Were medical-practice distributions followed by owner contributions to a related property LLC taxable as rent for the practice's free occupancy?

Plain-English summary

Florida found no commercial-rent sales tax under the proposed arrangement, but only if the medical practice's shareholder distributions and the owners' later contributions to the property LLC were genuine profit and capital transactions. If those cash flows effectively paid the building's mortgage, taxes, insurance, or other expenses, they would become taxable rent consideration.

The property LLC was owned equally by two married couples. The two husbands were physicians who equally owned a professional corporation and practiced medicine through it. The LLC planned to own a new building used by the practice without a written or oral lease and without any rent payment.

The LLC would hold title, be the mortgagor, and pay the mortgage, property tax, and insurance. It also owned another property rented to an unrelated tenant, on which it would collect and remit sales tax. If that unrelated rent did not cover all LLC property expenses, the four LLC owners would contribute the shortfall.

Related-party occupancy can still be taxable

Florida taxes commercial real-property rent and licenses, including money or another thing of value paid directly or indirectly. Rule 12A-1.070 specifically covered related parties and payments made for a property owner's benefit.

The absence of a written lease did not control. Nor could the entities be ignored because profits passed through for federal income tax. Florida respected their separate form for non-income taxes.

Three safeguards separated profits from rent

The Department was concerned that practice profits distributed to the two physician-shareholders could fund their contributions to the property LLC and thereby satisfy property expenses.

It said those distributions would not be rent only if controlling documents and records showed that:

1. Distribution timing did not coincide with when property expenses were due.
2. Distribution amounts did not coincide with the amounts of those expenses.
3. Distributions reflected actual income or profit rather than the property's obligations.

Subject to those conditions, no consideration flowed from the practice for its occupancy, so section 212.031 did not impose sales tax.

What this means for you

Closely held professional practices

Free use of related real estate is not automatically tax-free. Authorities can trace distributions and owner contributions to determine whether the practice indirectly paid the owner's property costs.

Commercial-property LLCs

Keep capital contributions, third-party rent, and property expenses separately documented. Timing and amount patterns can make formally separate transfers look like occupancy consideration.

Accountants and tax professionals

Review the corporation's governing documents, distribution policy, LLC contribution records, and expense schedules together. Bookkeeping that records no rent does not settle the substance of the transaction.

Common questions

Q: Did the medical practice owe rent tax merely because it used related property?
A: No. Tax depended on whether it furnished direct or indirect consideration for occupancy.

Q: Did the absence of a lease prevent taxable rent?
A: No. Florida said a landlord-tenant relationship and rent consideration can exist without a written lease.

Q: When could shareholder distributions be treated as rent?
A: When they effectively funded property expenses by matching their timing or amount rather than reflecting true profits.

Q: Was unrelated tenant rent treated differently?
A: Yes. The LLC stated that it would collect and remit sales tax on rent paid by the unrelated tenant.

Citations and references

• Fla. Stat. § 212.02(2), (10)(i), and (12) — business, license, and person definitions
• Fla. Stat. § 212.031 — tax on commercial real-property rent or license consideration
• Fla. Stat. § 608.471(3) — separate non-income-tax treatment of disregarded LLCs
• Fla. Admin. Code r. 12A-1.070(4) and (19) — related-party rent and indirect consideration
• Regal Kitchens, Inc. v. Department of Revenue, 641 So. 2d 158 (Fla. 1st DCA 1994) — no written lease required; entity form carries tax consequences
• Department of Revenue v. Ryder System, Inc., 406 So. 2d 1299 (Fla. 1st DCA 1981) — no rent where related occupants made no monetary rental payment

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 04A-056

Original ruling text

SUMMARY
QUESTION: Where owners of a piece of commercial property are both the shareholders in the corporation which
occupies the property and partners in the partnership which owns the property, are the distributions made to them as
shareholders subject to Florida sales tax under Section 212.031, F.S., when those shareholders might, from time to
time, (as partners in the partnership) pay the property expenses on the property?
ANSWER - Based on Facts Below: No, provided: the distributions made to them do not coincide with the time at
which the property's expense obligations are due; the amount of the distributions do not coincide with the amount of
the property's expense obligations; and the distributions are based on a true reflection of income or profit and not on
the amount of the property's expense obligations.

September 23, 2004

Re: Technical Assistance Advisement 04A-056
Florida Sales and Use Tax
Related Party Real Property Rentals
Sections 212.031, 213.22, and 608.471(3), F.S. ("Florida Statutes")
Rule 12A-1.070, F.A.C. ("Florida Administrative Code")
XXX ("LLC")
FEIN: XX
XXX ("P.A.")
FEIN: XX
Dear:
This response is in reply to your letter dated July 23, 2004, requesting the Department’s issuance of a Technical
Assistance Advisement ("TAA") pursuant to Section 213.22, F.S., and Chapter 12-11, F.A.C., regarding related
entities and the rental of commercial real property. An examination of your letter has established that you have
complied with the statutory and regulatory requirements for issuance of a TAA. Therefore, the Department is hereby
granting your request for issuance of a TAA.
ISSUE
Where an entity owns a piece of commercial real property and the property is occupied by both an unrelated entity
and a related entity, are the contributions made by the ownership of the property (e.g., in the event the rent paid by
the unrelated entity does not cover the expenses of owning and operating the property) subject to Florida sales tax
under Section 212.031, F.S.?
REQUESTED ADVISEMENT

Your letter of July 23, 2004, asks, in part:

... whether[,] in the below described structure, sales tax is due for the use of real property owned by [LLC] and used
by [P.A.] where there are no payments made for use of the property by [P.A.] to or on behalf of [LLC] and there is no
lease agreement between [LLC] and [P.A.] regarding the use of the property.

FACTS
Your letter of July 23, 2004, provides, in part:

[P.A.] will use real property owned by [LLC] without paying rent to [LLC] for such use. There will not be any written or
unwritten lease agreement between the [LLC] and [P.A.] regarding the use of the real property to be used by [P.A.]....
[LLC] is owned equally by [two married couples, as tenants by the entireties]. [P.A.] is a Florida professional service
corporation owned equally by [the two husbands, individually]. [LLC] is in the process of acquiring a new building that
will be used by [P.A.]. Presently, [LLC] owns a building that will be leased to an unrelated lessee for which rent and
sales tax on such commercial rental will be collected and sales tax remitted. [LLC] is a registered dealer for Florida
sales tax purposes. [P.A.] will use the new building acquired by [LLC]. There will be no lease agreement between
[LLC] and [P.A.] regarding the use of the property. There will be no payments made by [P.A.] to [LLC] for the use of
such real property. [LLC] will lease another piece of real property to an unrelated lessee pursuant to a lease and will
collect and remit sales tax on such lease payments. [LLC] will be owned by licensed medical doctors and their
spouses. The same licensed medical doctors own [P.A.] and practice medicine through that entity.
To the extent the lease payments received by [LLC] from its lessee are insufficient to cover the expenses of
owning and operating all its properties, the owners of [LLC] shall make contributions to [LLC]. [LLC] is a
partnership for federal income tax purposes. As such [,] profits and loss and separate items of income and deduction
pass through to its partners and any income is taxed at the individual partner level. [P.A.] is a Florida corporation that
has elected Subchapter S treatment for federal income tax purposes. As such, profits and loss pass through to the
shareholders and any income is taxed at the individual shareholder level. [emphasis supplied]

For federal income tax purposes, [LLC] will not indicate the receipt of rental payments related to the use of the
property by [P.A.] on its federal partnership return (Form 1065). Nor will [P.A.] indicate the payment of rent for the use
of the property for federal income tax purposes on its federal corporate return (Form 1120S). For financial accounting
purposes, neither the [LLC] nor [P.A.] will indicate the receipt or payment of rental payments related to the use of the
property by [P.A.] on any financial or accounting records maintained by... either entity.
The subject real property is under construction and [LLC] has signed a contract to purchase it when construction is
completed. Additionally, the following facts are provided.

1) The entity that will hold the title to the property is [LLC].
2) The entity that will be the mortgagor of the property will be [LLC].
3) The entity that will be responsible for payment of property taxes per the county tax collector will be [LLC].
4) The entity that will be responsible for payment of insurance on the property will be [LLC].
5) The entity that will actually pay the mortgage, ad valorem taxes and insurance premiums will be [LLC].

TAXPAYER'S POSITION
Your letter of July 23, 2004, relies on a TAA issued by the Department and on the following two (2) cases: St. Johns
Trading Company v. Department of Revenue, DOAH Case Number 84-1652 (1985) and Department of Revenue v.
Ryder System, Inc., 406 So.2d 1299 (Fla. 1st DCA, 1981). You assert that the authority you cite, above, all held that
there was no Florida sales tax liability based on facts and circumstances similar to the arrangement you propose
between LLC and P.A. Your position, therefore, is that no Florida sales tax would be due under the arrangement you
propose.
APPLICABLE STATUTES AND RULES
Section 212.02, F.S., provides in part:

(2) "Business" means any activity engaged in by any person, or caused to be engaged in by him or her, with the object
of private or public gain, benefit, or advantage, either direct or indirect....

(10)(i) "License," as used in this chapter with reference to the use of real property, means the granting of a privilege to
use or occupy a building or a parcel of real property for any purpose.

(12) "Person" includes any individual, firm, copartnership, joint adventure, association, corporation, estate, trust,
business trust, receiver, syndicate, or other group or combination acting as a unit and also includes any political
subdivision, municipality, state agency, bureau, or department and includes the plural as well as the singular number.

Section 212.031, F.S., provides in part:
(1)(a) It is declared to be the legislative intent that every person is exercising a taxable privilege who engages in the
business of renting, leasing, letting, or granting a license for the use of any real property....

(c) For the exercise of such privilege, a tax is levied in an amount equal to 6 percent of and on the total rent or license

fee charged for such real property by the person charging or collecting the rental or license fee. The total rent or
license fee charged for such real property shall include payments for the granting of a privilege to use or occupy real
property for any purpose and shall include base rent, percentage rents, or similar charges....
(d) When the rental or license fee of any such real property is paid by way of property, goods, wares, merchandise,
services, or other thing of value, the tax shall be at the rate of 6 percent of the value of the property, goods, wares,
merchandise, services, or other thing of value. [emphasis supplied]

(3) The tax imposed by this section shall be in addition to the total amount of the rental or license fee, shall be
charged by the lessor or person receiving the rent or payment in and by a rental or license fee arrangement with the
lessee or person paying the rental or license fee, and shall be due and payable at the time of the receipt of such rental
or license fee payment by the lessor or other person who receives the rental or payment....

Section 213.22(1), F.S., provides in part:
... Technical assistance advisements shall have no precedential value except to the taxpayer who requests the
advisement and then only for the specific transaction addressed in the technical assistance advisement, unless
specifically stated otherwise in the advisement....
Section 608.471, F.S., provides in part:

(3) Single-member limited liability companies and other entities that are disregarded for federal income tax purposes
must be treated as separate legal entities for all non-income-tax purposes. The Department of Revenue shall adopt
rules to take into account that single-member disregarded entities such as limited liability companies and qualified
subchapter S corporations may be disregarded as separate entities for federal tax purposes and therefore may report
and account for income, employment, and other taxes under the taxpayer identification number of the owner of the
single-member entity.
Rule 12A-1.070, F.A.C., provides in part:
(1)(a) Every person who rents or leases any real property or who grants a license to use, occupy, or enter upon any
real property is exercising a taxable privilege....

(4)(c) Ad valorem taxes paid by the tenant or other person actually occupying, using, or entitled to use any real
property to the lessor or any other person on behalf of the lessor, including transactions between affiliated entities, are
taxable.

(19)(a) The lease or rental of real property or a license fee arrangement to use or occupy real property between
related "persons," as defined in s. 212.02(12), F.S., in the capacity of lessor/lessee, is subject to tax.

(b) The total consideration, whether direct or indirect, payments or credits, or other consideration in kind, furnished by
the lessee to the lessor is subject to tax despite any relationship between the lessor and the lessee.
(c) The total consideration furnished by the lessee to a related lessor for the occupation of real property or the use or
entitlement to the use of real property owned by the related lessor is subject to tax, even though the amount of the
consideration is equal to the amount of the consideration legally necessary to amortize a debt owned by the related
lessor and secured by the real property occupied, or used, and even though the consideration is ultimately used to
pay that debt.

DISCUSSION
The issue presented in your letter of July 23, 2004, involves a situation wherein an LLC owns a piece of commercial
real property and two (2) members of the LLC are the co-equal owners of the P.A. that occupies the commercial real
property. Under the facts presented, it is alleged that the P.A. will not make any payments to the LLC in exchange for
the right to use and occupy the property. The facts indicate that the LLC anticipates renting space to an unrelated third
entity in order to cover all the expenses of the property. Florida sales tax on the rent received from the unrelated third
entity will be collected and remitted. It is anticipated that the rent received from the unrelated third party might not
cover all the expense of the property, in which case, the owners of the LLC will make contributions to the LLC in order
to cover those expenses.
In Florida, the renting, leasing, letting, or granting a license for the use of any real property is subject to Florida sales
tax. Sales tax is due on the rental consideration paid for the right to use or occupy commercial real property. See Rule
12A-1.070(4) and (19), F.A.C. When the rental or license fee of any such real property is paid by way of any "other
thing of value," Florida sales tax is due on the value of the "other thing of value." See Section 212.031(1)(d), F.S.
The lease or rental of real property between related "persons" is taxable. See Rule12A-1.070(19), F.A.C. "Person" is
defined at Section 212.02(12), F.S., and includes all types of entities including individuals and corporations. Further,
limited liability companies that are disregarded for federal income tax purposes are treated as separate legal entities
for all non-income tax purposes under Florida law. See Section 608.471(3), F.S.
All payments made on behalf of the owner of commercial real property that benefit the owner of the commercial real
property are considered "rent consideration" and are therefore subject to Florida sales tax. See Rule 12A1.070(19)(b), F.A.C., and Seaboard Coastline Railroad Company v. Askew, #72-15 (Fla. Cir. Ct., 2nd Cir., Leon Co.,
1972). (Rent consideration may be payable directly to the lessor or to some other person directed by the lessor.)
There need not be a written lease in order for there to be a landlord/tenant relationship. See Regal Kitchens, Inc. v.
Department of Revenue, 641 So.2d 158 (Fla. 1st DCA, 1994).
When a business decision is made to create separate legal entities for purposes of owning and occupying real
property to achieve advantages such as preferred financing, tax advantage, risk control, insurance coverage, or the

like, the formalities of such arrangements are recognized for purposes of imposing Florida sales tax on transactions
between those separate legal entities. See Seaboard Coastline Railroad Company, supra. Courts have held that
parties are not free to "... disavow the existence of the corporation for the purpose of obtaining a tax advantage."
Regal Kitchens, 641 So.2d at 163. The Regal Kitchens opinion also held that: "Those who seek the protection
afforded by incorporation must also accept the burdens." Id.
Under the facts presented, the LLC anticipates renting space to an unrelated third entity and using the rent received to
cover all of the property's expenses. In the event that the rent does not cover all of the property's expenses, the LLC's
ownership will make contributions to the LLC to make-up any shortcomings. The LLC is owned equally by four (4)
persons. Two (2) of these persons ("shareholders") equally own P.A. and conduct their medical practice through that
entity.
The medical practice is generating revenue, which we assume, is being distributed in part to the two shareholders
discussed above. The two shareholders, as members of the LLC, will make contributions (if needed) to the LLC to pay
the operating expenses of the real property. The Department is concerned that distributions made by the P.A. to the
two shareholders will, in effect, be a vehicle by which the property expenses will be satisfied. In such a situation, those
distributions would be considered "rental consideration" subject to Florida sales tax under Section 212.031, F.S.,
because the true substance of the distribution is to pay property expenses on behalf of the owner (i.e., the LLC).
The Department recognizes that there may be situations wherein "income" or "profit" flowing between related entities,
in an arrangement such as the one before us, would not be "rental consideration." Key to any determination on behalf
of the Department would be a review of the P.A.'s membership agreement or other controlling documents. The
Department would be interested in the timing, amount and control of the distributive shares of earnings or cash flow to
the two (2) persons identified above. The Department would look to the membership agreement or other controlling
documents to ascertain: (1) that distributions do not coincide with the time at which the property’s expense obligations
are due; (2) the amount of distributions does not coincide with the amount of the property's expense obligations; and
(3) the distributions are based on a true reflection of income or profit and not on the amount of the property's expense
obligations.
CONCLUSION
Under the facts as stated, and contingent on the answers to the questions concerning the distributions made by the
P.A. to its two (2) shareholders, the arrangement you have described in your letter would not result in sales tax being
due under Section 212.031, F.S., because there would be no consideration being paid by the P.A. for the use and
occupancy of LLC's real property.
This response constitutes a Technical Assistance Advisement under Section 213.22, F.S., which is binding on the
Department only under the facts and circumstances described in the request for this advice as specified in Section
213.22, F.S. Our response is predicated on those facts and the specific situation summarized above. You are advised
that subsequent statutory or administrative rule changes, or judicial interpretations of the statutes or rules, upon which
this advice is based, may subject similar future transactions to a different treatment than expressed in this response.

You are further advised that this response, your request and related backup documents are public records under
Chapter 119, F.S., and are subject to disclosure to the public under the conditions of s. 213.22, F.S. Confidential
information must be deleted before public disclosure. In an effort to protect confidentiality, we request you provide the
undersigned with an edited copy of your request for Technical Assistance Advisement, the backup material and this
response, deleting names, addresses and any other details which might lead to identification of the taxpayer. Your
response should be received by the Department within 15 days of the date of this letter.
Sincerely,
Eric R. Peate
Senior Attorney
Technical Assistance & Dispute Resolution
(850) 922-4714
Control No.: 60997