Were distributions from a restaurant corporation to its related property owner taxable as consideration for using the commercial real estate?

Plain-English summary

The Florida Department of Revenue concluded that the related-party distributions were taxable rent under the facts and documents presented. Calling the payments S-corporation profits did not control when the restaurant occupied property owned by a related entity and the surrounding records indicated a rental arrangement.

The property owner was a single-member Florida LLC owned through a revocable trust. A related S corporation operated a restaurant on the property. The requester proposed that there would be no lease, no reported rent, and no payments expressly tied to the owner's mortgage, property tax, or insurance obligations. Instead, the restaurant corporation's income and profits would pass to the trust as distributions.

Substance and supporting documents controlled

The Department said a distribution could be used for any legal purpose without automatically becoming rent. But if its purpose was payment for use and occupancy of the property, it was taxable consideration under section 212.031.

The timing and amount of distributions were relevant. Payments that coincided with the property's mortgage, tax, insurance, or other expense obligations could indicate indirect rent. The requester would need to show that distributions truly reflected corporate income and profits rather than the amount needed to carry the property.

The existing documents contradicted the proposed no-rent arrangement

The restaurant corporation's 2003 federal return reported $238,598 of rental deductions. The owner's operating agreement stated that its purpose included acquiring real estate, while the restaurant corporation's governing documents contemplated real-estate activity. The deed, mortgage, security agreement, and other records also formed part of the Department's review.

Because the claimed new arrangement conflicted with the parties' returns and governing documents, the Department assumed they would continue operating according to those records. On that basis, the distributions were taxable.

Related entities remained separate for this tax

The ruling noted that a single-member LLC disregarded for federal income-tax purposes was still treated as a separate legal entity for Florida non-income taxes. The relationship between owner and occupant therefore did not eliminate tax on direct or indirect consideration for commercial-property use.

The Department also distinguished prior decisions where no meaningful compensation flowed between the owner and occupant. Here, money would flow from the operating corporation to the trust associated with the property owner, and the existing documents supported a rental characterization.

What this means for you

Businesses using property owned by a related entity

The absence of a written lease or a payment labeled "rent" does not end the inquiry. Florida may examine distributions, expense payments, accounting records, tax returns, loan documents, and governing agreements together.

S corporations and pass-through entities

Federal pass-through treatment does not determine Florida sales-tax treatment. A distribution can still be indirect consideration for occupying commercial real estate.

Accountants and advisers

Make the proposed economic arrangement consistent across returns, books, entity documents, and actual cash flows. Inconsistent historical records can cause the Department to reject the taxpayer's characterization.

Common questions

Q: Are all shareholder distributions from an occupant to a related owner taxable rent?
A: No. The ruling said distributions could be used for any lawful purpose, but they became taxable when their purpose was consideration for use and occupancy.

Q: Why were the distributions taxable here?
A: The claimed no-rent arrangement conflicted with the corporation's prior rental deduction and the parties' governing and transaction documents.

Q: Would matching property expenses matter?
A: Yes. Distributions that matched the timing or amount of property obligations could be treated as rent consideration.

Q: Did federal disregarded-entity treatment combine the owner and occupant for Florida sales tax?
A: No. The ruling applied section 608.471(3) and treated the LLC as a separate entity for this non-income tax.

Q: Could different documentation have changed the result?
A: The Department said it would require amended corporate documents and consistent federal returns before determining that the proposed arrangement was nontaxable.

Citations and references

• Fla. Stat. § 212.02 — relevant definitions
• Fla. Stat. § 212.031 — tax on commercial real-property rent or license consideration
• Fla. Stat. § 213.22(1) — TAA reliance limitation
• Fla. Stat. § 608.471(3) — separate treatment of federally disregarded entities for non-income taxes
• Fla. Admin. Code r. 12A-1.070 — direct, indirect, and in-kind consideration between related lessors and occupants
• St. John's Trading Company v. Department of Revenue, DOAH Case No. 84-1652 (1985) — no compensation flowed for occupancy on distinguishable facts
• Department of Revenue v. Ryder Systems, Inc., 406 So. 2d 1299 (Fla. 1st DCA 1981) — no rental payment on distinguishable facts
• Seaboard Coastline Railroad Company v. Askew, No. 72-15 (Fla. Cir. Ct., 2d Cir., Leon County, 1972) — cited in the related-entity discussion

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 05A-030

Original ruling text

SUMMARY
QUESTION: Whether any portion of distributions resulting from income and/or profits realized by a single stockholder
corporation ("Occupant"), and passed through to its sole stockholder and owner ("Owner") of real property ("Property")
it occupies, is rent consideration under Section 212.031, F.S., where the Taxpayer alleges: (1) Occupant will not pay
rent to the Owner of the Property; (2) there will be no lease agreement between the Owner and the Occupant; and (3)
the Owner will be responsible for all mortgage payments, property taxes and insurance premiums on the subject
property?
ANSWER - Based on Facts Below: Once the Occupant issues distributions, its sole stockholder, the Trust and
Owner of the Property, may apply such funds for any legal purpose, including any and all expenses of real property its
owns. However, if the purpose of those distributions is for the use and occupancy of the Property, then such
distributions will be subject to tax. As a result, the Department will examine all relevant facts and documents. Under
the facts presented here, the Owner's characterization of the transaction is inconsistent with the documents it provided
the Department, such as Federal Income Tax Returns, incorporation documents and by-laws. Therefore, the
Department can only conclude that the parties will continue operating as indicated in the documents provided, which
provide for a taxable transaction. Accordingly, the Department concludes that under those circumstances, such
distributions are taxable under Section 212.031, F.S.

June 29, 2005

Re: Technical Assistance Advisement 05A-030
Sales and Use Tax
EIN#: XX
EIN#: XX
Related entities and commercial real property rentals
Sections 212.031, 213.22 and 608.471(3), F.S. ("Florida Statutes")
Rule 12A-1.070, F.A.C. ("Florida Administrative Code")
Dear:
This is in response to your correspondence to the Department, dated February 24, 2005, and May 23, 2005, and
additional documents attached to the latter, requesting the Department's issuance of a Technical Assistance
Advisement ("TAA") pursuant to Section 213.22, F.S., and chapter 12-11, F.A.C., regarding related entities and the
rental of commercial real property. An examination of your letter established that you complied with the statutory and
regulatory requirements for issuance of a TAA. Therefore, the Department is hereby granting your request for
issuance of a TAA.
ISSUE

Whether any portion of distributions resulting from income and/or profits realized by a single stockholder corporation
("Occupant"), and passed through to its sole stockholder and owner ("Owner") of real property ("Property") it occupies,
is rent consideration under Section 212.031, F.S., where the Taxpayer alleges: (1) Occupant will not pay rent to the
Owner of the Property; (2) there will be no lease agreement between the Owner and the Occupant; and (3) the Owner
will be responsible for all mortgage payments, property taxes and insurance premiums on the subject property.
FACTS
Your letter dated February 24, 2005, provides in part, the following facts:
[Owner] is a single member Florida limited liability company which has elected to be taxed as either a disregarded
entity or a Subchapter "S" corporation for Federal Income Tax purposes, the specifics of which are yet to be
determined, but also seem immaterial since both types of entities are essentially pass-through entities for the purpose
of Federal Income Tax. The Taxpayor's [Owner's] sole member is XXX ("Member"), as Trustee of his Revocable
Living Trust (the "Trust"), all income of the Trust is taxed to [Member] personally. The Taxpayor [Owner] is owner of
certain real estate located in ... Florida (the "Property").
[Occupant] is a Florida corporation (the "Corporation"), that has elected to be taxed as a Subchapter "S" corporation
for Federal Income Tax purposes, and has as its sole stockholder, the Trust, as defined above. The Corporation
[Occupant] operates a restaurant on the Property owned by the Taxpayor [Owner]. There is no written or unwritten
lease agreement between the Taxpayor [Owner] and the Corporation [Occupant] regarding the use of the property,
and no rent is paid.
As stated above, the Taxpayor [Owner] is a pass-through entity for Federal Income Tax purposes. As such, profits
and losses pass through to its Member and are ultimately taxed at the individual member level. All net profits and cash
flow from the Corporation [Occupant] and the Taxpayor [Owner] will be distributed to the Trust. (sic)
For Federal Income Tax purposes, neither the Taxpayor [Owner] nor the Trust, will indicate the receipt of rental
payments related to the use of the property by the Corporation [Occupant] on any Federal Income Tax Returns.
For financial accounting purposes, neither the Taxpayor [Owner] nor the Corporation [Occupant], nor the Trust, will
indicate the receipt or payment of rental payments related to the use of the Property by the Corporation [Occupant] on
any financial or accounting records maintained by any of said entities.
The Taxpayor [Owner] currently holds title to the Property, is the Mortgagor of the Property is responsible for property
taxes, is responsible for payment of property insurance, and is the actual entity paying the Mortgage, property taxes
and insurance premiums with respect to the Property.
...The Members Agreement does not provide for distributions which coincide with the time at which the property's
expense obligations are due; does not provide for distributions to coincide with the amount of the property's expense
obligations; and those controlling the amount of "income" or "profit" flowing to the Taxpayor [Owner] in accordance
with the Agreement is a true reflection of income and profit and is not dependent upon the Property's expense

obligations.
In addition, in response to the Department's request, you provided the Department with the following documents
attached to your letter, dated May 23, 2005:

1. Income tax return for [Owner] (No return yet filed-entity classification Attached)(FN 1);
2. Income tax return for [Occupant] (2003 attached);
3. Articles of Incorporation for [Occupant];
4. By-Laws for [Occupant];
5. Articles of Organization for [Owner];
6. Single Member Operating Agreement for [Owner];
7. Warranty Deed into [Owner];
8. Promissory Note to a National Bank;
9. Mortgage to a National Bank;
10. UCC-1 Financing Statement filed with ... County and State of Florida;
11. Security Agreement in favor of a National Bank.
    A review of the foregoing indicate the following historical facts:
    First, Occupant's Articles of Incorporation state that the purpose of the corporation is, among other things, as follows:
    To acquire by purchase, lease or otherwise, lands and interest in lands, and to own, hold, improve, develop and
    manage any real estate so acquired, and to erect, or cause to be erected, on any lands owned, held or occupied, and
    to encumber or dispose of any lands, or interest in lands, and any buildings or other structures, at any time owned or
    held by the corporation; to buy, sell, mortgage, exchange, lease, hold for investment or otherwise, use and operate,
    real estate of all kinds, improved or unimproved, or any right or interest therein.
    Next, the Owner's Operating Agreement states that its purpose is as follows:
    Company is organized to "acquire real estate", and to do any and all things necessary, convenient, or incidental to that
    purpose, and to conduct such other business as may be permitted by law.
    Moreover, the above-mentioned Operating Agreement specifies that the Owner's only member, the trustee of a

revocable trust, was only obligated to provide an initial cash and property contribution, according to Exhibit A therein,
which was devoid of any dollar amount or property description. The Operating Agreement also states that the cash
flow for the Owner's members shall be distributed no later than 75 days after the end of the taxable year.
In regards to the Occupant, its By-laws indicate that the entity will issue dividends as required by law. Also, according
to Occupant's 2003, Federal Income Tax Form 1120S, Occupant reported $238,598 as deductions for rental
payments.
The documents you provided also indicate that the Owner took title to the real property in question via a special
warranty deed, dated December 23, 2004. Concurrently, the Owner executed a promissory note, in addition to a
mortgage encumbering the Property, which provides for an assignment of rents in the event Owner collects any.
Furthermore, Occupant granted a security interest in the restaurant and real property it occupies, through a Security
Agreement.
TAXPAYER'S ARGUMENT
In your letter to the Department, dated February 24, 2005, you stated that your position is that the facts and
circumstances of your case are substantially similar to the arrangement in Technical Assistance Advisement No. 04A032 and the authorities therein relied upon, which include St. John's Trading Company v. Department of Revenue,
DOAH Case Number 84-1652 (1985), and Department of Revenue v. Ryder Systems, Inc., 406 So.2d 1299 (Fla. 1st
DCA 1981). As such, you argue that no portion of the income or profits of the Corporation passed through to the Trust
are "rent consideration" to the Taxpayer for Florida Sales Tax purposes.
APPLICABLE STATUTES AND RULES
Section 212.02, F.S., provides in part:

(2) "Business" means any activity engaged in by any person, or caused to be engaged in by him or her, with the object
of private or public gain, benefit, or advantage, either direct or indirect....

(10)(i) "License," as used in this chapter with reference to the use of real property, means the granting of a privilege to
use or occupy a building or a parcel of real property for any purpose.

(12) "Person" includes any individual, firm, copartnership, joint adventure, association, corporation, estate, trust,
business trust, receiver, syndicate, or other group or combination acting as a unit and also includes any political
subdivision, municipality, state agency, bureau, or department and includes the plural as well as the singular number.

Section 212.031, F.S., provides in part:
(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, letting, or granting a license 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 and on the total rent or license
fee charged for such real property by the person charging or collecting the rental or license fee. The total rent or
license fee charged for such real property shall include payments for the granting of a privilege to use or occupy real
property for any purpose and shall include base rent, percentage rents, or similar charges...
(d) When the rental or license fee of any such real property is paid by way of property, goods, wares, merchandise,
services, or other thing of value, the tax shall be at the rate of 6 percent of the value of the property, goods, wares,
merchandise, services, or other thing of value. [emphasis supplied]

(2)(b) It is the further intent of this Legislature that only one tax be collected on the rental or license fee payable for the
occupancy or use of any such property, that the tax so collected shall not be pyramided by a progression of
transactions, and that the amount of the tax due the state shall not be decreased by any such progression of
transactions.
(3) The tax imposed 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 or 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. ...

Section 213.22(1), F.S., provides in part:
... Technical assistance advisements shall have no precedential value except to the taxpayer who requests the
advisement and then only for the specific transaction addressed in the technical assistance advisement, unless
specifically stated otherwise in the advisement. ...
Section 608.471, F.S., provides in part:

(3) Single-member limited liability companies and other entities that are disregarded for federal income tax purposes
must be treated as separate legal entities for all non-income-tax purposes. The Department of Revenue shall adopt
rules to take into account that single-member disregarded entities such as limited liability companies and qualified
subchapter S corporations may be disregarded as separate entities for federal tax purposes and therefore may report
and account for income, employment, and other taxes under the taxpayer identification number of the owner of the
single-member entity.
Rule 12A-1.070, F.A.C., provides in part:
(1)(a) Every person who rents or leases any real property or who grants a license to use, occupy, or enter upon any
real property is exercising a taxable privilege ....

(4)(c) Ad valorem taxes paid by the tenant or other person actually occupying, using, or entitled to use any real
property to the lessor or any other person on behalf of the lessor, including transactions between affiliated entities, are
taxable.

(8) When a tenant (lessee) or other person occupying, using, or entitled to use any real property (licensee) sublets or
assigns some portion of the leased or licensed property, he may take credit on a pro rata basis for the tax that he paid
to his landlord or other such person on the space that he subleases or assigns...
(12) When a tenant or other person pays insurance for his own protection, the premium is not regarded as rental or
license 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 premium 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 rental of real property or a license fee arrangement to use or occupy real property between
related "persons," as defined in s. 212.02(12), F.S., in the capacity of lessor/lessee, is subject to tax.
(b) The total consideration, whether direct or indirect, 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 the lessee.
(c) The total consideration furnished by the lessee to a related lessor for the occupation of real property or 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 occupied, or used, and even though the consideration is ultimately used to
pay that debt.

LAW AND DISCUSSION
Pursuant to your particular set of facts, the issue presented is whether any portions of income or profits realized by a
single stockholder corporation, and passed through, as distributions, to its sole stockholder and owner of the Property
it occupies, are rent consideration under Section 212.031, F.S.
Generally, under Florida law, a person who engages in the business of renting, leasing or granting a license for the
use and occupancy of real property is exercising a taxable privilege. Section 212.031, F.S. Specifically, the lease or
rental of real property between related "persons," in the capacity of lessor/lessee, is subject to tax. Rule 12A1.070(19)(a), F.A.C. In addition, the Florida Administrative Code provides that the aforementioned lease or rental
payments furnished by the lessee to the lessor, which may be direct or indirect, payments or credits, or other
consideration in kind, is rental consideration and, therefore, taxable despite any relationship between lessor and
lessee. See Rule 12A-1.070(19), F.A.C. Moreover, in Florida, limited liability companies that are disregarded for
federal income tax purposes are treated as separate legal entities for all non-income-tax purposes under Florida law.
See Section 608.471(3), F.S. Rule 12A-1.070(19)(b), F.A.C., and Seaboard Coastline Railroad Company v. Askew,

#72-15 (Fla. Cir. Ct., 2nd Cir., Leon Co., 1972).
Pursuant to the facts you presented, the Owner is clearly in the business of leasing real property. First, the Occupant's
2003 Federal Tax Return, Form 1120S, indicates that the Occupant reported rental liability, which can only be a result
of paying monies to or on behalf of the Owner for the use of the Property it occupies. Next, the Owner's Operating
Agreement provides that the purpose of the Owner is to "acquire real estate" and to do any and all things necessary,
convenient or incidental to that purpose and to conduct such other business as may be permitted by law. The Owner
is in the business of leasing real property pursuant to Section 212.031, F.S.
Since the Owner is in the business of leasing real property, any consideration from the Occupant for the use of the
Property is subject to tax. In your request, you state that the Occupant currently operates a restaurant on the Property.
Further, you alleged that the parties will not enter into a lease agreement, the Occupant will not pay rent, neither party
will report rent received or paid, and the Owner will be the sole entity responsible and actually paying for all mortgage,
ad valorem taxes and insurance payments on the Property. Nevertheless, monies will flow from the Occupant to the
Owner in the form of distributions to its sole stockholder, the Trust. In this case, the issue is whether those
distributions are a form of consideration for the use of the Property, which will benefit the Owner and, therefore, be
subject tax.
Once the Occupant issues distributions, its sole stockholder, the Trust and Owner of the Property, may apply such
funds for any legal purpose, including any and all expenses of real property its owns. However, if the purpose of those
distributions is for the use and occupancy of the Property, then such distributions will be subject to tax. As a result, the
Department will examine all relevant facts and documents. For example, if distributions coincide with the amount and
time when the Property's expense obligations are due, the Department will consider such amounts to be rent
consideration for the use and occupancy of the Property. In addition, the Department will require that the Taxpayer
prove that such distributions are based on a true reflection of the Occupant's income and profits, not on the amount
required to fulfill the Property's expense obligations. In this regard, your characterization of the new transaction is
inconsistent with the parties' current incorporation documents, Bylaws, and previous federal income tax returns. For
instance, the Occupant claimed rental liability in its 2003 Federal Income Tax Returns, and the Owner's purpose,
according to its Operating Agreement is to, among other things, acquire and lease real estate.
Consequently, prior to a determination that your business arrangement is a nontaxable transaction, the Department
will require that the parties amend all corporation documents to reflect the true substance of the transaction (i.e. the
specific purpose and method of distributions, the true purpose of the entities, etc.). Furthermore, the Department will
also require that the parties file federal income tax returns consistent with the transaction you portrayed in your
request.
Finally, you based your conclusion that any distributions made by either Occupant should not be subject to tax, on
Technical Assistance Advisement No. 04A-032 and the authorities therein relied upon, which include St. John's
Trading Company v. Department of Revenue, DOAH Case Number 84-1652 (1985), and Department of Revenue v.
Ryder Systems, Inc., 406 So.2d 1299 (Fla. 1st DCA 1981). However, the facts presented are distinguishable from
both cases. First, in St. John's, the court found no compensation flowed between the owner and occupant, its
subsidiary, for occupancy of the real property; instead, the court found only offsetting journal entries without any real

significance. Thus, the court found no taxable rental consideration between the parties. Likewise, in Ryder, the court
affirmed the lower court's finding that there was no rental payment made. See Ryder Systems, Inc. Neither case
examined the significance of a single stockholder corporation's income and profit distributions to its sole stockholder, a
trust, where the single stockholder corporation occupies real property its sole member owns.
CONCLUSION
Under the facts presented, the Occupant will pass through to the Owner, as distributions, all income and profits
realized and the Owner will pay for all expenses related to the Property. However, the Owner's characterization of the
transaction is inconsistent with the documents it provided the Department. In that case, the Department can only
conclude that the parties will continue operating as indicated in the documents you provided, thereby creating a
taxable transaction. Accordingly, the Department concludes that under the present circumstances, such distributions
are taxable under Section 212.031, F.S.
This response constitutes a Technical Assistance Advisement under Section 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 Section
213.22, F.S. Our response is predicated 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,
Jessica A. Olmedillo
Attorney
Technical Assistance and Dispute Resolution
(850) 922-4835
Ctrl # 14604

Footnote 1. Owner did not provide any attachments for this form.