97-000698 American Aircraft Sales International, Inc. vs. Department Of Revenue Status: Closed Recommended Order on Friday, October 3, 1997.

Summary: Aircraft dealer held planes for resale and lease-sale. Use tax assessed because plans were depreciated in error, though amended returns corrected error. Recommended Order: no tax.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

AMERICAN AIRCRAFT SALES )

INTERNATIONAL, INC. , )

)

Petitioner , )

)

vs. ) Case No. 97-0698

)

STATE OF FLORIDA, DEPARTMENT OF )

REVENUE , )

)

Respondent. )

___________________________________)

RECOMMENDED ORDER

On August 4, 1997, a formal administrative hearing was held

in this case in Tallahassee, Florida, before J. Lawrence

Johnston, Administrative Law Judge, Division of Administrative

Hearings.

APPEARANCES

For Petitioner: Harold F. X. Purnell, Esquire

Rutledge, Ecenia, Underwood,

Purnell & Hoffman

Post Office Box 551

Tallahassee, Florida 32302-0551

For Respondent: Albert J. Wollerman, Esquire

Office of the Attorney General

The Capitol

Tax Section

Tallahassee, Florida 32399-1050

STATEMENT OF THE ISSUE

The issue in this case is whether the Petitioner owes State

of Florida use tax and local government infrastructure tax on the

alleged use of three airplanes.

PRELIMINARY STATEMENT

On November 21, 1995, the State of Florida Department of

Revenue (the "Department") issued a Notice of Proposed Assessment

for sales or use tax and local government infrastructure tax upon

the Petitioner, American Aircraft International, Inc.

("American"). The assessment was issued after an audit conducted

by the Department confirmed that American had depreciated three

(3) aircraft for federal income tax purposes but had paid neither

sales tax on their purchase nor use tax on their use. The

Department assessed American for use tax and local government

infrastructure surtax for the period of August 1, 1989 through

July 31, 1994, plus delinquent penalties and interest.

On February 26, 1996, American filed an informal protest.

On October 7, 1996, the Department issued its Notice of Decision

sustaining the assessment, in full, less partial payments of

$5,036.45 on the use tax assessment and $459.99 on the local

government infrastructure surtax assessment. American protested

the assessment in a Petition for Reconsideration, dated November

6, 1996. The Department denied the Petition for Reconsideration

and upheld the assessment in its Notice of Reconsideration, dated

January 10, 1997.

American requested formal administrative proceedings on the

assessment, and the matter was referred to the Division of

Administrative Hearings on February 17, 1997. After two

continuances relating to discovery, a formal administrative

hearing was held on August 4, 1997, in Tallahassee, Florida.

American presented testimony from Mrs. Dorothy Tolbert, co-owner

of American, and Mr. Allen Shaw, American's certified public

accountant (CPA), and had Petitioner's Exhibits 1 through 6

admitted in evidence. By virtue of a Joint Pre-hearing

Stipulation, the Department presented its prima facie case

through the stipulated testimony of Tax Auditor, William Berger,

and had Department's Exhibits 1 through 7 admitted in evidence.

At the end of the final hearing, the Department ordered a

transcript, and the parties were given 15 days from the filing of

the transcript in which to file their proposed recommended

orders.

The transcript of the proceedings was filed on August 19,

1997. However, uncontested motions for extension of time from

each party were granted, extending the time to file proposed

recommended orders to September 19, 1997.

FINDINGS OF FACT

1. Charles and Dorothy Tolbert own and operate American

Aircraft International, Inc. (American). American is in the

business primarily of selling and brokering aircraft sales. Most

of American's business involves brokering in which American earns

a commission or fee for putting together a seller and buyer and

bringing the transaction to a conclusion. On a much less

frequent basis, American will purchase an airplane for resale.

2. American advertises the availability of its airplanes,

both brokered and American-owned, for either sale or lease.

However, American has not had occasion to lease one of its own

aircraft except as part of a lease-purchase agreement.

3. American does not make any other use of airplanes it

offers for sale or lease, except as necessary for maintenance and

repairs and for demonstration to prospective purchasers or

lessees. Such use would be cost-prohibitive. Fuel, crew, and

insurance costs would be well in excess of the cost of a ticket

on a commercial airline. American's insurance policy only covers

the use of the planes for demonstration and maintenance purposes.

4. On February 6, 1990, American traded for a King Air

200, N56GR, serial number 059, at an acquisition value of

$650,000. The King Air 200 was delivered to American from

Carlisle, Kentucky, and held by American for resale purposes only

and was flown only for purposes of maintenance and repairs and

for demonstration to prospective purchasers. When it was sold in

1991 to an English company, BC Aviation, Ltd., American had flown

the aircraft only 7 hours. The aircraft was delivered out-of-

state in May 1991.

5. In July 1991, American bought a kit for a home-buil t

aircraft called the Renegade, serial number 445. The kit was

manufactured and sold by a company in British Columbia, Canada.

American's intent in purchasing the kit was to build the airplane

and decide whether to become a dealer. It took a year and a half

to build, and by the time it was completed, American decided not

to pursue the dealership. In September of 1991, American sold

the Renegage to the Tolberts. The Tolberts registered the

Renegade in September 1994, under N493CT.

6. At first, the To lberts did not pay sales tax on their

purchase of the Renegade. They thought that, since they owned

American, no sales tax was due. When the Department audited

American and pointed out that sales tax was due, the Tolberts

paid the tax in December 1994.

7. In 1991, American also purchased a King Air B90,

N988SL, serial number LJ438, for $175,000. The King Air B90 was

held by American for resale purposes only and was flown only for

purposes of maintenance and repairs and for demonstration to

prospective purchasers. In July 1991, American sold the aircraft

to Deal Aviation of Chicago, Illinois. However, Deal could not

qualify for its own financing, so American agreed to lease-sell

the aircraft to Deal. Under the lease-purchase agreement entered

into on July 21, 1991, the purchase price was $269,000, payable

$4,747.85 a month until paid in full. (The agreement actually

said payments would be made for 84 months, but that would amount

to total payments well in excess of the purchase price; the

evidence did not explain this discrepancy.) American continued

to hold title to the aircraft and continued to make payments due

to the bank on American's financing for the aircraft. The lease-

purchase agreement must have been modified, or payments

accelerated, because American transferred title to the aircraft

in April 1993.

8. The Department asserted that a Dolphin Aviation ramp

rental invoice on the King Air B90 issued in August for the month

of September 1991 reflected that the aircraft was parked at the

Sarasota-Bradenton Airport at the time of the invoice, which

would have been inconsistent with American's testimony and

evidence. But the invoice contained the handwritten notation of

Dorothy Tolbert that the airplane was "gone," and her testimony

was uncontradicted that she telephoned Dolphin when she got the

invoice and to inform Dolphin that the invoice was in error since

the plane had not been at the ramp since Deal removed it to

Illinois on July 21, 1991. As a result, no ramp rent was paid

after July 1991. Indeed, the Department's own audit schedules

reflect that no ramp rent was paid on the King Air B90 after

July 1991.

9. The Department also presented an invoice dated

September 16, 1991, in the amount of $3400 for engine repairs

done on the King Air B90 by Hangar One Aviation in Tampa,

Florida. The invoice reflects that the repairs were done for

American and that they were paid in full on September 19, 1991,

including Florida sales tax. The Department contended that the

invoice was inconsistent with American's testimony and evidence.

But although American paid for these repairs, together with

Florida sales tax, Mrs. Tolbert explained that the repairs were

made under warranty after the lease-purchase of the airplane by

Deal. A minor engine problem arose soon after Deal removed the

airplane to Illinois. Deal agreed to fly the plane to Hangar One

for the repairs, and American agreed to pay for the repairs.

After the repairs were made, Hangar One telephoned Mrs. Tolbert

with the total, and she gave Hangar One American's credit card

number in payment. She did not receive American's copy of the

invoice until later. She does not recall if she: noticed the

Florida sales tax and did not think to question it; noticed it

and decided it was not enough money ($179) to be worth disputing;

or just did not notice the Florida sales tax.

10. When American's certified public accountant (CPA),

Allan Shaw, prepared American's federal income tax return for

1990, he included the King Air 200 as a fixed capital asset on

the company's book depreciation schedule and booked $26,146 of

depreciation on the aircraft for 1990 on a cost basis of

$650,000. For federal tax purposes, he took the maximum

allowable depreciation deduction on the aircraft ($92,857) by

attributing a seven-year life to the aircraft and using the

double declining balance method of calculating depreciation.

11. The next year, 1991, Shaw included the both the King

Air B90 and the Renegade as fixed capital assets on the company's

book depreciation schedule. He booked $9,378 of depreciation on

the B90 on a cost basis of $175,000 and $1,872 on the Renegade on

a cost basis of $25,922 for part of the year 1991. For federal

tax purposes, he took the maximum allowable depreciation

deduction on the B90 ($12,507) by attributing a seven-year life

to the aircraft and using the double declining balance method of

calculating depreciation. This depreciation was subtracted from

the "gross income from other rental activities" on Schedule K of

the return in the amount of $22,796, which represented the

payments from Deal under the lease-purchase agreement. The

Renegade was depreciated for the same amount as its book

depreciation, and no income was recorded as having been generated

from use of the Renegade.

12. The next year, 1992, Shaw again included the both the

King Air B90 and the Renegade as fixed capital assets on the

company's book depreciation schedule. He booked $35,613 of

depreciation on the B90 and $5,555 on the Renegade. For federal

tax purposes, he took the maximum allowable depreciation

deduction on the B90 ($25,014) by attributing a seven-year life

to the aircraft and using the double declining balance method of

calculating depreciation. This depreciation was subtracted from

the "gross income from other rental activities" on Schedule K of

the return in the amount of $51,737, which again represented the

payments from Deal under the lease-purchase agreement. The

Renegade was depreciated for the same amount as its book

depreciation, and no income was recorded as having been generated

from use of the Renegade.

13. It is not clear from the evidence why American's CPA

decided American was entitled to claim depreciation on the three

aircraft in question. (Shaw also depreciated another airplane in

1989 which was before the period covered by the Department's

audit.) Shaw's final hearing and deposition testimony was

confusing as to whether he recalled discussing the question with

the Tolberts. He may have; if he did, he probably discussed it

with Mrs. Tolbert. Meanwhile, Mrs. Tolbert does not recall ever

discussing the question of depreciation with Shaw. In all

likelihood, Shaw probably made his own decision that American

could depreciate the airplanes to minimize income taxes by

claiming that they were fixed capital assets used in the business

and not just inventory items being held for resale. For the King

Air B90, there were lease payments Shaw could use to justify his

decision; but there were no lease payments for the King Air 200

or the Renegade. The evidence was not clear whether there were

lease payments for the airplane Shaw depreciated in 1989.

14. For the next year, 1993, Shaw included the Renegade as

a fixed capital asset on the company's book depreciation schedule

and booked $7,712 of depreciation on the Renegade. For federal

tax purposes, the Renegade was depreciated for the same amount as

its book depreciation, and no income was recorded as having been

generated from use of the Renegade.

15. When the Department audited American startin g in

July 1994, tax auditor William Berger saw the depreciation

schedules and tax returns, both of which indicated to him that

the three airplanes in question were used by the company, but no

sales or use tax was paid on them. (He also pointed out the

Tolberts' failure to pay sales tax on the purchase of the

Renegade from American, and the Tolberts later paid the tax, as

previously mentioned.) As a result, on July 26, 1995, the

Department issued two notices of intent. One was to make sales

and use tax audit changes which sought to assess American

$56,097.77 in use taxes, together with delinquent penalties of

$14,657.36 and interest through July 26, 1995, in the amount of

$31,752.61, for a total of $102,507.74, with subsequent interest

accruing at the rate of $18.44 per day. The second was to make

local government infrastructure surtax audit changes which sought

to assess American $609.99 in the surtax, together with

delinquent penalties of $163.14 and interest through July 26,

1995, in the amount of $256.33, for a total of $1,029.46, with

subsequent interest accruing at the rate of $.20 per day.

16. It is not clear from the record how the Department

arrived at the use tax and surtax figures. The alleged use tax

assessment should have been calculated as $51,061.32 (six percent

of the acquisition costs of the airplanes), and the alleged

surtax assessment should have been calculated at the statutory

maximum of $50 per item, for a total of $150.

17. On August 28, 1995, American made a partial payment of

$5,496.44 on the Department's use tax and surtax audit change

assessments, intending to leave a disputed assessed amount of

$51,061.32 in use tax and $150 in surtax. It is not clear from

the record what American intended the $5,496.44 to apply towards.

18. American filed an Informal Protest of the use tax and

surtax audit change assessments on February 26, 1996. The

Informal Protest contended that the use tax and surtax were not

due and that the federal income tax depreciation schedules were

"not determinative."

19. On October 6, 1996, the Department issued a Notice of

Decision denying American's protest primarily on the ground that

the depreciation of the aircraft for federal income tax purposes

constituted using them for use tax purposes.

20. After receiving the Notice of Decision, on November 4,

1996, American filed amended tax returns to remove the

depreciation of the airplanes (together with the "gross income

from other rental activities" on Schedule K of the 1991 return).

(Although CPA Shaw refused to admit it, it is clear that

American's federal income tax returns were amended in order to

improve its defense against the Department's use tax and surtax

assessments.) As a result of the amended returns, American had

to pay an additional $15,878 in federal income tax on the 1990

return; there was no change in the tax owed on any of the other

returns.

21. On November 6, 1996, American filed a Petition for

Reconsideration on the ground that the returns had been amended

and the additional federal income tax paid. On January 10, 1997,

the Department issued a Notice of Reconsideration denying

American's Petition for Reconsideration on the ground that

"subsequent modifications made to the federal income tax returns

will have no affect [sic] upon" the use tax and surtax

assessments.

CONCLUSIONS OF LAW

22. Under 120.80(14)(b), Florida Statutes ( Supp. 1996),

the Department's burden of proof is limited to proof of the

assessment and the factual and legal basis for it. Since, in

this case, the Department met its burden of proof, the burden

shifted to the Petitioner to demonstrate by a preponderance of

the evidence that the assessment is incorrect. See Dept. of

Revenue v. Nu-Life Health and Fitness Center , 623 So. 2d 747,

751-752 (Fla. 1st DCA 1992).

23. Section 212.02(20), Florida Statutes (1995), states:

"Use" means and includes the exercise of any right or

power over tangible personal property incident to the

ownership thereof, or interest therein, except that it

does not include the sale at retail of that property in

the regular course of business.

Unless a specific exemption applies, use tax is imposed at the

moment the property is used in Florida. See Section

121.06(1)(a), Florida Statutes (1995).

24. Department of Revenue Rule 12A-1.007(10)(g), Florida

Administrative Code, provides in pertinent part:

(g)1. Registered aircraft dealers who purchase

aircraft exclusively for resale are exempt from the

payment of tax on the purchase price at the time of

purchase but shall pay a tax computed on 1 percent of

the value of the aircraft each calendar month that the

aircraft is used by the dealer.

2. The payment of such use tax shall commence in the

month during which the aircraft is first used for any

purpose for which income is received by the dealer for

its use, including charter, rental, flight training,

and demonstration where a charge is made.

25. Although some supporting documentation could not be

produced, the evidence in this case proved that American did not

use the three aircraft in question except to maintain and repair

them and to demonstrate them for purposes of resale.

26. The evidence was clear that the King Air 200 and

Renegade were only used in this fashion. The case of the King

Air B90 is more complicated since American received lease

payments from Deal Aviation. However, American received those

lease payments under a lease-purchase agreement.

27. Rule 12A-1.071(1), Florida Administrative Code,

provides in pertinent part:

(d) Where a contract designated as a lease transfers

substantially all the benefits, including depreciation,

and risks inherent in the ownership of tangible

personal property to the lessee, and ownership of the

property transfers to the lessee at the end of the

lease term, or the contract contains a purchase option

for a nominal amount, the contract shall be regarded as

a sale of tangible personal property under a security

agreement (commonly referred to as a conditional-sale

type lease) from its inception. The purchase option

shall be regarded as a nominal amount if it does not

exceed $100 or 1 percent of the total contract price,

whichever is the lesser amount.

(e) Whether a lease is a conditional sale-type lease

or an operating lease shall be determined in accordance

with the provisions of the agreement, read in light of

the facts and circumstances existing at the time the

agreement was executed. Taxpayers who calculated and

paid taxes on leases entered into after January 2,

1989, pursuant to any amendments to paragraph (1)(d) of

this rule adopted after January 2, 1989, shall be

deemed to be in compliance with the requirements of

this rule.

28. The primary basis for the Department's assessment of

use tax on the three airplanes in question is that they were

depreciated on American's initial federal income tax returns and

thus, in the Department's view, "used" by American in its

business. The Department's position is based on the decision in

HMY New Yacht Sales v. Dept. of Revenue , 676 So. 2d 1385 (Fla.

1st DCA 1996).

29. The HMY New Yacht Sales case involved the imposition of

use tax on "The Bandit," a 47-foot fishing vessel boat owned by

HMY, a company engaged in the business of yacht sales. HMY had

purchased "The Bandit" for $520,000 from Davis Yachts, Inc., the

manufacturer, primarily for the purposes of resale. HMY,

however, also used the boat for promotion of sales of other boats

and to generally promote good will for its business. Indeed,

Davis Yachts bore some of the expense of the promotional

activities which inured to the benefit of both businesses.

Further, HMY had depreciated the boat on its federal tax returns,

reflecting that it was a depreciable capital asset rather than a

nondepreciable item of inventory. In affirming the imposition of

the use tax, the court held that the use of the boat for

promotional activities unrelated to the sale of that specific

vessel constituted a taxable use and that the claim of

depreciation on the boat on federal income tax returns reflected

a declaration that the yacht was used in HMY's trade or business.

30. In the instant matter, however, unlike the factual

situation in HMY, there was no use of the aircraft for any

purposes other than those directly related to the resale of the

aircraft. Such activities, as reflected in the HMY Yacht

decision, do not constitute a taxable use.

31. Further, in HMY there was a purposeful inclusion of the

vessel on HMY's federal tax return for depreciation purposes.

HMY did not claim that such inclusion was erroneous, nor were any

amended federal tax returns filed removing the claimed

depreciation on the vessel. Consequently, the instant matter is

distinguishable from the HMY Yacht Sales decision.

32. Since there was no taxable use of the aircraft in

question in this case, their depreciation on American's federal

income tax returns was in error. The erroneous depreciation

should not be viewed as a use of the aircraft. Nor should the

error be viewed as irremediable. The Department's view would

render meaningless amended tax returns, the sole purpose of which

is to correct errors made on initial tax returns.

33. Notwithstanding American's erroneous federal income

tax return, the American-Deal lease-purchase agreement, read in

light of the facts and circumstances existing at the time the

agreement was executed, conferred on Deal substantially all the

benefits and risks inherent in ownership of the King Air B90,

including depreciation. For sales and use tax purposes, the

American-Deal lease-purchase agreement was a conditional-sale

type lease under Rule 12A-1.071(d)-(e) and is treated as a sale,

not a lease.

34. The local government infrastructure surtax "piggy

backs" the use tax up to a maximum of $50 per item. Section

212.055(2), Florida Statutes (1995). Since no use tax was due,

neither was any surtax.

RECOMMENDATION

Based upon the foregoing Findings of Fact and Conclusions of

Law, it is

RECOMMENDED that the Department of Revenue enter a final

order withdrawing the assessment of use tax and local government

infrastructure surtax, delinquent penalties, and interest against

American.

RECOMMENDED this 3rd day of October, 1997, in Tallahassee,

Leon County, Florida.

___________________________________

J. LAWRENCE JOHNSTON

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-1550

(904) 488- 9675 SUNCOM 278-9675

Fax FILING [phone]

Filed with the Clerk of the

Division of Administrative Hearings

this 3rd day of October, 1997.

COPIES FURNISHED:

Harold F. X. Purnell, Esquire

Rutledge, Ecenia, Underwood,

Purnell & Hoffman, P.A.

Post Office Box 551

Tallahassee, Florida 32302-0551

Albert J. Wollermann, Esquire

Office of the Attorney General

The Capitol, Tax Section

Tallahassee, Florida 32399-1050

Linda Lettera, Esquire

Department of Revenue

Post Office Box 6668

Tallahassee, Florida 32314-6668

Larry Fuchs, Executive Director

Department of Revenue

104 Carlton Building

Tallahassee, Florida 32399-0100

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within 15

days from the date of this Recommended Order. Any exceptions to

this Recommended Order should be filed with the agency that will

issue the final order in this case.