05-001263 Legendary Restaurant Associates, Inc. vs. Department Of Revenue
 Status: Closed
Recommended Order on Thursday, July 27, 2006.


View Dockets  
Summary: The assessment of sales tax is sustained where payments of ad valorem taxes, loans, and insurance were made on behalf of the owner; there is no sales tax due on bookkeeping entries under the cooperative business agreement where no payment was made.

1STATE OF FLORIDA

4DIVISION OF ADMINISTRATIVE HEARINGS

8BEACHSIDE INN DESTIN, INC., )

13)

14Petitioner, )

16)

17vs. ) Case Nos. 05 - 1262

24) 05 - 1263

28DEPARTMENT OF REVENUE, ) 05 - 2261

35)

36Respondent. )

38)

39SUMMARY RECOMMENDED ORDER

42This case was scheduled for hearing July 5 and 6, 2006.

53On July 3, 2006, the parties filed Motions for Summary

63Recommended Order and filed stipu lated facts and exhibits. On

73July 5, 2006, the undersigned entered an Order Canceling

82Hearing and advised the parties that a Recommended Order would

92be prepared based on the stipulated facts and exhibits and

102written submissions of the parties. The author ity for

111conducting the proceeding is set forth in Sections 120.569 and

121120.57(1), Florida Statutes. The case was considered by Lisa

130Shearer Nelson, Administrative Law Judge.

135APPEARANCES

136For Petitioners: Robert S. Bernstein, Esquire

142Foley & Lardner

145The Greenleaf Building

148200 Laura Street

151Jacksonville, Florida 32202 - 3510

156For Respondent: James O. Jett, Esqui re

163Office of the Attorney General

168The Capitol, Plaza Level 01

173Tallahassee, Florida 32399 - 1050

178STATEMENT OF THE ISSUE

182Whether the Petitioners are liable for sales tax,

190penalties and int erest as assessed by the Department of

200Revenue (the Department) and if so, in what amount?

209PRELIMINARY STATEMENT

211This proceeding involves three cases which have been

219consolidated because they deal with a parent company and its

229subsidiaries. In Case No. 05 - 1262, on February 8, 2005, the

241Department issued to Petitioner Beachside Inn Destin, Inc., a

250Notice of Decision pursuant to Section 212.031, Florida

258Statutes, sustaining a sales tax assessment of $78,353.56,

267with $60,481.54 (plus interest which continues to accrue)

276remaining due. Petitioner timely filed a Petition for a

285Chapter 120 Administrative Hearing and the matter was

293forwarded to the Division of Administrative Hearings

300(Division) for the assignment of an administrative law judge

309to conduct a formal hearing to resolve the dispute.

318The case was originally set for hearing June 7, 2005, and

329was continued at the request of the Respondent. The parties

339were ordered to submit a Joint Status Report no later than

350June 17, 2005.

353In Case No. 05 - 1263, the Depart ment issued to Legendary

365Restaurant Associates, Inc., a Notice of Decision sustaining a

374sales tax assessment pursuant to Section 212.031, Florida

382Statutes, in the amount of $38,411.43, with $30,909.95 (plus

393interest which continues to accrue) remaining due for sales

402tax due. Petitioner timely filed a Petition for Chapter 120

412Administrative Hearing and the matter was forward to the

421Division for hearing.

424The case was originally set for hearing June 8, 2005, and

435was also continued at the request of the Resp ondent, with the

447parties ordered to submit a Joint Status report no later than

458June 17, 2005.

461In Case No. 04 - 1585, on January 27, 2004, the Department

473filed a Notice of Proposed Assessment sustaining an assessment

482for sales tax pursuant to Section 212.031, Florida Statutes,

491in the amount of $110,501.72, with $99,548.10 (plus interest

502which continues to accrue) remaining due. Petitioner timely

510filed a Petition for Chapter 120 Administrative Hearing and

519the Department forwarded the case to the Division. The case

529was originally set for hearing June 29, 2004; however, at the

540request of the parties, the hearing was cancelled and the

550Division file was closed without prejudice for the parties to

560re - open the case at a later date.

569On June 23, 2005, Case No. 04 - 1 585 was re - opened and

584designated as DOAH Case No. 05 - 2261. All three cases were

596consolidated and the matter was set for hearing October 17 and

60718, 2005. Both parties requested continuances and the case

616was set for hearing January 12 and 13, 2006, March 8 and 9,

6292006, and then July 6 and 7, 2006.

637On June 30, 2006, the Department filed a Motion for

647Summary Recommended Order. On July 3, 2006, Petitioners filed

656a Motion for Summary Recommended Order and Petitioners'

664Proposed Recommended Order. That same d ay the Department also

674filed Respondent's Motion to Cancel Final Hearing, stating

682that the parties had stipulated to the facts and had agreed to

694submit Motions for Summary Recommended Orders in lieu of

703having a live final hearing. As a result, the undersi gned

714entered an Order Canceling Hearing on July 5, 2006, and this

725case has been decided based on the written submissions and

735stipulated exhibits filed by the parties. The submissions of

744both parties have been considered in the preparation of this

754Summary Recommended Order.

757FINDINGS OF FACT

7601. The parties have stipulated to the facts stated in

770paragraphs 2 - 59. 1/

7752. The Department of Revenue is an agency of the State

786of Florida, pursuant to Section 20.21, Florida Statutes, and

795is authorized to administ er the tax laws of the state,

806pursuant to Section 213.05, Florida Statutes. The Department

814was authorized to conduct an audit of each of the Petitioners

825and to request information to determine their liability for

834taxes pursuant to Chapter 212, Florida Sta tutes.

8423. Legendary Holding, Inc. (Holding) is a corporation

850organized under the laws of Florida effective October 23,

8591996, and was so organized from 1999 - 2003. Holding's

869corporate address is 4100 Legendary Drive, Suite 200, Destin,

878Florida 32541.

8804. H olding was subject to the Internal Revenue Code of

8911986 as amended and in effect (IRC) during 1999 - 2003 and for

904federal income tax purposes, Holding was a subchapter "s"

913corporation during this time.

9175. Holding was also subject to Chapter 212, Florida

926Sta tutes, during 1999 - 2003.

9326. Petitioner Harry T's, Inc. (Harry T's), is a

941corporation organized under the laws of Florida effective

949November 9, 1998, and was so organized during Harry T's Audit

960Period, defined as December 1, 1999 through March 31, 2003.

970H arry T's was a wholly - owned subsidiary of Holding.

9817. During its Audit Period, Harry T's corporate address

990was 4460 Legendary Drive, Suite 400, Destin, Florida. Harry

999T's was subject to the IRC and for federal income tax purposes

1011was a qualified subchapt er S subsidiary of the s - corporation

1023parent, Holding.

10258. Petitioner Beachside Inn Destin, Inc. (Beachside) was

1033a corporation organized under the laws of Florida effective

1042March 6, 2000, and was so organized during the Beachside Audit

1053Period, defined as Ma y 1, 2000, through May 31, 2003.

1064Beachside, a wholly - owned subsidiary of Holding, was

1073administratively dissolved on October 14, 2004, for failure to

1082file an annual report.

10869. During the Audit Period, Beachside's principle place

1094of business was 2931 Sceni c Highway 98, Destin, Florida,

110432541. Its corporate address was 4460 Legendary Drive, Suite

1113400, Destin Florida.

111610. Beachside was subject to the IRC and for federal

1126income tax purposes was a qualified subchapter S subsidiary of

1136the s - corporation parent, Holding, during the Beachside Audit

1146Period.

114711. Petitioner Legendary Restaurant Associates, Inc.

1153(Restaurant) is a corporation organized under the laws of

1162Florida effective October 7, 1999, and was so organized during

1172Restaurant's Audit Period, defined a s December 1, 1999,

1181through March 31, 2003. During this time Restaurant was a

1191wholly owned subsidiary of Holding and Restaurant's corporate

1199address was 4460 Legendary Drive Suite 400, Destin, Florida.

120812. Restaurant was subject to the IRC and for feder al

1219income tax purposes was a wholly - owned, qualified subchapter S

1230subsidiary of the s - corporation parent, Holding, during the

1240Restaurant Audit Period.

124313. Legendary, Inc. (Legendary) is a corporation

1250organized under the laws of Florida during 1999 - 2003, a nd its

1263corporate address was also 4460 Legendary Drive, Suite 400,

1272Destin, Florida, during this time. Legendary was also a

1281wholly - owned subsidiary of Holding. Legendary was subject to

1291the IRC and for federal income tax purposes, was a qualified

1302subchapte r S subsidiary of the s - corporation parent, Holding.

131314. Legendary Resorts, LLC (Resorts), is a limited

1321liability company organized under the laws of Florida and was

1331so organized during 2000 - 2003. Resorts, whose corporate

1340address was also 4460 Legendary Drive, Suite 400, Destin,

1349Florida, was administratively dissolved on September 16, 2005,

1357for failure to file an annual report.

136415. Legendary entered into a cooperative business

1371agreement (CBA) with certain subsidiaries of Holding prior to

1380or during 1999 - 2 003. The terms of the CBA between Legendary

1393and these subsidiaries were identical other than the name of

1403the "manager" subsidiary and the percentage of compensation

1411paid to Legendary and the formula for sharing profits varied

1421from time to time.

142516. Legen dary also entered into a management agreement

1434with certain other of Holding's subsidiaries, and the terms of

1444these agreements were identical.

1448FACTS RELATED TO PETITIONER HARRY T'S AUDIT

145517. Harry T's was a registered dealer who filed form DR -

146715 (Sales Tax Return) with the Department for each month of

1478Harry T's Audit Period. Harry T's used the cash basis of

1489accounting during its Audit Period.

149418. The Department sent Harry T's a Notification of

1503Intent to Audit Books and Records (Form DR - 840) to conduct an

1516audit of Harry T's books and records for this purpose.

152619. The Department and Harry T's entered into an Audit

1536Agreement agreeing that a sampling method is the most

1545effective, expedient, and adequate method in which to conduct

1554an audit of Harry T's books and records. Gina Imm, a

1565Department tax auditor, examined and sampled the available

1573books and records of Harry T's to determine whether it

1583properly collected and remitted sales and use tax in

1592compliance with Chapter 212, Florida Statutes.

159820. Harry T's was the tenant party in a lease with

1609Legendary for the property upon which Harry T's operated its

1619business prior to January 1, 2000. Under the terms of the

1630lease agreement between Harry T's and Legendary, Harry T's

1639paid rent equal to eight percent of the gross sales to

1650Legendary. On January 1, 2000, the lease was terminated.

165921. On January 1, 2000, Harry T's entered into a CBA

1670with Legendary, which was effective throughout Harry T's Audit

1679Period.

168022. Harry T's operated a business on property owne d by

1691Holdings during Harry T's Audit Period. Accounting entries

1699were made each month during the Audit Period to record the

1710amount of CBA compensation that was accrued by Harry T's to

1721Legendary under the CBA. However, no rent was recorded on the

1732income ta x or accounting books of either Harry T's or

1743Legendary during the Audit Period. Further, no amount of

1752money labeled as CBA compensation was transferred from Harry

1761T's to Legendary during Harry T's Audit Period and no payments

1772labeled as "rent" were transf erred from Harry T's to

1782Legendary.

178323. Based upon the business decisions of the Chief

1792Financial Officer of Legendary, cash was transferred

1799periodically from Harry T's to Legendary during the Audit

1808Period. Based upon the business decisions of the Chief

1817Fi nancial Officer of Legendary, cash was also transferred from

1827Legendary to Harry T's.

183124. During Harry T's Audit Period cash was also

1840transferred from Legendary to Holdings. These amounts were

1848reflected as dividend distributions and varied in amount and

1857time from (a) Holdings insurance and mortgage indebtedness

1865obligations associated with the property used by Harry Ts and

1875owned by Holding, and (b) the amounts accrued under the CBA's.

1886Any amounts collected by Harry T's and not paid directly to

1897third parti es were distributed periodically to Holdings as

1906corporate dividends.

190825. The Department determined that the transfers of cash

1917from Harry T's to Legendary reflected rental consideration

1925paid as CBA compensation, and directed the Department's

1933auditor to a ssess sales tax against the amounts recorded as

1944CBA compensation accounting entries.

194826. Harry T's paid ad valorem taxes due on the property

1959on which Harry T's operated during each year of Harry T's

1970Audit Period. The Department auditor assessed sales tax on

1979the amounts of ad valorem taxes paid by Harry T's on behalf of

1992Holding.

199327. The Department determined that Harry T's owed

2001$58,844.02 in additional sales tax for the CBA compensation

2011and ad valorem taxes paid, plus statutory interest and

2020penalties. On September 5, 2003, the Department issued to

2029Harry T's a Notice of Intent to Make Audit Changes (form DR -

20421215) for Audit No. A0233016246, stating that Harry T's owed

2052$69,249.79 in taxes, $29,422.03 in penalties, and $6,612.44 in

2064interest for a total of $94 ,330.64, and that interest

2074continued to accrue on the unpaid assessment.

208128. By letter dated October 9, 2003, Harry T's agreed to

2092the portions of the assessment related to food and beverage,

2102but objected to the assessment for all other amounts including

2112t he CBA fees. Harry T's paid $10,953.62 for the uncontested

2124assessment amounts.

212629. The Department issued its Notice of Proposed

2134Assessment (NOPA) for audit number A0233016246 on January 27,

21432004. The NOPA stated that the total owed by Harry T's was

2155$69 ,249.79 in taxes, $29,422.03 in penalties, and $11,831.88

2166for a total of $110,501.72. The NOPA reflected a payment of

2178$10,953.62 paid for the uncontested amounts of the audit

2188assessment, and showed a balance due of $99,548.10 as of the

2200date of the NOPA.

22043 0. The Department received Harry T's formal written

2213protest on April 23, 2004.

2218FACTS RELATED TO RESTAURANT'S AUDIT

222331. Petitioner Restaurant was a registered dealer who

2231filed form DR - 15 (Sales and Use Tax Return) with the

2243Department for each month of the Restaurant Audit Period.

2252Restaurant used the cash basis of accounting.

225932. The Department sent Restaurant a Notification of

2267Intent to Audit Books and Records (Form DR - 840) to conduct an

2280audit of Restaurant's books and records for the purposes of

2290Chapte r 212, Florida Statutes. The Department and Restaurant

2299entered into an Audit Agreement stipulating that a sampling

2308method is the most effective, expedient, and adequate method

2317by which to conduct an audit of Restaurant's books and

2327records. Gina Imm exami ned and sampled the available books

2337and records of Restaurant to determine whether Restaurant

2345properly collected and remitted sales and use tax in

2354compliance with Chapter 212, Florida Statutes.

236033. Restaurant was the tenant party in leases for the

2370propert y upon which Restaurant operated its business prior to

2380January 1, 2000. On January 1, 2000, Restaurant terminated

2389its leases for these properties.

239434. Restaurant entered a CBA with Legendary prior to the

2404beginning of Restaurant's Audit Period, December 1 , 1999

2412through March 31, 2003. The CBA between Restaurant and

2421Legendary was effective throughout the Restaurant Audit

2428Period.

242935. Restaurant operated the "Crystal Beach Coffee

2436Company" and "Tony's By the Sea" on property owned by

2446Floridian Homes of Cryst al Beach, Inc. (FHCB), an unrelated

2456third party, during the Restaurant Audit Period.

246336. Restaurant operated "Blues" on property owned by an

2472individual, Mr. Peter H. Bos, during the Restaurant Audit

2481Period. 37. Restaurant operated "Rutherford's 465" on

2488p roperty owned by Regatta Bay Investor, Ltd., a Florida

2498limited partnership, during the Restaurant Audit Period.

250538. Accounting entries were made each month during the

2514Restaurant Audit Period to record the amount of CBA

2523compensation that was accrued by Res taurant to Legendary under

2533the CBA; however, no rent was recorded on the income tax or

2545accounting books of either Restaurant or Legendary during the

2554Restaurant Audit Period. No amount of money labeled as CBA

2564compensation was transferred from Restaurant to Legendary and

2572no payments labeled as "rent" were transferred from Restaurant

2581to Legendary.

258339. Based upon the business decisions of the Chief

2592Financial Officer of Legendary, cash was transferred

2599periodically from Restaurant to Legendary, and cash was als o

2609transferred from Legendary to Restaurant during the Restaurant

2617Audit Period. Any amounts collected by Restaurant during the

2626Restaurant Audit Period and not paid directly to third parties

2636were distributed periodically to Holdings as corporate

2643dividends.

264440. The Department determined that the transfers of cash

2653from Restaurant to Legendary reflected rental consideration

2660paid as CBA compensation, and directed the Department's

2668auditor to assess sales tax against the amounts recorded as

2678CBA compensation acc ounting entries.

268341. Restaurant paid ad valorem taxes due on the property

2693on which Restaurant operated during each year of the

2702Restaurant Audit period. The Department assessed sales tax on

2711the amounts of ad valorem taxes paid by Restaurant on behalf

2722of Holding.

272442. The Department determined that Restaurant owed

2731$17,880.71 in additional sales tax for the CBA compensation

2741and ad valorem taxes paid, plus statutory interest and

2750penalties.

275143. On September 5, 2003, the Department issued the

2760Restaurant a No tice of Intent to Make Audit Changes (Form DR -

27731215) for audit number A0231102584, stating that Restaurant

2781owed $26,092.10 in taxes, $8,940.31 in penalties, and

2791$1.808.87 in interest for a total of $36,841.28. The

2801Department noted Restaurant's payment of $ 8,745.53 for the

2811portions of the assessment related to food and beverage sales,

2821leaving a balance due as of that date of $28,095.75. The

2833Department informed Petitioner Restaurant that interest

2839continued to accrue on the unpaid assessment.

284644. The Departm ent issued its NOPA for audit number

2856A0231102584 on March 17, 2004, to Restaurant. The total owed

2866by Restaurant as stated in the NOPA was $26,092.10 in taxes,

2878$8,940.34 in penalties, and $3,378.99 in interest for a total

2890of $38,411.43, less the $8,745.53 already paid, for a total

2902balance due on that date of $29,665.90. Restaurant protested

2912the NOPA, and the Department referred the matter to the

2922Department's Technical Assistance and Dispute Resolution

2928Section.

292945. On March 28, 2005, the Department issue d its Notice

2940of Decision upholding the assessment of tax for the CBA fees

2951and ad valorem taxes paid by Restaurant, and on April 6, 2005,

2963the Department received the Restaurant's formal written

2970protest.

2971FACTS RELATED TO BEACHSIDE'S AUDIT

297646. Petitioner Bea chside Inn Destin, Inc. (Beachside)

2984was a registered dealer who filed form DR - 15 (Sales and Use

2997Tax Return) with the Department for each month during the

3007Beachside Audit period, May 1, 2000, through May 31, 2003.

3017Beachside used the cash basis of accountin g during the

3027Beachside Audit Period.

303047. Beachside and the Department entered into an Audit

3039Agreement stipulating that a sampling method is the most

3048effective, expedient, and adequate method by which to conduct

3057an audit of Beachside's books and records. Gina Imm, a Tax

3068Auditor for the Department, examined and sampled the available

3077books and records of Beachside to determine whether Beachside

3086properly collected and remitted sales and use tax during the

3096Audit Period in compliance with the requirements of Ch apter

3106212, Florida Statutes.

310948. Legendary Resorts, LLC (Resorts) entered into an

3117Asset Purchase Agreement with FHCB and Lester J. Butler,

3126Timothy Fulmer and Mitt Fulmer, three of Resorts' shareholders

3135(the Shareholders), in April 2000, for the acquisitio n of the

3146Beachside Inn assets by Resorts. Subsequent to the execution

3155of the Asset Purchase Agreement, the parties discovered that a

3165condition precedent to the agreement, i.e. , the assumption by

3174Resorts of the major indebtedness of FHCB could not be

3184accom plished as contemplated because it would cause the

3193existing lender to violate its loan consideration limits with

3202respect to the Legendary Group.

320749. After discovering this problem, Resorts entered into

3215a Triple - net Lease dated March 1, 2000, with the Shar eholders

3228for a beachfront lot and entered into a Triple - net Lease dated

3241March 1, 2000, with FHCB for the Beachside Inn assets that

3252were originally the subject of the Asset Purchase Agreement.

3261These Triple - net Leases were designed to transfer control, and

3272the benefits and burdens of ownership, of the Beachside Inn

3282assets to Resorts pending resolution of the financing

3290contingency and the closing under the Asset Purchase

3298Agreement.

329950. Beachside entered into a CBA with Legendary prior to

3309the beginning of the Beachside Audit Period, which was

3318effective throughout the Beachside Audit Period.

332451. Although Resorts was the party entitled to all

3333rights, and subject to all obligations, under the Triple - net

3344Leases and Asset Purchase Agreement, the financial accounti ng

3353and cash management functions and activities during the terms

3362of the Leases were handled by and recorded in Beachside

3372because these leases were designed to permit the Legendary

3381Group to take over the operations of the Beachside Inn assets

3392pending closin g and because the Legendary Group intended to

3402place the assets in Beachside under the Asset Purchase

3411Agreement upon the closing of the asset purchase.

341952. Resorts and Beachside operated the Beachside Inn

3427assets on property owned by FHCB and the Shareholde rs during

3438the Beachside Audit Period. Accounting entries were made each

3447month to record the amount of CBA compensation that was

3457accrued by Beachside to Legendary under the CBA but no rent

3468was recorded on the income tax or accounting books of either

3479Beachs ide or Legendary during the Beachside Audit Period. No

3489money labeled as CBA compensation was transferred from

3497Beachside or Resorts to Legendary and no payments labeled as

"3507rent" were transferred from Beachside or Resorts to

3515Legendary.

351653. Based on the bu siness decisions of the Chief

3526Financial Officer of Legendary, cash was transferred

3533periodically from Resorts and/or Beachside to Legendary and

3541from Legendary to Resorts and/or Beachside during the

3549Beachside Audit Period.

355254. After Resorts and Beachside op erated the Beachside

3561Inn assets for a period of time at a material loss, Resorts

3573was not able to arrange for suitable substitute financing to

3583close on the purchase of the Beachside Inn assets under the

3594Asset Purchase Agreement. Resorts, FHCB and the Share holders

3603reached an agreement on or about August 15, 2003 (the

3613Termination Date), whereby Resorts terminated its rights under

3621the Asset Purchase Agreement and the two leases. In exchange,

3631the Shareholders transferred ownership of the beachfront lot

3639to Reso rts.

364255. Federal income tax returns for calendar years 2000,

36512001, and 2002 were filed by Resorts which reflected the

3661results of operating the Beachside Inn assets. Following the

3670Termination Date, all of the historic accounting entries made

3679by Beachsid e reflecting the operation of the Beachside Inn

3689assets were moved from its books and records to the books and

3701records of Resorts for administrative reasons and consistency

3709with the legal documents.

371356. Beachside and Resorts made insurance payments on

3721beha lf of the owners of the property upon which Resorts

3732operated its business for each year of the Beachside Audit

3742Period. They also made payments for loans on behalf of the

3753owners of the property and paid ad valorem taxes due on the

3765property upon which Resor ts operated for each year of the

3776Beachside Audit Period.

377957. The Department assessed Beachside sales tax on the

3788amounts of ad valorem taxes, insurance payments and loan

3797payments paid by Beachside on behalf of FHCB and the

3807Shareholders. On October 27 , 2003, the Department issued

3815Beachside a Notice of Intent to Make Audit Changes (form DR -

38271215) for audit number A030582778, stating that Beachside owed

3836$69,436.01 in taxes, $30,606.77, and $7,635.33 for a total of

3849$107,678.11. The Department noted Beachs ide's payment of

3858$8,936.01 for the portions of the assessment related to sales

3869of good and beverage, and reflected a balance due after

3879payment of $98,742.10, with interest continuing to accrue. 2/

388958. Beachside made an additional payment of $8,936.01

3898towar d the balance due on the uncontested amount of the

3909assessment. On February 19, 2004, the Department issued its

3918Notice of Proposed Assessment for audit number A030582778,

3926stating that the total amount owed by Beachside was $69,436.01

3937in taxes, $30,606.77 i n penalties and $8,917.55 in interest

3949for a total of $108,960.33, less $17,872.02 previously paid by

3961Beachside, for a balance as of that date of $91,088.31.

397259. On April 16, 2004, Beachside protested the NOPA, and

3982the Department referred the matter to the Department's

3990Technical Assistance and Dispute Resolution Section. On March

399828, 2005, the Department issued its Notice of Decision

4007upholding the assessment of tax for the payment of ad valorem

4018taxes, insurance and loans by Beachside on behalf of Holding.

4028On April 6, 2005, the Department received the Beachside's

4037formal written protest of audit number A030582778.

4044ADDITIONAL FACTS

404660. In addition to the Stipulated Facts submitted by the

4056parties, the undersigned makes the following findings based

4064upon the st ipulated exhibits submitted.

407061. With respect to the CBAs, the documents provided

"4079the Co - Operator and Manager have agreed to enter into this

4091Agreement for each to provide certain assets to the Business

4101and for Manager to provide, on a cost effective basi s,

4112Management Services as required from time to time by the

4122Business." The Agreements state that "each have various

4130assets including fixtures, employees, contractual

4135relationships, knowhow and real estate which they wish to

4144combine to operate a restaurant and bar (the Business)."

415362. The CBAs do not name a physical location and do not

4165have provisions for care and repair of the premises; for

4175rights of access and inspection; for eminent domain or

4184condemnation; for default; for provision of utilities or for

4193subletting, all provisions typically seen in a commercial

4201lease. By contrast, the Triple - Net Lease for the Beachside

4212Inn Assets (Stipulated Exhibit 10) contains all of these

4221provisions.

422263. The CBAs provide for payment of management services,

4231expenses of the business, and all services and assets

4240necessary for the operations of the business. They are

4249clearly not limited to provision of a location.

425764. With respect to the Beachside Assets, the Triple - Net

4268Lease (the Beachside lease) was entered after the A sset

4278Purchase Agreement and expressly acknowledges the existence of

4286that document. However, the Beachside lease by its terms does

4296not provide a right of purchase at a nominal sum at the end of

4310the lease. It provides options to extend the term of the

4321thre e - year lease for five additional terms of three years

4333each, governed by the same terms and provisions. It also

4343provides a right to purchase the premises at any time during

4354the term of the lease and up to six months after any

4366extensions of the lease which shall be exercised by affecting

4376a closing under the Asset Purchase Agreement.

438365. The Beachside Lease for the Beachside Inn assets has

4393other provisions that are relevant to these proceedings. For

4402example, the Beachside Inn lease defines the term "rent" a s

4413including the base rent ($100 per month) plus any state sales

4424tax imposed "upon any and all rents or other payments provided

4435in this lease." It provides for surrender of the premises at

4446the expiration of the lease, including terms for removal of

4456any tra de fixtures, personal property and signs. Most

4465importantly, the Beachside Inn lease expressly states the

4473following:

447426. a. The Lease does not create the

4482relationship of principal and agent or of

4489partnership or of joint venture or of any

4497association betwe en Landlord and Tenant,

4503the sole relationship between the parties

4509hereto being that of Landlord and Tenant.

4516* * *

4519c. This Lease and the Exhibits, if any,

4527attached hereto and forming a part hereof,

4534constitute the entire agreement between

4539Landlord and Te nant affecting the Premises

4546and there are no other agreements, either

4553oral or written, between them other than

4560are herein set forth. . . .

4567CONCLUSIONS OF LAW

457066. The Division of Administrative Hearings has

4577jurisdiction over the subject matter and the parties to this

4587action in accordance with Sections 120.569 and 120.57(1),

4595Florida Statutes.

459767. The Department must demonstrate 1) that an

4605assessment has been made against the taxpayer and 2) the

4615factual and legal grounds for making the assessment. Onc e the

4626Department meets this initial burden of proof, the burden

4635shifts to the Petitioner to show by a preponderance of the

4646evidence that the assessment is incorrect. Section

4653120.80(14)(b)(2), Florida Statutes; IPC Sports, Inc. v.

4660Department of Revenue , 82 9 So. 2d 330 (Fla. 3d DCA 2002). In

4673determining whether the assessment is correct, the undersigned

4681is required to honor the settled principle that tax laws are

4692to be strongly construed in favor of the taxpayer and against

4703the government. Maas Brothers, I nc. v. Dickinson , 195 So. 2d

4714193, 198 (Fla. 1967); Leadership Housing, Inc. v. Department

4723of Revenue , 336 So. 2d 1239 (Fla. 4th DCA 1976).

473368. The sales tax indebtedness for all three entities

4742is governed by Section 212.031, Florida Statutes, and F lorida

4752Administrative Code Rule 12A - 1.070(4),(12)&(19). Section

4760212.031 provides:

4762(1)(a) It is declared to be the

4769legislative intent that every person is

4775exercising a taxable privilege who engages

4781in the business of renting, leasing, or

4788granting a lice nse for the use of any real

4798property . . . .

4803* * *

4806(c) For the exercise of such privilege, a

4814tax is levied in an amount equal to 6

4823percent of an on the total rent or license

4832fee charged for such real property by the

4840person charging or collecting the ren tal or

4848license fee. The total rent or license fee

4856charged for such real property shall

4862include payments for the granting or a

4869privilege to use or occupy real property

4876for any purpose and shall include base

4883rent, percentage rents, or similar charges.

4889Such charges shall be included in the total

4897rent or license fee subject to tax under

4905this section whether or not they can be

4913attributed to the ability of the lessor's

4920or licensor's property as used or operated

4927to attract customers. . . .

4933* * *

4936(3) The tax i mposed by this section shall

4945be in addition to the total amount of the

4954rental or license fee, shall be charged by

4962the lessor or person receiving the rent or

4970payment in and by a rental or license fee

4979arrangement with the lessee or person

4985paying the rental o r license fee, and shall

4994be due and payable at the time of the

5003receipt of such rental or license fee

5010payment by the lessor or other person who

5018receives the rental or payment . . . .

502769. The relevant portions of Florida Administrative Code

5035Rule 12A - 1. 070 provide:

5041(4)(a) The tenant or person actually

5047occupying, using or entitled to use any

5054real property from which rental or license

5061fee is subject to taxation under Section

5068212.031, F.S., shall pay the tax to his

5076immediate landlord or other person gran ting

5083the right to such tenant or person to

5091occupy or use such real property.

5097(b) The tax shall be paid at the rate of 5

5108percent prior to February 1, 1988, and 6

5116percent on or after February 1, 1988, on

5124all considerations due and payable by the

5131tenant or other person actually occupying,

5137using, or entitled to use any real property

5145to his landlord or other person for the

5153privilege of use, occupancy, or the right

5160to use or occupy any real property for any

5169purpose.

5170(c) Ad valorem taxes paid by the tenant or

5179other person actually occupying, using, or

5185entitled to use any property to the lessor

5193or any other person on behalf of the

5201lessor, including transactions between

5205affiliated entities, are taxable.

5209* * *

5212(12) When a tenant or other person pays

5220insurance f or his own protection, the

5227premium is not regarded as rental or

5234licensee fee consideration, even though the

5240landlord or other person granting the right

5247to occupy or use such real property is also

5256protected by the coverage. However, any

5262portion of the prem ium which secures the

5270protection of the landlord or person

5276granting the right to occupy or use such

5284real property and which is separately

5290stated or itemized is regarded as rental or

5298license fee consideration and is taxable.

5304* * *

5307(19)(a) The lease or re ntal of real

5315property or a license fee arrangement to

5322use or occupy real property between related

"5329persons" as defined in Section 212.02(12),

5335F.S., in the capacity of lessor/lessee, is

5342subject to tax.

5345(b) The total consideration, whether

5350direct or indire ct, payments or credits, or

5358other consideration in kind, furnished by

5364the lessee to the lessor is subject to tax

5373despite any relationship between the lessor

5379and lessee.

5381(c) The total consideration furnished by

5387the lessee to a related lessor for the

5395occup ation of real property, for the use or

5404entitlement to the use of real property

5411owned by the related lessor is subject to

5419tax, even though the amount of the

5426consideration is equal to the amount of the

5434consideration legally necessary to amortize

5439a debt owned by the related lessor and

5447secured by the real property, or used, and

5455even though the consideration is ultimately

5461used to pay that debt.

5466THE ASSESSMENT AGAINST HARRY T'S

547170. With respect to Harry T's, there are two issues

5481requiring resolution: 1) whether Harry's T's payment of ad

5490valorem taxes on behalf of the property owner are taxable

5500under Chapter 212.031, Florida Statutes; and 2) whether

5508payments of cash denominated as dividends transferred from

5516Harry T's to a related business entity are taxabl e as rent

5528where the parties have entered into a "Cooperative Business

5537Agreement."

553871. The first issue requires little discussion. Rule

554612A - 1.070(4)(c) makes it clear ad valorem taxes paid by the

5558tenant "or other person actually occupying, using, or enti tled

5568to use any real property" on behalf of the lessor, including

5579transactions between affiliated entities, are taxable. Harry

5586T's makes no argument to the contrary. Accordingly, to the

5596extent that the audit finds that Harry T's must pay sales tax

5608on the amount of ad valorem taxes paid, the Department has

5619demonstrated both a factual and legal basis for making the

5629assessment, and the Petitioner has not demonstrated that the

5638assessment is incorrect.

564172. The second issue is less straightforward. There is

5650no question that the parties entered a cooperative business

5659agreement by which they agree to pool their resources to

5669operate a restaurant and bar. The parties have stipulated

5678that Harry T's operated on property owned by its parent

5688company, Holdings, and t hat while there were accounting

5697entries reflecting CBA compensation accrued by Harry T's to

5706Legendary, there were no payments actually made and labeled as

5716either CBA compensation or as rent.

572273. Cash was transferred between subsidiaries based upon

5730th e business decisions of the Chief Financial Officer of

5740Legendary. However, as he testified via deposition, these

5748transfers were accomplished to facilitate the needs of the

5757individual companies. They were not tied to the accounting

5766entries reflected as CB A compensation.

577274. More importantly, the cash distributions labeled as

5780corporate dividends appear to bear no correlation to the CBA

5790compensation book entries. The records reflecting the actual

5798transfers have not been included in the stipulated exhibi ts.

5808Instead, the parties have stipulated that these amounts

5816reflect "any amounts collected by Harry T's . . . and not paid

5829directly to third parties."

583375. Section 212.031(3) provides that sales tax on leases

5842is due and payable "at the time of the recei pt of such rental

5856or license fee payment by the lessor or other person who

5867receives the rental or payment." Simply put, in order for

5877there to be a tax due and owing, there must be a payment of

5891rent. See Department of Revenue , 406 So. 2d 1299 (Fla. 1st

5902DC A 1981); see also St. Johns Trading Co. v. Department of

5914Revenue , DOAH Case No. 84 - 1652 (DOR Final Order 1985). Here,

5926there is no such paymentansfer of cash between related

5935entities with no correlation to an agreed amount or percentage

5945for payment of rent is not sufficient to demonstrate that the

5956Petitioner was paying rent for the use of the property. To

5967the extent that the audit assesses taxes for the amount listed

5978as CBA compensation in Harry T's bookkeeping entries,

5986Petitioner has demonstrated tha t the assessment is incorrect

5995and sales tax should not be assessed for those amounts.

6005THE ASSESSMENT AGAINST RESTAURANT

600976. Petitioner Legendary Restaurant Associates, Inc.,

6015challenges the Department audit on the same basis, i.e. ,

60241) whether Res taurant's payment of ad valorem taxes on behalf

6035of the property owner are taxes under Chapter 212.031, Florida

6045Statutes; and 2) whether payments of case denominated as

6054dividends transferred from Restaurant to a related business

6062entity are taxable as rent w here the parties have entered into

6074a "Cooperative Business Agreement."

607877. For the same reasons outlined with respect to Harry

6088T's, the assessment of additional sales tax on the ad valorem

6099taxes paid by Restaurant on behalf of Holding during the audit

6110pe riod is sustained. However, the additional taxes on the

6120bookkeeping entries labeled as CBA compensation cannot be

6128sustained as no payment for rent was actually made.

6137THE ASSESSMENT AGAINST BEACHSIDE

614178. With respect to Beachside, the Department has

6149ass essed additional taxes for the ad valorem taxes, insurance

6159payments and loan payments paid by Beachside on behalf of FHCB

6170and the Shareholders. All of these items are specified as

6180payments that would trigger sales tax pursuant to Rule 12A -

61911.070. See spec ifically Florida Administrative Code Rule 12A -

62011.070(4)(c), (12) and (19)(b) and (c).

620779. Petitioner contends that these amounts are not

6215subject to assessment because there was a shift in the

6225beneficial ownership of the Beachside Inn assets during the

6234Au dit Period. Petitioner states:

6239Since Resorts both owned the Beachside Inn

6246assets for tax purposes and operated on

6253them, there can be no lease (since a lease

6262between owner of real property and itself

6269as the tenant effects a merger under

6276Florida law) and no sales or use tax should

6285be due here in connection therewith.

629180. Beachside operated under the terms of the Beachside

6300lease during the entire Audit Period. While the parties have

6310stipulated that the intent of the leases was to transfer

6320contr ol of the assets, as well as the benefits and burdens of

6333ownership to Resorts, the language of the lease must determine

6343whether Resorts became the equitable owner of the property.

635281. In order to have all the benefits and burdens of

6363ownership so as to qualify as an equitable owner of the

6374property, there must be the ability to purchase the property at

6385a nominal sum. Robbins v. Mt. Sinai Medical Center, Inc. , 748

6396So. 2d 349 (Fla. 3d DCA 1999); Metropolitan Dade County v.

6407Brothers of the Good Shepherd , Inc. , 714 So. 2d 573 (Fla. 3d

6419DCA 1998). Here, the option to purchase required Resorts to

6429affect a closing under the Asset Purchase Agreement. The Asset

6439Purchase Agreement did not allow for purchase of the property

6449at a nominal sum, but instead require d a note for payment of

6462$880,000. Under these circumstances, Resorts cannot be

6470considered the equitable owner of the property.

647782. If Resorts is not the equitable owner of the

6487property, Beachside clearly cannot claim the benefits of

6495ownership. Unde r these circumstances, Resorts and Beachside

6503were paying the ad valorem taxes, insurance premiums and loan

6513payments in their capacities as tenants, as contemplated by the

6523Beachside Inn lease, for the benefit of the property owner.

6533Accordingly, the Departm ent has sustained its burden regarding

6542the taxes assessed against Beachside, and Petitioner has not

6551demonstrated that the assessment is incorrect.

6557RECOMMENDATION

6558Upon consideration of the facts found and conclusions of

6567law reached, it is

6571RECOMMENDED:

6572Th at the Department of Revenue enter a final order

6582finding that:

65841. The Department's assessment for additional sales tax,

6592penalties and interest against Petitioner Harry T's is

6600sustained for the portion attributable to payment of ad

6609valorem taxes only;

66122. The Department's assessment for additional sales tax,

6620penalties and interest against Petitioner Legendary Restaurant

6627Associates, Inc., is sustained for the portion attributable to

6636payment of ad valorem taxes only; and

66433. The Department's assessment for additional sales tax

6651penalties and interest against Petitioner Beachside Inn, Inc.,

6659be sustained in its entirety.

6664DONE AND ENTERED this 27th day of July, 2006, in

6674Tallahassee, Leon County, Florida.

6678S

6679________________________ ___________

6681LISA SHEARER NELSON

6684Administrative Law Judge

6687Division of Administrative Hearings

6691The DeSoto Building

66941230 Apalachee Par kway

6698Tallahassee, Florida 32399 - 3060

6703(850) 488 - 9675 SUNCOM 278 - 9675

6711Fax Filing (850) 921 - 6847

6717www.doah.state.fl.us

6718Filed with t he Clerk of the

6725Division of Administrative Hearings

6729this 27th day of July, 2006.

6735ENDNOTES

67361/ For reasons that are not explained, several of the

6746Stipulated Facts submitted by the parties read "intentionally

6754om itted." Moreover, not all of the Stipulated Facts agreed to

6765by the parties are reflected in the Proposed Recommended Order

6775submitted by Petitioners. Accordingly, the numbering of the

6783Stipulated Facts herein does not correspond to the numbering in

6793the par ties' submissions.

67972/ The amounts in the stipulated facts submitted appear to be,

6808for the most part, the amounts listed in the Notice of Intent

6820to Make Audit Changes issues September 26, 2003, as opposed to

6831those listed in the Notice issued October 27, 2003. See

6841Exhibit 14. The undersigned has used the numbers actually

6850identified in the Notice issued October 27, 2003.

6858COPIES FURNISHED:

6860James O. Jett, Esquire

6864R. Lynn Lovejoy, Esquire

6868Office of the Attorney General

6873The Capitol, Plaza Level 01

6878Tallahas see, Florida 32399 - 1050

6884Robert S. Bernstein, Esquire

6888Foley & Lardner

6891The Greenleaf Building

6894200 Laura Street

6897Jacksonville, Florida 32202 - 3510

6902Bruce Hoffmann, General Counsel

6906Department of Revenue

6909The Carlton Building, Room 204

6914Tallahassee, Flo rida 32399 - 0100

6920James Zingale, Executive Director

6924Department of Revenue

6927The Carlton Building, Room 104

6932Tallahassee, Florida 32399 - 0100

6937NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

6943All parties have the right to submit written exceptions wi thin

695415 days from the date of this recommended order. Any exceptions

6965to this recommended order should be filed with the agency that

6976will issue the final order in this case.

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Date
Proceedings
PDF:
Date: 07/27/2006
Proceedings: Recommended Order
PDF:
Date: 07/27/2006
Proceedings: Summary Recommended Order cover letter identifying the hearing record referred to the Agency.
PDF:
Date: 07/27/2006
Proceedings: Summary Recommended Order. CASE CLOSED.
PDF:
Date: 07/05/2006
Proceedings: Notice of Transfer.
PDF:
Date: 07/05/2006
Proceedings: Order Cancelling Hearing (case will be considered upon the parties` stipulated facts and exhibits).
PDF:
Date: 07/03/2006
Proceedings: Respondent`s Motion to Cancel Final Hearing filed.
PDF:
Date: 07/03/2006
Proceedings: Petitioners` Proposed Recomended Order filed.
PDF:
Date: 07/03/2006
Proceedings: Petitioners` Motion for Summary Recommended Order filed.
PDF:
Date: 06/30/2006
Proceedings: Respondent`s Motion for Summary Recommended Order filed.
PDF:
Date: 06/29/2006
Proceedings: Notice of Filing Joint Exhibits filed (Hearing exhibits not available for viewing).
PDF:
Date: 06/27/2006
Proceedings: Joint Stipulation of Facts and Listing of Joint Exhibits filed.
PDF:
Date: 04/19/2006
Proceedings: Order of Pre-hearing Instructions.
PDF:
Date: 04/19/2006
Proceedings: Notice of Hearing (hearing set for July 6 and 7, 2006; 10:00 a.m., Central Time; Shalimar, FL).
PDF:
Date: 04/17/2006
Proceedings: Status Report filed.
PDF:
Date: 03/06/2006
Proceedings: Order Granting Continuance and Placing Case in Abeyance (parties to advise status by April 17, 2006).
PDF:
Date: 03/03/2006
Proceedings: Respondent`s Motion for Continuance filed.
PDF:
Date: 02/16/2006
Proceedings: Notice of Taking Corporate Representative Deposition filed.
PDF:
Date: 12/28/2005
Proceedings: Order Granting Continuance and Re-scheduling Hearing (hearing set for March 8 and 9, 2006; 10:00 a.m., Central Time; Niceville, FL).
PDF:
Date: 12/21/2005
Proceedings: Petitioners` Unopposed Motion to Continue filed.
PDF:
Date: 11/17/2005
Proceedings: Joint Response to Initial Order filed.
Date: 10/26/2005
Proceedings: Joint Response to Initial Order filed (not available for viewing).
PDF:
Date: 10/14/2005
Proceedings: Respondent`s Response to Petitioner`s Request for Production (Original Case No. 05-2261 identified) filed.
PDF:
Date: 10/14/2005
Proceedings: Respondent`s Response to Petitioner`s Request for Production (Original Case No. 05-1263 identified) filed.
PDF:
Date: 10/14/2005
Proceedings: Respondent`s Response to Petitioner`s Request for Production (Original Case No. 05-1262 identified) filed.
PDF:
Date: 10/07/2005
Proceedings: Amended Notice of Hearing (hearing set for January 12 and 13, 2006; 10:00 a.m., Central Time; Shalimar, FL; amended as to Location).
PDF:
Date: 09/29/2005
Proceedings: Order Granting Continuance and Re-scheduling Hearing (hearing set for January 12 and 13, 2006; 10:00 a.m., Central Time; Destin, FL).
PDF:
Date: 09/27/2005
Proceedings: Department`s Unopposed Motion for Continuance of Case filed.
PDF:
Date: 06/24/2005
Proceedings: Order of Pre-hearing Instructions.
PDF:
Date: 06/24/2005
Proceedings: Notice of Hearing (hearing set for October 17 and 18, 2005; 10:00 a.m., Central Time; Destin, FL).
PDF:
Date: 06/23/2005
Proceedings: Order Reopening Case and Granting Consolidation (04-1585 reopened and assigned case no. 05-2261 and case nos. 05-1262, 05-1263, 05-2261 are consolidated).
PDF:
Date: 06/22/2005
Proceedings: Addendum to Notice of Proposed Assessment filed.
PDF:
Date: 06/17/2005
Proceedings: Joint Status Report (05-1263) filed.
PDF:
Date: 06/17/2005
Proceedings: Joint Status Report filed.
PDF:
Date: 05/18/2005
Proceedings: Order Granting Continuance (parties to advise status by June 17, 2005).
PDF:
Date: 05/17/2005
Proceedings: Respondent`s Motion to Continue filed.
PDF:
Date: 05/03/2005
Proceedings: Respondent`s Notice of Serving of First Set of Interrogatories filed.
PDF:
Date: 05/03/2005
Proceedings: Respondent`s First Request for Production of Documents filed.
PDF:
Date: 04/29/2005
Proceedings: Notice of Appearance as Co-counsel (filed by J. Jett, Esquire).
PDF:
Date: 04/27/2005
Proceedings: Petition for a Chapter 120 Administrative Hearing filed.
PDF:
Date: 04/27/2005
Proceedings: Agency referral filed.
PDF:
Date: 04/18/2005
Proceedings: Order of Pre-hearing Instructions.
PDF:
Date: 04/18/2005
Proceedings: Notice of Hearing (hearing set for June 8, 2005; 10:00 a.m., Central Time; Destin, FL).
PDF:
Date: 04/13/2005
Proceedings: Notice of Appearance (filed by R. Lovejoy, Esquire).
PDF:
Date: 04/13/2005
Proceedings: Response to Initial Order filed.
PDF:
Date: 04/08/2005
Proceedings: Initial Order.
PDF:
Date: 04/08/2005
Proceedings: Notice of Decision filed.
PDF:
Date: 04/08/2005
Proceedings: Petition for a Chapter 120 Administrative Hearing filed.
PDF:
Date: 04/08/2005
Proceedings: Agency referral filed.
PDF:
Date: 04/27/2004
Proceedings: Notice of Proposed Assessment filed.

Case Information

Judge:
LISA SHEARER NELSON
Date Filed:
04/08/2005
Date Assignment:
06/29/2006
Last Docket Entry:
07/27/2006
Location:
Shalimar, Florida
District:
Northern
Agency:
Department of Revenue
 

Counsels

Related Florida Statute(s) (10):