Were distributions from two property-occupying LLCs to their owner taxable rental consideration?

Plain-English summary

Two single-member LLCs occupied real property owned by their common member. The requester proposed no lease and no rent, with business income and profits distributed to the owner and shareholder capital contributions covering property shortfalls.

Florida did not give a final determination that the arrangement was nontaxable. Distributions would be rent if their purpose was payment for use and occupancy. The Department would examine whether their timing or amount matched property obligations and whether they truly reflected the occupants' income and profits.

Before approving nontaxable treatment, Florida required documents showing the transaction's substance, money flows, purposes and methods of distributions and contributions, and the entities' true purposes. Federal returns also had to be consistent with the described arrangement.

What this means for you

No written lease and a distribution label were not enough. Related entities needed contemporaneous legal, accounting, and tax records showing that distributions arose from profits rather than property costs.

Common questions

Did Florida rule that the distributions were nontaxable? No. It required additional proof before making that determination.

When would distributions be treated as rent? When paid for use and occupancy, including where their timing or amount tracks property obligations.

What proof did the Department require? Detailed transaction and money-flow documents plus consistent federal income-tax returns.

Citations and references

• Fla. Stat. § 212.031 (commercial real-property rent tax)
• Fla. Admin. Code r. 12A-1.070 (real-property rentals)
• Fla. Stat. § 608.471(3) (disregarded LLC treatment for non-income taxes)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 05A-031R

Original ruling text

SUMMARY
QUESTION: Whether any portion of the income or profits realized by any one of two (2) single-member LLC
subsidiaries ("Occupants"), and passed through to their single member ("Owner"), is rent consideration pursuant to
Section 212.031, F.S., where the Owner alleges the following: (1) Neither Occupant will pay rent to the Owner of real
property; (2) there will be no lease agreement between the Owner and either Occupant; and (3) the Owner's
shareholders will make capital contributions, if needed, to the extent of any shortfall or anticipated shortfall associated
with the subject property ("Property").
ANSWER - Based on Facts Below: Once the Occupants issue distributions, their member may apply such funds for
any lawful purpose, including any and all expenses of real property it 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 documents and facts. 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 be based on a true reflection of the Occupant's income and profits, not on the amount
required to fulfill the Property's expense obligations. Moreover, the Occupants shall only make distributions to their
member in accordance with Florida and Federal law, and comply with sound accounting principles.
Consequently, prior to a determination that the parties' business arrangement is a nontaxable transaction, the
Department will require that Taxpayer provide it with any and all documents that specifically reflect the true substance
of the transaction and, in particular, that describe the flow of money between the parties involved in greater detail (i.e.,
the specific purpose and method of distributions and contributions, 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.

September 21, 2005

Re: Sales and Use Tax 05A-038
XXX ("Owner")
XXX ("Occupant 1")
XXX ("Occupant 2")
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 March 4, 2005, and April 12, 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 granted your request and issued TAA 05A031; however, after further consideration, the Department has revised its response. Hence, this response constitutes
Revised Technical Assistance Advisement 05A-031R.
ISSUE
Whether any portion of the income or profits realized by any one of two (2) single-member LLC subsidiaries
("Occupants"), and passed through to their single member ("Owner"), is rent consideration pursuant to Section
212.031, F.S., where the Owner alleges the following: (1) Neither Occupant will pay rent to the Owner of real property;
(2) there will be no lease agreement between the Owner and either Occupant; and (3) the Owner's shareholders will
make capital contributions, if needed, to the extent of any shortfall or anticipated shortfall associated with the subject
property ("Property").
FACTS
Your letter dated March 4, 2005, provides in part, the following facts:

1. Sub.1 [Occupant 1] and Sub. 2 [Occupant 2] will occupy real estate owned by Taxpayer [Owner].
2. The Taxpayer [Owner] is an S Corporation for federal income tax purposes. As such, profits and losses will pass
   through to the shareholders and any income is taxed at the individual shareholder level.
3. Taxpayer [Owner] is the sole member of Sub. 1 [Occupant 1], a single member LLC that is treated as a division of
   the Taxpayer for federal income tax purposes. As such, profits and loss pass through to the single member parent the
   Taxpayer [Owner] and are reported on its federal income tax return Form 1120S.
4. Taxpayer [Owner] is the sole member of Sub. 2 [Occupant 2], a single member LLC that is treated as a division of
   the Taxpayer for federal income tax purposes. As such, profits and loss pass through to the single member parent the
   Taxpayer [Owner] and are reported on its federal income tax return Form 1120S.
5. Sub. 1 [Occupant 1] and Sub. 2 [Occupant 2] will use real property [Property] owned by Taxpayer [Owner] without
   paying rent to the Taxpayer [Owner]. There will not be any written or unwritten lease agreement between the
   Taxpayer [Owner] and Sub. 1 [Occupant 1] and Sub. 2 [Occupant 2] regarding the use of the real property [Property]
   to be used by them.
6. The shareholders of Taxpayer [Owner] will make capital contributions to the Taxpayer [Owner], if needed, to the
   extent of any shortfall or anticipated shortfall associated with the subject property [Property]. All net profits and cash
   flow from the Subs [Occupants] would be distributed to the Taxpayer [Owner].
7. For federal income tax purposes, the Taxpayer [Owner] will not indicate the receipt of rental payments related to the

use of the property by Sub. 1 [Occupant 1] or Sub. 2 [Occupant 2] on Taxpayer's [Owner's] federal income tax return.
Sub. 1 [Occupant 1] and Sub. 2 [Occupant 2], as divisions of the Taxpayer [Owner], will not file their own tax returns.

8. For financial accounting purposes, neither the Taxpayer [Owner] nor Sub. 1 [Occupant 1] and Sub. 2 [Occupant 2]
   will indicate the receipt or payment of rental payments related to the use of the property [Property] on any financial or
   accounting records maintained by the Taxpayer [Owner].
9. The Taxpayer [Owner] is the mortgagor of the property [Property], is responsible for the property taxes, and will be
   responsible for the payment of all real property insurance and will be the actual entity paying the mortgage, property
   taxes and insurance premiums.
   In addition, in response to the Department's request, you provided the Department with the following documents
   attached to your letter, dated April 12, 2005:
10. 2004 Form 1120S U.S. Income Tax Return for an S Corporation for Taxpayer [Owner]. You stated that since both
    Sub 1 [Occupant 1] and Sub 2 [Occupant 2] were incorporated in 2004, no income tax returns have been prepared or
    filed. Both Sub 1 [Occupant 1] and Sub 2 [Occupant 2] will be filing under Business Code No. 238210.
11. Construction Mortgage, dated October 11, 2001, between Taxpayer [Owner] and Florida Bank (hereinafter
    "Construction Mortgage").
12. Warranty Deed (hereinafter, "Warranty Deed") dated October 9, 1996 between [Sellers] and Taxpayer [Owner].
13. Articles of Incorporation for Taxpayer [Owner].
14. Articles of Organization and Operating Agreement for Sub 1 [Occupant 1].
15. Articles of Organization and Operating Agreement for Sub 2 [Occupant 2].
16. Bylaws for Taxpayer [Owner].
    The Construction Mortgage, you provided states:
    THIS MORTGAGE, INCLUDING THE ASSIGNMENT OF RENTS AND THE SECURITY INTEREST IN THE RENTS
    AND PERSONAL PROPERTY, IS GIVEN TO SECURE (A) PAYMENT OF THE INDEBTEDNESS AND (B)
    PERFORMANCE OF ANY AND ALL OBLIGATIONS UNDER THE NOTE, THE RELATED DOCUMENTS, AND THIS
    MORTGAGE.
    Furthermore, the Construction Mortgage states that the Grantor [Owner] shall pay all taxes related to the Property.
    Finally, the Construction Mortgage also provides that the Grantor [Owner] is responsible for insurance on the Property.
    The Owner's Articles of Incorporation provide, that, among other things:

[t]he general nature of the business to be transacted by the Corporation shall be as follows: ... (2) To acquire by
purchase, lease, exchange or otherwise, any lands, buildings, interests in real and personal property and
improvements of any tenure, nature or description whatever, and whenesoever [sic] situate, and to hold, sell, develop,
improve, lease, mortgage, and deal generally in the same.... (11) To manage lands, buildings and other properties,
real and personal, whether belonging to the corporation or not; and to collect rents and income and to supply tenants
and occupiers;....
In regards to the Occupants, their individual operating agreements state that the purpose of each Occupant is "to
carry on any lawful business or activity which may be conducted by a limited liability company organized under the Act
[Florida Limited Liability Company Act]." The operating agreements also provide that "[c]ash flow for each taxable year
of the Company shall be distributed to Member [Owner] no later than seventy-five (75) days after the end of the
taxable year" and that "[a]ll Profit or Loss shall be allocated to Member [Owner]."
Finally, the Owner's Bylaws state that the dividends of the corporation will be decided by vote; however, the Bylaws
are silent in regard to the method by which it will request or allow contributions by its shareholders.
TAXPAYER'S ARGUMENT
In your letter to the Department, dated March 4, 2005, you stated that your position is that "no portion of the income or
profits realized by either Sub. 1 [Occupant 1] or Sub. 2 [Occupant 2] and [, which] pass through to the Taxpayer
[Owner], is 'rent consideration' for Florida sales tax purposes." You based your position on St. Johns Trading
Company v. Department of Revenue, DOAH Case Number 84-1652 (1985); Department of Revenue v. Ryder
Systems, Inc., 406 So.2d 1299 (Fla. 1st DCA 1981); and Technical Assistance Advisements 04A-061, 04A-057 and
04A-032.
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 the income or profits realized by
any one of two (2) single-member LLC subsidiaries, Occupants, and passed through to their single member, Owner, is
rent consideration under Section 212.031, F.S.
Generally, Florida law provides that 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. Additionally, 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, are rental consideration and, therefore, taxable despite any relationship between lessor and

lessee. Moreover, 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 12A1.070(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's Articles of Incorporation provide that the Owner, among other things,
shall acquire interest in real property to lease it and shall manage lands and buildings and collect rent. Accordingly,
Owner may lease real property without violating its own Articles of Incorporation. A court in Florida addressed the
issue whether a person is engaged in the business of renting or leasing real property under the confines of Section
212.031(1)(a), Florida Statutes. See Regal Kitchens, Inc. v. Department of Revenue, 641 So.2d 158 (Fla. 1st DCA,
1994). In Regal, the court concluded that:
[n]othing in subsection 212.02(2) Florida Statutes (1989), suggests that the term "business" is limited to those who
engage in regular course of dealing with different clients or customers. A person who rents a single duplex unit is
engaged in the business as is the owner of an apartment who rents thousands of units.
See Regal Kitchens, at 163. In addition, the definition of "business" in Section 212.02(12), Florida Statues, does not
provide exceptions for occasional or isolated leases or licenses. Therefore, if the Owner receives rent consideration
from either Occupant for the use and occupancy of the Property, the Owner is in the business of leasing real property.
In your request, you alleged that the Owner will not receive any consideration from either Occupant, as neither
Occupant will pay any rent to the Owner; there will be no lease agreement between the Owner and either Occupant;
and the Owner's shareholder will make capital contributions as required to cover the expenses of the Property.
Nevertheless, you also stated that monies will flow from the Occupants to the Owner in the form of distributions to
their member, the Owner. In this case, the issue is whether those distributions are a form of rent consideration for the
use of the Property, which will benefit the Owner and, therefore, be subject to tax.
According to its Operating Agreement, Occupant 1 will distribute cash flow for each taxable year of the company to
the Owner no later than seventy five (75) days after the end of its taxable year.(FN 1) Likewise, according to its
Operating Agreement, Occupant 2 will operate and distribute its cash flow like Occupant 1. At the same time, you
claimed that the Owner will make all payments in relation to the Property, and the Owner's shareholders will make
capital contributions to the Owner, if needed, to the extent of any shortfall or anticipated shortfall associated with said
expenses.
Once the Occupants issue distributions, their member may apply such funds for any lawful purpose, including any and
all expenses of real property it 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
documents and facts. 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 be based on a
true reflection of the Occupant's income and profits, not on the amount required to fulfill the Property's expense
obligations. Moreover, the Occupants shall only make distributions to their member in accordance with Florida and

Federal law, and comply with sound accounting principles.
Consequently, prior to a determination that the parties' business arrangement is a nontaxable transaction, the
Department will require that you provide it with any and all documents that specifically reflect the true substance of the
transaction and, in particular, that describe the flow of money between the parties involved in greater detail (i.e., the
specific purpose and method of distributions and contributions, 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 St.
John's Trading Company, Inc. and Ryder Systems, supra. 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
CONCLUSION
Under the facts presented, the Occupants will pass through the Owner, as distributions, all income and profits
realized, and the Owner will pay all expenses related to the Property. However, as previously stated, prior to a
determination that the parties' business arrangement is a nontaxable transaction, the Department will require that you
provide it with any and all documents that specifically reflect the true substance of the transaction and, in particular,
that describe the flow of money between the parties involved in greater detail (i.e., the specific purpose and method of
distributions and contributions, 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.
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) 488-7758
Ctrl # 15248

FOOTNOTE 1. "The profits and losses of the limited liability company shall be allocated among the members in the
manner provided in the articles of organization or the operating agreement." See Section 608.4261, F.S. Additionally.
"a member may not receive a distribution from a limited liability company to the extent that, after giving effect to the
distribution, the limited liability company would be insolvent." See Section 608.428(2), F.S.