Regal Kitchens, Inc. v. Florida Dept. of Revenue, 93-994

• Decision Date: 29 July 1994
• Docket Number: No. 93-994,93-994
• Citation: 641 So.2d 158
• Parties: 19 Fla. L. Weekly D1654 REGAL KITCHENS, INC., Appellant, v. FLORIDA DEPARTMENT OF REVENUE, Appellee.
• Court: Florida District Court of Appeals

Page 158

641 So.2d 158

19 Fla. L. Weekly D1654

REGAL KITCHENS, INC., Appellant, v. FLORIDA DEPARTMENT OF REVENUE, Appellee.

No. 93-994.

District Court of Appeal of Florida,

First District.

July 29, 1994.

J. Riley Davis of Katz, Kutter, Haigler, Alderman, Marks and Bryant, Tallahassee, and Stanton G. Levin, P.A., Coral Gables, for appellant.

Robert A. Butterworth, Atty. Gen., and Jarrell L. Murchison, Asst. Atty. Gen., Tallahassee, for appellee.

Cynthia S. Tunnicliff of Pennington & Haben, Tallahassee, for amicus curiae Florida Auto. Dealers Ass'n.

Harold F.X. Purnell of Rutledge, Ecenia, Underwood & Purnell, P.A., Tallahassee, for amicus curiae Lodge Enterprises, Inc.

Bernard A. Barton, Jr., Douglas A. Wright, and Laurel J. Lenfestey of Holland & Knight, Tampa, for amicus curiae Anchor Glass Container Corp.

PADOVANO, Philip J., Associate Judge.

This is an appeal from a declaratory statement issued by the Department of Revenue. The appellant, Regal Kitchens, Inc., has advanced two arguments for reversal: (1) the declaratory statement is impermissibly broad in that it purports to declare a general policy that applies to an entire class of taxpayers, and (2) the position asserted by the Department on the merits of the case is incorrect. We have concluded that the first argument is meritorious and that portions of the declaratory statement must be stricken. However, because we find no error in the Department's position on the merits, those portions of the declaratory statement specifically addressing the transaction in this case are affirmed.

Central to the tax controversy between the immediate parties is a dispute regarding the nature of the legal relationship between a corporation, a general partnership, and four individuals. The corporation, Regal Kitchens, conducts its business operations on improved real property owned by a general partnership known as 8600 Associates. The property consists of a manufacturing plant and offices. Four individuals are the principal owners of both the corporation and the partnership. Each of the principals owns stock in Regal Kitchens, Inc., in the same proportion that he owns his separate partnership interest in 8600 Associates.

The real property was once owned by Regal Kitchens subject to a mortgage in favor of the Banker's Life Company. In 1977, Regal decided to sell the property to 8600 Associates, and to lease it back. After the sale and leaseback, 8600 Associates assumed liability for payment of the note and mortgage to Banker's Life and Regal remained liable on the note. In 1981, Regal Kitchens obtained a loan from the Merchants Bank of Miami and used the equity in the property owned by 8600 Associates as collateral. At that time, 8600 Associates gave the Merchants Bank a second mortgage on the property. The loan agreement with Merchants Bank provides that a default on the first mortgage is a default on the second. Additionally, the four principals in Regal Kitchens and 8600 Associates guaranteed payment to Merchants Bank.

The agreement between Regal Kitchens and 8600 Associates was reduced to writing in the form of a commercial lease. According to the most recent version of the lease, Regal Kitchens pays rent each month and 8600 Associates applies the rental income to its payments on the first and second mortgages on the property and the insurance and taxes. There is no profit to 8600 Associates. The rent payments received from Regal do not exceed the total financial obligation by 8600 Associates for the expenses and the debt service. 8600 Associates is not engaged in any other business. Apparently, the partnership was formed for the sole purpose of taking title to the real property and leasing it back to Regal Kitchens.

Regal Kitchens formally requested that the Department of Revenue issue a technical assistance advisement to address the applicability of the sales tax laws to the transaction between Regal and 8600 Associates. On April 24, 1992, the Department answered by informing Regal Kitchens that the rental income paid to 8600 Associates under the written lease is taxable under chapter 212, Florida Statutes, and that it is not subject to any exemption. Regal then filed the petition for declaratory statement that has become the subject of this appeal. On March 2, 1993, the Department of Revenue issued the Declaratory Statement, once again taking the position that the rent paid by Regal Kitchens to 8600 Associates is subject to sales tax under chapter 212, the Florida Revenue Act.

The Department reasoned that the transaction was taxable under section 212.031, Florida Statutes (1989), and that Regal Kitchens was not entitled to a tax exemption under rule 12A-1.070(19)(c). This exemption applies if the consideration paid by one corporation to a related corporation for the use of property is equal to a debt secured by the property and if each of the corporations is equally liable on the debt. However, the Department concluded that Regal was not equally liable and that the exemption could not be used in a situation such as this, in which the owner is a general partnership and the operator is a corporation. In the process, the Department made a detailed analysis of rule 12A-1.070(19)(c).

The first issue is whether the declaratory statement is impermissibly broad. We conclude that it is. Section 120.565, Florida Statutes (1989), states in part that "[a] declaratory statement shall set out the agency's opinion as to the applicability of a specified statutory provision or of any rule or order of the agency as it applies to the petitioner in his particular set of circumstances only." This statute limits the use of a declaratory statement to an expression of the agency's position on an issue raised by an individual petitioner in a particular set of facts. As this court observed in Florida Optometric Association v. Department of Professional Regulation, 567 So.2d 928, 937 (Fla. 1st DCA 1990), an administrative agency may not use a declaratory statement as a vehicle for the adoption of a broad agency policy or to provide statutory or rule interpretations that apply to an entire class of persons.

The declaratory statement in this case goes well beyond an expression of the Department's position on the issue presented by Regal Kitchens. The Department concluded that Regal Kitchens was not entitled to claim the exemption in rule 12A-1.070(19)(c) for rental payments between related corporations because the exemption must be strictly construed and because it does not apply to a rental payment made by a corporation to a general partnership. However, the declaratory statement was not limited to an analysis of the applicability of exemption under rule 12A-1.070(19)(c). On the contrary, much of the discussion is devoted to an expression of the Department's view that there is no statutory basis for the exemption. The Department disclaimed an intent to nullify the rule 12A-1.070(19)(c) exemption by stating that the rule "was duly promulgated and will be respected until it is repealed." Yet the message sent by the declaratory statement to a broad class of taxpayers was clear: the Department has concluded that the exemption stated in rule 12A-1.070(19)(c) for related corporations is not valid. An administrative agency cannot effectively repudiate one of its own rules by making a contrary expression in a declaratory statement.

Although the declaratory statement contains a detailed explanation of the Department's position regarding the validity of rule 12A-1.070(19)(c), that reasoning is not necessary to support the conclusion. If the exemption does not apply to Regal Kitchens, as the Department maintains, then the Department has no cause to express an opinion on the validity of the exemption. Despite this error, it is possible for the court to separate the part of the declaratory statement that properly addresses the tax consequences of the Regal Kitchens transaction from those parts of the declaratory statement that are improper expressions of general agency policy. A declaratory statement may be affirmed in part to the extent that it is proper, if the improper parts are severable. Mental Health Dist. Bd. v. Florida Dep't of Health and Rehabilitative Services, 425 So.2d 160 (Fla. 1st DCA 1983). Applying this principle, the court strikes out only those portions of the declaratory statement that address the validity of the tax exemption afforded by rule 12A-1.070(19)(c).

The next issue is whether the Department was correct on the merits of its determination that the rent paid by Regal Kitchens to 8600 Associates is taxable. Declaratory statements are subject to judicial review under section 120.68 of the Administrative Procedure Act, but an appellate court may reverse a declaratory statement only if the agency's interpretation of the law is clearly erroneous. Grady v. Department of Professional Regulation, 402 So.2d 438 (Fla. 3d DCA), appeal dismissed, 411 So.2d 382 (Fla.1981).

Section 212.031, Florida Statutes (1993), provides in part that "every person is exercising a...