Would Florida follow a corporation's federal treatment of shareholder advances as compensation, and did the ruling decide tax on its use of the shareholder's vehicle?

Plain-English summary

A closely held corporation rented specially modified tour buses to touring bands. Its sole shareholder and president personally held title to one bus because, according to the taxpayer, the lender required individual ownership and a personal guarantee. The corporation used the bus exclusively, paid its mortgage, insurance, repairs, and operating costs, and claimed depreciation and deductions.

The corporation also paid some of the owner's personal expenses and travel advances. It offset those amounts against shareholder loans and submitted expense receipts, then treated the year-end net amount as compensation on its federal return.

Florida gave a limited corporate-income-tax answer: in the absence of a contrary federal determination, it would follow the corporation's federal treatment of the net amount as compensation. Florida starts with adjusted federal income and generally leaves redetermination of that amount to the IRS.

The Department identified two common exceptions. A Florida auditor may correct an obvious federal-return error or take other action, and may examine a transaction that has only Florida tax consequences, such as certain affiliate payments on separate state returns.

The ruling did not decide whether the corporation's payment of the owner-titled bus expenses was taxable rental consideration for sales-tax purposes. Too many facts about ownership and the arrangement were unclear, so that issue was moved to a separate Letter of Technical Advice. The TAA also said it lacked enough facts to decide the Florida corporate-income-tax consequences of the bus arrangement itself.

What this means for you

Florida generally follows federal income characterization

If a corporation reports shareholder advances as compensation federally, Florida normally begins with the same treatment.

State auditors retain independent tools

Federal conformity does not make the return untouchable. Obvious errors and Florida-only transactions can still be examined and adjusted.

The vehicle-rent issue remains unresolved

The page title referred to a vehicle lease, but the operative TAA expressly declined to decide whether paying the owner's vehicle expenses created taxable rent. Do not infer an answer from the title or facts.

Complete facts are required for binding advice

A Technical Assistance Advisement binds the Department only on a fully disclosed factual record. Missing ownership, agreement, and payment details prevented a ruling on the bus.

Common questions

Q: Did Florida accept the compensation deduction?
A: It said it would follow the federal treatment absent a contrary federal determination, subject to audit authority.

Q: Can Florida ever depart from the federal return?
A: Yes, for an obvious federal error or a transaction with only Florida tax consequences, among other authorized audit actions.

Q: Did the TAA hold that the bus arrangement was or was not a lease?
A: No. The Department refused to analyze that sales-tax issue because important facts were missing.

Q: Did the ruling decide depreciation and expenses on the bus?
A: No. It said the corporate-income-tax consequences of that arrangement were not requested with sufficient facts.

Citations and references

• Fla. Stat. § 220.02(3) (federal income-tax concepts)
• Fla. Stat. §§ 220.12 and 220.43(1) (adjusted federal income and matching treatment)
• Fla. Stat. §§ 213.34 and 220.731 (audit and investigative authority)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 08C1-007

Original ruling text

Summary
QUESTION : Does Florida’s corporate income tax follow federal determinations of income?
ANSWER : Yes. Florida utilizes federal computations of income as the starting point for its
corporate income tax. However, if the federal return contains an obvious error, or a transaction
only has Florida tax consequences, an auditor may examine the transaction or the error, and
either adjust the Florida return or take other appropriate action.
QUESTION : May the Department decline to issue a Technical Assistance Advisement if a
taxpayer does not provide additional information?
ANSWER : Yes. A Technical Assistance Advisement is based on the facts provided by the
taxpayer. If the taxpayer fails or refuses to provide information, the Department cannot issue a
binding answer.
August 8, 2008
Re:

Technical Assistance Advisement 08C1-007
Corporate Income Tax – Vehicle Lease
Sections 213.34, 220.02(3), 220.12, 220.43(1), 220.731, Florida Statutes (F.S.)
XXX (Owner), SSN: XXX
XXX (Taxpayer), FEIN: XXX

Dear:
Your letter of XXX, requests advice regarding the XXX sales tax and XXX corporate income tax
obligations of your clients, XXX (Taxpayer) and its president, XXX (Owner). This response
constitutes a Technical Assistance Advisement under Chapter 12-11, XXX Administrative Code
(F.A.C.), and is issued to you under authority of section 213.22, XXX Statutes (F.S.).
ISSUES

1. Whether Taxpayer’s payment of all expenses related to the operation and ownership of a
   XXX constitutes taxable rental consideration for the use of the XXX for purposes of the XXX
   sales tax.
2. Whether amounts that Owner received from the Taxpayer for personal expenses and travel
   advances, offset by loans made to and expense receipts tendered to the Taxpayer, were properly
   treated as compensation for purposes of the XXX corporate income tax.
   FACTS
   The Taxpayer is a XXX corporation that rents specially modified tour buses to touring bands
   throughout the United States. Owner and his wife are the sole directors, sole shareholders, and

Technical Assistance Advisement 08C1-007
Page 2

President and Vice President, respectively, of the Taxpayer. In late XXX, Owner bought the Bus
for approximately XXX, including applicable XXX sales tax. The Taxpayer states that Owner
bought the XXX for the exclusive use of the Taxpayer. However, the Taxpayer claims that at the
time of purchase, the lender required Owner to title the XXX in his personal name, rather than in
the name of Taxpayer, and to personally guarantee the loan.
According to the Taxpayer, Owner gave the XXX to the Taxpayer, to be used exclusively by the
Taxpayer in its business. The Taxpayer claims that it did not enter into an oral or written lease
or rental agreement with Owner at the time of transfer. The Taxpayer states that it pays “all
expenses associated with the operation” of the XXX, including insurance, repairs, and mortgage
payments. The Taxpayer states that it depreciates the XXX and deducts the expenses related to
the maintenance of XXX. Taxpayer states that it is the only party who uses XXX and enjoys the
benefits related to its use.
In XXX, the Taxpayer contacted the Department about its use of the XXX. The Taxpayer states
the Department “. . . is indicating a lease or some imputed rent should have been charged for
sales tax purposes between [Owner] and [Taxpayer]” if Owner is determined to be the owner of
the XXX. The Taxpayer requests a determination of the taxability of its use of the XXX.
The Taxpayer does not provide XXX for its XXX. XXX must directly negotiate their
remuneration with the third parties who XXX from the Taxpayer, and those XXX are paid
separately. The XXX pay their own business related expenses. The separation of XXX from the
maintenance and ownership of the XXX was done for asset protection purposes. The Owner has
been, for the most part, the only individual that has XXX a XXX the Taxpayer has leased or
beneficially used. Other XXX have been retained when Owner was either ill or needed
temporary relief because of long XXX distances. Owner reports the income he is paid on his
individual federal income tax return, along with the expenses solely related to and incurred while
performing services as a XXX (e.g., travel expenses).
In calendar years XXX, the Taxpayer advanced Owner monies by directly paying some of
Owner’s personal expenses and by providing monies for travel expenses. These travel expenses
were partially offset by loans made to the Taxpayer by its Owner and by expense receipts
tendered to the Taxpayer by Owner. The Taxpayer treated the net amount of these transactions
(computed as of year end) as compensation paid to Owner.
REQUESTED ADVISEMENT
The Taxpayer requests that the Department issue a Technical Assistance Advisement stating the
Taxpayer’s payment of the expenses of the XXX does not constitute taxable rental consideration
for use of the XXX. The Taxpayer further requests that the Department follow the tax treatment
of travel advances it claimed on its federal income tax returns by treating the excess of those
expenses as compensation to its Owner.

Technical Assistance Advisement 08C1-007
Page 3

TAXPAYER’S POSITION
The Taxpayer argues that it is the “true and beneficial owner of [the XXX], despite the fact that
title was originally acquired in, and at all time thereafter, was held in the individual name of
[Owner,] because [the Taxpayer] pays all expenses relating to [the XXX] and is the only party
who uses and enjoys the benefits related to its operation.” Taxpayer argues that although Owner
was not an employee of the Taxpayer, the Taxpayer had an “accountable expense allowance
arrangement” within the meaning of Treasury Regulation § 1.62-2(c). This expense allowance
arrangement was for the convenience of the XXX of its XXX, so they would not have to account
to the parties that directly paid their compensation. Therefore, it is proper for the Taxpayer to
treat excess travel advances as in the nature of compensation paid to Owner.
APPLICABLE LAW
Section 220.02(3), Florida Statutes, provides:
It is the intent of the Legislature that the income tax imposed by this code utilize,
to the greatest extent possible, concepts of law which have been developed in
connection with the income tax laws of the United States, in order to:
(a) Minimize the expenses of the Department of Revenue and difficulties in
administering this code;
(b) Minimize the costs and difficulties of taxpayer compliance; and
(c) Maximize, for both revenue and statistical purposes, the sharing of
information between the state and the Federal Government.
Section 220.12, Florida Statutes, provides:
For purposes of this code, a taxpayer’s net income for a taxable year shall be its
adjusted federal income, or that share of its adjusted federal income for such year
which is apportioned to this state under s. 220.15, plus nonbusiness income
allocated to this state pursuant to s. 220.16, less the exemption allowed by s.
220.14.
Section 213.34, Florida Statutes, provides in part:
(1) The Department of Revenue shall have the authority to audit and examine the
accounts, books, or records of all persons who are subject to a revenue law made
applicable to this chapter, or otherwise placed under the control and
administration of the department, for the purpose of ascertaining the correctness
of any return which has been filed or payment which has been made, or for the
purpose of making a return where none has been made.

(2) The department, or its duly authorized agents, may inspect such books and

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Page 4

records necessary to ascertain a taxpayer’s compliance with the revenue laws of
this state, provided that the department’s power to make an assessment or grant a
refund has not terminated under s. 95.091(3).

Section 220.43(1), Florida Statutes, provides:
To the extent not inconsistent with the provisions of this code or forms or
regulations prescribed by the department, each taxpayer making a return under
this code shall take into account the items of income, deduction, and exclusion on
such return in the same manner and amounts as reflected in such taxpayer's
federal income tax return for the same taxable year.
Section 220.731, Florida Statutes, provides in part:
For the purpose of administering and enforcing the provisions of this chapter, the
department or any officer, agent, or employee of the department designated by the
executive director in writing or by regulation may:
(1) Hold investigations concerning any matters;
(2) Require the attendance of any individual, or any officer or employee of a
taxpayer, having knowledge of such matters; and
(3) Take testimony and require proof for its information.

DISCUSSION AND RESPONSE
Sales Tax
The Taxpayer requests that the Department issue a Technical Assistance Advisement stating the
Taxpayer’s payment of the expenses of the XXX does not constitute taxable rental consideration
for use of the XXX. Unfortunately, several important facts regarding the Taxpayer’s
arrangement with Owner for the use of the XXX are either unclear or unknown. Accordingly,
the Department will not analyze this issue in a Technical Assistance Advisement. Instead, this
issue will be analyzed in a separately-issued Letter of Technical Advice to the Taxpayer.
Corporate Income Tax
Like most states, Florida uses federal computations of income as the starting point for its
corporate income tax. Section 220.12, F.S., provides that adjusted federal income is the starting
point for determining XXX net income, and generally speaking, the XXX Legislature annually
adopts the Internal Revenue Code and its computation of income. See, § 220.03(1)(n), F.S.
Taxpayers are required to follow federal determinations of income in reporting their income to
XXX to the extent not inconsistent with Chapter 220, F.S. § 220.43(1), F.S.
The Department is granted the authority under sections 213.34(1) and 220.731, F.S., to conduct

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examinations of a taxpayer’s books and records to verify the correctness of returns and a
taxpayer’s compliance with XXX revenue laws. Generally speaking, the Department focuses on
those items reported on the XXX corporate income tax return, and leaves the redetermination of
adjusted federal income to the Internal Revenue Service. There are two common exceptions.
First, if an auditor finds an error on the related federal income tax return, the auditor may correct
an obvious error or take other action, such as forwarding the information to the Internal Revenue
Service. And, second, if an item or transaction has only XXX corporate income tax
consequences (e.g., payments between affiliates), then the auditor may examine and adjust that
transaction or item. This second situation often occurs when taxpayers file consolidated federal
income tax returns, but separate XXX corporate income tax returns.
The Taxpayer is essentially a one-person corporation. On its federal income tax return, the
Taxpayer offset amounts that it advanced to Owner against loans made to it by Owner, and
treated the balance as compensation expense. Although it is possible that an auditor might make
an adjustment, in the absence of additional information, the Department would follow federal
determinations of income, subject to the provisions of section 220.23, F.S. (relating to federal
audit adjustments). The Taxpayer also uses the XXX owned by its Owner. The Taxpayer pays
all the expenses associated with the XXX and claims them as a deduction (together with
depreciation) on its federal income tax return. We have not been asked to opine on the XXX
corporate income tax consequences of that arrangement, and the facts supplied by the Taxpayer
are insufficient to draw any conclusions. Accordingly, the Department will follow the
Taxpayer’s tax treatment of compensation expense in the absence of a contrary federal income
tax determination.
CONCLUSION
For corporate income tax purposes, the Department will follow the Taxpayer’s treatment of
compensation expense in the absence of a contrary federal income tax determination. 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 section 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.

Technical Assistance Advisement 08C1-007
Page 6

If you have any further questions with regard to this matter and wish to discuss them, you may
contact us directly at (850)922-4700.
Sincerely,

Gary A. Moreland, Senior Attorney
Technical Assistance and Dispute Resolution

Record ID: 38219