Could a corporation that moved from New York to Florida during one fiscal year use separate accounting instead of Florida's three-factor apportionment formula?

Plain-English summary

Florida denied the corporation's request to use separate accounting for the portions of its fiscal year before and after moving from New York to Florida.

The New York corporation dissolved into a Florida corporation through a Type F reorganization. The Department treated the Florida entity as an absolute continuation of the New York entity: the federal identification number and corporate identity continued, tax attributes carried over, and one federal and Florida tax year covered the full 12 months.

The company had not maintained separate records for the two periods and had continued the same business operation in two locations. It also assigned a pension-plan adjustment to the earlier period when calculating the later Florida loss.

The Department found that the standard three-factor formula—50% sales, 25% property, and 25% payroll—reasonably and equitably apportioned the year's income. The company had not shown the gross distortion or taxation of extraterritorial value needed for an alternative method.

What this means for you

A midyear move and unfavorable apportionment result did not by themselves justify separate accounting. The ruling required clear evidence that the standard formula operated unreasonably and arbitrarily, plus proof that the proposed alternative fairly reflected Florida activity.

Common questions

Q: Why was the pre-move New York income included in the apportionable tax base? A: The Type F reorganization continued the same corporation and tax year, and Florida applied its apportionment formula to the corporation's adjusted federal income.

Q: Did the company keep separate books for the two periods? A: No. The ruling said the records did not separately distinguish the pre-move and post-move operations.

Q: Was a different apportionment percentage enough to justify an alternative method? A: No. The quoted rule required gross distortion and clear evidence of extraterritorial taxation.

Q: What method did Florida require? A: The standard three-factor property-payroll-sales formula described in section 220.15.

Citations and references

• Fla. Stat. § 220.11 — Florida corporate income tax
• Fla. Stat. §§ 220.15, 220.152 — standard and alternative apportionment
• Fla. Admin. Code r. 12C-1.0152 — departure from standard apportionment
• I.R.C. § 368(a)(1)(F) — Type F reorganization
• Roger Dean Enterprises, Inc. v. Department of Revenue, 387 So.2d 358 (Fla., 1980) — nexus and fairly apportioned income
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 95C1-009

Original ruling text

Oct 18, 1995

Re: Technical Assistance Advisement No. 95(C)1-009 XXX (Corporation) Separate Accounting

Dear :

Your letter of June 22, 1995, requested a Technical Assistance Advisement on the application of corporate income tax on the above referenced matter. This response to your request constitutes a Technical Assistance Advisement under Chapter 12-11, Florida Administrative Code, and is issued to you under the authority of s. 213.22, Florida Statutes.

Discussion Of Facts

The Corporation sells XXX equipment, primarily at retail with some wholesales. The Corporation was formed in New York in 1976 and operated a showroom and retail store exclusively in New York until August, 1994. In August of 1994, the New York operation was sold and the company was moved to Florida. A Florida corporation was formed and the New York corporation was dissolved in a type F re-organization per section 368(a)(1)(F), I.R.C. Operations began in Florida in September of 1994. For the year ended January 31, 1995, there were no Florida sales until after the move to Florida.

Your request states the company has operated at a loss while in Florida, due to slower sales resulting from starting up in a new location, and the Corporation's taxable income for the year ended January 31, 1995, is entirely attributable to the operation while in New York and the sale of the business in New York.

The information provided includes an income statement for the 12 months ended January 31, 1995 and a trial balance through August 31, 1994. The net loss of $XX for the period September 1, 1994 to January 31, 1995 (Second Period), was achieved by subtracting the January 31, 1995 fiscal year net income from the trial

balance net income on August 31, 1994. However, an excess Defined Benefit Pension Plan contribution returned to the corporation in December, 1994, was applied to the February 1, 1994 to August 31, 1994 (First Period) income. Accordingly, no pension expense is included for the Second Period.

You are requesting that the Department use its discretion under s. 220.152, F.S., and Rule 12C-1.0152, F.A.C., to allow an allocation of the operations of the corporation from February 1, 1994, to August 31, 1994, to New York and the operations from September 1, 1994 to January 31, 1995 to Florida.

The Corporation believes that the conditions causing the three factor formula to distort the income earned in Florida are nonrecurring, and the taxpayer anticipates using the standard formula for future years.

Statutory Authority

Section 220.11 F.S., provides that "[a] tax measured by net income is hereby imposed on every taxpayer for each taxable year... for the privilege of conducting business, earning or receiving income in this state, or being a resident or citizen of this state."

Section 220.15(1), F.S., provides that "[e]xcept as provided in ss. 220.151 and 220.152, 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..." This section goes on to articulate the "three-factor" (property, payroll and sales) apportionment methodology.

Section 220.152, F.S., states that:

"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-1.0152(2), F.A.C., provides: "A departure from the applicable method of apportionment required under the provisions of ss. 220.15 or 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. 217, 88 S. Ct. 995, 19 L. Ed. 2d 1201 (1968), which is incorporated by reference in Rule 12C-1.0511, F.A.C.). "(b) The party (Department of Revenue or the 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 12C1.0511, 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 (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.). "(3) 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 this state. "(4) 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. "(5) A taxpayer shall petition the Department for a departure from the required apportionment method by filing, on or before the due date for filing of the return for the taxable year, with extension, either: a written request for a technical assistance advisement under s. 213.22, F.S., and Department of Revenue Rule Chapter 12-11, F.A.C.; or, a petition for a declaratory statement under s. 120.565, F.S., and Department of Revenue Rules 12-2.010, 12-2.011, 12-2.012, and 12-2.013, F.A.C. "(a) The taxpayer shall file the request or petition with the Division of Taxpayer Assistance, P.O. Box 7443, Tallahassee, Florida 32314-7443. "(b) The taxpayer's request or petition must include a summary of the evidence to support the taxpayer's contention that the applicable apportionment formula results in taxation of extraterritorial values and to demonstrate that the regular formula operates to unreasonably and arbitrarily attribute income to Florida far out of proportion to the business transacted in Florida. The taxpayer must also furnish evidence that the use of an alternative method fairly and accurately apportions income to Florida."

Discussion And Analysis Of Law

The Florida Supreme Court held in Roger Dean Enterprises, Inc. v. Department of Revenue, 387 So.2d 358 (Fla., 1980): "The requisite nexus is supplied when the corporation and some of its income producing activities are connected with the taxing jurisdiction. If this is the case, all of that corporation's income may be included in a fairly apportioned tax base for state income tax purposes. There is no requirement that each increment of income have a relationship to the taxing jurisdiction." (emphasis supplied).

In October of 1994, the Corporation (Newco) began business operations in Florida after the New York corporation (Oldco) was dissolved, in a type F re-organization, into a corporation formed in Florida. In a type F re-organization, the tax attributes carry over from Oldco to Newco. In fact, Newco is

treated as an absolute continuation of Oldco, such that the taxable year continues and any net operating losses of Newco may be carried back to a taxable year of Oldco. The federal identification number has not changed and the Corporation has not lost its identity.

Based on the facts presented, the Corporation's federal return will include the results of its operations for the 12 months ended January 31, 1995. The Corporation has not kept separate records for the First Period and Second Period. The Corporation has continued to operate its business without any specific intent to distinguish its operation between the First Period and the Second Period. Florida piggybacks the I.R.C., and therefore, a Florida tax return will be required when a federal tax return is required. The tax returns cover the same time periods.

The business operation for the fiscal year ended January 31, 1995, is one operation in two locations. The Corporation, like any other Company operating in Florida, enjoyed the benefits of the state, both tangible and intangible.

A taxpayer doing business both within and without Florida would apportion its adjusted federal income pursuant to s. 220.15(1), F.S.,

"... 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."

The property factor is defined by s. 220.15(2), F.S., as

"... a fraction the numerator of which is the average value of the taxpayer's real and tangible personal property owned or rented and used in this state during the taxable year or period and the denominator of which is the average value of such property owned or rented and used everywhere." (Emphasis supplied.)

The payroll factor is defined by s. 220.15(4), F.S., as

"... a fraction the numerator of which is the total amount paid in this state during the taxable year or period by the taxpayer for compensation and the denominator of which is the total compensation paid everywhere during the taxable year or period." (Emphasis supplied.)

The sales factor is defined by s. 220.15(5), F.S., as

"... a fraction the numerator of which is the total sales of the taxpayer in this state during the taxable year or period and the denominator of which is the total sales of the taxpayer everywhere during the taxable year or period." (Emphasis supplied.)

This method and procedure will reasonably and equitably determine the amount of income to be apportioned to Florida.

After carefully considering your request, we have determined, from the facts that you have presented, that the three factor method of apportioning income is reasonable and rationally related to the values connected with Florida. Therefore, the request for separate accounting is denied.

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 based 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 and your request 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 by the Department before disclosure. In an effort to protect the confidentiality

of such information, your request for the deletion of specific information will be observed.

Sincerely,

Val Poliuto
Statutory Compliance Section

Control #22035
VJP/kk
Enclosure (Not Included in TLL)