Could an insurer replace Florida's direct-premiums apportionment factor for income from an IRC section 338(h)(10) deemed asset sale?

Plain-English summary

The insurer recognized business income from a stock sale treated as an asset sale under IRC section 338(h)(10). It sought to replace Florida's standard insurance-company factor—Florida direct premiums divided by direct premiums everywhere—with a lower alternative based in part on its state licenses.

The Department denied the request. Alternative apportionment was reserved for rare cases where the regular formula produced a grossly distorted result, taxed extraterritorial value, or operated unreasonably and arbitrarily in relation to Florida activity.

The change from the insurer's historical factors was not of constitutional magnitude. Treating every state license as equal also did not establish distortion because license value could vary with acquisition cost and market opportunity. The larger Florida tax resulted from the much larger asset-sale income, not from an unfair factor.

What this means for you

A one-time transaction and a materially lower proposed factor do not themselves justify alternative apportionment. The taxpayer must prove that the statutory method, not merely the income event, creates the exceptional distortion.

Common questions

Was the deemed asset-sale income business income? Yes.

Why was alternative apportionment denied? The taxpayer did not prove gross distortion, extraterritorial taxation, or an unreasonable relationship to Florida activity.

Was a different apportionment percentage enough? No.

Citations and references

• Fla. Stat. §§ 220.151 and 220.152, Fla. Admin. Code rr. 12C-1.0151(3)(b) and 12C-1.0152, and Roger Dean Enterprises v. Department of Revenue, 387 So. 2d 358 (Fla. 1980), as cited in the advisement.

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 12C1-008

Original ruling text

Executive Director
Lisa Vickers

QUESTION: May the taxpayer use alternative apportionment under section 220.152, F.S.?
ANSWER: The taxpayer was not granted permission to use alternative apportionment under section
220.152, F.S.

June 14, 2012
XXX
XXX
XXX
Re:

Technical Assistance Advisement 12C1-008
XXX, hereinafter “the Taxpayer”
Tax: Corporate Income Tax
Issue: Request for Permission to Use Alternative Apportionment
FEIN:XXX
Sections 220.151 and 220.152, Florida Statutes (F.S.)
Rules 12C-1.0151(3) (b) and 12C-1.0152, Florida Administrative Code (F.A.C.)

Dear XXX:
This is in response to your request dated XXX, for a Technical Assistance Advisement (TAA) pursuant to
section 213.22, F.S., and Rule Chapter 12-11, F.A.C., regarding permission to use an alternative
apportionment method for Florida corporate income tax purposes. An examination of your letter has
established that you have complied with the statutory and regulatory requirements for issuance of a TAA.
Therefore, the Department is hereby granting your request for a TAA.
FACTS
The stock of the Taxpayer, a wholly-owned subsidiary of an XXX and XXX company, was sold to
another entity on XXX. The stock sale is to be treated as a deemed asset sale under section 338(h)(10), of
the Internal Revenue Code. On the date of the sale, the Taxpayer held XXX licenses in XXX states and
the XXX.
During the years prior to the sale, insurance policies issued by the Taxpayer were XXX by other
companies within its consolidated group, reducing the direct premiums the Taxpayer reported to Florida
for XXX, XXX, and XXX. The Florida apportionment factors reported on the Taxpayer’s returns for the
tax years ended December 31, 2003, through December 31, 2010, were:
Child Support Enforcement – Ann Coffin, Director  General Tax Administration – Maria Johnson, Director
Property Tax Oversight – James McAdams, Director  Information Services – Tony Powell, Director

www.myflorida.com/dor
Tallahassee, Florida 32399-0100

Technical Assistance Advisement 12C1-008
Page 2

Tax Year

Florida
Apportionment Factor

12/31/2003
12/31/2004
12/31/2005
12/31/2006
12/31/2007
12/31/2008
12/31/2009
12/31/2010
Average

XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX

The Taxpayer’s letter of XXX, indicates that its standard apportionment factor for the tax year ended
XXX, will be XXX.
As a result of the increase in taxable income reported to Florida caused by the sale of its stock (I.R.C.
section 338(h)(10)), the Taxpayer is requesting that, in addition to using direct premiums to compute its
apportionment factor, it be allowed to include the sales price of its Florida license in the numerator of the
apportionment factor and the sales price of all licenses sold in the denominator of the apportionment
factor. The Taxpayer is assuming that all of the licenses are equal in value and is estimating the sales
price of the Florida license at $XXX for the numerator, XXX of the total sales price of the stock to be
included in the denominator ($XXX). The alternative apportionment factor suggested by the Taxpayer for
the tax year ended XXX, would be XXX.
LEGAL AUTHORITY
Section 220.151(1)(a), F.S., states:
Except as provided in paragraph (b), the tax base of an insurance company for a taxable year or
period shall be apportioned to this state by multiplying such base by a fraction the numerator of
which is the direct premiums written for insurance upon properties and risks in this state and the
denominator of which is the direct premiums written for insurance upon properties and risks
everywhere. For purposes of this paragraph, the term "direct premiums written" means the total
amount of direct premiums written, assessments, and annuity considerations, as reported for the
taxable year or period on the annual statement filed by the company with the Office of Insurance
Regulation of the Financial Services Commission in the form approved by the National
Convention of Insurance Commissioners or such other form as may be prescribed in lieu thereof.
Rule 12C-1.0151(3)(b), F.A.C., states in part:
If the principal source of premiums written by an insurance company is not for premiums for
reinsurance accepted by it, the adjusted federal taxable income is apportioned to Florida by

Technical Assistance Advisement 12C1-008
Page 3

multiplying it by a fraction, the numerator of which is the direct premiums written for insurance
upon properties and risks in Florida and the denominator of which is the direct premiums written
for insurance upon properties and risks everywhere.
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
Section 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 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. 317, 88 S. Ct. 995, 19 L. Ed. 2d 1201 (1968), which is
incorporated by reference in Rule 12C-1.0511, F.A.C.). (emphasis supplied)
(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 12C-1.0511, 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)
(2) The party seeking to use an alternative formula must prove that the alternative formula fairly
and accurately apportions income to Florida based upon business activity in this state.

Technical Assistance Advisement 12C1-008
Page 4

(3) A departure from the regularly applicable apportionment method will be authorized only in
limited and specific cases where unusual fact situations (which ordinarily will be unique and
nonrecurring) produce a result that is incongruous with the results of previous tax years under the
regularly applicable apportionment method.

ISSUE PRESENTED
May the Taxpayer use alternative apportionment under section 220.152, F.S.?
DISCUSSION AND ANALYSIS
Section 220.151, F.S., and Rule 12C-1.0151(3)(b), F.S., require insurance companies to multiply their
adjusted federal income by a fraction, the numerator of which is the direct premiums written for insurance
on properties and risks in Florida and the denominator of which is the direct premiums written for
insurance on properties and risks everywhere. However, if this method of apportioning income materially
distorts the apportionment factor, the Taxpayer may petition the Department under section 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 petition.
Alternative apportionment is very rare. The Florida Supreme Court recognized this fact in Roger Dean
Enterprises v. State, Department of Revenue, 387 So. 2d 358 (Fla. 1980).
There is a very strong presumption in favor of normal three-factor apportionment and against the
applicability of relief provisions. . . . The relief provision should be used where the statute
reaches arbitrary or unreasonable results so that its application could be attacked successfully on
constitutional grounds. Departures from the basic formula should be avoided except where
reasonableness requires. Id. At 363.

In Moorman Manufacturing Co. v. Bair, Director of Revenue of Iowa, 437 U.S. 267 (1978), the U.S.
Supreme Court stated:
…[the] claim that the Constitution invalidates an apportionment formula whenever it may result
in taxation of some income that did not have its source in the taxing state is incorrect.
437 U.S. at 272.
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

Technical Assistance Advisement 12C1-008
Page 5

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 is correct in stating that the income from the I.R.C. section 338(h)(10) transaction (sale of
stock treated as an asset sale) is business income. The income from this sale is substantially greater than
the income generated from the direct premiums written during the tax year. The Taxpayer is also correct
that its suggested alternative apportionment factor (XXX) is substantially lower than the standard
insurance company apportionment factor (XXX) under s. 220.151, F.S. However, as provided in Rule
12C-1.0152, F.A.C.,
An alternative method may not be invoked … 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.
As noted above, the Taxpayer’s apportionment factors before the deemed asset sale took place on XXX,
ranged from XXX for the XXX tax year to XXX for the XXX tax year, to XXX for the XXX tax year.
The Taxpayer’s average apportionment over the previous eight tax years was XXX and XXX for the XXX
through XXX tax years. Under the standard apportionment calculation, the Taxpayer indicates that its
apportionment factor for the XXX tax year will be XXX, which is actually less than the Taxpayer’s XXX
apportionment factor, and only about 50 percent greater than the average apportionment over the past
eight tax years, with or without the apportionment for the XXX tax year included.
The difference in the apportionment formula noted above (a drop of 20 percent or an increase of
approximately 50 percent) does not rise to the differences found to be unconstitutional in Norfolk (205.62
percent and 162.1 percent). 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:
When 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.

Technical Assistance Advisement 12C1-008
Page 6

Since the difference in the apportionment factor (a drop of 20 percent or an increase of approximately 50
percent) is nowhere near the differences found to be unconstitutional, the standard insurance company
single factor apportionment 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 personal 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 (sales, property, and payroll).
However, in this case the Taxpayer uses single factor apportionment instead of three-factor
apportionment. The Taxpayer asserts that in this case, the standard insurance company apportionment
operates unreasonably and attributes income to Florida that is out of all proportion to the Taxpayer’s
activities in Florida. The Taxpayer attempts to demonstrate this by asserting that all of the XXX state
insurance company licenses owned are equal in value.
Clearly, this cannot be the case. The value of each state license would seem to depend on the cost
necessary to obtain the license and the anticipated market within that state for the type of insurance
business to be written. Looking back prior to the XXX, the Taxpayer’s Florida apportionment factor was
roughly XXX percent each year, indicating that approximately XXX percent of its business was within
Florida and roughly XXX percent of its value was the result of Florida activity. In addition, over the
years, the Taxpayer has deducted expenses associated with its insurance licenses, including those from
other states, at approximately XXX percent in computing its Florida corporate income tax. This means
that the income apportionable to Florida in the years prior to the I.R.C. section 338(h)(10) transaction was
reduced by expenses incurred by the Taxpayer in maintaining all of its insurance company licenses. As a
result, the single factor apportionment formula used by insurance companies is not operating unreasonably
and does not attribute income to Florida that is out of all proportion. Therefore, an alternative
apportionment formula is not appropriate.
In addition, because other states often do not impose corporate income taxes on insurance companies, the
income on which this Taxpayer is taxed in all states does not exceed 100 percent of its income. Therefore,
extraterritorial values are not taxed, the effect of the sale on the apportionment factor does not rise to a
constitutional level, and an alternative apportionment formula is not appropriate.
The Taxpayer has not shown by clear and cogent evidence that the exclusion of the business asset sale
from the apportionment formula results in the 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 asset sale. Additionally, the Taxpayer has not demonstrated that the exclusion of the business asset
sale from 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. Rather, the increase in the Taxpayer’s

Technical Assistance Advisement 12C1-008
Page 7

Florida net income and in the amount of tax reported to Florida appears to be strictly a function of the
Taxpayer having more income to report than it had in previous years, as a result of the sale of its assets.
CONCLUSION
Based on the discussion above, the standard insurance company apportionment factor under s. 220.151,
F.S., produces a reasonable result and does not produce a constitutional distortion that would warrant an
alternative apportionment under s. 220.152, F.S. Therefore, the Taxpayer must use the standard insurance
company apportionment under s. 220.151, F.S., for its tax year ending XXX
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 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., which are subject to disclosure to the public under the conditions of s. 213.22,
F.S. Your name, address, and any other details, which might lead to identification of the taxpayer, must
be deleted before disclosure. In an effort to protect the confidentiality of such information, we request you
provide the undersigned with an edited copy of your request for Technical Assistance Advisement, backup
material and response within fifteen days of the date of this advisement.

Sincerely,

Suzanne C. Paul
Tax Law Specialist
Technical Assistance and
Dispute Resolution

SCP/tlf
Control No.:

122260