Could a Florida consolidated group exclude section 338 asset sales from its sales factor?

Subject

Apportionment - Other Methods

Plain-English summary

The consolidated group had to include the affiliate asset-sale receipts in its Florida sales factor. Florida rules treated sales of business assets as sales, and the group's section 338(h)(10) election treated the affiliate dispositions as asset sales for tax purposes.

The resulting change in the overall apportionment formula was approximately 4.5%, which the Department did not consider gross distortion. The ruling also noted that most of the underlying assets sold were physically located in Florida. The group therefore failed to show by clear and cogent evidence that the standard formula operated unreasonably, arbitrarily, or taxed extraterritorial values.

What this means for you

A different apportionment percentage alone did not justify an alternative method. The taxpayer had to prove a grossly distorted result that did not fairly represent Florida business activity.

Common questions

Q: Could the asset-sale receipts be excluded from the sales factor? No.

Q: Was a 4.5% overall formula change enough to prove distortion? No.

Q: Did asset location matter? Yes. The Department noted that most underlying assets were physically in Florida.

Citations and references

• Fla. Stat. § 220.152 — alternative apportionment methods
• Fla. Admin. Code r. 12C-1.0152 — departure from standard apportionment
• Fla. Admin. Code r. 12C-1.0155(1)(b) — sales of business assets
• I.R.C. § 338(h)(10) — stock-sale election treated as asset sale
• Norfolk & Western Railway Co. v. Missouri State Tax Commission, 390 U.S. 217 (1968)
• Butler Bros. v. McColgan, 315 U.S. 501 (1942)
• Hans Rees' Sons, Inc. v. North Carolina ex rel. Maxwell, 283 U.S. 123 (1931)
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 00C1-012

Original ruling text

SUMMARY

QUESTION: Does the inclusion of sales of affiliates, which
were elected to be treated under s. 338(h)(10), Internal
Revenue Code as asset sales for tax purposes, distort the
sales factor?

ANSWER - Based on Facts Below: No, the inclusion of the
business asset sales in the Florida sales factor does not
distort the apportionment formula. Therefore, the taxpayer
must include these asset sales in its Florida sales factor.

Nov 08, 2000

Re: Technical Assistance Advisement 00C1-012
Corporate Income Tax - Apportionment - Other Methods
Section 220.152, F.S.
XXX, hereinafter referred to as "Taxpayer"

Dear :

Your letter dated XX, requests a Technical Assistance Advisement
concerning whether or not asset sales of certain Florida and non
Florida subsidiaries made by the Taxpayer, which the Taxpayer
elected, under s. 338(h)(10), Internal Revenue Code (I.R.C.), to
treat as asset sales for corporate income tax purposes, should
be included in the consolidated group's sales apportionment
factor. This response to your request constitutes a Technical
Assistance Advisement under Chapter 12-11, Florida
Administrative Code, and is issued to you under the authority of
s. 213.22, Florida Statutes.

FACTS

The Taxpayer is the parent company of an affiliated group, and
files consolidated federal and Florida income tax returns.
During XXX, the Taxpayer sold many of its affiliates. All but
one of these subsidiaries were based in Florida. The Taxpayer

elected under s. 338(h)(10), I.R.C., to treat these sales as
asset sales for tax purposes. As a result of the inclusion of
these asset sales, the numerator of the sales factor increases
from $XX to $XX, or XX%. The denominator of the sales factor
increases from $XX to $XX, or XX%.

QUESTION

May the asset sales be excluded from the Florida sales factor
under s. 220.152, F.S., due to the increase in the Taxpayer's
apportionment factor created by including these asset sales in
the Florida sales factor?

DISCUSSION AND ANALYSIS OF LAW

Section 220.152, F.S., states:

If the apportionment methods of ss. 220.15 and 220.151 do
not fairly represent the extent of a taxpayer's tax base
attributable to this state, the taxpayer may petition for,
or the department may require, in respect to all or any
part of the taxpayer's tax base, if reasonable:

(1) Separate accounting;

(2) The exclusion of any one or more factors;

(3) The inclusion of one or more additional factors which
will fairly represent the taxpayer's tax base attributable
to this state; or

(4) The employment of any other method which will produce
an equitable apportionment.

Rule 12C-1.0152, F.A.C., states in part:

(1)(a) A departure from the applicable method of
apportionment required under the provisions of ss. 220.15
or 220.151, F.S., shall be permitted only where the method
does not accurately and fairly reflect business activity in
Florida. An alternative method may not be invoked, either

by the Department of Revenue or by the taxpayer, merely
because it reaches a different apportionment percentage
than the regularly applicable formula. However, if the
applicable formula will lead to a grossly distorted result
in a particular case, a fair and accurate alternative
method is appropriate (see Norfolk and Western Railway Co.
v. Missouri State Tax Commission, 390 U.S. 217, 88 S. Ct.
995, 19 L. Ed. 2d 1201 (1968), which is incorporated by
reference in Rule 12C-1.0511, F.A.C.).

(b) A taxpayer seeking to utilize an alternative
apportionment method must show by clear and cogent evidence
that the regularly applicable formula would result in
taxation of extraterritorial values (see Butler Bros. v.
McColgan, 315 U.S. 501, 62 S. Ct. 701, 86 L. Ed. 991
(1942), which is incorporated by reference in Rule 12C1.0511, F.A.C.). This can be shown only if the regularly
applicable formula is demonstrated to operate unreasonably
and arbitrarily in apportioning to Florida a percentage of
income which is out of all proportion to the business
transacted in Florida and does not accurately and fairly
reflect business activity in Florida (see Hans Rees' Sons,
Inc. v. North Carolina ex rel Maxwell, 283 U.S. 123, 51 S.
Ct. 385, 75 L. Ed. 879 (1931), which is incorporated by
reference in Rule 12C-1.0511, F.A.C.). (emphasis supplied)

Rule 12C-1.0155, F.A.C., states in part:

(1)(b) Sales of business assets. If a taxpayer derives
receipts from the sale of equipment used in its business,
such receipts constitute a "sale". For example, a truck
express company owns a fleet of trucks and sells its trucks
under a regular replacement program. The gross receipts
from the sales of the trucks are included in the sales
factor. If amounts of gross receipts arising from an
incidental or occasional sale of a fixed asset used in the
regular course of the taxpayer's trade or business would
materially distort the sales factor, the taxpayer may
petition the Department, or the Department is authorized to
require, pursuant to s. 220.152, F.S., and Rule 12C-1.0152,
F.A.C., an adjustment to the sales factor. (emphasis

supplied)

Rule 12C-1.0155, F.A.C, requires the sales of business assets to
be included in the sales factor. However, if the inclusion of
such sales in the sales factor materially distorts the sales
factor, the Taxpayer may petition the Department under s.
220.152, F.S., and Rule 12C-1.0152, F.A.C., for an adjustment to
the apportionment formula.

Rule 12C-1.0152, F.A.C., provides for an adjustment to the
apportionment formula if the formula leads to a grossly
distorted result. This rule further requires the Taxpayer to
show by clear and cogent evidence that the apportionment formula
results in taxation of extraterritorial values. The Taxpayer
must demonstrate that the apportionment formula operates
unreasonably and arbitrarily in apportioning income to Florida,
which is out of all proportion to the business transacted in
Florida and does not accurately and fairly reflect business
activity in Florida.

The Taxpayer has shown that the numerator and the denominator of
the sales factor have substantially increased because of the
inclusion of the business asset sales, however, the overall
impact on the sales factor and the apportionment formula is less
material and certainly does not rise to a constitutional level.
The sales factor increases from XX to XX, amounting to an
approximately XX percent increase. This change in the sales
factor causes the overall apportionment formula to increase from
roughly XX% to XX%, for an approximately 4.5 percent change.
Although, the income of the Taxpayer increases by $XX as a
result of the asset sales, the change in the apportionment
formula is commensurate with the Taxpayer's election to treat
the sales as asset sales. The change in the apportionment
formula also reflects that the vast majority of the underlying
assets sold were physically located in Florida and should be
allocated to Florida.

The difference in the apportionment formula noted above (4.5%)
does not rise to the differences found to be unconstitutional in
Norfolk (205.62% and 162.1%). In Norfolk, the U.S. Supreme
Court found the application of the apportionment formula

unconstitutional where the taxing state imposed an ad valorem
property tax on the railroad rolling stock, using the familiar
single-factor mileage formula apportionment basis. The taxpayer
presented evidence showing that the actual inventory of rolling
stock in Missouri on tax day was less than half (approximately
$7,600,000 versus assessed value of $19,981,000) the value
assessed using Missouri's apportionment formula. The taxpayer
further demonstrated that its calculation of the tax-day value
was representative of the value of rolling stock located within
the state throughout the year and in the preceding year. The
Supreme Court in Norfolk, at page 329, noted that it is not
necessary for a state to demonstrate that its use of the mileage
formula yields an exact measure of value. However, the Supreme
Court further stated that:

[w]hen a taxpayer comes forward with strong evidence
tending to prove that the mileage formula will yield a
grossly distorted result in its particular case, the State
is obliged to counter that evidence or to make the
accommodations necessary to assure that its taxing power is
confined to its constitutional limits. If it fails to do
so and if the record shows that the taxpayer has sustained
the burden of proof to show that the tax is so excessive as
to burden interstate commerce, the taxpayer must prevail.

Since the difference in the apportionment factor (4.5%) is
nowhere near the differences found to be unconstitutional,
including the business asset sales in the sales factor of the
apportionment formula does not lead to a grossly distorted
result. Therefore, an alternative apportionment formula is not
appropriate.

In the Hans Rees' case, North Carolina attempted to apportion
income of a manufacturing concern using a formula based on the
ratio of the value of the taxpayer's real and tangible personal
property located in North Carolina over the value of its real
and tangible real property located everywhere times its entire
income. The taxpayer was able to demonstrate that such a onefactor (property) apportionment formula "operated unreasonably
and arbitrarily" in attributing income to the state that was
"out of all proportion" to the taxpayer's activities in the

state. The type of distortion present in Hans Rees' is largely
remedied today by use of a three-factor apportionment formula.
The three factors now generally used by states to apportion
income of a manufacturing or mercantile business (like the
taxpayer in Hans Rees') to their state, are sales, property, and
payroll.

The Taxpayer has not shown by clear and cogent evidence that the
inclusion of the business asset sales in the apportionment
formula results in taxation of extraterritorial values. The
Taxpayer receives the benefits and protections of Florida law,
and there is no question that Florida may constitutionally tax
these asset sales. Also, the Taxpayer has not demonstrated that
the inclusion of the business asset sales in the apportionment
formula makes the formula operate unreasonably and arbitrarily
in apportioning the Taxpayer's income to Florida, or that the
apportionment formula is inaccurate and does not fairly reflect
the Taxpayer's business activity in Florida.

CONCLUSION

Based on the discussion above, the inclusion of the business
asset sales in the Florida sales factor does not distort the
apportionment formula. Therefore, the Taxpayer must include
these asset sales in its Florida sales factor.

This response constitutes a Technical Assistance Advisement
under s. 213.22, F.S., which is binding on the Department only
under the facts and circumstances described in the request for
this advice as specified in s. 213.22, F.S. Our response is
based on those facts and the specific situation summarized
above. You are advised that subsequent statutory or
administrative rule changes or judicial interpretations of the
statutes or rules upon which this advice is based may subject
similar future transactions to a different treatment than
expressed in this response.

You are further advised that this response, your request and
related backup documents are public records under Chapter 119,
F.S., and are subject to disclosure to the public under the
conditions of s. 213.22, F.S. Confidential information must be

deleted before public disclosure. In an effort to protect
confidentiality, we request you provide the undersigned with an
edited copy of your request for Technical Assistance Advisement,
the backup material and this response, deleting names, addresses
and any other details which might lead to identification of the
taxpayer. Your response should be received by the Department
within 15 days of the date of this letter.

Sincerely,

Robert DuCasse
Technical Assistance and Dispute Resolution

RCD/
Control No.: 42617