S.R.G. Corp. v. Department of Revenue

• Decision Date: 30 June 1978
• Docket Number: No. 52491,52491
• Parties: S.R.G. CORPORATION, Appellant, v. DEPARTMENT OF REVENUE, State of Florida, Appellee.
• Court: Florida Supreme Court

Page 687

365 So.2d 687

S.R.G. CORPORATION, Appellant, v. DEPARTMENT OF REVENUE, State of Florida, Appellee.

No. 52491.

Supreme Court of Florida.

June 30, 1978.

Rehearing Denied Dec. 14, 1978.

Kenneth M. Myers and Debra E. Cohen of Myers, Kaplan, Levinson, Kenin & Richards, Miami, for appellant.

Robert L. Shevin, Atty. Gen., and David K. Miller, Asst. Atty. Gen., Tallahassee, for appellee.

OVERTON, Chief Justice.

This cause is before us on direct appeal from a final summary judgment of a circuit court upholding the constitutionality of Chapter 220, Florida Statutes (1975). We have jurisdiction. Article V, Section 3(b)(1), Florida Constitution.

The issue concerns the applicability of Florida's new corporate income tax law to deferred taxable gains which were realized prior to November 2, 1971. We hold such gains are not taxable.

The facts of this case are not disputed by the parties and may be briefly summarized as follows. In 1963, the United States Government condemned the appellant's property, and the appellant received an award from those condemnation proceedings. In 1965, the appellant utilized the condemnation award to purchase replacement property. Pursuant to Section 1033 of the Internal Revenue Code, the appellant chose to defer the capital gain realized when he received the condemnation award. The federal income tax liability for that gain was therefore not recognized in 1963 and was deferred under the cited provision of the Code until ultimate disposition of the replacement property.

At the time of the described transactions in 1963 and 1965 there existed in the State of Florida a constitutional prohibition against the levy of a corporate income tax. Article IX, Section 11, Florida Constitution (1924). On November 2, 1971, the voters of this State adopted an amendment to our constitution allowing the imposition of a tax on the income of "other than natural persons." Article VII, Section 5, Florida Constitution. Following this amendment, the Florida Legislature enacted the Florida Income Tax Code, Chapter 220, Florida Statutes (1977), which imposed an income tax commencing January 1, 1972, on "other than natural persons."

In 1975, the appellant sold the replacement property and paid the federal income tax on the capital gain. The federal tax paid by the appellant included the deferred gain realized on the original property at the time it was condemned and the gain realized on the replacement property. The State, through its Department of Revenue, asserted that it was entitled to compute the state capital gain tax on both the deferred gain from the 1963 condemnation transaction and the gain realized on the replacement property.

The appellant then commenced this action as a suit for declaratory and injunctive relief, seeking a declaration that the State could not tax that portion of the transaction relating to the deferred gain which was realized when the property was condemned in 1963. The appellant does not contest taxation of the gain realized on the replacement property.

At trial, the appellant taxpayer asserted (1) that the Florida corporate income tax provisions could not be construed to impose a tax on gain which was "realized" prior to the effective date of the taxing statute, and (2) that, if the Florida corporate income tax provisions were construed to be applicable, taxation of the gain in this case would constitute retroactive taxation in violation of the Due Process Clauses of the Florida and United States Constitutions. The trial court rejected these contentions and granted summary judgment in favor of the appellee, Department of Revenue. We agree with the appellant's first contention and reverse.

Section 220.02(4)(a) of the Florida Income Tax Code defines "income" which is subject to taxation as:

(a) "Income," for purposes of this Code, including gains from the sale, exchange, or other disposition of property, shall be deemed to be created for Florida income tax purposes At such time as said income is realized for federal income tax purposes ; (Emphasis supplied.)

The appellee, Department of Revenue, contends that the term "realized" as it appears in this section is used in a nontechnical sense. They argue that Chapter 220 contemplates taxation of all income which is recognized and reflected on the federal income tax return for the same period. Essentially, the Department of Revenue asserts that recognition of income by the federal government is the event which brings the Florida tax into operation. We disagree.

The Florida Income Tax Code expressly provides that the Code shall utilize concepts of law developed in connection with the federal income tax laws. Section 220.02(3), Florida Statutes (1977). Under the federal laws, the terms "realization" and "recognition" are not synonymous. "Realization" for federal income tax purposes occurs when the taxpayer received actual economic gain from the disposition of property. See Helvering v. Horst, 311 U.S. 112, 115, 61 S.Ct. 144, 85 L.Ed. 75 (1940). It is when the taxable event occurs which gives rise to actual economic gain. "Recognition," on the other hand, refers only to the time when the tax itself becomes due and payable. Ordinarily, these two events occur simultaneously, but this does not alter the fact that the two terms have distinct and different meanings.

In statutory construction, case law clearly requires that legislative intent be determined primarily from the language of the statute. Thayer v. State, 335 So.2d 815 (Fla.1976); Van Pelt v. Hilliard, 75 Fla. 792, 78 So. 693 (1918). The reason for this rule is that the Legislature must be assumed to know the meaning of the words and to have expressed its intent by the use of the words found in the statute. We must, therefore, conclude that the Legislature intended to employ the federal concept of realization when it used that term in its definition of income found in Section 220.02(4)(a).

This conclusion is in full accordance with our recent decision in Department of Revenue v. Leadership Housing, Inc., 343 So.2d 611 (Fla.1977). Although Leadership Housing involved different issues from the present case, we held that, for purposes of the Florida Income Tax Code, gain becomes true taxable income when it is Realized at the time of sale or other disposition of the property. In the present case, appellant realized gain when the federal government paid it the condemnation award in 1963. That was the realized taxable event, and, in 1963, the Florida Constitution prohibited the imposition of an income tax on that transaction. We find and hold that Chapter 220 only authorizes taxation of gain which is realized by the taxpayer after January 1, 1972, and, since the disputed portion of the appellant's gain was realized in 1963, the State cannot impose an income tax on that gain.

In view of this finding we need not address the second contention of the appellant which asserts that the imposition of a tax on the portion of its gain relating to the 1963 condemnation constitutes retroactive taxation.

The final summary judgment entered by the circuit court is reversed and the cause is remanded to the circuit court with directions to enter judgment in accordance with the views expressed herein.

It is so ordered.

ADKINS, BOYD, HATCHETT and ALDERMAN, JJ., concur.

ENGLAND, J., dissents with an opinion, with which SUNDBERG, J., concurs.

ENGLAND, Justice, dissenting.

Like so many other matters in life, if you ask the wrong question you're apt to get a wrong answer. That is what a majority of the Court has done here, although the initial fault rests not with the Court but with the Department of Revenue. The department framed the issue (or it allowed S.R.G. Corporation to frame the issue) for our review as one involving the taxation of income "realized" in 1963. That was a mistake, and it has proved to be the predicate on which the Court has now fashioned its mistaken resolution of this controversy.

The issue presented for our review, I submit, is whether the department must compute the Florida income tax liability of a corporate taxpayer by reference to all "basis" provisions in the Internal Revenue Code of 1954 ("the Internal Revenue Code"), or whether it is required under the Florida Income Tax Code ("the Florida Code") to fashion a hybrid basis provision for the Florida tax in situations such as the one before us. I think that the answer in the Florida Code is explicit that all federal bases whether original cost, adjusted cost, or substituted are to be utilized for Florida income tax purposes. As there is no constitutional defect in the statutory scheme prescribed, it follows that we have no choice but to rule with the department in this case.

S.R.G. Corporation owns property which was condemned by the United States government in 1963 ("the old property"). ¹ Within the time limitations expressed in Section 1033 of the Internal Revenue Code, S.R.G. reinvested the condemnation proceeds in similar property ("the new property") and was allowed by the Internal Revenue Service to defer the recognition of gain on the disposition of the old property until the new property was either disposed of or sold. The new property was then sold by S.R.G. in 1975, at which time S.R.G. reported the sale for both federal and Florida income tax purposes.

On its 1975 federal income tax return, the corporation was obliged to show as the basis for new property, for purposes of computing its taxable capital gain, the difference between the 1975 sales price and the basis of the old property. ² For Florida income tax purposes, however, the corporation reported a gain ³ subject to tax on the difference between the 1975 sales price and the cash paid for the new property that is, the amount received in 1963 as recompense for the condemnation of the old property. In tax terms, the corporation did not report for Florida income tax purposes the same "substituted" tax basis it reported to the federal...