New CIT Rule  
New Rule Gives DOR Broad CIT Discretion

A recently adopted rule liberally interprets the Department of Revenue's discretion under Florida Statutes s. 220.44. That statute confers on the Department director the authority for Florida corporate income tax purposes to make adjustments to income, deduction, exclusion or apportionment factors to the extent necessary to clearly reflect the taxpayer’s net income if there is an “agreement, understanding or arrangement . . . between taxpayers, or between any taxpayer and any other person, which causes the taxpayer’s net income to be improperly or inaccurately reflected.

New Rule 12C-1.044 vests adjustment authority in the Director or the Director’s designee. A much wider range of adjustments are authorized than those specified in the statute. It would allow adjustments as before, but also when “any . . . device, whether by inadvertence or design, improperly or inaccurately reflects Florida income.” The word “device” is not defined.

Adjustments may be made even when there has been no effort by the taxpayer to reduce, avoid or escape tax. Examples are given of circumstances in which adjustments may be made, including transactions off “fair price” involving transfers of property, loans, services and intangibles, and transactions, arrangements or agreements with little or no business purpose other than the reduction or avoidance of tax, presumably despite the fact that such arrangements may be entirely lawful.

Adjustments upon taxpayer request are also contemplated. Interestingly, adjustments may be made in the case of “acquisitions requiring substantial capital investment in Florida resulting in substantial changes in organizational structure and increases in the Florida apportionment fraction of the newly acquired corporation or group of corporations due to increases in the property and payroll factors.” In a highly fact-specific scenario detailed in the proposed rule (affiliated group required to create different legal entities, not previously filing consolidated Florida return, acquired group headquartered in Florida, substantial debt taken on in purchase, NOLs expected on separate Florida returns, etc.), the Director or designee is authorized to enter into an agreement of up to 10 years’ duration providing for accelerated use of current-year NOLs not to exceed the lesser of $2 million or 25% of additional Florida investments made in the first 3 years after the acquisition. Recapture provisions are to be included in the agreement. Generally, no further such agreement is available for 10 years. A taxpayer that disagrees with a decision made by the Department on the taxpayer’s request for an adjustment under this last subsection (the one described in the lengthy scenario alluded to above) is specifically authorized to seek review of the decision by the Governor and Cabinet acting as the head of the Florida Department of Revenue. No mention is made of recourse with respect to other unagreed adjustments made after taxpayer request.

Posted: 2004-10-13 00:00:00.0

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