000. The explanation given by Linda Lyles, Refund Auditor, is as follows: EXPLANATION: I am denying your refund request for the following reason: Your refund has exceeded the 3 year statute of limitations per s. 215.26(2) Florida Statutes. Tax paid on or after October 1, 1994, but before July 1, 1999 has a five year limit, for tax paid after July 1999, the limit is 3 years from the date paid. Additionally r 12C-2.012(b) F.A.C. states, 'Form DR-26, Application for Refund, must be filed with the Department for tax paid on or after July 1, 1999 within 3 years after the date the tax was paid.' Your 2000 tax was paid on February 25, 2000, therefore your refund application should have been submitted by February 25, 2003. It was postmarked June 19, 2003. On July 21, 2003, Mr. Stevens wrote to Ms. Lyles requesting an informal conference, citing Subsection 215.26(5), Florida Statutes, and giving the following reasons why the return was not prepared correctly: Our client intends to demonstrate reasonable cause for failure to prepare the return correctly, detect such error, and timely file the refund request within the three-year statutory period. The principal reasons for failure to comply with the time limitations and conditions for a timely refund request were that: The Company's assistant secretary has prepared the intangible return for a number of years using the instructions provided in the intangible return package. He was unaware of the changes in statutes eliminating a Florida intangible return on bank assets. Furthermore, the intangible return instructions for the year 2000 were silent with respect to this change in tax law. The Company has engaged a certified public accounting firm to prepare their income tax returns and relies on this firm to provide relevant and timely information on bank income and other tax issues. This firm failed to notify the Company of the change in intangible personal property tax laws. In 2002, a Florida Department of Revenue audit was conducted in which the auditor obtained and reviewed copies of the intangible personal property tax return for January 1, 2000. The auditor should have known that banking assets were not subject to intangible tax and failed to advise the Company. We have enclosed a copy of the DR-840 for your convenience. The intervening audit referenced in Petitioner's letter of June 21, 2003, was a corporate income tax audit. In the Notification of Intent to Audit Book and Records, the auditor requested that Petitioner make its intangible tax return and intangible personal property records available for audit to determine whether Petitioner properly took a credit on its corporate income tax return for intangible tax paid in 1999. However, in accordance with the general practice of the Department, the auditor who conducted the corporate income tax audit did not audit Petitioner's intangible tax return. The Notification of Intent to Audit Book and Records identified the tax to be audited as Corporate Income Tax pursuant to Chapter 220, Florida Statutes. If an auditor determines during an audit that an examination of another tax is necessary, it is the policy of the Department that the auditor inform the taxpayer, add that tax to the Notification of Intent to Audit Book and Records, initial that change, and request the taxpayer to initial the addition. There is no indication in the audit file that any other tax was audited other than corporate income tax. On July 25, 2003, the Department issued a Notice of Proposed Refund Denial regarding Petitioner's request for the 2000 intangible tax refund. On January 5, 2004, the Department issued a Notice of Decision of Refund Denial sustaining its earlier proposed decision to deny the refund request because the request was filed outside the three-year statute of limitations referenced in Subsection 215.26(2), Florida Statutes.
Recommendation Based upon the Findings of Fact and Conclusions of Law, it is RECOMMENDED: That the Department of Revenue enter a final order denying Petitioner's request for a refund of intangible taxes. DONE AND ENTERED this 9th day of July, 2004, in Tallahassee, Leon County, Florida. S BARBARA J. STAROS 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 July, 2004.
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
The Issue Is Petitioner Haas Publishing Company liable for the taxes and interest assessed under Chapter 212, Florida Statutes, specifically the sales and use tax and related surtaxes, pursuant to Section 212.031, Florida Statutes, and Florida Administrative Code Rule 12A-1.070, for the audit period June 1, 1995 through May 31, 2000, and if so, to what extent?
Findings Of Fact Haas is a Delaware corporation, authorized to do business in the State of Florida. It is a subsidiary of Primedia, Inc. Haas publishes free consumer guides to apartments and homes and is paid by the apartment owners, realtors, and homeowners who advertise in the publications. One of Haas' divisions, Distributech, distributes the guides to retail stores. Haas negotiates with retailers for an appropriate site for its display of publications at each retail location. Nationwide, Haas distributes its publications from approximately 42,000 locations. Nationwide, Haas paid for the exclusive right to distribute, under contracts, in approximately 20,000 locations. Otherwise, it distributes in "free" locations. As required by Section 72.011(1)(b), Florida Statutes, Haas has complied with all applicable registration requirements with respect to the taxes at issue herein. DOR is the agency responsible for the administration and enforcement of Florida's tax laws, including sales and use tax and various local surtaxes. DOR conducted an audit of Haas for the period of June 1, 1995 through May 31, 2000. The audit resulted in an assessment of sales and use tax and associated surtaxes, interest, and penalties (Assessment). After protest and petition for reconsideration, DOR issued its Notice of Reconsideration (NOR) to Haas on May 16, 2003, wherein DOR sustained the Assessment in full, but offered to waive all penalties, without prejudicing Haas' right to challenge the remainder of the Assessment in full. Haas accepted the Department's offer to waive all penalties in their entirety, making a payment on the Assessment at the time the Petition herein was filed. In other words, Haas paid certain uncontested amounts in order to pursue the instant challenge to the remainder of the Assessment of all taxes and all interest, and in order to take advantage of an unrelated "extended amnesty" provided by DOR. This formal proceeding followed. The auditor who actually performed the work of the audit did not testify at the disputed-fact hearing. DOR's only witness, Ms. Gifford, did not participate in the original audit. However, Ms. Gifford reviewed the audit documents in detail and professionally consulted with the auditor and other reviewers to review the auditor's methods against the paperwork of the audit. She also reviewed the audit with input from Haas and its representative in the course of the Technical Assistance and Dispute Resolution (TADR) process, and throughout the informal challenges preceding this formal proceeding. She also reviewed all of the de novo material presented at the deposition of Haas' principal, Mr. Sullender, for purposes of her testimony. She is an expert capable of assisting the trier of fact, in that she is a Florida-licensed certified public accountant (CPA), and the undersigned is satisfied with the accuracy of her explanation of DOR's policies and procedures and of her predecessor's methodology and calculations. Also, her interpretations of rules and statutes are entitled to great weight where they purport to be the interpretation of the agency, but they do not constitute "factual" testimony and are not binding in this de novo proceeding. Ms. Gifford's analysis of case law is not entitled to that same deference. At the disputed-fact hearing, Haas challenged both the timeliness of the audit and the methodology of the audit. It is axiomatic that the amount assessed depends upon the methodology employed by the auditor, but DOR contended herein that because Haas protested only that an assessment had been made and because Haas had accepted all available offers of mitigation, Haas could not protest, at hearing, the amount calculated for the Assessment, whether the audit's calculations were correct, or whether the audit had been conducted in a timely manner. The following allegations of the Petition herein are relevant to these issues: No payment made by Haas to a retailer in Florida constituted payment for a lease of real property; No payment made by Haas to a retailer in Florida constituted payment for a license to use real property; The payments made by Haas to retailers were for distribution rights and/or intrinsically valuable personal property rights; The payments made by Haas to retailers were not subject to Florida sales and use taxes and other surtaxes; Alternatively, the payments made by Haas to retailers should have been apportioned by DOR, pursuant to Section 212.031, Florida Statutes; Some or all of the taxes that the Department claims that Haas owes have been paid by the retailers with whom Haas had agreements; The Department was without statutory authority to impose the Assessment for taxes and interest as set forth in Exhibit A; and The Assessment that is the subject of this proceeding is unlawful and violates the provisions of Chapter 212, Florida Statutes; Petitioner is entitled to relief under Sections 72.011 and Section 120.80, Florida Statutes. Section 212.031, Florida Statutes, dictates that the payments made by Haas to Florida retailers were not subject to Florida tax and therefore requires that the Assessment by DOR be stricken or modified. The auditor sent Form DR-840, the Notice of Intent to Audit (NOI), to Haas on May 30, 2000. This item informed the Taxpayer that the period of the audit would be June 1, 1995 through May 30, 2000, and that the audit would commence before July 29, 2000 (within 60 days) unless an attached waiver was signed and returned. The audit file does not reflect a signed waiver within 60 days. Ms. Gifford, on behalf of DOR, testified that the purpose of this NOI was to warn the Taxpayer that the audit would begin within 60 days unless the Taxpayer waived the timeline and that with a waiver, the audit would begin within 120 days. Ms. Gifford further testified that DOR considers itself limited to going back only five years from the date the auditor begins to review a taxpayer's records and that the Agency interprets Section 213.335, Florida Statutes, to require completion of the audit within one year of the initial letter. Ms. Gifford asserted that with a waiver, DOR would interpret the several applicable statutes and rules to provide the auditor with 120 days to begin an audit to encompass the whole of June 1, 1995 to May 30, 2000. However, if an audit is not begun within 120 days, DOR understands that the statutory audit period is not tolled and DOR usually removes the delay period from the front end (i.e., DOR starts the audit period the delayed number of days after June 1, 1995) and adds it to the back end (ends the audit period the delayed number of days after May 30, 2000) so that a five-year period of audit occurs, but the audit period starts some date later than June 1, 1995, and ends some date later than May 30, 2000. DOR considers the start of the audit to be when the auditor begins looking at records of the taxpayer. Haas provided pertinent, but incomplete, records on August 29, 2000, which was more than 60 days and less than 90 days after the May 30, 2000, NOI. Haas requested several extensions to review work papers received from the auditor. All were honored by DOR. A lot of correspondence ensued between the auditor and Haas and between DOR and Haas' designated representative(s)/accountants, but DOR's auditor did not record any time spent on the audit file until he met with Haas or its representative on October 23, 2000, more than 120 days after May 30, 2000. On the basis of the auditor's work record/timesheet, Haas contends that October 23, 2000, which was more than 120 days after the May 30, 2000 NOI, is when the audit actually began. Exchanges of records, work papers, and information continued, and on or about May 29, 2001, a vice-president of Haas signed and FAXED to DOR's auditor a consent to extend the statute of limitations for sales and use tax assessments through March 29, 2002. However, he did not affix the corporate seal in the designated part of the consent form. The consent form had been prepared by the auditor and mailed to Haas on or about March 25, 2001. It only listed "sales and use tax" as a reference. It did not identify any other tax, which ultimately made up the Assessment, including Charter Transit System Tax, Local Government Infrastructure Tax, Indigent Care Tax, or School Capital Outlay Tax, which, although related to sales and use tax, have separate designations. These surtax audits are based on the same facts, circumstances, and records as the sales and use tax audit herein but DOR lists and computes them separately from the sales and use tax on some of its forms. (See Finding of Fact 19.) The validity and timeliness, vel non, of the foregoing consent to extension was not raised by Petitioner until the disputed-fact hearing. A Notice of Intent to Make Audit Changes (also called an NOI) was dated September 21, 2001. The Notice of Proposed Assessment (NOPA) was issued December 5, 2001. DOR considers this document to be the completion of the audit. After the audit was completed, it was submitted to DOR's TADR, a dispute resolution process. A Notice of Decision (NOD) was entered July 30, 2002. Haas petitioned for reconsideration, alleging additional facts. By a May 16, 2003, Notice of Reconsideration (NOR), the audit was upheld. The NOR and NOIA lump all Chapter 212, Florida Statutes' taxes together. The NOPA lists each surtax separately. The compromise of amounts and this formal proceeding followed, as described above in Findings of Fact 5-6. Many contracts and other records were not provided by Haas to DOR until TADR, until the informal proceedings, or until after the Petition for this formal proceeding had been filed. Among other things, DOR had upheld the auditor's initial decision with regard to calculating Haas' 1997 tax. The auditor had not tested or sampled Haas' records for the full of the audit period in order to arrive at a tax figure for 1997. Because Haas had not provided certain records (RDAs) for 1997, Haas' figures for December 1996 were "extrapolated" by the auditor to the first six months of 1997, while the figures for January 1998 were "extrapolated" back to the last six months of 1997. Ms. Gifford felt this method constituted a legitimate estimate of the taxes due where a taxpayer had failed to provide adequate records. For the audit period, Haas published and distributed, free of charge to the public, apartment and home guides. The distribution was accomplished through contracts, on a regional and national level, with major retail store chains such as K-Mart, Blockbuster, Eckerd's, and Winn-Dixie Stores. The tax-assessment problems herein are compounded by Haas' choice not to use uniform contractual arrangements with all retailers; by its failure to designate within its contracts and/or accounting records what, if any, intangible uses it believed it was paying for; and its failure to allocate within its contracts and/or accounting records the amounts it believed it was paying for each alleged intangible use. Some of the contracts state that there is no corporate relation between Haas and the retailer. Haas has one major and several smaller competitors who distribute their own publications at retail store chains. Haas' contracts with the retail store chains guarantee to Haas the exclusive right to distribute apartment and home guides from the retail stores' locations and usually include the right to use the retail chains' respective logos and trademarks in Haas' promotional/sales materials and publications. One exception is Seven-Eleven, which limits to a greater degree use of its trademark and logo than do some of the other retailers. Not every contract contains a reference to a retailer's trademark or logo. Haas used its exclusive rights to distribute with certain retail store chains as an inducement to sell advertising to the apartment owners, realtors, and others who advertise in its publications. It was valuable to Haas to be able to tell potential print advertisers that its apartment/home guide was the only one allowed to be distributed from the particular retail chains. It was valuable to Haas to be able to show potential print advertisers the logo of retailers in Haas' promotional materials and publications. In most places, the exclusive right to distribute from the specified retail locations distinguished Haas from its competitors and allowed it to charge more for its advertising than they did. Mr. Sullender, Haas' principal, is credible that in each instance where Haas' contracts do not mention the use of trademarks and logos, each retail chain otherwise gave permission or provided Haas with its logo and trademark materials to use, as a result of the contracts. However, Haas provided nothing to DOR prior to instituting this formal case, by which DOR could have determined that such permission had been provided outside the contracts. Haas' right to place the retailers' logo or trademark on Haas' publication racks was a valuable right and every Haas rack displayed logos. Yet, the contracts do not obligate Haas to use the retailers' logos or trademarks, and Haas can still distribute from the racks without a logo. The contracts made no specific allocation of payments by Haas to the retailers for use of the retailers' logos and trademarks. The issue of whether payment for use of a logo or trademark should have been separately allocated from Haas' payment to the retailer in its contracts was not taken into consideration by DOR because this issue, in those terms, was not raised during the audit or subsequent informal protest/review procedures. However, the issue of allocation based on fair rental value of the space utilized in connection with prior audits of some of the respective retailers was raised. This is largely an issue of semantics. (See Findings of Fact 55-56.) All except one of the contracts at issue guarantee Haas the exclusive right to distribute its publications from the particular retail chains' locations. Exclusivity of the rights accruing to Haas is singularly important to Haas' business. However, Haas has been known to charge its competitors for space on its racks. Haas also is free to enter into partnerships with its competitors. In order to secure the exclusive right to distribute its publications from the retail locations and the right to use the retailers' trademarks and logos, Haas pays fees to the retail store chains under the contracts. Typically, Haas has to "outbid" at least one other competitor to obtain the foregoing exclusive rights. The payments under the contracts were typically made "per store," per month, and did not vary depending on the location of the store within the State. Part of Haas' negotiating strategy and ultimate success in securing exclusive use of most of its locations is the judicious use of "signing bonuses." Signing bonuses are specifically allocated in some, but not all, of Haas' contracts. In some contracts, they are directly linked to the right of exclusivity. They can be substantial amounts. However, according to Ms. Gifford, signing bonuses have never been part of DOR's Assessment in this case. (TR-62-63) Because the exclusive right to distribute its print materials was so valuable to Haas, it paid up to $375 per month per store under one contract. When Haas did not secure the exclusive right to distribute from a retail chain, it would not pay for the right to distribute, but distributed its publications from "free" locations. Nationwide, this compares at 20,000 paid to 22,000 unpaid locations. (See Finding of Fact 1.) The amount Haas paid a retail chain did not vary by particular store location within the chain nor by the size of the rack that Haas placed in a particular store. Haas' racks take up from two to four-feet worth of floor space. Haas supplied the racks, but, in general, the retail chains had control over the size, type, and color of the racks placed in its stores and limited Haas' access to the racks. Haas was solely responsible for set-up, replenishing, and maintenance of its racks on the retailer's property. Haas purchases liability insurance. Haas is always assigned covered space by the retailer. Haas considers space near an entrance/exit of the retailer's covered premises to be premium space. Retailers consider this same space to be "dead space," beyond its cash registers, which is essentially useless for display or sale of their retail goods. However, some retailers park carts or post notices in these areas. Haas does not sell or distribute any goods of, or for, the retailer. It merely stocks its own publications in its own racks in the retailer's space. Haas has no other contact with the retailers' business. Under the contracts, retailers have no obligation to market Haas' publications. They do not buy or sell them or pay to advertise in them. Retailers pay nothing to Haas. If Haas uses a retailer's logo and/or trademark in Haas' own advertising or in its publications per their negotiated arrangement, it is for the purpose of promoting Haas' publications. Use of the retailers' logos and trademarks has a benefit to the retailer, but a purely incidental one, since the retail customer who picks up a Haas publication from the Haas rack has already made the decision to enter the retail store in the first place. None of the retail chains ever attempted to charge sales or use taxes to Haas based on the payments made under the contracts. There is no evidence that Haas or any retailer, on Haas' behalf, tendered sales or use taxes to the State on the contracts at issue herein. Although some contracts acknowledge that a retailer is a franchisee of a third party, none of the contracts refer to the relationship between Haas and the retailer as a "franchise" or acknowledge Haas as a franchisee. Ms. Gifford did not equate Haas' use of a retailer's logo or trademark to market Haas' publications, not the retailer's goods, with all the accoutrements of a franchise, as she understood those accoutrements. DOR issued to a different taxpayer (not Haas) Technical Assistance Advisement No. 03A-002 (the TAA), concerning real property lease agreements. Although this advisory letter from a DOR attorney is not binding, except between DOR and the party to whom it is addressed, and although it is limited to the specific facts discussed within it, the legal conclusions therein are instructive, if not conclusive, of DOR's official interpretation of the statutes and rules it administers and of its agency policy with regard to when allocations are appropriate between intangible rights and real property rights. TAA 03A-002 cites, with approval, paragraphs 56 through 59 of the Final Order in Airport Limousine Service of Orlando, Inc. v. Department of Revenue, DOAH Case No. 94-1790, et seq., (March 23, 1995)1/ and State ex rel. N/S Associates v. Board of Review of the Village of Greendale, 473 N.W. 2d 554 (Wisc. App. 1991), and states, "The test for isolating intangible business value is as simple as asking whether the disputed value is appended to the property, and thus transferable with the property, or is it independent of the property so that it either stays with the seller or dissipates upon sale." This TAA also states that DOR will view the reasonableness of allocations of payments made pursuant to a lease agreement on a case-by-case basis in reference to whether the allocation is made in good faith or lacks any basis. It further cites with approval Bystrom v. Union Land Investment, Inc., 477 So. 2d 585, 586 (Fla. 3rd DCA 1985) ("Good faith for property tax valuation purposes will mean 'real, actual, and of a genuine nature as opposed to a sham or deception.'") The TAA anticipates that DOR would require that the taxpayer make reasonable allocations, within the taxpayer's own records, of lease payments to rent and other items not subject to tax, and that the taxpayer would also be required to otherwise maintain records adequate to establish how the taxpayer determined that each allocation was reasonable, and further, that if DOR auditors were satisfied with the taxpayer's records, an appraisal would not be required by DOR. The TAA does not foreclose the requirement of an appraisal to test the taxpayer's records. Synopsized, the TAA opines that separate payments by a tenant to a landlord for trademark, service mark, or logo rights of the landlord are subject to the tax on real property rentals unless the allocation of payments made by the taxpayer is reasonable, and further, that the allocation is not reasonable where no substantial, competent, and persuasive evidence is provided to establish the value of the trademark, service mark, or logo rights of the landlord received by the tenant and a legitimate business purpose for the tenant to acquire those rights is not demonstrated. Herein, Haas had not allocated rent and intangibles within its own contracts/records. It was Ms. Gifford's view that if the Taxpayer herein had not allocated the value of the trademarks, etc. and the real property value of its contracts, it was not up to DOR to do so in the course of an audit. Nonetheless, during the protest period, DOR had considered allocating the payments made by Haas under its contracts, into taxable and non-taxable payments, by reviewing the market rate rental for the space occupied and obtaining a valuation of the identifiable intangible property. Ultimately, DOR did not use this method on the basis that Haas had not submitted sufficient records. At hearing, Haas attempted to present evidence of the fair market value of the real estate involved and of the so- called intangible rights through an intangible property appraiser and a Florida-certified real estate appraiser. Lee Waronker is a Florida-certified real estate appraiser who was accepted as an expert in real estate appraisal. Mr. Waronker prepared a report which made a comparison of Haas' contracts with allegedly comparable rental properties, but he only used three "comparables," none of which included racks owned by similar advertising businesses. He did not consider what Petitioner's real competitors paid for similar space. Thus, when he arrives at an average fair rental value of Haas' space in all the retailers' locations as $25-50 per square foot, his base figures are suspect. Therefore, when he concluded that since Haas was paying an average of $355 per square foot and all the remainder of the contract payments should be allocated to intangible rights, such as trademarks and exclusivity, he was not credible or persuasive. His figures also apply only to the date of his appraisal in 2003, and admittedly would not be representative of the value of the rental property during the audit period. Therefore, his analysis that only 11.3 percent, plus or minus, of the contract prices constituted rent or a license to use is discounted and not accepted. Petitioner also presented the testimony and report of James N. Volkman, an intangible property appraiser who was accepted as an expert in that field. Mr. Volkman obtained all of his data from either the Securities and Exchange Commission filings of eighty-three percent of the retailers involved, from Haas, or from information compiled by DOR. These are legitimate appraisal sources. He performed his appraisal within the professional standards of the Financial Accounting Standards Board. He concluded that Haas' contracts could best be described as "distribution agreements," "because they are the means by which Haas distributes its publications" and because anyone familiar with the operations of a publisher would understand a line item on a balance sheet of a "distribution agreement" and not everyone would understand the term "license to use real property." It is noted that "distribution agreements" are not listed in the statute, but this, by itself, is not a fatal flaw. He maintained that the Haas contracts could not reasonably be characterized as a license to use real property, because the amount paid was well in excess of the fair rental value of the space. However, as part of his analysis, Mr. Volkman did not rely on Mr. Waronker's independent real estate appraisal, but conducted his own analysis as to the amount a retailer would likely charge a party seeking to utilize the floor space taken up by the approximate size of a single Haas rack. In doing so, Mr. Volkman was admittedly outside his realm of expertise. Mr. Volkman allocated the amounts Haas was paying as twelve percent to the "right to use real property"; twenty-four percent to "non-compete rights" (his term for exclusivity); fourteen percent to "trademark rights"; thirty-five percent to "distribution cost savings" (a term which seems to describe Haas not having to identify and mail its publications to interested persons or use a retailer's magazine rack);2/ and fifteen percent to "market penetration premium."3/ The last two calculations are not credible and undermine the entire allocations summary he presented. The distribution cost savings figure contains too many assumptions not fully documented. Mr. Volkman also arrived at his calculation of the "market penetration premium" merely by selecting the residual percentage sufficient to make up the difference, so that his other figures added up to 100 percent of the total fee paid by Haas to retailers. His reason for doing this is not plausible. He assumed that just because the growth rate of Haas' business far exceeded the growth rate in multi- family units, it must be that Haas substantially increased its market share during the audit period due to exclusivity. Ultimately, he could not explain the fifteen percent calculation for "market penetration" by the documents he relied on for calculating the other three categories. More damaging to the weight and credibility of his report is that Mr. Volkman did not consider Haas' signing bonuses as having anything to do with the exclusivity rights accruing to Haas. He considered the signing bonuses not to be an intangible right but only "compensation to retailers for negotiating these agreements." However, signing bonus rights seem to be the only intangible rights allocated in any of the contracts and were inherently recognized as such by DOR when it chose not to address them in the Assessment. There are also a number of other questionable portions of his report and opinion which cause it to be discounted and not accepted here.
Recommendation Based on the foregoing Findings of Facts and Conclusions of Law, it is RECOMMENDED that the Department of Revenue enter a final order finding the Assessment factually and legally correct and sustaining the Assessment plus interest to date. DONE AND ENTERED this 18th day of June, 2004, in Tallahassee, Leon County, Florida. S ______ ELLA JANE P. DAVIS 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 18th day of June, 2004.
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.
