88-004100 Murray Kramer Corporation vs. Department Of Revenue Status: Closed Recommended Order on Monday, June 26, 1989.

Summary: Convoluted family businesses, trusts, and citrus investments combined with disagreement over account procedures resulted in affirmed assessment.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

MURRAY KRAMER CORPORATION, INC., )

)

Petitioner, )

)

vs. ) CASE NO. 88-4100

)

STATE OF FLORIDA DEPARTMENT )

OF REVENUE, )

)

Respondent. )

__________________________________)

RECOMMENDED ORDER

Upon due notice, this cause came on for formal hearing on February 13,

1989, in Tallahassee, Florida, before Ella Jane P. Davis, a duly assigned

Hearing Officer of the Division of Administrative Hearings.

APPEARANCES

For Petitioner: Milton P. Weiss, C.P.A.

as Qualified Representative of Petitioner

686 Hampstead Avenue

West Hampstead, New York 11552

For Respondent: Jeffrey M. Dikman, Esquire

Assistant Attorney General

Tax Section

Department of Legal Affairs

The Capitol

Tallahassee, Florida 32399-1050

Sharon A. Zahner, Esquire

Assistant General Counsel

Department of Revenue

Room 204, Carlton Building

Post Office Box 6668

Tallahassee, Florida 32314-6668

STATEMENT OF THE ISSUE

Is the Respondent's assessment for corporate income tax and interest for

the tax years ending 12/31/78, 12/31/79, and 12/31/80 appropriate, and may it be

properly imposed upon Petitioner?

PRELIMINARY STATEMENT

At the commencement of formal hearing, Milton P. Weiss, C.P.A., was

examined and determined on the record to be both authorized and qualified to

represent Petitioner, pursuant to Rule 22I-6.008, F.A.C. To this end, one

exhibit was admitted as HO-A.

Official recognition was taken of certain statutes and rules and a number

of motions were disposed of upon the record and need not be revisited here.

Respondent presented the oral testimony of Frank J. Siska and had admitted

in evidence Exhibits R-1, R-2A, R-2B, R-3, R-4, R-5, and R-7. There was no R-6.

Petitioner presented the oral testimony of Milton P. Weiss and had admitted

Exhibits P-1, P-2, P-3, P-9, and P-10. Exhibits P-6, P-7, and P-8 were not

admitted in evidence.

A transcript was filed, and all timely-filed proposed findings of fact have

been ruled upon in the Appendix to this Recommended Order, pursuant to Section

120.59(2), F.S.

FINDINGS OF FACT

1. The instant dispute between the parties arose out of how the

substantial business interests of Petitioner Murray Kramer Corp. are to be

defined and by what accounting method its corporate income tax assessments are

to be made. Milton P. Weiss, C.P.A., is Petitioner's accountant and qualified

representative for purposes of this proceeding. He is neither an internal

bookkeeper for the corporation nor a corporate officer thereof.

2. At all times material, Petitioner was conducting business, deriving

income, or existing within the State of Florida, pursuant to Chapter 220, F.S.

3. Petitioner invests primarily through partnerships. Among Petitioner's

holdings and investments is ownership of an orange grove in the State of Florida

from which it derived income by way of the sales of citrus fruit grown in

Florida during the taxable years at issue: 1978, 1979, and 1980. The orange

grove constitutes real and tangible property in Florida for purposes of

Florida's corporate income tax.

4. Petitioner has consistently filed Florida corporate income tax returns

on a "separate accounting" basis since the inception of Florida's Corporate

Income Tax Law on January 1, 1972. Petitioner used this method for the years at

issue: 1978, 1979, and 1980. It did so without petitioning the Respondent

Department of Revenue for permission at or before the filing of the returns to

use the "separate accounting" method to determine the Florida tax base.

Accordingly, Petitioner did not receive prior written permission from the

Department to use the "separate accounting" method for those years, and the

Department did not require that the Petitioner use the "separate accounting"

method in those years. Nonetheless, Petitioner asserts that its pattern of

using the "separate accounting" method for six years put the Department on

sufficient notice that the corporate taxpayer would continue to use that method

indefinitely and further asserts that it was therefore entitled to use such a

"separate accounting" method on the basis of its prior consistent usage.

5. Petitioner's Florida corporate returns declare investment income from

dividends, interest, gains from securities, partnership income, and income from

its orange grove located in Florida. In each of the disputed tax years,

Petitioner entered its federal taxable income on Line 1 of the Florida

Corporation Income Tax Return, FORM F-1120. This amount is not at issue and is

accepted as a "given" by both parties.

6. However, in each of the disputed tax years, Petitioner did not complete

the apportionment schedule on Page 3 of the respective returns. Instead of

using the apportionment method, Petitioner computed what it characterized as

"Florida Profit" or "Florida Income" on a schedule it attached, based totally on

the profits it derived from the Florida orange grove and then inserted that

amount on Line 6, Florida Portion of Adjusted Federal Income, of the

"Computation of Florida Tax Liability" on the Florida return. This entry did

not relate computationally to the amount of federal taxable income reported

federally on Line 1.

7. All gross receipts from the sale of citrus fruit by Petitioner were

derived from sales made to Zellwood Fruit Distributors. This dollar amount is

also undisputed. Petitioner received payment from its Florida orange grove

operation in the form of checks drawn by Zellwood.

8. Approximately June 20, 1983, Respondent Department of Revenue made an

initial audit of Petitioner's books and records for the taxable years in

question. Respondent's auditor assigned at that time had full and free access

to Petitioner's books and records. He and his supervisor memorialized their

view that the "separate accounting" method employed by Petitioner was proper,

but this judgment call (by the auditor on June 29, 1983 and by his supervisor on

July 1, 1983) was in the nature of free-form agency action and was neither

accepted nor formalized by their superiors within the agency who ultimately

determined that the Petitioner should have employed the "apportionment" method

and that the burden was upon the Petitioner even under the apportionment method

to establish that one hundred percent of its income was not derived in Florida.

9. The Respondent Department therefore determined the tax owed by

Petitioner upon the basis of 100% of Petitioner's income as opposed to the

yearly percentages that Petitioner had unilaterally assigned to its orange

grove, and issued its Revised Notice of Intent to Make Corporate Income Tax

Audit Changes on November 7, 1983.

10. Florida's apportionment formula is a three-factor function which takes

selected business activities of the taxpayer and computes the portion of that

activity attributable to Florida, divided by that activity everywhere. A

composite of the subtotal of those three measures (payroll, sales, and property)

of business activity are used to compute Florida's share of the "everywhere"

base that would be available under the adjusted federal taxable income base.

See, Section 214.71(1), F.S.

11. The Department calculated the tax using the three statutorily

recognized apportionment factors of payroll, sales, and property. Concerning

the first apportionment factor, payroll, Petitioner had federally reported no

amount of payroll, and therefore this factor was determined by the Department to

be zero, and pursuant to Section 220.15, F.S., the payroll factor was eliminated

and the other two factors were used exclusively. Concerning the sales factor,

all gross receipts of the orange grove were considered to be derived within the

State of Florida, and all gross income attributable to intangible personal

property was excluded from the sales factor, pursuant to Section 220.15(1), F.S.

Concerning the property factor, the Department determined that all real and

tangible personal property was within the State of Florida. The situs of the

intangible property was not established by the taxpayer. Therefore, because

Section 214.71, F.S. limits the construction of the property factor to include

only "real and tangible personal property," it was thus determined to exclude

intangible property.

12. The Respondent Department of Revenue issued its Notice of Proposed

Assessment on November 16, 1983, showing a balance of $10,596.00 ($7308.00 tax,

$275.00 penalty, and $3,013.00 interest computed through October 31, 1983, plus

notice of daily interest of $2.40 per day from November 1, 1983 until paid.)

13. Petitioner timely availed itself of informal protest procedures, and

the Department issued its Notice of Decision on March 15, 1985. By its June 21,

1988 Notice of Reconsideration, the Department concluded its informal

proceedings and denied Petitioner's assertion of the right to use a "separate

accounting" method and further denied Petitioner's challenge to the Department's

assessment by the "apportionment" method, which in this instance had not made

any apportionment for "outside Florida" activities.

14. The situs of intangible personal property was not sufficiently

demonstrated by the Petitioner at formal hearing. The Petitioner also did not

establish that it owns real or tangible personal property outside Florida.

15. Zellwood Fruit Distributors provided Petitioner Murray Kramer with

letters attesting that, based upon information received from Winter Gardens

Citrus Products Cooperative, Winter Gardens' sales percentages in the State of

Florida were as follows:

1979 1980

18.60% 21.07%

Zellwood provided no such figures to Petitioner for the year 1978. Petitioner

contends, on the basis of the after the fact Zellwood letters, that Zellwood was

a member of Winter Gardens, a cooperative, and Murray Kramer was an associate

grower of Zellwood. At formal hearing, no one from Zellwood or Winter Gardens

testified; no contract between Petitioner Murray Kramer and either Zellwood or

Winter Gardens was introduced to prove agency; no bills of lading, sales slips,

corporate documents, or other connective link among the three entities was

offered in evidence; nor was any primary, direct, non-hearsay evidence of sales

amounts or situs of Winter Gardens' sales offered by Petitioner.

16. Milton Weiss, Petitioner's accountant, asserted that if a straight

"apportionment" (not "separate accounting") calculation had been made for the

income derived in Florida by Petitioner, percentages would be:

1978 1979 1980

24.03% 15.31% 15.01%

These percentages rely in part on what are clearly the out-of-court statements

of Zellwood's correspondent, relaying further out-of-court statements from

Winter Gardens Citrus. (See the immediately preceding Finding of Fact).

Neither of these out-of-court hearsay statements is such as may be used to

supplement or explain direct evidence, since no direct, primary source evidence

of these sales or income has been presented before the undersigned in this de

novo proceeding. See, Section 120.58(1), F.S.

17. Petitioner has not directly paid wages during the tax years at issue.

18. Petitioner has not produced any federal partnership tax returns nor

other persuasive proof to account for the return on its investments through

partnership channels.

19. During the tax years at issue, Petitioner was not a member of a

Florida cooperative, as that term, "cooperative," is used in Section

214.71(3)(a)2, F.S. (See Finding of Fact 15).

20. Petitioner was unable, by evidence of a type commonly relied upon by

reasonably prudent persons in the conduct of their affairs, to establish that

all amounts other than the percentages of gross income Petitioner had assigned

by either of the alternative accounting methods was generated outside of the

State of Florida. In so finding, the undersigned specifically rejects

Petitioner's assertion that the initial audit report of June 1983 could, by

itself alone, legally or factually establish that only the orange grove income

was Florida income, that Petitioner's Florida income was solely from the orange

grove, that the interest, dividends, and gains on securities sales were not

derived in Florida, that the Petitioner taxpayer received rent income from

partnerships, that the partnership real estate which gave rise to the rent

income was 100% outside Florida, or that the Respondent's initial audit

"verified" the figures needed to compute the sales factor, the figures for the

property factor, and the figures for the payroll factor of the "apportionment"

method for the following reasons: In addition to the first auditor's report

being free-form agency action which was ultimately rejected by the agency, and

in addition to the failure of either the first auditor or his supervisor to

testify in the instant Section 120.57(1) de novo proceeding as to the accuracy

of the underlying primary documentation which Petitioner Murray Kramer claimed

the first auditor had apparently reviewed, Petitioner did not offer in evidence

at formal hearing any such direct evidence documentation which it claimed had

been reviewed by the auditors. Further, Respondent's successive auditor, Mr.

Siska, testified that it is auditor practice to only examine those books and

records individual auditors believe to be necessary to complete the audit. This

discretionary element eliminates any guarantee of what the initial auditor

relied upon.

21. For the same reasons, Petitioner's assertion that the Internal Revenue

Service (IRS) audit of its books and records for the year 1979 "verifies" that

the Petitioner's books and records accurately reflect the transactions that took

place, is rejected. Petitioner Murray Kramer had admitted a letter (P-10)

notifying the corporation that the IRS' "examination of ... tax returns for the

above periods shows no change as required in the tax reported. The returns are

accepted as filed." The tax period indicated on this exhibit is "7912", which

is not helpful, and even if it means, as Mr. Weiss testified, that the 1979

federal tax return which is part of the Florida Corporate Tax Return is accurate

under federal law, this IRS letter alone does not verify all the underlying

documentation for all three years in question.

22. Also, specifically with regard to investments made through other

entities, Mr. Weiss' testimony suggests that the wages paid and partnership

returns of these other entities never were in the possession of, nor accessible

by, this Petitioner.

23. Petitioner's reliance on its federal returns is apparently based, in

part, at least, upon its assertion that it is a "financial institution" as

defined in Sections 214.71(3)(b) and 220.15(2), F.S., but the presentation

quality of evidence in this case does not permit of such a finding, either.

24. Petitioner has paid no portion of the assessed taxes.

CONCLUSIONS OF LAW

25. The Division of Administrative Hearings has jurisdiction over the

parties and subject matter of this cause. See, Section 120.57(1), F.S.

26. The initial order of proof approved in this type of assessment

proceeding is for the Department of Revenue to establish that the agency was

appropriately and procedurally correct in the assessment. At that point, the

order and burden of proof shifts to the Petitioner to establish the

inaccurateness of the agency's assessment with regard to the liability for, and

amount of tax, interest, and penalties claimed. See, Section 214.06, F.S.

27. The Respondent agency met its initial prima facie burden of proof.

Petitioner failed to demonstrate that the assessment was in error.

28. Petitioner Murray Kramer first contended that the assessment was in

error because Petitioner is entitled to use a "separate accounting" procedure

pursuant to Section 214.73(1), F.S., which separate accounting method it had

employed from 1972 to 1978 (six consecutive years) without requesting prior

approval to do so from the Respondent Department of Revenue. Petitioner's

argument in support of this proposition is somewhere between asserting that the

agency was "on notice" since the agency had accepted this method for six years

before denying it in 1978, 1979, and 1980, and "estoppel" for the same reason.

The Respondent agency contends that prior written agency approval of the use of

such a method must be sought and obtained by the taxpayer, pursuant to Section

214.73, F.S. That statute provides, in pertinent part, as follows:

If the apportionment methods of ss. 214.71

and 214.72 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;

Petitioner Murray Kramer admittedly did not get such formal approval prior to

filing the returns in question, but Respondent has failed to show that the

statute clearly mandates Respondent's reading that prior written agency approval

is required. On the other hand, the Petitioner has not demonstrated any case

law to support its position re: "notice equals estoppel and/or approval."

29. Assuming, but not ruling, that an estoppel theory of some kind would

permit Petitioner to continue to file its returns using the "separate

accounting" method, the Respondent Department was nonetheless entitled at any

time within the specified statutory period, to return and audit the Petitioner's

corporate returns so as to determine their accuracy and appropriateness.

30. In this instant situation, before the audit was finally approved, the

Department of Revenue considered the opinion in Roger Dean Enterprises, Inc. v.

Florida Department of Revenue, 387 So.2d 358 (Fla. 1980), which created a very

strong presumption in favor of the apportionment method of accounting, and the

Department then conducted its assessment on that basis. The pertinent

directions in Roger Dean are as follows:

There is a very strong presumption in favor

of normal 3-factor apportionment and against

the applicability of the relief provisions.

See Donald M. Drake Co. v. Department of

Revenue, 263 Or. 26, 500 P.2d 1041 (1972).

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...

Section 214.73, Florida Statutes (1973),

gives the Department of Revenue discretion to

alter the apportionment formula in very rare

instances, but does not vest any discretion

in the Department to modify federal taxable

income.

31. Petitioner did not establish any rare circumstances to warrant

acceptance of the separate accounting procedure over the regular three-factor

apportionment method provided in Section 214.71(1), F.S. See, also, Section

220.53, F.S.

32. Petitioner did not present the necessary underlying documentation to

support its "separate accounting" figures.

33. Petitioner alternatively and ultimately suggested that the three-

factor apportionment formula should have different numbers plugged into it than

the Department of Revenue had used. The thrust of Petitioner's presentation at

formal hearing was in this direction and this alternative position also failed

upon a lack of credible supporting evidence. It appears that all of such full

documentation was never in the possession of Petitioner, so the agency also is

not estopped by its considerable delay (5 years) during the informal resolution

process.

34. Most commonly, a corporation uses its own property, payroll, and sales

to calculate apportionment between in-Florida and out-of-state activities.

Murray Kramer argued that certain amounts allegedly paid to employees of certain

limited partnerships (by the limited partnerships) should be included in the

payroll factor of its apportionment formula. Murray Kramer asserts that it is a

limited partner of these limited partnerships and that its distributive share of

the partnership's factors should be included in its apportionment. The

Department denied this assertion because the federal partnership tax returns

were not produced and the requisite federally determined amounts were not

presented so as to perfect Murray Kramer's opportunity to obtain factor

adjustments based upon its alleged interests in partnerships.

35. However, 12C-1.022(2), F.A.C. provides:

Every Florida partnership having any partner

subject to the Florida Corporate Income Tax

Code is required to make an information

return...

(b) The corporate taxpayer-partner filing

Form F-1120, Florida Corporation Income Tax

Return, may use FORM 1065 to report its

distributive share of partnership income and

its share of the apportionment factors of a

partnership with joint venture which is not a

Florida partnership.

Example: Corporation W is subject to the

Florida Income Tax Code and is also a partner

in partnership UVW, an Ohio partnership, that

does no business in Florida and is not

required to file a Florida Partnership

Information Return. However, W may use FORM

F-1065, Florida Partnership Information

Return, to report its share of the

partnership income adjustments and the

partnership apportionment factors for

partnership UVW.

36. At formal hearing, Petitioner did not offer in evidence federal

partnership returns from its partners, or even self-serving Florida 1065's based

on such federal returns, and has instead relied on figures computed from

inadmissible or not credible hearsay sources.

37. "Financial organizations" may claim the right, pursuant to Section

214.71(3)(b)2, F.S., to use the gross profits (interest and dividends) arising

from ownership of stocks, bonds, or other securities as part of the sales

factor, but herein, there is insufficient credible direct evidence to pronounce

Petitioner a "financial organization" or to establish that its stocks, bonds,

and securities have a business situs outside of Florida. Although the initial

auditors may have, as Petitioner's sole witness asserted, examined books and

records including bank statements and broker statements which could have

established that the interest, dividends, and gains on securities sales and

rental income were from partnerships outside of Florida, these primary sources

were not introduced at formal hearing, which is a de novo hearing, and therefore

these were not before the undersigned.

38. Section 220.15(1), F.S. excludes interest and dividends from the sales

factor to be used by sellers of tangible personal property, i.e., citrus fruit.

Rule 12C-1.015(4)(d)6, F.A.C. excludes income arising from the sales factor

unless geographic situs is established. It was not.

39. Section 214.71(3)(a)2, F.S. permits use of an alternative sales factor

only when citrus fruit is delivered by a cooperative for a grower member, by a

grower member to a cooperative, or by a grower-participant to a Florida

processor. Petitioner sold all its orange grove produce to Zellwood which was

not established to be a cooperative, and Petitioner admittedly was not a

cooperative itself. Without an agency agreement or something more than the

unsupported hearsay statements in Zellwood's letters, Petitioner cannot qualify

for this calculation credit/formula. Moreover, Section 214.71(3)(a), F.S.

(1980) was not available for Petitioner's 1978 calendar year tax return.

RECOMMENDATION

Based upon the foregoing findings of fact and conclusions of law, it is

RECOMMENDED that the Department of Revenue enter a Final Order which

dismisses the Petition and affirms the assessment.

DONE and ORDERED this 26th day of June, 1989, in Tallahassee, Leon County,

Florida.

_________________________________

ELLA JANE P. DAVIS

Hearing Officer

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-1550

[phone]

Filed with the Clerk of the

Division of Administrative Hearings

this 26th day of June, 1989.

APPENDIX TO RECOMMENDED ORDER, CASE NO. 88-4100

The following constitute rulings, pursuant to Section 120.59(2), F.S. upon

the parties' respective proposed findings of fact (PFOF).

Petitioner's PFOF:

1, 6. Accepted.

2, 9, 10, 11, 17, 19. Rejected for the reasons set out in the Recommended

Order.

3, 5, 7, 8, 12, 14, 16. Accepted but not dispositive of any material issue

for the reasons set forth in the Recommended Order. With regard to item 8,

specifically, this determination is non-binding in the de novo proceeding.

4. Rejected upon the citation given as not proved or applicable as stated.

13. Accepted in part and rejected in part as not proved or applicable as

stated. See Conclusions of Law 11-12.

15, 18. Rejected as out of context and misleading upon the record as a

whole, and as not dispositive of any material issue, and as subordinate and

unnecessary to the facts as found.

Respondent's PFOF:

1, 2, 3, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 18. Accepted.

4, 5. Accepted in part; what is not adopted is subordinate or unnecessary

to the facts as found.

17. Accepted, but by itself is not dispositive of any material issue at

bar, for the reasons set out in the Recommended Order.

COPIES FURNISHED:

Milton P. Weiss, C.P.A.

686 Hampstead Avenue

West Hampstead, New York 11552

Jeffrey M. Dikman, Esquire

Assistant Attorney General

Tax Section

Department of Legal Affairs

The Capitol

Tallahassee, Florida 32399-1050

Sharon A. Zahner, Esquire

Assistant General Counsel

Department of Revenue

Room 204, Carlton Building

Post Office Box 6668

Tallahassee, Florida 32314-6668

William D. Townsend, Esquire

General Counsel

203 Carlton Building

Tallahassee, Florida 32399

Katie D. Tucker, Executive Director

Department of Revenue

102 Carlton Building

Tallahassee, Florida 32399-0100

Milton P. Weiss, C.P.A.

3091 North Course Drive

Pompano Beach, Florida 33069

=================================================================

AGENCY FINAL ORDER

=================================================================

STATE OF FLORIDA

DEPARTMENT OF REVENUE

MURRAY KRAMER CORPORATION,

INC.,

Petitioner,

vs. CASE NO. 88-4100

STATE OF FLORIDA DEPARTMENT

OF REVENUE,

Respondent.

_____________________________/

FINAL ORDER

Upon due notice, this cause came on for formal hearing on February 13,

1989, in Tallahassee, Florida, before Ella Jane P. Davis, a duly assigned

Hearing Officer of the Division of Administrative Hearings.

APPEARANCES

For Petitioner: Milton P. Weiss, C.P.A.

as Qualified Representative of

Petitioner

686 Hampstead Avenue

West Hampstead, New York 11552

For Respondent: Jeffrey M. Dikman, Esquire

Assistant Attorney General

Tax Section

Department of Legal Affairs

The Capitol

Tallahassee, Florida 32399-1050

Sharon A. Zahner, Esquire

Assistant General Counsel

Department of Revenue

Room 204, Carlton Building

Post Office Box 6668

Tallahassee, Florida 32314-6668

Hearing Officer Davis subsequently entered a recommended Order on June 26,

1989. On July 21, 1989, the Attorney General, on behalf of the Department of

Revenue, timely filed an exception to one conclusion of law contained within the

recommended Order but did not take exception to the findings of fact contained

within the Recommended Order. The exception taken by the Department was merely

for purposes of clarification, was consistent with the conclusions of law

rendered by the Hearing Officer, and is hereby adopted. With this one change

the Recommended Order is adopted verbatim.

STATEMENT OF THE ISSUE

Is the Respondent's assessment for corporate income tax and interest for

the tax years ending 12/31/78, 12/31/79, and 12/31/80 appropriate, and may it be

properly imposed upon Petitioner?

PRELIMINARY STATEMENT

At the commencement of formal hearing, Milton P. Weiss, C.P.A., was

examined and determined on the record to be both authorized and qualified to

represent Petitioner, pursuant to Rule 22I-6.008, F.A.C. To this end, one

exhibit was admitted as HO-A.

Official recognition was taken of certain statutes and rules and a number

of motions were disposed of upon the record and need not be revisited here.

Respondent presented the oral testimony of Frank J. Siska and had admitted

in evidence Exhibits R-1, R-2A, R-2B, R-3, R-4, R-5, and R-7. There was no R-6.

Petitioner presented the oral testimony of Milton P. Weiss and had admitted

Exhibits P-1, P-2, P-3, P-9, and P-10. Exhibits P-6, P-7, and P-8 were not

admitted in evidence.

A transcript was filed, and all timely-filed proposed findings of fact have

been ruled upon in the Appendix to this Respondent's Proposed Substituted Order,

pursuant to Section 120.59(2), F.S.

FINDINGS OF FACT

1. The instant dispute between the parties arose out of how the

substantial business interests of Petitioner Murray Kramer Corp. are to be

defined and by what accounting method its corporate income tax assessments are

to be made. Milton P. Weiss, C.P.A., is Petitioner's accountant and qualified

representative for purposes of this proceeding. He is neither an internal

bookkeeper for the corporation nor a corporate officer thereof.

2. At all times material, Petitioner was conducting business, deriving

income, or existing within the State of Florida, pursuant to Chapter 220, F.S.

3. Petitioner invests primarily through partnerships. Among Petitioner's

holdings and investments is ownership of an orange grove in the State of Florida

from which it derived income by way of the sales of citrus fruit grown in

Florida during the taxable years at issue: 1978, 1979, and 1980. The orange

grove constitutes real and tangible property in Florida for purposes of

Florida's corporate income tax.

4. Petitioner has consistently filed Florida corporate income tax returns

on a "separate accounting" basis since the inception of Florida's Corporate

Income Tax Law on January 1, 1972. Petitioner used this method for the years at

issue: 1978, 1979, and 1980. It did so without petitioning the Respondent

Department of Revenue for permission at or before the filing of the returns to

use the "separate accounting" method to determine the Florida tax base.

Accordingly, Petitioner did not receive prior written permission from the

Department to use the "separate accounting" method for those years, and the

Department did not require that the Petitioner use the "separate accounting"

method in those years. Nonetheless, Petitioner asserts that its pattern of

using the "separate accounting" method for six years put the Department on

sufficient notice that the corporate taxpayer would continue to use that method

indefinitely and further asserts that it was therefore entitled to use such a

"separate accounting" method on the basis of its prior consistent usage.

5. Petitioner's Florida corporate returns declare investment income from

dividends, interest, gains from securities, partnership income, and income from

its orange grove located in Florida. In each of the disputed tax years,

Petitioner entered its federal taxable income on Line 1 of the Florida

Corporation Income Tax Return, FORM F-1120. This amount is not at issue and is

accepted as a "given" by both parties.

6. However, in each of the disputed tax years, Petitioner did not complete

the apportionment schedule on Page 3 of the respective returns. Instead of

using the apportionment method, Petitioner computed what it characterized as

"Florida Profit" or "Florida Income" on a schedule it attached, based totally on

the profits it derived from the Florida orange' grove and then inserted that

amount on Line 6, Florida Portion of Adjusted Federal Income, of the

"Computation of Florida Tax Liability" on the Florida return. This entry did

not relate computationally to the amount of federal taxable income reported

federally on Line 1.

7. All gross receipts from the sale of citrus fruit by Petitioner were

derived from sales made to Zellwood Fruit Distributors. This dollar amount is

also undisputed. Petitioner received payment from its Florida orange grove

operation in the form of checks drawn by Zellwood.

8. Approximately June 20, 1983, Respondent Department of Revenue made an

initial audit of Petitioner's books and records for the taxable years in

question. Respondent's auditor assigned at that time had full and free access

to Petitioner's books and records. He and his supervisor memorialized their

view that the "separate accounting" method employed by Petitioner was proper,

but his judgment call (by the auditor on June 29, 1983 and by his supervisor on

July 1, 1983) was in the nature of free-form agency action and was neither

accepted nor formalized by their superiors within the agency who -ultimately

determined that the Petitioner should have employed the "apportionment" method

and that the burden was upon the Petitioner even under the apportionment method

to establish that one hundred percent of its income was not derived in Florida.

9. The Respondent Department therefore determined the tax owed by

Petitioner upon the basis of 100% of Petitioner's income as opposed to the

yearly percentages that Petitioner had unilaterally assigned to its orange

grove, and issued its Revised Notice of Intent to Make Corporate Income Tax

Audit Changes on Novemeber 7, 1983.

10. Florida's apportionment formula is a three-factor function which takes

selected business activities of the taxpayer and computes the portion of that

activity attributable to Florida, divided by that activity everywhere. A

composite of the subtotal of those three measures (payroll, sales, and property)

of business activity are used to compute Florida's share of the "everywhere"

base that would be available under the adjusted federal taxable income base.

See, Section 214.71(1), F.S.

11. The Department calculated the tax using the three statutorily

recognized apportionment factors of payroll, sales, and property. Concerning

the first apportionment factor, payroll, Petitioner had federally reported no

amount of payroll, and therefore this factor was determined by the Department to

be -zero, and pursuant to Section 220.15, F.S., the payroll factor was

eliminated and the other two factors were used exclusively. Concerning the

sales factor, all gross receipts of the orange grove were considered to be

derived within the State of Florida, and all gross income attributable to

intangible personal property was excluded from the sales factor, pursuant to

Section 220.15(1), F.S. Concerning the property factor, the Department

determined that all real and tangible personal property was within the State of

Florida. The situs of the intangible property was not established by the

taxpayer. Therefore, because Section 214.71, F.S. limits the construction of

the property factor to include only "real and tangible personal property," it

was thus determined to exclude intangible property.

12. The Respondent Department of Revenue issued its Notice of Proposed

Assessment on November 16, 1983, showing a balance of $10,596.00 ($7308.00 tax,

$275.00 penalty, and $3,013.00 interest computed through October 31, 1983, plus

notice of daily interest of $2.40 per day from November 1, 1983 until paid.)

13. Petitioner timely availed itself of informal protest procedures, and

the Department issued its Notice of Decision on March 15, 1985. By its June 21,

1988 Notice of Reconsideration, the Department concluded its informal

proceedings and denied Petitioner's assertion of the right to use a "separate

accounting" method and further denied Petitioner's challenge to the Department's

assessment by the apportionment" method, which in this instance had not made any

apportionment for "outside Florida" activities.

14. The situs of intangible personal property was not sufficiently

demonstrated by the Petitioner at formal hearing. The Petitioner also did not

establish that it owns real or tangible personal property outside Florida.

15. Zellwood Fruit Distributors provided Petitioner Murray Kramer with

letters attesting that, based upon information received from Winter Gardens

Citrus Products Cooperative, Winter Gardens' sales percentages in the State of

Florida were as follows:

1979 1980

18.60% 21.07%

Zellwood provided no such figures to Petitioner for the year 1978. Petitioner

contends, on the basis of the after the fact Zellwood letters, that Zellwood was

a member of Winter Gardens, a cooperative, and Murray Kramer was an associate

grower of Zellwood. At formal hearing, no one from Zellwood or Winter Gardens

testified; no contract between Petitioner Murray Kramer and either Zellwood or

Winter Gardens was introduced to prove agency; no bills of lading, sales slips,

corporate documents, or other connective link among the three entities was

offered in evidence; nor was any primary, direct, non-hearsay evidence of sales

amounts or situs of Winter Gardens' sales offered by Petitioner.

16. Milton Weiss, Petitioner's accountant, asserted that if a straight

"apportionment" (not "separate accounting") calculation had been made for the

income derived in Florida by Petitioner, percentages would be:

1978 1979 1980

24.03% 15.31% 15.01%

These percentages rely in part on what are clearly the out-of-court statements

of Zellwood's correspondent, relaying further out-of-court statements from

Winter Gardens Citrus. (See the immediately preceding Finding of Fact). Neither

of these out-of-court hearsay statements is such as may be used to supplement or

explain direct evidence, since no direct, primary source evidence of these sales

or income has been presented before the undersigned in this de novo proceeding.

See, Section 120.58(1), F.S.

17. Petitioner has not directly paid wages during the tax years at issue.

18. Petitioner has not produced any federal partnership tax returns nor

other persuasive proof to account for the return on its investments through

partnership channels.

19. During the tax years at issue, Petitioner was not a member of a

Florida cooperative, as that term, "cooperative," is used in Section

214.71(3)(a)2, F.S. (See Finding of Fact 15).

20. Petitioner was unable, by evidence of a type commonly relied upon by

reasonably prudent persons in the conduct of their affairs, to establish that

all amounts other than the percentages of gross income Petitioner had assigned

by either of the alternative accounting methods was generated outside of the

State of Florida. In so finding, the undersigned specifically rejects

Petitioner's assertion that the initial audit report of June 1983 could, by

itself alone, legally or factually establish that only the orange grove income

was Florida income, that Petitioner's Florida income was solely from the orange

grove, that the interest, dividends, and gains on securities sales were not

derived in Florida, that the Petitioner taxpayer received rent income from

partnerships, that the partnership real estate which gave rise to the rent

income was 100% outside Florida, or that the Respondent's initial audit

"verified" the figures needed to compute the sales factor, the figures for the

property factor, and the figures for the payroll factor of the "apportionment"

method for the following reasons: In addition to the first auditor's report

being free-form agency action which was ultimately rejected by the agency, and

in addition to the failure of either the first auditor or his supervisor to

testify in the instant Section 120.57(1) de novo proceeding as to the accuracy

of the underlying primary documentation which Petitioner Murray Kramer claimed

the first auditor had apparently reviewed, Petitioner did not offer in evidence

at formal hearing of any such direct evidence documentation which it claimed had

been reviewed by the auditors. Further, Respondent's successive auditor, Mr.

Siska, testified that it is auditor practice to only examine those books and

records individual auditors believe to be necessary to complete the audit. This

discretionary element eliminates any guarantee of what the initial auditor

relied upon.

21. For the same reasons, Petitioner's assertion that the Internal Revenue

Service (IRS) audit of its books and records for the year 1979 "verifies" that

the Petitioner's books and records accurately reflect the transactions that took

place, is rejected. Petitioner Murray Kramer had admitted a letter (P-10)

notifying the corporation that the IRS' "examination of ... tax returns for the

above periods shows no change as required in the tax reported. The returns are

accepted as filed." The tax period indicated on this exhibit is "7912", which

is not helpful, and even if it means, as Mr. Weiss testified, that the 1979

federal tax return which is part of the Florida Corporate Tax Return is accurate

under federal law, this IRS letter alone does not verify all the underlying -

documentation for all three years in question.

22. Also, specifically with regard to investments made through other

entities, Mr. Weiss' testimony suggests that the wages paid and partnership

returns of these other entities never were in the possession of, nor accessible

by, this Petitioner.

23. Petitioner's reliance on its federal returns is apparently based, in

part, at least, upon its assertion that it is a "financial institution" as

defined in sections 214.71(3)(b) and 220.15(2), F.S., but the presentation

quality of evidence in this case does not permit of such a finding, either.

24. Petitioner has paid no portion of the assessed taxes.

CONCLUSIONS OF LAW

1. The Division of Administrative Hearings has jurisdiction over the

parties and subject matter of this cause. See, Section 120.57(1), F.S.

2. The initial order of proof approved in this type of assessment

proceeding is for the Department of Revenue to establish that the agency was

appropriately and procedurally correct in the assessment. At that point, the

order and burden of proof shifts to the Petitioner to establish the

inaccurateness of the agency's assessment with regard to the liability for, and

amount of tax, interest, and penalties claimed. See, Section 214.06, F.S.

3. The Respondent agency met its initial prima facie burden of proof.

Petitioner failed to demonstrate that the assessment was in error.

4. Petitioner Murray Kramer first contended that the assessment was in

error because Petitioner is entitled to use a "separate accounting" procedure

pursuant to Section 214.73(1), F.S., which separate accounting method it had

employed from 1972 to 1978 (six consecutive years) without requesting prior

approval to do so from the Respondent Department of Revenue. Petitioner's

argument in support of this proposition is somewhere between asserting that the

agency was "on notice" since the agency had accepted this method for six years

before denying it in 1978, 1979, and 1980, and "estoppel" for the same reason.

The Respondent agency contends that prior written agency approval of the use of

such a method must be sought and obtained by the taxpayer, pursuant to Section

214.73, F.S. That statute provides, in pertinent part, as follows:

If the apportionment methods of ss. 214.71

and 214.72 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;

Petitioner Murray Kramer admittedly did not get such formal approval prior to

filing the returns in question, but Respondent has failed to show that the

statute clearly mandates Respondent's reading that prior written agency approval

is required. On the other hand, the Petitioner has not demonstrated any case

law to support its position re: "notice equals estoppel and/or approval."

5. Assuming, but not ruling, that an estoppel theory of some kind would

permit Petitioner to continue to file its returns using the "separate

accounting" method, the Respondent Department was nonetheless entitled at any

time within the specified statutory period, to return and audit the Petitioner's

corporate returns so as to determine their accuracy and appropriateness.

6. In this instant situation, before the audit was finally approved, the

Department of Revenue considered the opinion in Roger Dean Enterprises, Inc. v.

Florida Department of Revenue, 387 So.2d 358 (Fla. 1980), which created a very

strong presumption in favor of the apportionment method of accounting, and the

Department then concluded its assessment on that basis. The pertinent

directions in Roger Dean as are follows:

There is a very strong presumption in favor

of normal 3-factor apportionment and against

the applicability of the relief provisions.

See Donald M. Drake Co. v. Department of

Revenue, 263 Or. 26, 500 P.2d 1041 (1972).

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...

Section 214.73, Florida Statutes (1973),

gives the Department of Revenue discretion

to alter the apportionment formula in very

rare instances, but does not vest any

discretion in the Department to modify

federal taxable income.

7. Petitioner did not establish any rare circumstances to warrant

acceptance of the separate accounting procedure over the regular three-factor

apportionment method provided in Section 214.71(1), F.S. See, also, Section

220.53, F.S.

8. Petitioner did not present the necessary underlying documentation to

support its "separate accounting" figures.

9. Petitioner alternatively and ultimately suggested that the three-factor

apportionment formula should have different numbers plugged into it than the

Department of Revenue had used. The thrust of Petitioner's presentation at

formal hearing was in this direction and this alternative position also failed

upon a lack of credible supporting evidence. It appears that all of such full

documentation was never in the possession of Petitioner, so the agency also is

not estopped by its considerable delay (5 years) during the informal resolution

process.

10. Most commonly, a corporation uses its own property, payroll, and sales

to calculate apportionment between in-Florida and out-of-state activities.

Murray Kramer argued that certain amounts allegedly paid to employees of certain

limited partnerships (by the limited partnerships) should be included in the

payroll factor of its apportionment formula. Murray Kramer asserts that it is a

limited partner of these limited partnerships and that its distributive share of

the partnership's factors should be included in its apportionment. The

Department denied this assertion because the federal partnership tax returns

were not produced and the requisite federally determined amounts were not

presented so as to perfect Murray Kramer's opportunity to obtain factor

adjustments based upon its alleged interests in partnerships.

11. However, 12C-1.022(2), F.A.C. provides:

Every Florida partnership having any partner

subject to the Florida Corporate Income Tax

Code is required to make an information

return...

(b) The corporate taxpayer-partner filing

Form F-1120, Florida Corporate Income Tax

Return, may use FORM 1065 to report its

distributive share of partnership income

and its share of the apportionment factors of

a partnership with joint venture which is not

a Florida partnership.

Example: Corporation W is subject to the

Florida Income Tax Code and is also a partner

in partnership UVW, an Ohio partnership, that

does no business in Florida and is not required

to file a Florida Partnership Information

Return. However, W may use FORM F-1065,

Florida Partnership Information Return, to

report its share of the partnership income

adjustments and the partnership apportionment

factors for partnership UVW.

12. At formal hearing, Petitioner did not offer in evidence federal

partnership returns from its partners, or even self-serving Florida 1065's based

on such federal returns, and has instead relied on figures computed from

inadmissible or not credible hearsay sources.

13. "Financial organizations" may claim the right, pursuant to Section

214.71(3)(b)2, F.S., to use the gross profits (interest and dividends) arising

from ownership of stocks, bonds, or other securities as part of the sales

factor, but herein, there is insufficient credible direct evidence to pronounce

Petitioner a "financial organization" or to establish that its stocks, bonds,

and securities have a business situs outside of Florida. Although the initial

auditors may have, as Petitioner's sole witness asserted, examined books and

records including bank statements and broker statements which could have

established that the interest, dividends, and gains on securities sales and

rental income were from partnerships outside of Florida, these primary sources

were not introduced at formal hearing, which is a de novo hearing, and therefore

these were not before the undersigned.

14. Section 220.15(1), F.S. excludes interest and dividends from the sales

factor to be used by sellers of tangible personal property, i.e., citrus fruit.

Rule 12C-1.015(4)(d)6, F.A.C. excludes income attributable to intangibles from

the sales factor unless geographic situs is established. Situs was not

established.

15. Section 214.71(3)(a)2, F.S. permits use of an alternative sales factor

only when citrus fruit is delivered by a cooperative for a grower member, by a

grower member to a cooperative, or by a grower-participant to a Florida

processor. Petitioner sold all its orange grove produce to Zellwood which was

not established to be a cooperative, and Petitioner admittedly was not a

cooperative itself. Without an agency agreement or something more than the

unsupported hearsay statements in Zellwood's letters, Petitioner cannot qualify

for this calculation credit/formula. Moreover, Section 214.71(3)(a), F.S.

(1980) was not available for Petitioner's 1978 calendar year tax return.

Any Party to this Order has the right to seek judicial review of the Order

pursuant to Section 120.68, F.S., by the filing of a Notice of Appeal pursuant

to Rule 9.110, Florida Rules of Appellate Procedure, with the clerk of the

Department in the Office of General Counsel, Post Office Box 6668, Tallahassee

Florida 32314-6668 and by filing a copy of the Notice of Appeal accompanied by

the applicable filing fees with the appropriate District Court of Appeal. The

Notice of Appeal must be filed within 30 days from the date this Order is filed

with the clerk of the Department.

Based upon the foregoing findings of fact and conclusions of law, it is

ORDERED that the assessment be affirmed and that the Petition be dismissed.

DONE and ORDERED this 20th day of September 1989, in Tallahassee, Leon

County, Florida.

________________________

KATIE D. TUCKER

Executive Director

Department of Revenue

Post Office Box 6668

Tallahassee, Florida 32314-6668

[phone]

Filed with the Clerk of the

Department of Revenue this

20th day of September, 1989.

APPENDIX TO RESPONDENT'S PROPOSED SUBSTITUTED ORDER

IN CASE NO. 88-4100

The following constitute rulings, pursuant to Section 120.59(2), F.S. upon

the parties' respective proposed findings of fact (PFOF).

Petitioner's PFOF:

1, 6. Accepted.

2, 9, 10, 11, 17, 19. Rejected for the reasons set out in the

Respondent's Proposed Substituted Order.

3, 5, 7, 8, 12, 14, 16. Accepted but not dispositive of any material

issue for the reasons set forth in the Respondent's Proposed Substituted Order.

With regard to item 8, specifically, this determination is non-binding in the de

novo proceeding.

4. Rejected upon the citation given as not proved or applicable as

stated.

13. Accepted in part and rejected in part as not proved or applicable as

stated. See Conclusions of Law 11-12.

15, 18. Rejected as out of context and misleading upon the record as a

whole, and as not dispositive of any material issue, and as subordinate and

unnecessary to the facts as found.

Respondent's PFOF:

1, 2, 3, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 18. Accepted.

4, 5. Accepted in part; what is not adopted is subordinate or unnecessary

to the facts as found.

17. Accepted, but by itself is not dispositive of any material issue at

bar, for the reasons set out in the Respondent's Proposed Substituted Order.

COPIES FURNISHED:

Milton P. Weiss, C.P.A.

686 Hampstead Avenue

West Hampstead, New York 11552

Jeffrey M. Dikman, Esquire

Assistant Attorney General

Tax Section

Department of Legal Affairs

The Capitol

Tallahassee, Florida 32399-1050

Sharyn L. Smith, Director

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-1550

Sharon A. Zahner, Esquire

Assistant General Counsel

Department of Revenue

Room 204, Carlton Building

Post Office Box 6668

Tallahassee, Florida 32314-6668

William D. Moore, Esquire

General Counsel

Room 203, Carlton Building

Post Office Box 6668

Tallahassee, Florida 32314-6668

Katie D. Tucker, Executive Director

Department of Revenue

102 Carlton Building

Tallahassee, Florida 32399-0100

Milton P. Weiss, C.P.A.

3091 North Course Drive

Pompano Beach, Florida 33069

Ella Jane P. Davis

Hearing Officer

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-1550