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

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.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

BEACHSIDE INN DESTIN, INC., )

)

Petitioner, )

)

vs. ) Case Nos. 05 - 1262

) 05 - 1263

DEPARTMENT OF REVENUE, ) 05 - 2261

)

Respondent. )

)

SUMMARY RECOMMENDED ORDER

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

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

Recommended Order and filed stipu lated facts and exhibits. On

July 5, 2006, the undersigned entered an Order Canceling

Hearing and advised the parties that a Recommended Order would

be prepared based on the stipulated facts and exhibits and

written submissions of the parties. The author ity for

conducting the proceeding is set forth in Sections 120.569 and

120.57(1), Florida Statutes. The case was considered by Lisa

Shearer Nelson, Administrative Law Judge.

APPEARANCES

For Petitioners: Robert S. Bernstein, Esquire

Foley & Lardner

The Greenleaf Building

200 Laura Street

Jacksonville, Florida 32202 - 3510

For Respondent: James O. Jett, Esqui re

Office of the Attorney General

The Capitol, Plaza Level 01

Tallahassee, Florida 32399 - 1050

STATEMENT OF THE ISSUE

Whether the Petitioners are liable for sales tax,

penalties and int erest as assessed by the Department of

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

PRELIMINARY STATEMENT

This proceeding involves three cases which have been

consolidated because they deal with a parent company and its

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

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

Notice of Decision pursuant to Section 212.031, Florida

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

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

remaining due. Petitioner timely filed a Petition for a

Chapter 120 Administrative Hearing and the matter was

forwarded to the Division of Administrative Hearings

(Division) for the assignment of an administrative law judge

to conduct a formal hearing to resolve the dispute.

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

was continued at the request of the Respondent. The parties

were ordered to submit a Joint Status Report no later than

June 17, 2005.

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

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

sales tax assessment pursuant to Section 212.031, Florida

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

interest which continues to accrue) remaining due for sales

tax due. Petitioner timely filed a Petition for Chapter 120

Administrative Hearing and the matter was forward to the

Division for hearing.

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

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

parties ordered to submit a Joint Status report no later than

June 17, 2005.

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

filed a Notice of Proposed Assessment sustaining an assessment

for sales tax pursuant to Section 212.031, Florida Statutes,

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

which continues to accrue) remaining due. Petitioner timely

filed a Petition for Chapter 120 Administrative Hearing and

the Department forwarded the case to the Division. The case

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

request of the parties, the hearing was cancelled and the

Division file was closed without prejudice for the parties to

re - open the case at a later date.

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

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

consolidated and the matter was set for hearing October 17 and

18, 2005. Both parties requested continuances and the case

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

2006, and then July 6 and 7, 2006.

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

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

a Motion for Summary Recommended Order and Petitioners'

Proposed Recommended Order. That same d ay the Department also

filed Respondent's Motion to Cancel Final Hearing, stating

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

submit Motions for Summary Recommended Orders in lieu of

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

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

case has been decided based on the written submissions and

stipulated exhibits filed by the parties. The submissions of

both parties have been considered in the preparation of this

Summary Recommended Order.

FINDINGS OF FACT

1. The parties have stipulated to the facts stated in

paragraphs 2 - 59. 1/

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

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

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

pursuant to Section 213.05, Florida Statutes. The Department

was authorized to conduct an audit of each of the Petitioners

and to request information to determine their liability for

taxes pursuant to Chapter 212, Florida Sta tutes.

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

organized under the laws of Florida effective October 23,

1996, and was so organized from 1999 - 2003. Holding's

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

Florida 32541.

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

1986 as amended and in effect (IRC) during 1999 - 2003 and for

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

corporation during this time.

5. Holding was also subject to Chapter 212, Florida

Sta tutes, during 1999 - 2003.

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

corporation organized under the laws of Florida effective

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

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

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

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

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

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

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

parent, Holding.

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

a corporation organized under the laws of Florida effective

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

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

Beachside, a wholly - owned subsidiary of Holding, was

administratively dissolved on October 14, 2004, for failure to

file an annual report.

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

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

32541. Its corporate address was 4460 Legendary Drive, Suite

400, Destin Florida.

10. Beachside was subject to the IRC and for federal

income tax purposes was a qualified subchapter S subsidiary of

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

Period.

11. Petitioner Legendary Restaurant Associates, Inc.

(Restaurant) is a corporation organized under the laws of

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

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

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

wholly owned subsidiary of Holding and Restaurant's corporate

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

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

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

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

Restaurant Audit Period.

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

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

corporate address was also 4460 Legendary Drive, Suite 400,

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

wholly - owned subsidiary of Holding. Legendary was subject to

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

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

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

liability company organized under the laws of Florida and was

so organized during 2000 - 2003. Resorts, whose corporate

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

Florida, was administratively dissolved on September 16, 2005,

for failure to file an annual report.

15. Legendary entered into a cooperative business

agreement (CBA) with certain subsidiaries of Holding prior to

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

and these subsidiaries were identical other than the name of

the "manager" subsidiary and the percentage of compensation

paid to Legendary and the formula for sharing profits varied

from time to time.

16. Legen dary also entered into a management agreement

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

these agreements were identical.

FACTS RELATED TO PETITIONER HARRY T'S AUDIT

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

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

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

accounting during its Audit Period.

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

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

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

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

Agreement agreeing that a sampling method is the most

effective, expedient, and adequate method in which to conduct

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

Department tax auditor, examined and sampled the available

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

properly collected and remitted sales and use tax in

compliance with Chapter 212, Florida Statutes.

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

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

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

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

paid rent equal to eight percent of the gross sales to

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

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

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

Period.

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

Holdings during Harry T's Audit Period. Accounting entries

were made each month during the Audit Period to record the

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

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

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

Legendary during the Audit Period. Further, no amount of

money labeled as CBA compensation was transferred from Harry

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

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

Legendary.

23. Based upon the business decisions of the Chief

Financial Officer of Legendary, cash was transferred

periodically from Harry T's to Legendary during the Audit

Period. Based upon the business decisions of the Chief

Fi nancial Officer of Legendary, cash was also transferred from

Legendary to Harry T's.

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

transferred from Legendary to Holdings. These amounts were

reflected as dividend distributions and varied in amount and

time from (a) Holdings insurance and mortgage indebtedness

obligations associated with the property used by Harry Ts and

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

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

third parti es were distributed periodically to Holdings as

corporate dividends.

25. The Department determined that the transfers of cash

from Harry T's to Legendary reflected rental consideration

paid as CBA compensation, and directed the Department's

auditor to a ssess sales tax against the amounts recorded as

CBA compensation accounting entries.

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

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

Audit Period. The Department auditor assessed sales tax on

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

Holding.

27. The Department determined that Harry T's owed

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

and ad valorem taxes paid, plus statutory interest and

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

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

1215) for Audit No. A0233016246, stating that Harry T's owed

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

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

continued to accrue on the unpaid assessment.

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

the portions of the assessment related to food and beverage,

but objected to the assessment for all other amounts including

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

assessment amounts.

29. The Department issued its Notice of Proposed

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

2004. The NOPA stated that the total owed by Harry T's was

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

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

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

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

date of the NOPA.

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

protest on April 23, 2004.

FACTS RELATED TO RESTAURANT'S AUDIT

31. Petitioner Restaurant was a registered dealer who

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

Department for each month of the Restaurant Audit Period.

Restaurant used the cash basis of accounting.

32. The Department sent Restaurant a Notification of

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

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

Chapte r 212, Florida Statutes. The Department and Restaurant

entered into an Audit Agreement stipulating that a sampling

method is the most effective, expedient, and adequate method

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

records. Gina Imm exami ned and sampled the available books

and records of Restaurant to determine whether Restaurant

properly collected and remitted sales and use tax in

compliance with Chapter 212, Florida Statutes.

33. Restaurant was the tenant party in leases for the

propert y upon which Restaurant operated its business prior to

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

its leases for these properties.

34. Restaurant entered a CBA with Legendary prior to the

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

through March 31, 2003. The CBA between Restaurant and

Legendary was effective throughout the Restaurant Audit

Period.

35. Restaurant operated the "Crystal Beach Coffee

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

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

third party, during the Restaurant Audit Period.

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

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

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

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

limited partnership, during the Restaurant Audit Period.

38. Accounting entries were made each month during the

Restaurant Audit Period to record the amount of CBA

compensation that was accrued by Res taurant to Legendary under

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

accounting books of either Restaurant or Legendary during the

Restaurant Audit Period. No amount of money labeled as CBA

compensation was transferred from Restaurant to Legendary and

no payments labeled as "rent" were transferred from Restaurant

to Legendary.

39. Based upon the business decisions of the Chief

Financial Officer of Legendary, cash was transferred

periodically from Restaurant to Legendary, and cash was als o

transferred from Legendary to Restaurant during the Restaurant

Audit Period. Any amounts collected by Restaurant during the

Restaurant Audit Period and not paid directly to third parties

were distributed periodically to Holdings as corporate

dividends.

40. The Department determined that the transfers of cash

from Restaurant to Legendary reflected rental consideration

paid as CBA compensation, and directed the Department's

auditor to assess sales tax against the amounts recorded as

CBA compensation acc ounting entries.

41. Restaurant paid ad valorem taxes due on the property

on which Restaurant operated during each year of the

Restaurant Audit period. The Department assessed sales tax on

the amounts of ad valorem taxes paid by Restaurant on behalf

of Holding.

42. The Department determined that Restaurant owed

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

and ad valorem taxes paid, plus statutory interest and

penalties.

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

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

1215) for audit number A0231102584, stating that Restaurant

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

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

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

portions of the assessment related to food and beverage sales,

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

Department informed Petitioner Restaurant that interest

continued to accrue on the unpaid assessment.

44. The Departm ent issued its NOPA for audit number

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

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

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

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

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

the NOPA, and the Department referred the matter to the

Department's Technical Assistance and Dispute Resolution

Section.

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

of Decision upholding the assessment of tax for the CBA fees

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

the Department received the Restaurant's formal written

protest.

FACTS RELATED TO BEACHSIDE'S AUDIT

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

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

Tax Return) with the Department for each month during the

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

Beachside used the cash basis of accountin g during the

Beachside Audit Period.

47. Beachside and the Department entered into an Audit

Agreement stipulating that a sampling method is the most

effective, expedient, and adequate method by which to conduct

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

Auditor for the Department, examined and sampled the available

books and records of Beachside to determine whether Beachside

properly collected and remitted sales and use tax during the

Audit Period in compliance with the requirements of Ch apter

212, Florida Statutes.

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

Asset Purchase Agreement with FHCB and Lester J. Butler,

Timothy Fulmer and Mitt Fulmer, three of Resorts' shareholders

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

Beachside Inn assets by Resorts. Subsequent to the execution

of the Asset Purchase Agreement, the parties discovered that a

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

Resorts of the major indebtedness of FHCB could not be

accom plished as contemplated because it would cause the

existing lender to violate its loan consideration limits with

respect to the Legendary Group.

49. After discovering this problem, Resorts entered into

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

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

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

were originally the subject of the Asset Purchase Agreement.

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

the benefits and burdens of ownership, of the Beachside Inn

assets to Resorts pending resolution of the financing

contingency and the closing under the Asset Purchase

Agreement.

50. Beachside entered into a CBA with Legendary prior to

the beginning of the Beachside Audit Period, which was

effective throughout the Beachside Audit Period.

51. Although Resorts was the party entitled to all

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

Leases and Asset Purchase Agreement, the financial accounti ng

and cash management functions and activities during the terms

of the Leases were handled by and recorded in Beachside

because these leases were designed to permit the Legendary

Group to take over the operations of the Beachside Inn assets

pending closin g and because the Legendary Group intended to

place the assets in Beachside under the Asset Purchase

Agreement upon the closing of the asset purchase.

52. Resorts and Beachside operated the Beachside Inn

assets on property owned by FHCB and the Shareholde rs during

the Beachside Audit Period. Accounting entries were made each

month to record the amount of CBA compensation that was

accrued by Beachside to Legendary under the CBA but no rent

was recorded on the income tax or accounting books of either

Beachs ide or Legendary during the Beachside Audit Period. No

money labeled as CBA compensation was transferred from

Beachside or Resorts to Legendary and no payments labeled as

"rent" were transferred from Beachside or Resorts to

Legendary.

53. Based on the bu siness decisions of the Chief

Financial Officer of Legendary, cash was transferred

periodically from Resorts and/or Beachside to Legendary and

from Legendary to Resorts and/or Beachside during the

Beachside Audit Period.

54. After Resorts and Beachside op erated the Beachside

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

was not able to arrange for suitable substitute financing to

close on the purchase of the Beachside Inn assets under the

Asset Purchase Agreement. Resorts, FHCB and the Share holders

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

Termination Date), whereby Resorts terminated its rights under

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

the Shareholders transferred ownership of the beachfront lot

to Reso rts.

55. Federal income tax returns for calendar years 2000,

2001, and 2002 were filed by Resorts which reflected the

results of operating the Beachside Inn assets. Following the

Termination Date, all of the historic accounting entries made

by Beachsid e reflecting the operation of the Beachside Inn

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

records of Resorts for administrative reasons and consistency

with the legal documents.

56. Beachside and Resorts made insurance payments on

beha lf of the owners of the property upon which Resorts

operated its business for each year of the Beachside Audit

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

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

property upon which Resor ts operated for each year of the

Beachside Audit Period.

57. The Department assessed Beachside sales tax on the

amounts of ad valorem taxes, insurance payments and loan

payments paid by Beachside on behalf of FHCB and the

Shareholders. On October 27 , 2003, the Department issued

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

1215) for audit number A030582778, stating that Beachside owed

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

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

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

of good and beverage, and reflected a balance due after

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

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

towar d the balance due on the uncontested amount of the

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

Notice of Proposed Assessment for audit number A030582778,

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

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

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

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

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

the Department referred the matter to the Department's

Technical Assistance and Dispute Resolution Section. On March

28, 2005, the Department issued its Notice of Decision

upholding the assessment of tax for the payment of ad valorem

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

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

formal written protest of audit number A030582778.

ADDITIONAL FACTS

60. In addition to the Stipulated Facts submitted by the

parties, the undersigned makes the following findings based

upon the st ipulated exhibits submitted.

61. With respect to the CBAs, the documents provided

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

Agreement for each to provide certain assets to the Business

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

Management Services as required from time to time by the

Business." The Agreements state that "each have various

assets including fixtures, employees, contractual

relationships, knowhow and real estate which they wish to

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

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

have provisions for care and repair of the premises; for

rights of access and inspection; for eminent domain or

condemnation; for default; for provision of utilities or for

subletting, all provisions typically seen in a commercial

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

Inn Assets (Stipulated Exhibit 10) contains all of these

provisions.

63. The CBAs provide for payment of management services,

expenses of the business, and all services and assets

necessary for the operations of the business. They are

clearly not limited to provision of a location.

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

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

Purchase Agreement and expressly acknowledges the existence of

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

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

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

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

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

provides a right to purchase the premises at any time during

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

extensions of the lease which shall be exercised by affecting

a closing under the Asset Purchase Agreement.

65. The Beachside Lease for the Beachside Inn assets has

other provisions that are relevant to these proceedings. For

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

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

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

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

the expiration of the lease, including terms for removal of

any tra de fixtures, personal property and signs. Most

importantly, the Beachside Inn lease expressly states the

following:

26. a. The Lease does not create the

relationship of principal and agent or of

partnership or of joint venture or of any

association betwe en Landlord and Tenant,

the sole relationship between the parties

hereto being that of Landlord and Tenant.

* * *

c. This Lease and the Exhibits, if any,

attached hereto and forming a part hereof,

constitute the entire agreement between

Landlord and Te nant affecting the Premises

and there are no other agreements, either

oral or written, between them other than

are herein set forth. . . .

CONCLUSIONS OF LAW

66. The Division of Administrative Hearings has

jurisdiction over the subject matter and the parties to this

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

Florida Statutes.

67. The Department must demonstrate 1) that an

assessment has been made against the taxpayer and 2) the

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

Department meets this initial burden of proof, the burden

shifts to the Petitioner to show by a preponderance of the

evidence that the assessment is incorrect. Section

120.80(14)(b)(2), Florida Statutes; IPC Sports, Inc. v.

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

determining whether the assessment is correct, the undersigned

is required to honor the settled principle that tax laws are

to be strongly construed in favor of the taxpayer and against

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

193, 198 (Fla. 1967); Leadership Housing, Inc. v. Department

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

68. The sales tax indebtedness for all three entities

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

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

212.031 provides:

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

legislative intent that every person is

exercising a taxable privilege who engages

in the business of renting, leasing, or

granting a lice nse for the use of any real

property . . . .

* * *

(c) For the exercise of such privilege, a

tax is levied in an amount equal to 6

percent of an on the total rent or license

fee charged for such real property by the

person charging or collecting the ren tal or

license fee. The total rent or license fee

charged for such real property shall

include payments for the granting or a

privilege to use or occupy real property

for any purpose and shall include base

rent, percentage rents, or similar charges.

Such charges shall be included in the total

rent or license fee subject to tax under

this section whether or not they can be

attributed to the ability of the lessor's

or licensor's property as used or operated

to attract customers. . . .

* * *

(3) The tax i mposed by this section shall

be in addition to the total amount of the

rental or license fee, shall be charged by

the lessor or person receiving the rent or

payment in and by a rental or license fee

arrangement with the lessee or person

paying the rental o r license fee, and shall

be due and payable at the time of the

receipt of such rental or license fee

payment by the lessor or other person who

receives the rental or payment . . . .

69. The relevant portions of Florida Administrative Code

Rule 12A - 1. 070 provide:

(4)(a) The tenant or person actually

occupying, using or entitled to use any

real property from which rental or license

fee is subject to taxation under Section

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

immediate landlord or other person gran ting

the right to such tenant or person to

occupy or use such real property.

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

percent prior to February 1, 1988, and 6

percent on or after February 1, 1988, on

all considerations due and payable by the

tenant or other person actually occupying,

using, or entitled to use any real property

to his landlord or other person for the

privilege of use, occupancy, or the right

to use or occupy any real property for any

purpose.

(c) Ad valorem taxes paid by the tenant or

other person actually occupying, using, or

entitled to use any property to the lessor

or any other person on behalf of the

lessor, including transactions between

affiliated entities, are taxable.

* * *

(12) When a tenant or other person pays

insurance f or his own protection, the

premium is not regarded as rental or

licensee fee consideration, even though the

landlord or other person granting the right

to occupy or use such real property is also

protected by the coverage. However, any

portion of the prem ium which secures the

protection of the landlord or person

granting the right to occupy or use such

real property and which is separately

stated or itemized is regarded as rental or

license fee consideration and is taxable.

* * *

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

property or a license fee arrangement to

use or occupy real property between related

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

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

subject to tax.

(b) The total consideration, whether

direct or indire ct, payments or credits, or

other consideration in kind, furnished by

the lessee to the lessor is subject to tax

despite any relationship between the lessor

and lessee.

(c) The total consideration furnished by

the lessee to a related lessor for the

occup ation of real property, for the use or

entitlement to the use of real property

owned by the related lessor is subject to

tax, even though the amount of the

consideration is equal to the amount of the

consideration legally necessary to amortize

a debt owned by the related lessor and

secured by the real property, or used, and

even though the consideration is ultimately

used to pay that debt.

THE ASSESSMENT AGAINST HARRY T'S

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

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

valorem taxes on behalf of the property owner are taxable

under Chapter 212.031, Florida Statutes; and 2) whether

payments of cash denominated as dividends transferred from

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

where the parties have entered into a "Cooperative Business

Agreement."

71. The first issue requires little discussion. Rule

12A - 1.070(4)(c) makes it clear ad valorem taxes paid by the

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

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

transactions between affiliated entities, are taxable. Harry

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

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

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

demonstrated both a factual and legal basis for making the

assessment, and the Petitioner has not demonstrated that the

assessment is incorrect.

72. The second issue is less straightforward. There is

no question that the parties entered a cooperative business

agreement by which they agree to pool their resources to

operate a restaurant and bar. The parties have stipulated

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

company, Holdings, and t hat while there were accounting

entries reflecting CBA compensation accrued by Harry T's to

Legendary, there were no payments actually made and labeled as

either CBA compensation or as rent.

73. Cash was transferred between subsidiaries based upon

th e business decisions of the Chief Financial Officer of

Legendary. However, as he testified via deposition, these

transfers were accomplished to facilitate the needs of the

individual companies. They were not tied to the accounting

entries reflected as CB A compensation.

74. More importantly, the cash distributions labeled as

corporate dividends appear to bear no correlation to the CBA

compensation book entries. The records reflecting the actual

transfers have not been included in the stipulated exhibi ts.

Instead, the parties have stipulated that these amounts

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

directly to third parties."

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

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

or license fee payment by the lessor or other person who

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

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

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

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

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

there is no such paymentansfer of cash between related

entities with no correlation to an agreed amount or percentage

for payment of rent is not sufficient to demonstrate that the

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

the extent that the audit assesses taxes for the amount listed

as CBA compensation in Harry T's bookkeeping entries,

Petitioner has demonstrated tha t the assessment is incorrect

and sales tax should not be assessed for those amounts.

THE ASSESSMENT AGAINST RESTAURANT

76. Petitioner Legendary Restaurant Associates, Inc.,

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

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

of the property owner are taxes under Chapter 212.031, Florida

Statutes; and 2) whether payments of case denominated as

dividends transferred from Restaurant to a related business

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

a "Cooperative Business Agreement."

77. For the same reasons outlined with respect to Harry

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

taxes paid by Restaurant on behalf of Holding during the audit

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

bookkeeping entries labeled as CBA compensation cannot be

sustained as no payment for rent was actually made.

THE ASSESSMENT AGAINST BEACHSIDE

78. With respect to Beachside, the Department has

ass essed additional taxes for the ad valorem taxes, insurance

payments and loan payments paid by Beachside on behalf of FHCB

and the Shareholders. All of these items are specified as

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

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

1.070(4)(c), (12) and (19)(b) and (c).

79. Petitioner contends that these amounts are not

subject to assessment because there was a shift in the

beneficial ownership of the Beachside Inn assets during the

Au dit Period. Petitioner states:

Since Resorts both owned the Beachside Inn

assets for tax purposes and operated on

them, there can be no lease (since a lease

between owner of real property and itself

as the tenant effects a merger under

Florida law) and no sales or use tax should

be due here in connection therewith.

80. Beachside operated under the terms of the Beachside

lease during the entire Audit Period. While the parties have

stipulated that the intent of the leases was to transfer

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

ownership to Resorts, the language of the lease must determine

whether Resorts became the equitable owner of the property.

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

ownership so as to qualify as an equitable owner of the

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

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

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

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

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

affect a closing under the Asset Purchase Agreement. The Asset

Purchase Agreement did not allow for purchase of the property

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

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

considered the equitable owner of the property.

82. If Resorts is not the equitable owner of the

property, Beachside clearly cannot claim the benefits of

ownership. Unde r these circumstances, Resorts and Beachside

were paying the ad valorem taxes, insurance premiums and loan

payments in their capacities as tenants, as contemplated by the

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

Accordingly, the Departm ent has sustained its burden regarding

the taxes assessed against Beachside, and Petitioner has not

demonstrated that the assessment is incorrect.

RECOMMENDATION

Upon consideration of the facts found and conclusions of

law reached, it is

RECOMMENDED:

Th at the Department of Revenue enter a final order

finding that:

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

penalties and interest against Petitioner Harry T's is

sustained for the portion attributable to payment of ad

valorem taxes only;

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

penalties and interest against Petitioner Legendary Restaurant

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

payment of ad valorem taxes only; and

3. The Department's assessment for additional sales tax

penalties and interest against Petitioner Beachside Inn, Inc.,

be sustained in its entirety.

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

Tallahassee, Leon County, Florida.

S

________________________ ___________

LISA SHEARER NELSON

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Par kway

Tallahassee, Florida 32399 - 3060

(850) 488 - 9675 SUNCOM 278 - 9675

Fax Filing (850) 921 - 6847

www.doah.state.fl.us

Filed with t he Clerk of the

Division of Administrative Hearings

this 27th day of July, 2006.

ENDNOTES

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

Stipulated Facts submitted by the parties read "intentionally

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

by the parties are reflected in the Proposed Recommended Order

submitted by Petitioners. Accordingly, the numbering of the

Stipulated Facts herein does not correspond to the numbering in

the par ties' submissions.

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

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

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

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

Exhibit 14. The undersigned has used the numbers actually

identified in the Notice issued October 27, 2003.

COPIES FURNISHED:

James O. Jett, Esquire

R. Lynn Lovejoy, Esquire

Office of the Attorney General

The Capitol, Plaza Level 01

Tallahas see, Florida 32399 - 1050

Robert S. Bernstein, Esquire

Foley & Lardner

The Greenleaf Building

200 Laura Street

Jacksonville, Florida 32202 - 3510

Bruce Hoffmann, General Counsel

Department of Revenue

The Carlton Building, Room 204

Tallahassee, Flo rida 32399 - 0100

James Zingale, Executive Director

Department of Revenue

The Carlton Building, Room 104

Tallahassee, Florida 32399 - 0100

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions wi thin

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.