How did a corporate partner include proceeds from partnership sales of Florida and out-of-state business real estate in its sales factor?

Plain-English summary

Florida required the corporate taxpayer to include its partnership shares of both real-estate sales in the sales-factor computation. One partnership sold its only asset, Florida real estate used in the rental business. Another partnership sold undeveloped land in a redacted state.

The taxpayer held a direct interest in the partnership that sold the Florida property and an additional indirect interest through another partnership. It also held an interest in the partnership that sold the out-of-state land.

Direct and tiered partnership factors flowed through

The cited rules attributed each partnership's Florida and everywhere payroll, property, and sales to its partners. A corporate partner added its share to its own factors, including the amount flowing through a tiered partnership interest.

For the ruling's sales-factor structure:

• The taxpayer's share of the Florida real-property proceeds entered both the Florida numerator and the everywhere denominator.
• Its share of the out-of-state real-property proceeds entered the everywhere denominator rather than the Florida numerator.

That result followed the rule sourcing real-property receipts to the state where the property was located and the rule allocating partnership sales according to the partner's interest or partnership agreement.

Both business-asset sales remained in the regular formula

Rule 12C-1.0155 required receipts from sales of assets used in a business to enter the sales factor. The taxpayer requested an alternative method because including both sales substantially changed its sales factor and overall apportionment percentage.

Florida required clear and cogent evidence that the normal method operated unreasonably and arbitrarily, taxed extraterritorial values, and attributed income out of all proportion to Florida activity. The taxpayer did not meet that burden.

The Department found the increase commensurate with the income generated by both sales and with the fact that part of the sold property was physically located in Florida. Including the out-of-state receipts in the everywhere factor did not turn the Florida calculation into taxation of extraterritorial values.

What this means for you

Corporate partners and tiered partnerships

Trace business-asset proceeds through every ownership tier. Preserve the partnership agreement or other support for each partner's factor share.

Multistate real-estate groups

Source real-property sale receipts by property location under the rules applicable to the return year, while including the appropriate partnership share in the everywhere base.

Tax professionals

Do not infer gross distortion from a large percentage change alone. Also treat the ruling's three-factor formula and 2003 regulations as historical and verify current law.

Common questions

Q: Did the direct and indirect Florida partnership interests both count?
A: Yes. Partnership sales flowed through to the corporate taxpayer through its ownership interests.

Q: Where did the Florida property proceeds go?
A: The taxpayer's share entered both the Florida numerator and everywhere denominator.

Q: Where did the out-of-state property proceeds go?
A: The taxpayer's share entered the everywhere denominator, with real-property receipts sourced by property location.

Q: Did the two large sales justify alternative apportionment?
A: No. Florida found no gross distortion or taxation of extraterritorial values on the represented facts.

Citations and references

• Fla. Stat. §§ 220.15 and 220.152 — historical sales factor and alternative apportionment
• Fla. Admin. Code rr. 12C-1.002 and 12C-1.015(10) — partnership factor flow-through
• Fla. Admin. Code rr. 12C-1.0152 and 12C-1.0155 — distortion standard, business-asset sales, and real-property sourcing
• Norfolk & Western Railway Co. v. Missouri State Tax Commission, 390 U.S. 317 (1968)
• Butler Bros. v. McColgan, 315 U.S. 501 (1942)
• Hans Rees' Sons, Inc. v. North Carolina, 283 U.S. 123 (1931)
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 03C1-008

Original ruling text

SUMMARY

QUESTION: Should the proceeds from the sale of real estate
by a partnership, which is in the commercial rental
business, be included in the Taxpayer's apportionment
factor when the Taxpayer is a corporate partner of the
partnership?

ANSWER - Based on Facts Below: Florida law requires the
Taxpayer to include its share of the proceeds from the
partnership's sale of real property that was used in the
partnership's commercial rental business, in its
apportionment factor. The inclusion of the proceeds from
the sale of real estate that was used in the Taxpayer's
commercial rental business does not distort the
apportionment factor or tax extraterritorial values.

Nov 17, 2003

Re: Technical Assistance Advisement 03C1-008
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 the sale of one of the Taxpayer's buildings
that was used in its rental business should be included in the
Florida sales 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 owns directly, or through partnerships, commercial
real estate in several states, including Florida. The Taxpayer,

either directly or through the partnerships, leases the
commercial real estate to outside tenants and receives rental
income. The Taxpayer pays corporate income taxes to the various
states in which the commercial property is located.
Occasionally, the Taxpayer or one of its partnerships sells one
of its real estate holdings. In XX, one of the partnerships in
which the Taxpayer is a partner, sold its only asset, XXX
located in Florida.

In addition to the Taxpayer's direct ownership in the
partnership that sold Florida realty, the Taxpayer also has an
indirect interest through another partnership. The Taxpayer
also has an interest in a partnership that sold undeveloped land
in XXX.

In the XX tax year, the Taxpayer's weighted sales factor was XX
and was based solely on the rental activities of the Taxpayer
and the factors that flowed to the Taxpayer through the
partnerships. In the XX tax year, the Taxpayer's weighted sales
factor would be XX if only the rental activities of the Taxpayer
and the factors that flowed to the Taxpayer through the
partnerships were included in the computation. (The XX weighted
sales factor is less than the XX weighted sales factor because
the Florida real estate was sold in the middle of the tax year,
resulting in less Florida rental income.) If the proceeds from
the sale of the real estate (Florida and XX) were included in
the sales factor, the Taxpayer's XX weighted sales factor would
be XX.

The Taxpayer's apportionment factor for the XX tax year would be
XX if the proceeds from the sale of real estate were excluded
from the sales factor. The Taxpayer's apportionment factor for
the XX tax year would be XX if the proceeds from the sale of
real estate (Florida and XXX) were included in the sales factor.

The Taxpayer's federal taxable income for the XX tax year is XX,
and its federal taxable income for the XX tax year is XX. The
substantial increase in federal taxable income is from the
Taxpayer's investment in the Florida partnership that sold its
Florida real estate and from the Taxpayer's investment in the
partnership that sold XXX real estate.

QUESTION

Should the proceeds from the sale of real estate by a
partnership, which is in the commercial rental business, be
included in the Taxpayer's apportionment factor when the
Taxpayer is a corporate partner of the partnership?

LAW

Section 220.02, F.S., states in part:

(1) It is the intent of the Legislature in enacting this
code to impose a tax upon all corporations, organizations,
associations, and other artificial entities which derive
from this state or from any other jurisdiction permanent
and inherent attributes not inherent in or available to
natural persons, such as perpetual life, transferable
ownership represented by shares or certificates, and
limited liability for all owners.... It is the intent of
the Legislature to subject such corporations and other
entities to taxation hereunder for the privilege of
conducting business, deriving income, or existing within
this state. This code is not intended to tax, and shall not
be construed so as to tax, any natural person who engages
in a trade, business, or profession in this state under his
or her own or any fictitious name, whether individually as
a proprietorship or in partnership with others, or as a
member or a manager of a limited liability company
classified as a partnership for federal income tax
purposes; any estate of a decedent or incompetent; or any
testamentary trust. However, a corporation or other taxable
entity which is or which becomes partners with one or more
natural persons shall not, merely by reason of being a
partner, exclude from its net income subject to tax its
respective share of partnership net income. This statement
of intent shall be given preeminent consideration in any
construction or interpretation of this code in order to
avoid any conflict between this code and the mandate in s.
5, Art. VII of the State Constitution that no income tax be
levied upon natural persons who are residents and citizens

of this state.
...
(3) It is the intent of the Legislature that the income tax
imposed by this code utilize, to the greatest extent
possible, concepts of law which have been developed in
connection with the income tax laws of the United States,
in order to:

(a) Minimize the expenses of the Department of Revenue and
difficulties in administering this code;

(b) Minimize the costs and difficulties of taxpayer
compliance; and

(c) Maximize, for both revenue and statistical purposes,
the sharing of information between the state and the
Federal Government.

(4) It is the intent of the Legislature that the tax
imposed by this code be prospective in effect only.
Consistent with this intention and the intent expressed in
subsection (3), it is hereby declared to be the intent of
the Legislature that:

(a) "Income", for purposes of this code, including gains
from the sale, exchange, or other disposition of property,
be deemed to be created for Florida income tax purposes at
such time as such income is realized for federal income tax
purposes;

(b) No accretion of value, no accrual of gain, and no
acquisition of a right to receive or accrue income which
has occurred or been generated prior to November 2, 1971,
be deemed to be "property", or an interest in property, for
any purpose under this code; and

(c) All income realized for federal income tax purposes
after November 2, 1971, be subject to taxation in full by
this state and be taxed in the manner and to the extent
provided in this code.
...

Section 220.03(1)(s), F.S., states:

"Partnership" includes a syndicate, group, pool, joint
venture, or other unincorporated organization through or by
means of which any business, financial operation, or
venture is carried on, including a limited partnership; and
the term "partner" includes a member having a capital or a
profits interest in a partnership.

Section 220.11, F.S., states in part:

(1) A tax measured by net income is hereby imposed on every
taxpayer for each taxable year commencing on or after
January 1, 1972, and for each taxable year which begins
before and ends after January 1, 1972, for the privilege of
conducting business, earning or receiving income in this
state, or being a resident or citizen of this state. Such
tax shall be in addition to all other occupation, excise,
privilege, and property taxes imposed by this state or by
any political subdivision thereof, including any
municipality or other district, jurisdiction, or authority
of this state.
...

Section 220.15, F.S., states in part:

(1) Except as provided in ss. 220.151 and 220.152, adjusted
federal income as defined in s. 220.13 shall be apportioned
to this state by taxpayers doing business within and
without this state by multiplying it by an apportionment
fraction composed of a sales factor representing 50 percent
of the fraction, a property factor representing 25 percent
of the fraction, and a payroll factor representing 25
percent of the fraction. If any factor described in
subsection (2), subsection (4), or subsection (5) has a
denominator that is zero or is determined by the department
to be insignificant, the relative weights of the other
factors in the denominator of the apportionment fraction
shall be as follows:...

(5) The sales factor is a fraction the numerator of which
is the total sales of the taxpayer in this state during the
taxable year or period and the denominator of which is the
total sales of the taxpayer everywhere during the taxable
year or period.

(a) As used in this subsection, the term "sales" means all
gross receipts of the taxpayer except interest, dividends,
rents, royalties, and gross receipts from the sale,
exchange, maturity, redemption, or other disposition of
securities. However:...

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-1.002, F.A.C., provides a declaration of intent and
states:

Corporations and other artificial entities which are to
become partners in a partnership which conducts business,
derives income or exists within the state shall be subject
to tax under the Florida Income Tax Code, without regard to
any other factor which would determine the tax status of
that partner for Florida income tax purposes. The
partnership's conduct of business, derivation of income or

existence within Florida shall be deemed attributable to
the partners, rather than to the partnership itself.
(Emphasis Supplied)

Rule 12C-1.015(10), F.A.C., states:

Partnerships. The amounts of the property, payroll, and
sales of a partnership are attributable to the partners or
members of the joint venture. A corporation that is a
partner in a partnership must add its share of the
property, payroll, and sales to its own apportionment
factors, regardless of whether the partnerships are Florida
partnerships. Form F-1065 is used in part to distribute to
each partner subject to the tax its share of the
apportionment factors of the partnership or joint venture.
(Emphasis Supplied)

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(1)(b), F.A.C., states:

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(2)(c), F.A.C., states:

Real Property. Gross receipts from the sale, lease, rental,
or licensing of real property are in this state if the real
property is located in this state. (Emphasis Supplied)

Rule 12C-1.0155(4), F.A.C., states:

Sales of a partnership are included in the denominator of a
taxpayer's sales factor to the extent of the taxpayer's
interest in the partnership. The amount of sales in Florida
is also included in the numerator of the sales factor to
the extent of the taxpayer's interest in the partnership.
Partnership sales should be allocated to each partner based
on each partner's interest in the partnership, or as
designated in the partnership agreement, for inclusion in

the Florida sales factor. (Emphasis Supplied)

DISCUSSION

The Florida statutes and rules are clear that the activities of
a partnership flow through the partnership to its partners. The
partnerships' Florida and everywhere payroll, property, and
sales are attributable to the members of each partnership. A
corporation that is a partner in a partnership must add its
share of the partnership's payroll, property, and sales to its
own apportionment factors. Therefore, if the partnership's sale
of Florida realty that was used in the partnership's business is
properly included in the partnership's sales factor, it would
properly be included in the Taxpayer's sales factor. Likewise,
if the partnership's sale of XXX realty that was used in the
partnership's business is properly included in the partnership's
sales factor, it would properly be included in the Taxpayer's
sales factor.

Rule 12C-1.0155, F.A.C, requires the sale 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. The Taxpayer has made such a
request.

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
its sales factor, as well as its overall apportionment factor,
substantially increased when the partnership's sale of Florida

real estate and the partnership's sale of XXX real estate are
included in the sales factor on the XX Florida corporate income
tax return. Now, we must consider whether the inclusion of the
proceeds from the sale of the partnerships' real estate in the
sales factor materially distorts the sales factor and whether it
results in the taxation of extraterritorial values.

The income of the Taxpayer substantially increases as a result
of the partnership's sale of the Florida real estate. The
income of the Taxpayer also increases as a result of the
partnership's sale of XXX real estate. The increase in the
apportionment formula is commensurate with the fact that part of
the real estate that was sold by the partnerships was located in
Florida. The increase in the apportionment formula reflects
that part of the real estate sold was physically located in
Florida and that the proceeds from that sale should be allocated
to Florida.

Although the difference in the apportionment factors between
including or excluding the real estate sales is substantial,
extraterritorial values are not taxed. The regular
apportionment factor, which includes the sale of the real estate
that was used in each partnership's commercial rental business,
does not operate unreasonably and arbitrarily in apportioning to
Florida a percentage of income which is out of all proportion to
the business transacted in Florida.

In Norfolk, supra, 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.

In the Hans Rees' case, supra, 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 one-factor (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 proceeds, from the sale of real estate that was
used in the Taxpayer's business, 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 the sale of
real estate that was used in the Taxpayer's business. Also, the
Taxpayer has not demonstrated that the inclusion of the proceeds
from the sale of real estate 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 in XX. In fact, an evaluation of
the transactions and Taxpayer's tax returns seems to indicate
that the amount of income apportioned to Florida through the
normal apportionment calculation may be too low.

CONCLUSION

Based on the discussion above, Florida law requires the Taxpayer
to include its share of the proceeds from the partnership's sale
of real property that was used in the partnership's commercial
rental business, in its apportionment factor. The inclusion of
the proceeds from the sale of real estate that was used in the
Taxpayer's commercial rental business does not distort the
apportionment factor or tax extraterritorial values.

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.: 57397