Could a corporate member separately account for its Florida LLC income instead of including partnership factors in apportionment?

Plain-English summary

The Florida Department of Revenue required an out-of-state corporation to include its share of a Florida LLC's property, payroll, and sales in the corporation's Florida apportionment factors. The corporation owned 60 percent of the LLC, which was taxed as a partnership.

Florida follows the federal flow-through treatment of partnerships. The Department therefore treated the LLC's activities and tax attributes as flowing through to its corporate member, even though the corporation described the two operations as separate and non-unitary.

The Department denied separate accounting as an alternative apportionment method because the corporation did not prove by clear and cogent evidence that the standard formula operated unreasonably and arbitrarily or taxed extraterritorial value.

What this means for you

Corporate partners and LLC members

Partnership-taxed entity factors may have to be combined with the corporate owner's own Florida apportionment factors.

Corporate tax advisors

Alternative apportionment requires evidence of gross distortion, not merely a higher Florida percentage than separate accounting would produce.

Common questions

Q: Did the LLC's factors flow through to the corporate member?
A: Yes, to the extent of its partnership interest.

Q: Did Florida accept separate accounting?
A: No.

Q: Was the corporation's assertion that the operations were non-unitary enough?
A: No.

Citations and references

• Fla. Stat. §§ 220.15, 220.152, and 213.22
• Fla. Admin. Code rr. 12C-1.015(10) and 12C-1.0152-.0155

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 14C1-013

Original ruling text

Executive
Director
Marshall Stranburg

QUESTION: MAY THE TAXPAYER BE GRANTED PERMISSION TO USE AN
ALTERNATIVE METHOD OF APPORTIONMENT IN COMPUTING ITS FLORIDA
CORPORATE INCOME TAX LIABILITY?
ANSWER: THE TAXPAYER WAS NOT GRANTED PERMISSION TO USE AN
ALTERNATIVE METHOD OF APPORTIONMENT IN COMPUTING ITS FLORIDA
CORPORATE INCOME TAX LIABILITY.
November 10, 2014
Re:

Technical Assistance Advisement 14C1-013
Corporate Income Tax
Request to Use Alternative Apportionment
Sections: 220.15 and 220.152, F.S.
Rules 12C-1.015, 12C-1.0152, 12C-1.0153, 12C-1.0154, 12C-1.0155, F.A.C.
XXXX (FEIN:XXXX) (hereinafter “taxpayer”)
XXXX (hereinafter “LLC”)

Dear XXXX:
This is in response to your request dated XXXX, for a Technical Assistance Advisement (TAA)
pursuant to section 213.22, Florida Statutes (F.S.), and Rule Chapter 12-11, Florida
Administrative Code (F.A.C.), regarding whether the taxpayer may use an alternative
apportionment factor. An examination of your letter has established that you have complied with
the statutory and regulatory requirements for issuance of a TAA. Therefore, the Florida
Department of Revenue (hereinafter “the Department”) is hereby granting your request for a
TAA.
FACTS SUPPLIED BY TAXPAYER
The taxpayer operates XXXX in XXXX and owns 60 percent of an LLC which operates XXXX
in Florida. The LLC is taxed as a partnership for federal income tax purposes. The taxpayer has
no operations in Florida other than through its ownership of the LLC. The taxpayer states that its
operations and those of the LLC are completely separate and are non-unitary.
The taxpayer believes that the use of separate accounting in reporting its income would better
reflect the appropriate Florida tax base.
Child Support Enforcement – Ann Coffin, Director  General Tax Administration – Maria Johnson, Director
Property Tax Oversight – Howard Moyes, Interim Director  Information Services – Damu Kuttikrishnan, Director

www.myflorida.com/dor
Tallahassee, Florida 32399-0100

Technical Assistance Advisement
Page 2

LEGAL AUTHORITY
Section 220.15, F.S., states in part:
(1) Except as provided in ss. 220.151 and 220.152, and 220.153, adjusted federal
income as defined in s. 220.13 shall be apportioned to this state by taxpayers doing
business within and without this state by multiplying it by an apportionment fraction
composed of a sales factor representing 50 percent of the fraction, a property factor
representing 25 percent of the fraction, and a payroll factor representing 25 percent of
the fraction. If any factor described in subsection (2), subsection (4), or subsection (5)
has a denominator that is zero or is determined by the department to be insignificant, the
relative weights of the other factors in the denominator of the apportionment fraction
shall be as follows: . . .
Section 220.152, F.S., states:
Apportionment; other methods. --If the apportionment methods of ss. 220.15 and
220.151 do not fairly represent the extent of a taxpayer's tax base attributable to this
state, the taxpayer may petition for, or the department may require, in respect to all or
any part of the taxpayer's tax base, if reasonable:
(1) Separate accounting;
(2) The exclusion of any one or more factors;
(3) The inclusion of one or more additional factors which will fairly represent the
taxpayer's tax base attributable to this state; or
(4) The employment of any other method which will produce an equitable
apportionment.
Rule 12C-1.015(10), F.A.C., states:
Partnerships. The amounts of the property, payroll, and sales of a partnership
are attributable to the partners or members of the joint venture. A
corporation that is a partner in a partnership must add its share of the
property, payroll, and sales to its own apportionment factors, regardless of
whether the partnerships are Florida partnerships. Form F-1065 is used in part
to distribute to each partner subject to the tax its share of the apportionment factors
of the partnership or joint venture. (Emphasis Supplied)

Technical Assistance Advisement
Page 3

Rule 12C-1.0152, F.A.C., states in part:
(1)(a) A departure from the applicable method of apportionment required under the
provisions of Section 220.15 or Section 220.151, F.S., shall be permitted only where the
method does not accurately and fairly reflect business activity in Florida. An alternative
method may not be invoked, either by the Department of Revenue or the taxpayer,
merely because it reaches a different apportionment percentage than the regularly
applicable formula. However, if the applicable formula will lead to a grossly distorted
result in a particular case, a fair and accurate alternative method is appropriate (see
Norfolk and Western Railway Co. v. Missouri State Tax Commission, 390 U.S. 317, 88
S. Ct. 995, 19 L. Ed. 2d 1201 (1968), which is incorporated by reference in Rule 12C1.0511, F.A.C.).
(b) A taxpayer seeking to utilize an alternative apportionment method must show by
clear and cogent evidence that the regularly applicable formula would result in taxation
of extraterritorial values (see Butler Bros. v. McColgan, 315 U.S. 501, 62 S. Ct. 701, 86
L. Ed. 991 (1942), which is incorporated by reference in Rule 12C-1.0511, F.A.C.).
This can be shown only if the regularly applicable formula is demonstrated to operate
unreasonably and arbitrarily in apportioning to Florida a percentage of income which is
out of all proportion to the business transacted in Florida and does not accurately and
fairly reflect business activity in Florida (see Hans Rees' Sons, Inc. v. North Carolina ex
rel. Maxwell, 283 U.S. 123, 51 S. Ct. 385, 75 L. Ed 879 (1931), which is incorporated
by reference in Rule 12C-1.0511, F.A.C.).
(2) The party seeking to use an alternative formula must prove that the alternative
formula fairly and accurately apportions income to Florida based upon business activity
in Florida.
(3) A departure from the regularly applicable apportionment method will be authorized
only in limited and specific cases where unusual fact situations (which ordinarily will
be unique and nonrecurring) produce a result that is incongruous with the results of
previous tax years under the regularly applicable apportionment method.

Rule 12C-1.0153(9), F.A.C., states the following in regard to the property factor:
A portion of a partnership's real and tangible personal property, both owned or
rented and used during the tax year in the regular course of such trade or business,
is included in the denominator of a taxpayer's property factor to the extent of the
taxpayer's interest in the partnership. The value of such property located in Florida
is also included in the numerator of the property factor. The value of property that
is rented or leased by the taxpayer to the partnership or vice versa is, with respect
to the taxpayer, excluded from the property factor of the partnership or eliminated
to the extent of the taxpayer's interest in the partnership in order to avoid

Technical Assistance Advisement
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duplication. For purposes of inclusion in the Florida property factor, partnership
property is allocated to each partner based on their interest in the partnership, or as
designated in the partnership agreement.
Rule 12C-1.0154(6), F.A.C., states the following in regard to the payroll factor:
Compensation paid to employees of a partnership is included in the denominator of
the taxpayer's payroll factor to the extent of the taxpayer's interest in the
partnership. The amount paid to employees in Florida is also included in the
numerator of the payroll factor to the extent of the taxpayer's interest in the
partnership. Partnership payroll should be allocated to each partner based on each
partner's interest in the partnership, or as designated in the partnership agreement,
for inclusion in the Florida payroll factor.
Rule 12C-1.0155(4), F.A.C., states:
Sales of a partnership are included in the denominator of a taxpayer's sales factor to
the extent of the taxpayer's interest in the partnership. The amount of sales in
Florida is also included in the numerator of the sales factor to the extent of the
taxpayer's interest in the partnership. Partnership sales should be allocated to each
partner based on each partner's interest in the partnership, or as designated in the
partnership agreement, for inclusion in the Florida sales factor.
ISSUES PRESENTED

1. Whether the taxpayer’s sales, payroll, and property factors of the apportionment formula
   should include the taxpayer’s interest in the LLC.
2. Whether the taxpayer may use an alternative apportionment method.
   DISCUSSION AND ANALYSIS
   The Taxpayer is requesting the use of an alternative apportionment factor for Florida, because it
   believes that the standard apportionment factor taxes extraterritorial values and apportions more
   income to Florida than Florida is constitutionally allowed to tax.1

1

The Taxpayer, in its request for relief, states: “The taxpayer, . . ., XXXX in XXXX. It is also a XXXX
member in [LLC], a company operating XXXX in Florida. [LLC] is taxable as a partnership. Thus, the
taxpayer receives a share of [LLC’s] Florida income or loss. The taxpayer has no other Florida-sourced
income. The taxpayer’s XXXX operations are entirely autonomous from the operations of [LLC], and are
not ‘unitary.’ . . . Applying the regular apportionment method, the taxpayer’s XXXX income is
effectively subject to significant income tax in Florida.”

Technical Assistance Advisement
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In this instance, the LLC is treated as a partnership for federal income tax purposes. As Florida
follows the federal tax treatment of LLC’s, the LLC is also treated as a partnership for Florida
corporate income tax purposes. The Florida statutes and rules are clear that the activities of a
partnership flow through the partnership to its partners.
For federal income tax purposes, partnerships generally have no formal federal filing
requirement other than information returns, and because a partnership is a conduit, items of
partnership income, expense, gain, or loss pass through to the partners and are given tax effect at
the partner level. For state income tax apportionment purposes, a particular state’s approach in
this area dictates the flow-through of partnership tax attributes up to the corporate partner.
Florida’s approach conforms to the federal concept of the flow-through of partnership tax
attributes up to the corporate partner. The apportionment rule, Rule 12C-1.015(10), F.A.C.,
governs the corporate income tax treatment of corporations that invest in partnerships. This rule
provides that a corporation that is a partner in a partnership must add its share of the
partnership’s property, payroll, and sales to its own apportionment factor. Based on the
foregoing, the partnerships’ property, payroll, and sales should be combined with the taxpayer’s
property, payroll, and sales, for purposes of determining the taxpayer’s apportionment factor, as
provided by Rule 12C-1.0153(9), F.A.C., Rule 12C-1.0154(6), F.A.C., and Rule 12C-1.0155(4),
F.A.C.
The Florida statutes and rules are clear that the activities of a partnership flow through the
partnership to its partners. Therefore, the activities of the partnership are attributable to the
partners and, contrary to the statement in the taxpayer’s letter, are unitary to the partners.
As a result of its XXXX income being included in the tax base reported to Florida, the taxpayer
has requested to use separate accounting as an alternative apportionment method under section
220.152, F.S. In Florida, alternative apportionment is very rare. The Florida Supreme Court
recognized this fact in Roger Dean Enterprises v. State, Department of Revenue, 387 So. 2d 358
(Fla. 1980).
There is a very strong presumption in favor of normal three-factor apportionment and
against the applicability of relief provisions. . . . The relief provision should be used
where the statute reaches arbitrary or unreasonable results so that its application could
be attacked successfully on constitutional grounds. Departures from the basic formula
should be avoided except where reasonableness requires.
Id. at 363.
Rule 12C-1.0152, F.A.C., provides for an adjustment to the apportionment formula if the
standard formula leads to a grossly distorted result. This rule references two court cases.
In Norfolk, supra, the U.S. Supreme Court found the application of the apportionment formula
unconstitutional where the taxing state imposed an ad valorem property tax on the railroad
rolling stock, using the familiar single-factor mileage formula apportionment basis. The

Technical Assistance Advisement
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taxpayer presented evidence showing the actual inventory of rolling stock in Missouri on tax day
was less than half (approximately $7,600,000 versus assessed value of $19,981,000) the value
assessed using Missouri’s apportionment formula. The taxpayer further demonstrated that its
calculation of the tax-day value was representative of the value of rolling stock located within
the state throughout the year and in the preceding year. The Supreme Court in Norfolk, at page
329, noted that it is not necessary for a state to demonstrate that its use of the mileage formula
yields an exact measure of value. However, the Supreme Court further stated that:
[w]hen a taxpayer comes forward with strong evidence tending to prove that the
mileage formula will yield a grossly distorted result in its particular case, the State
is obliged to counter that evidence or to make the accommodations necessary to
assure that its taxing power is confined to its constitutional limits. If it fails to do
so and if the record shows that the taxpayer has sustained the burden of proof to
show that the tax is so excessive as to burden interstate commerce, the taxpayer
must prevail.
In the Hans Rees’ case, supra, North Carolina tried to apportion income of a manufacturing
concern using a formula based on the ratio of the value of the taxpayer’s real and tangible
personal property located in North Carolina over the value of its real and tangible property
located everywhere times its entire income. The taxpayer was able to show that such a onefactor (property) apportionment formula “operated unreasonably and arbitrarily” in attributing
income to the state that was “out of all proportion” to the taxpayer’s activities in the state. The
Court concluded that proof the formula produced a tax on 83% of the taxpayer’s income when
only 17% of that income actually had its source in the State would be enough to invalidate the
assessment under the Due Process Clause. See Moorman Manufacturing Co. v. Bair, Director
of Revenue of Iowa, 437 U.S. 267 (1978). The type of distortion present in Hans Rees’ is largely
remedied today by use of a three-factor apportionment formula. The three factors now generally
used by states to apportion the income of most businesses (like the taxpayer in Hans Rees’) to
their state are sales, property, and payroll.
Rule 12C-1.0152, F.A.C., and the cited case law require the taxpayer to show by clear and
cogent evidence that the apportionment formula results in taxation of extraterritorial values. The
taxpayer must demonstrate that the apportionment formula operates unreasonably and arbitrarily
in apportioning income to Florida, that it is out of all proportion to the business transacted in
Florida, and that it does not accurately and fairly reflect business activity in Florida.
While section 220.152, F.S., authorizes a taxpayer to petition the Department to use an
alternative apportionment method if the methods of sections 220.15 and 220.151, F.S., do not
fairly represent the taxpayer’s tax base attributable to Florida, the taxpayer is also required to
show that use of the apportionment method provided by section 220.15, F.S., causes its tax base
attributable to Florida to be unfairly represented. Here, Florida law requires the taxpayer to
include its share of the LLC’s property, payroll, and sales, with its own, in computing its Florida
apportionment factor. The taxpayer has not shown that using this apportionment method causes
its tax base attributable to Florida to be unfairly represented. Therefore, the Department cannot
approve an alternative apportionment method.

Technical Assistance Advisement
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CONCLUSION
Based on the discussion above, Florida law requires the taxpayer to include its share of the
LLC’s property, payroll, and sales, when determining the taxpayer’s apportionment factor.
Additionally, as the taxpayer has failed to show that use of the apportionment method provided
by section 220.15, F.S., causes its tax base attributable to Florida to be unreasonably and
arbitrarily represented, the taxpayer is required to use the apportionment method provided by
section 220.15, F.S., in apportioning its income to Florida.
This response constitutes a Technical Assistance Advisement under s. 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 s. 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 documents are public records
under chapter 119, F.S., which are subject to disclosure to the public under the conditions of s.
213.22, F.S. Your name, address, and any other details, which might lead to identification of the
taxpayer, must be deleted before disclosure. In an effort to protect the confidentiality of such
information, we request you provide the undersigned with an edited copy of your request for
Technical Assistance Advisement, backup material and response within fifteen days of the date
of this advisement.
Sincerely,

Suzanne C. Paul
Tax Law Specialist
Technical Assistance and Dispute Resolution
(850) 717-6794
Record ID: 179528