92-002106 Kjell Bergh And Mary Bergh vs. Department Of Revenue Status: Closed Recommended Order on Tuesday, September 28, 1993.

Summary: Petitioners leasing real property to a related business entity are not in business of leasing propert and are not subject to tax.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

KJELL and MARY BERGH, )

)

Petitioners, )

)

vs. ) CASE NO. 92-2106

)

DEPARTMENT OF REVENUE, )

)

Respondent. )

_________________________________)

RECOMMENDED ORDER

This matter was heard by William R. Dorsey, Jr., the Hearing Officer

assigned by the Division of Administrative Hearings, on September 4, 1992, in

Tallahassee, Florida. Subsequent to the final hearing and Mr. Dorsey's

departure from the Division of Administrative Hearings, this matter was assigned

to Don W. Davis on August 17, 1993, for preparation of a recommended order.

APPEARANCES

For Petitioners: Cynthia S. Tunnicliff

Carlton, Fields, Ward, Emmanuel,

Smith & Cutler P.A.

Post Office Drawer 190

Tallahassee, Florida 32302

For Respondent: Mark T. Aliff, Esquire

Assistant Attorney General

Department of Legal Affairs

Tax Section, Capitol Building

Tallahassee, Florida 32399-1050

STATEMENT OF THE ISSUES

The issue is whether the Petitioners owe sales tax to the State of Florida

for lease payments made to them by Borton Motors, Inc., on a lease of commercial

property. The Petitioners argue that the transaction was structured to fall

within an exemption to taxation because (a) they maintain they are not in the

business of leasing real property and (b) Rule 12A

Administrative Code, excludes from taxation lease payments where the lease

payments are used to amortize a debt, and the corporation making the lease

payment is equally liable on the debt secured by the real property as is the

record owner of the property.

PRELIMINARY STATEMENT

At the hearing, the parties submitted a Stipulation of Facts which covers

some, but not all, of the matters in issue. Attached to the Stipulation were a

number of documents which pertain to the acquisition of the real estate by the

Petitioners, and their lease of that property to Borton Motors, Inc. A

deposition of Mr. Kjell Bergh was also admitted into evidence. A transcript of

the hearing was filed on September 24, 1992. A motion of the parties for an

extension of the time for filing proposed recommended orders until October 22,

1992, was granted.

FINDINGS OF FACT

1. Kjell Bergh operates a Volvo dealership in Minnesota. He also has other

business interest in the United States and abroad. In 1986, he received approval

from Volvo to open a Volvo dealership in the area of Boca Raton, Florida. Boca

Raton zoning makes it very difficult to locate automobile dealerships there.

Mr. Bergh therefore located a suitable five acre site to build the Volvo

dealership in nearby Delray Beach, Florida. The property was purchased in 1987

solely to build the automobile dealership on it. At some point Mr. Bergh also

received a Volkswagen franchise, and operates both the Volvo and the Volkswagen

franchises on the Delray Beach property. Title to the land was taken

individually in the names of Kjell and his wife Mary Bergh, as joint tenants, on

the advice of their tax counsel. The purchase price for the land was

approximately one million dollars.

2. The automobile dealership is operated by Borton Motors Incorporated, a

Florida corporation organized in 1986. It is owned 75 percent by the

Petitioners, Kjell and Mary Bergh, and 25 percent by the vice president and

general manager, Loren Sheffer, who has also invested money in the dealership.

It is common in the automobile industry for local managers to have a personal

stake in automobile dealerships they manage for absentee owners. The manager,

however, has only a minority interest, and the automobile manufacturer, Volvo,

holds Mr. Bergh responsible for the operation of the dealership.

3. The Berghs financed the purchase of the land and the buildings used as

the automobile dealership facilities through the Barnett Bank of Palm Beach

County.

4. On July 23, 1987, the Berghs executed a note and mortgage for

$2,000,000 in favor of the Barnett Bank for the purchase of the property along

with a construction loan agreement to build the dealership facility. The rate

and mortgage were modified to increase the amount borrowed to $2,250,000 in May

and June of 1988.

5. The land was then leased to Borton Motors, Inc., the legal entity which

operated the automobile dealerships. As a condition of obtaining the loan from

Barnett Bank, the bank required that Borton Motors, Inc., guarantee the loan

which the bank had made to Mr. and Mrs. Bergh, and also required the Berghs to

assign the lease to Barnett Bank. The terms of the mortgage give Barnett Bank

the right to collect rents and other payments from the property, and prohibits

the termination or cancellation of the lease without Barnett's permission.

Barnett Bank had the right to approve the lease provisions and to set the amount

of the rent so that the debt service coverage ratio would be no less than 1.2

times the amount borrowed.

6. In connection with the loan by Barnett Bank, on July 27, 1987, Borton

Motors, Inc., gave to Barnett Bank "its continuing and unconditional guarantee

of the payment in full when due of any and all indebtedness of Debtor [Kjell and

Mary Bergh] to Bank to the same extent as if Guarantor [Borton Motors, Inc.]

were the principal debtor of the indebtedness" (Exhibit 1D).

7. From the inception of the transaction, it was intended that the entity

operating the automobile dealership, Borton Motors, Inc., would finance the

purchase of the real estate on which the automobile dealership would be located,

and the construction of necessary improvements. This was accomplished through

the rental payments Borton Motors, Inc., would make to the Berghs, who had

actually taken title to the land. Through its guarantee, Borton Motors, Inc.,

was as liable to Barnett Bank as were the Berghs, from the inception of the

loan. The Berghs hoped to receive a return on monies they invested in the

automobile dealership, whether for real estate, improvements to the real estate,

inventory in the form of cars, or parts, or for payments made for labor to its

sales force and service technicians. It is misleading to state that the Berghs

intended to receive a return on the real estate investment they made. The

return on the real estate is not the result of a separate investment made by the

Berghs, it is instead a part of the overall operation of the dealership. The

Berghs are not investors in real property who happened to lease property to a

tenant who happens to operate a automobile dealership on that property. The

Berghs do take a federal income tax deduction for interest paid on the note to

Barnett Bank and report the rent received from Borton Motors, Inc., as income on

their federal income tax returns.

8. Petitioners have acquired other debt on behalf of the corporation and

do not receive any money from the corporation over and above the amount of the

mortgage and other indebitness.

9. The Barnett Bank of Palm Beach County eventually sold its loan to the

Berghs to Volvo Finance North American, Inc., in late April 1992. This sale has

no effect on the taxation of the transaction of issue.

10. On February 8, 1991, the Department of Revenue sent to the Petitioners

a form requesting them to file a "application for Sales and Use Tax

Registration" and asking them to report the rental income they had received from

Borton Motors, Inc., on the dealership property for the period February 1986

through February 1991. The Berghs filed the application and supplied the rental

figures to the Department, but maintained no tax was due because the "amount

paid reflects the actual debt service."

11. The Department sent the Berghs a Notice of Assessment on February 28,

1991, stating that they owed $71,043.29 in tax, penalties and interest,

representing a sales tax at the rate of 6 percent upon the lease payments they

had received from Borton Motors, plus penalties and interest. The Department

also gave them notice of a right to protest the assessment.

12. The Berghs did protest the assessment to the Department's Bureau of

Hearings and Appeals, which sustained the assessment, but agreed to reduce the

penalty involved. The Berghs paid $7,043.50 plus interest of $2,327.98 which

represents the amount of payments from Borton Motors, Inc., in excess of the

debt service due to Barnett Bank.

CONCLUSIONS OF LAW

13. The Division of Administrative Hearings has jurisdiction over the

parties and subject matter of this proceeding, pursuant to Section 120.57(1),

Florida Statutes.

14. Section 212.031(1)(a), Florida Statutes, states:

It is declared to be the legislative intent

that every person is exercising a taxable

privilege who engages in the business of

renting, leasing, letting or granting a

license for the use of any real property . . ..

15. The term "business" is defined to mean any activity engaged in by any

person or caused to be engaged in by him with the object of public or private

gain whether direct or indirect. Section 212.02(2), Florida Statutes.

16. A person is not necessarily engaged in the business of renting real

property when the rental is to a related corporation. Lord Chumley's of Stuart,

Inc. v. Department of Revenue, 401 So.2d 817 (Fla. 4th DCA 1981). In Lord

Chumley's payments to the taxpayer by the corporation for debt service, taxes,

insurance and other operating expenses did not equate to rent. Similarly,

Petitioners are not in the business of renting real property.

17. Further, Section 212.031(1)(a), Florida Statutes, is interpreted by

Respondent in Rule 12A-1.070(19)(c), Florida Administrative Code, which

provides:

The total consideration furnished by one

corporation to a related corporation for the

occupation of real property or the use or

entitlement to the use of real property owned

by the related corporation 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 corporation and secured by the real

property occupied, or used, and even though

the consideration is ultimately used to pay

that debt. However, such consideration is not

rent but the payment of a debt if the

corporation furnishing the consideration is

as equally liable on the debt secured by the

real property as the related corporation, any

amount furnished to the related corporation

over the amount legally necessary to amortize

that debt is subject to tax unless

specifically exempted by statute.

(emphasis supplied).

18. The rule has been extended beyond related corporations to related

entities through Respondent's published Technical Assistance Advisement (TAA)

No. 90A-019, Tax FALR 90:84.

19. Accordingly, the rule provides a two-prong test for determining

whether a proposed lease arrangement is a financing arrangement not subject to

sales tax: The lessee and the lessor must be related and they must be equally

liable on the debt.

20. Respondent does not contest that Petitioners and the corporation in

this instance are equally liable on the debt. Instead, Respondent argues for the

first time in posthearing submissions that the two parties are not "related"

inasmuch as they are not identical.

21. Notably, the rule does not define the term "related" and Respondent

offered no evidence of any policy definition or basis for any policy choice of

definition from which to determine the reasonableness of such policy. Absent

evidence to the contrary, an interpretation of the words in a rule or statute

rests upon the plain and ordinary meaning of those words. Gar

Inc. v. State Department of Environmental Regulation, 468 So.2d 413 (Fla 1st DCA

1985), and Florida Department of Revenue v. DeMari, 338 So.2d 838 (Fla. 1976).

22. The term "related" is defined as "standing in relation"; "connected";

"allied"; and "akin". Black's Law Dictionary, p. 1258 (6th edition 1990).

Borton Motors, Inc. and Petitioners are clearly "related".

23. Respondent's proposed interpretation of the term "related" appears to

constitute "an agency statement defined as a rule" under Section 120.52(16),

Florida Statutes. Accordingly, Respondent should have demonstrated that such

definition did not exceed the scope of delegated authority. Section

120.57(1)(b)(15), Florida Statutes.

RECOMMENDATION

Based on the foregoing, it is recommended that a final order be entered

withdrawing the assessment of tax.

DONE AND ENTERED this 28th day of September, 1993, in Tallahassee, Leon

County, Florida.

___________________________________

DON W. DAVIS

Hearing Officer

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Fl 32399-1550

[phone]

Filed with the Clerk of the

Division of Administrative Hearings

this 28th day of September, 1993.

APPENDIX TO RECOMMENDED ORDER, CASE NO. 92-2106

The following constitutes my rulings pursuant to Section 120.59, Florida

Statutes, on proposed findings of fact submitted by the parties.

Petitioner's Proposed Findings:

1.-19. Adopted, though not verbatim.

Respondent's Proposed Findings:

1. Accepted, excepted for last sentence which is rejected as

unsupported by weight of the evidence.

2.-6. Adopted.

7. Subordinate to hearing officer findings on this point.

8.-10. Accepted, but not verbatim.

COPIES FURNISHED:

Cynthia S. Tunnicliff

Carlton, Fields, Ward, Emmanuel,

Smith & Cutler P.A.

Post Office Drawer 190

Tallahassee, Florida 32302

Mark T. Aliff, Esquire

Assistant Attorney General

Department of Legal Affairs

Tax Section, Capitol Building

Tallahassee, Florida 32399-1050

Linda Lettera

General Counsel

Department of Revenue

204 Carlton Building

Tallahassee, Florida 32399-0100

Larry Fuchs

Executive Director

Department of Revenue

104 Carlton Building

Tallahassee, Florida 32399-0100

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions to this Recommended

Order. All agencies allow each party at least 10 days in which to submit

written exceptions. Some agencies allow a larger period within which to submit

written exceptions. You should contact the agency that will issue the final

order in this case concerning agency rules on the deadline for filing exceptions

to this Recommended Order. Any exceptions to this Recommended Order should be

filed with the agency that will issue the final order in this case.

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

AGENCY FINAL ORDER

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

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

KJELL and MARY BERGH, )

)

Petitioner, )

)

vs. ) CASE NO. 92-2106

) DOR 93-23-FOF

DEPARTMENT OF REVENUE, )

)

Respondent. )

_________________________________)

FINAL ORDER

This cause came before the Department of Revenue for the purpose of issuing

a final order. The hearing officer assigned to conduct the final hearing left

the Division of Administrative Hearings prior to the issuance of the Recommended

Order and the case was reassigned to another hearing officer who entered a

Recommended Order on September 28, 1993. The Department filed Exceptions to the

Recommended Order with a Memorandum of Law and Proposed Substituted Order on

October 29, 1993, in accordance with an agreed upon extension of time. The

Petitioners filed their Response to the Exceptions and Proposed Substituted

Order November 11, 1993. Copies of these documents are attached to this Final

Order.

STATEMENT OF THE ISSUES

The Department adopts and incorporates in this Final Order the Statement of

the Issues in the Recommended Order. The Department's exceptions to the

Statement of the Issues in the Recommended Order are not material and are

therefore withdrawn.

FINDINGS OF FACT

The Department adopts and incorporates in this Final Order the Findings of

Fact in the Recommended Order except to note that the Finding of Fact number 5

suggests that the land was leased after July 23, 1987, the date the mortgage and

note was executed. This is not based on substantial competent evidence. The

lease and mortgage documents attached to the stipulation show the lease was

entered into two weeks earlier, on July 9, 1993. The remaining Exceptions to

the Findings of Fact in the Recommended Order filed are not material and are

therefore withdrawn.

CONCLUSIONS OF LAW

The Department of Revenue adopts and incorporates in this Final Order

paragraphs 13 and 14 of the Conclusions of Law in the Recommended Order. The

remaining Conclusions of Law in the Recommended Order are rejected because they

misapprehend the law and rely on or recite incomplete portions of the statutes

or rules.

This Final Order will expand and elaborate on the Conclusions of Law in the

Exceptions and Proposed Substituted Order filed by the Department with the

following:

15. The Petitioners' central argument is that they do not owe tax because

they are not engaged in the business of leasing property. They base this

argument on the idea that "engaging in business" within the meaning of Chapter

212, F.S., requires a profit motive, and that because they are related to the

extent of 75 percent stock ownership of their tenant corporation, there is no

such motive. The question of whether or not the Berghs are related to their

corporation is irrelevant to the question of whether or not their rent payments

are subject to sales tax. Furthermore, though similarly irrelevant, it is

misleading to think of the Petitioners as being in the automobile dealership

business. Borton Motors, Inc. is in the automobile dealership business. The

Petitioners' business activity is as lessor/landlord to Borton Motors, Inc.

16. The Recommended Order and Petitioners' Response to the Department's

Exceptions and Proposed Substituted Order focus on the first sentence in section

212.02(2), F.S., which defines the term "business" for purposes of the section

212.031, F.S., tax on the rental of real property. In this sentence, "business"

is defined to mean ". . . any activity . . . with the object of private or

public gain, benefit, or advantage, either direct or indirect." Clearly, a

profit flowing directly from the lease is not required under this definition.

17. The direct benefits and advantages flowing to the Berghs from the

lease are obvious. Most prominent is that their debt service obligations in the

property are being met with the overwhelming gain, benefit or advantage being

the strengthening of their equity position in the property with each lease

payment made by the corporation/tenant. This alone is sufficient benefit to

satisfy the definition of the term "business" in sections 212.02(2), and

212.031(1)(a), F.S. Some other direct benefits, such as limitations tort and

creditor liability, present and future income tax benefits, and insurance cost

reductions, are not in the record and need not be discussed.

18. However, there are other reasons to conclude that the statutory

definition of the term "business" is satisfied by the Petitioners' leasing

activity. Petitioners, in their Response to the Exceptions and Proposed

Substituted Order, cite to Green v. Panama City Housing Authority, 110 So.2d

490, 491 (Fla. 1st DCA, 1959), for authority that the section 212.02, F.S., term

"business" requires a "customary profit motive." While this concept was used to

determine whether the tax was levied against the landlord as opposed to the

tenant, it was distinguished in Green v. Surf Club, Inc., 136 So.2d 354 (Fla.

3rd DCA, 1962) holding that the benefits of membership in a not-for-profit

social club were sufficient to satisfy the statutory term "business" for sales

tax purposes.

19. Petitioners' reliance on the case Florida Revenue Commission v. Maas

Bros., Inc., 226 So.2d 849 (Fla. 1st DCA, 1969), is misplaced. References in

Maas Bros. to the concept of a profit motive cited in Green v. Panama City

Housing Authority, supra, relate to a tax on rentals in commercial buildings

enacted in a special session by Chapter 68-27 which expired June 30, 1969.

20. These earlier cases were decided before the section 212.031 tax on

real property leases (as distinguished from the section 212.03 transient rental

tax enacted with the original sales tax in 1949) was enacted by the 1969

Legislature in Section 6 of Chapter 69-222, Laws of Florida. With the 1969

imposition of the tax on the privilege of engaging in the business of renting

real property, Section 2 of Chapter 69-222, Laws of Florida was enacted amending

the definition of the term "business" in section 212.02(9), F.S., 1967, to

include all rentals of or licenses in real property.

21. The section 212.02(2), F.S., definition of "business" contains no

exception for occasional, isolated, or single leases of real property as it does

for the occasional or isolated sales of tangible personal property or services.

Section 212.02(2), in pertinent part reads: " . . . Except for the sales of any

aircraft, boat, mobile home, or motor vehicle, the term "business shall not be

construed in this chapter to include occasional or isolated sales or

transactions involving tangible personal property or services by a person who

does not hold himself out as engaged in business, but includes . . . all rentals

of or licenses in real property."

22. Petitioners next rely on the misapprehension that because they own 75

percent of the stock in their tenant corporation, the lease of their real

property to that corporation is not subject to tax and cite Lord Chumley's of

Stuart, Inc. v. Department of Revenue, 401 So.2d 817 (Fla. 4th DCA, 1981) for

support. Lord Chumley's is not controlling here because it involved a

circumstance where there was no written lease or rent payments. See also,

Department of Revenue v. Ryder Systems, Inc., 406 So.2d 1299 (Fla. 1st DCA,

1981) distinguishing Zero Foods Storage, etc. v. DOR, 330 So.2d 765 (Fla. 1st

DCA, 1976), where the tax was held due on a finding that rent was paid between a

corporation and its wholly owned subsidiary. Here, there is a lease, a distinct

landlord, tenant, and lease payments.

23. The Findings of Fact reveal clearly that the ownership and leasing

arrangement between Petitioners and Borton Motors, Inc. was a business decision

made for the financing and tax benefits which flow from such arrangements. See

paragraphs 1-7 of the Recommended Order. It is inconsistent to recognize and

provide for this corporate ownership and operation of business property while

denying the required separateness of the entity and its operations for tax

purposes.

24. In Seaboard Coastline RR Co. v. Askew, Case No. 72-15 (Fla. Cir. Ct.,

2nd Cir., Leon Co., 1972), the Court affirmed sales tax liability on a lease

between a corporation and its wholly owned subsidiary and held:

Plaintiff suggests that the sales and use tax

should not be exacted when, as here, (in part)

the lease is between a corporation and a

wholly-owned subsidiary. A corporation which

operates through a wholly-owned subsidiary

does so because it desires the benefits of the

separate identity of the two corporations in

transacting its business. While gaining the

benefit of doing business as two corporate

corporations, it must assume the economic

disadvantages of the separate legal identity

of the two corporations, including the taxes

upon transactions between the two.

25. Individuals create corporations to conduct their business for many

reasons. Often, full fee ownership of property does not offer the advantages

associated with only the right to use the property. As an example, individuals

may wish to shield their assets from claims of creditors or potential tort

victims, or minimize their insurance costs by holding title to real property and

leasing it to a separate entity they own for the operation of a business in

which they have an interest. Additionally, federal income tax advantages may be

gained by either or both parties to such a transaction. These benefits flow

from state recognition of the separate identities of the individuals and

entities.

26. Section 212.031, F.S., imposes a 6 percent sales tax on renting,

leasing, letting, or granting a license for the use of any real property. . . ."

The statute contains exemptions for dwelling units, agricultural property, some

airport and movie production property and so on. However, there is no exemption

in the statutes based on the relationship between the landlord and tenant or

based on how the real property is financed.

27. Rule 12A-1.070(19), F.A.C., addresses the imposition of the tax

between related corporations, not between individuals and a corporation as here.

Nevertheless, Petitioners seek to apply an exception or exemption in subsection

(19)(c) of the rule (involving rent between related corporations) which is

underlined below:

(19)(a) The lease or rental of real property

or a license fee arrangement to use or occupy

real property between related corporations is

subject to tax.

(b) The total consideration, whether direct

or indirect, payments or credits, or other

consideration in kind, furnished by one

corporation to another is subject to tax

despite the fact that one of the corporations

may be a parent corporation and the other a

wholly-owned subsidiary.

(c) The total consideration furnished by one

corporation to a related corporation for the

occupation of real property or the use or

entitlement to the use of real property owned

by the related corporation 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 corporation and secured by the

real property occupied, or used, and even

though the consideration is ultimately used to

pay that debt. However, such consideration is

not rent but the payment of a debt if the

corporation furnishing the consideration is as

equally liable on the debt secured by the real

property as the related corporation; any

amount furnished to the related corporation

over the amount legally necessary to amortize

that debt is subject to tax unless specifically

exempted by statute.

28. Section 212.031 imposes the tax on the total rent charged for the use

of real property. Rule 12A-1.070(19) elaborates on this by indicating that

leases between related corporations are taxable, even when the amount of the

rental payment equals the amount necessary to amortize a mortgage debt on the

leased property. However, the rule goes further and transforms otherwise

taxable lease payments into nontaxable debt payments when the related

corporations are "as equally liable" on the property's mortgage debt.

29. As stated, section 212.031, F.S., contains no provision exempting an

entity from the tax based on ownership or based on the ultimate disposition of

the rental payments. While the statute lists numerous exceptions where the tax

does not apply, there are none which depend upon the relationship between the

parties to the lease and the methods they may use to secure financing.

30. Nevertheless, Rule 12A-1.070(19)(c), F.A.C., contains an exception

exempting rent payments between equally liable related corporations. Since this

exception was duly promulgated, the Department must respect it until it is

repealed (the repeal has been stayed pending the outcome of Regal Kitchens, Inc.

v. Fla. Dept. of Revenue, Case No. 93-00994, 1st District Court of Appeal,

Tallahassee, Florida, a case where lease payments between a partnership and its

corporation were determined to be taxable). However, it cannot expand the

exception in the rule beyond its express terms since it functions as an

exception or exemption from tax. See State ex rel. Szabo Foods v. Dickinson,

286 So.2d 529 (Fla., 1974).

31. Rule 12A-1.070(19)(c), F.A.C., by its express terms applies to rent

paid between related corporations, not consideration paid, as here, between

individuals and a corporation. Since the law requires that all exceptions or

exemptions in taxation be narrowly construed and not expanded beyond their

express terms (Szabo, supra), the Department cannot, by its rule alone, expand

the exception to include lease payments between individuals and a corporation

such as Petitioners'. The expansive reading of the rule Petitioners seek will

have to come from the statutes, or not at all.

32. There is no basis in the statutes for converting rent payments made

pursuant to an enforceable lease between related entities or persons to

nontaxable debt payments because of joint liability to third parties. Section

212.021(2), F.S. provides that:

It is hereby declared to be the specific

legislative intent to tax each and every . . .

rental levied and set forth in this chapter,

except as to such . . . rental as shall be

specifically exempted therefrom by this

chapter.

Section 212.08(13) provides that: No

transactions shall be exempt from the tax

imposed by this chapter except those expressly

exempted herein.

Section 212.031(1)(c) levies the tax: on

the total rent or license fee charged for such

real property. . . .

Section 212.031(1)(d) provides that: When

the rental . . . is paid by way of

property . . . or other thing of value, the

tax shall be at the rate of 6 percent of the

value of the . . . other thing of value. (e.s.)

33. It is basic that payment of a debt is a thing of value and a form of

consideration that will support the section 212.031 tax on commercial rentals.

See Seaboard, supra. Since the rent here is used to retire Petitioners'

mortgage debt, it is the Department's position that the rental payment is

taxable. See section 212.031(1)(d), F.S.

34. In circumstances such as here, where the rental proceeds are used to

pay a landlord's mortgage, the landlord enjoys both the reduction of its

mortgage debt as well as the additional benefit of having its equity in the

property increased. In this regard, the illicit portion of Rule 12A-1.070

(19)(c), contravenes or conflicts with section 212.031(1)(d). The reduction of

Petitioners' liability on the note and the increase in its equity in the

property is unquestionably the payment of an "other thing of value" under the

express provisions of section 212.031(1)(d), and is fully subject to tax under

the statute. As was held by the Court in Seaboard, supra, by the terms of

section 212.031(1)(d), F.S., the legislature intended "to tax the full benefits

flowing to the landlord for the use of the leased premises."

35. Admittedly, in a circumstance where the tenant owed the landlord money

for an obligation unrelated to the use of the landlord's real property, a

payment to the landlord by the tenant in excess of the market or reasonably

imputed contract rent could be logically and legally held to be payment of a

debt, but only the amount found to be in excess of the value of the right to use

the land. Strangely, the current exception in the Rule, and Petitioner's

attempt to extend it, functions to invert this actuality by providing that only

the payment in excess of amortization (principal plus debt service) is rent, the

part of the payment least related to the value of the use of the land (where

recent full financing is obtained), the very value from which rent is typically

derived.

36. It should be noted that even co-owners who are co-makers on a note

secured with a mortgage on the jointly owned property could form a bona fide

landlord/tenant relationship with rental or lease payments subject to tax under

the statute. It may be in the furtherance of the business interests of either

owner to secure the exclusive use of the jointly owned property for a period of

time. In such a circumstance, the entity seeking the exclusive use of the

property could secure that exclusive use by entering into an enforceable lease

with rental payments based on the value of the other's interest in the property.

The fact that the payment could also be used to help retire the joint obligation

would not affect the status of the payment as rent.

37. Section 212.031, F.S., provides no basis for concluding that liability

to a third party alters the character of a lease payment or otherwise is

relevant to the question of whether the payment is consideration for the use of

land. The leasing of property is a separate transaction and the determination

of whether the lease payments are subject to tax does not depend upon subsequent

transactions. See Ryder Truck Rental, Inc. v. Bryant, 170 So.2d 822 (Fla.

1964), where unlike here, tax pyramiding was at issue. Even in situations like

Ryder, where there are multiple impositions of the tax on a sequence of

transactions involving the same property, the Court recognized that each

separate transaction can support the imposition of the tax. Here, multiple

impositions of the tax is not present and should be no impediment to the

recognition of the rental payment as a transaction separate from subsequent debt

payments or other dispositions of the rental proceeds.

38. As stated previously, related entity leases are often created to limit

tort liability, affect insurance coverage/costs, shield creditor claims, or

affect federal income tax liability (rental payments are an allowable business

expense deduction under Section 162 of the Internal Revenue Code). These

effects exist because of state creation and recognition of corporations as

separate entities and the rights and protections afforded them by state law.

Notably, while paragraph 7 of the recommended order discusses Petitioners'

federal income tax treatment of the rental payments received from Borton Motors,

Inc., there is nothing in the record indicating the extent, if any, of the

business expense deduction Borton Motors may have taken for income tax purposes

on the advise of tax counsel. See Recommended Order paragraphs 1 and 7. It is

not known what effect, if any, a statement that payments such as those herein

are not rent would have on income tax liability in a circumstance where the

deduction was taken.

39. The express terms of the Rule treats rental payments as nontaxable

debt payments if the related corporations are "as equally liable" on the leased

property's mortgage debt. It is the Department's position that the required

narrow construction of the phrase "as equally liable" dictates that the

exception or exemption in the Rule be limited to related corporations which are

co-makers on the note secured by the mortgage debt. Co-makers can be "as

equally liable" on the mortgage debt, whereas a maker and a guarantor, even a

payment guarantor under section 673.416(1), F.S., cannot. As between the

principal and guarantor, the liabilities are separate, the guarantor is

subordinate to the principal, and the guarantor's liability is contingent, or at

least scheduled to be unrealized.

40. As a result, a guarantor or other surety cannot be "as equally liable"

on a note as the maker under Rule 12A-1.070(19)(c). Therefore, since Borton

Motors, Inc., is not a co-maker on the mortgage debt, the rental payments fall

outside the express terms of the exception or exemption contained in Rule 12A-

1.070(1)(c) which require the related corporations to be "as equally liable" on

the mortgage debt.

41. It should be emphasized that this issue is complex and that it is

understandable that a misinterpretation such as presented with the exception or

exemption for equally liable related corporations in Rule 12A-1.070(19(c),

F.A.C., might find its way into the regulations and other interpretations of the

law issued by the Department of Revenue. In this regard, since the enactment of

this provision in 1989, the Department has issued several informal technical

assistance advisements under section 213.22, F.S., and at least two, as

acknowledged in the Recommended Order, have applied the exception in the rule to

leases involving partnerships and natural persons, as well as others to

financing arrangements involving guarantors. However, in anticipation that such

informal advisements may prove erroneous, section 213.22, F.S., specifically

provides that these informal advisements "have no precedential value except to

the taxpayer who requests the advisement and then only for the specific

transaction addressed..." It is clearly erroneous to use these informal

Technical Assistance Advisements as precedent as was done in paragraph 18 of the

Recommended Order.

CONCLUSION

Based on the foregoing, Petitioners' rental payments are fully taxable.

The exemption or exception for equally liable related corporations contained in

Rule 12A-1.070(19((c), F.A.C., when held to its express terms as is required of

all tax exceptions or exemptions, does not apply to petitioners or their

transactions since Petitioners are individuals and not corporations and Borton

Motors is not equally liable as a co-maker on the note securing the realty.

Furthermore, since a statutory basis for the exemption or exception is

lacking, the statute cannot be used to expand the Rule to include transactions

between corporations and individuals or transactions involving guarantors.

Therefore, on review of the record in this matter, it is ORDERED:

That the determination of the Recommended Order, that a Final Order be

entered withdrawing the assessment of tax should be, and hereby is, rejected.

The assessment is thus sustained in full.

DONE AND ENTERED in Tallahassee, Leon County, Florida, this 23rd day of

December, 1993.

_________________________

STATE OF FLORIDA

DEPARTMENT OF REVENUE

EXECUTIVE DIRECTOR

CERTIFICATE OF FILING

I HEREBY CERTIFY that the foregoing FINAL ORDER has been filed in the official

records of the Department of Revenue this 25 day of December, 1993.

COPIES FURNISHED TO:

Don W. Davis, Hearing Officer

State of Florida

Division of Administrative Hearings

The DeSoto Building, 1230 Apalachee Parkway

Tallahassee, Florida 32399-1550

Cynthia S. Tunnicliff, Esquire

Carlton, Fields, Ward, Emmanuel, Smith & Cutler P.A.

Post Office Drawer 190

Tallahassee, Florida 32302

Mark T. Aliff, Esquire

Assistant Attorney General

Department of Legal Affairs

Tax Section, Capitol Building

Tallahassee, Florida 32399-1050

Attachments:

Hearing Officer's Recommended Order

Department's Exceptions

Department's Proposed Substituted Order

Petitioners' Response to Exceptions and Proposed Substituted

NOTICE OF RIGHTS

Any party to this Final Order has the right to seek judicial review of the

Final Order as provided in Section 120.68, F.S., by the filing of a Notice of

Appeal as provided in Rule 9.110, Florida Rules of Appellate Procedure, with the

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

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

accompanied by the applicable filing fees, with the appropriate District Court

of Appeal. The Notice of Appeal must be filed within 30 days from the date this

Final Order is filed with the Clerk of the Department.