With millions at stake, many corporations figure it's worth the risk to push tax rules to the limit - and sometimes beyond.
By SYDNEY P. FREEDBERG
Published November 16, 2003
AmSouth Bank of Florida tweaked some numbers to save $3,502,129 on its Florida income tax.
NationsBank Corp. cut $6,558,335 by claiming extra credits and deductions.
Columbia/HCA Healthcare Corp. took advantage of vague words in the tax code to chop its payments by $9,632,158.
The companies' attempts to reduce their tax bills - now the focus of disputes with Florida's Department of Revenue - illustrate a high-stakes game that a growing number of businesses play at tax time.
Call it audit roulette.
Using aggressive interpretations of ambiguous rules, more and more firms are weighing the likelihood of a state tax audit against the value of the savings.
"State tax-planning strategies have gotten more aggressive, closer to the line, over the last several years," said Peter O. Larsen, a prominent Jacksonville tax lawyer.
"There are companies that say, "If I have a 50-50 shot at going to audit and a 50-50 chance of winning . . . what the heck, I'll take the risk.' "
"If the law doesn't say you can do it and it doesn't say you can't do it," Larsen asked, "is it morally wrong if that benefits your shareholders?"
In business-friendly Florida, most of the estimated 1.5-million businesses do not have to pay corporate income tax.
Of the 240,000 firms that are required to file state income tax returns, most pay little or nothing thanks to savvy accountants and tax lawyers, a code full of loopholes and politicians unwilling to plug them.
And as the number of no-paying businesses grows, some of those stuck with the bills are fighting back, accusing the state of unfair treatment, confusing rules and over-the-top pursuit of tax dollars.
On Thursday, the Florida Senate Committee on Finance and Taxation is scheduled to discuss a staff report recommending changes that would rein in corporate "tax avoidance behavior."
Some experts say such behavior not only creates inequities among competing businesses but undermines the tax system by encouraging noncompliance with tax laws.
At the Florida Department of Revenue, officials say they see no evidence of any widespread problem, saying most businesses do everything properly.
"Tax administration has always been like a sport," said department spokesman Dave Bruns. "Every tax attorney is always dreaming up ways to save their client money. They dream up something. We dream up a countermeasure. They dream up something else. And we dream up something else."
The Revenue Department says AmSouth-Florida, NationsBank and Columbia/HCA - three of the state's biggest taxpayers - owe millions because of questionable tax-saving steps during the 1990s.
The three Fortune 500 companies - all since merged or renamed - have taken their battles to court.
Larsen, who represents both banks, said neither of his clients played audit roulette or tried to avoid taxes.
Columbia/HCA, now HCA Inc., said it didn't try to avoid tax either, but Florida's tax code is so convoluted that it's easy for anyone to make an honest mistake.
"We want to get it right, but we also want to be fiscally prudent," said HCA spokesman Jeff Prescott.
This is how the three corporations collided with the Department of Revenue and ended up suing.
AmSouth: "Nowhere income'
The Revenue Department said the former AmSouth-Florida tried to sidestep $3.5-million in taxes in 1992-96 by asserting its Florida assets were managed by a committee in Alabama. That's where the bank's parent company, the nation's 22nd largest bank holding company, has its headquarters.
A multistate company uses three factors - payroll, property and sales - to calculate how much of its profits come from Florida.
When AmSouth omitted some income and the value of its Florida investment portfolio from its calculations, its Florida income subject to tax fell by tens of millions of dollars for 1992-96.
That, in turn, lowered the bank's tax liability from about $12.7-million to $9.2-million for the five-year period.
In short, while its payroll and business were almost solely in Florida, the bank treated money made from its investments as if it came from Alabama, state revenue officials say. And, lucky for the bank, Alabama didn't tax income from the investment portfolio either, documents show.
Increasingly, multistate companies are shifting income to a state where it is not taxed. Accountants call it "nowhere income," because it's not taxable in any state. "Nowhere income" costs Florida an estimated $18.7-million a year in possible revenue. Twenty-four states have rules to combat it, and it is one of the issues lawmakers plan to discuss on Thursday.
In AmSouth's case, bank executives vehemently deny they moved income anywhere. They say the Florida bank, like their banks in Alabama, Georgia and Tennessee, were subsidiaries of AmSouth Bancorporation and controlled by the home office in Birmingham.
"All of the investment portfolios were managed out of Birmingham," said spokesman Rick Swagler.
For a while, Florida revenue officials agreed. But in 1999, they hit the bank with the $3.5-million tax bill (plus $899,935 in interest as of Sept. 21, 1999).
AmSouth challenged the assessment in Leon Circuit Court. The bank said the Revenue Department wanted it to pay too much tax. The Alabama committee was formed long before the state conducted its audit, the bank said.
But state tax lawyers called the committee an "illusion."
"Since AmSouth-Florida could not operate as a bank with its assets located out of state, its delegation could accomplish no business purposes beyond tax avoidance and is therefore properly characterized as a sham," Assistant Attorney General Charles Catanzaro wrote in a court brief.
In March, Circuit Judge Janet Ferris ruled against AmSouth.
While the Florida portfolio may have been managed in Alabama, she said, the profits were still owned by the Florida bank, and Florida is where they were subject to tax.
Ferris offered this comparison: Could a taxpayer with a Merrill Lynch account avoid tax by claiming that records about the money were kept by Merrill Lynch in New York? Her answer: No.
AmSouth of Florida, which merged with AmSouth Bank of Walker County, Ala., in 1997, is appealing. The bank now has 170 Florida branches and total deposits of about $29.5-billion.
Attorney Larsen says the judge and the state misinterpreted facts and the law.
"The only evidence in the record is that (the management committee) is not a sham," Larsen and his colleagues wrote in a court brief.
AmSouth Bancorporation reported $871.8-million in pretax earnings last year. But it still pays little in income tax to the states in which it does business, documents filed with the Securities and Exchange Commission show.
Swagler said those statements aren't a complete picture of what the company pays in state taxes. "There are so many types of taxes other than a pure income tax," he said.
NationsBank: "Loss carryover'
NationsBank posted $189.8-million in Florida income in 1993, $135.1-million in 1994 and $184-million in 1995.
The bank says that in those years, it paid nearly $21-million in Florida taxes on intangible assets, such as goodwill. Yet it says many of its Florida subsidiaries weren't doing well, and documents show it paid nothing in Florida corporate income tax in 1993 and 1994 and just $1.8-million in 1995.
One reason: When auditors examined NationsBank's books, they concluded the bank had incorrectly slashed taxable income in 1993-1995 by $90,054,075.
Among other things, they found NationsBank - then composed of about 245 subsidiaries - should not have subtracted for wages of employees who didn't live in Florida. They also said the bank used a "patently improper" method to calculate state bank credits - a charge the bank vehemently denies.
"We used the agreed-upon methodology assigned to us by the auditors," bank spokeswoman Eloise Hale replied.
The Department of Revenue also challenged another tax-savings tactic that is still in dispute years later: the timing of the bank's use of a deduction known in accounting speak as a "net operating loss carryover," or NOL.
NOLs help companies that have big yearly swings in income and losses to minimize their tax bills by averaging income over several years.
A business generates NOLs when its deductions - or "ordinary and necessary expenses" - exceed its taxable income. So if on paper a firm has a loss one year and a profit the next, it can carry over that loss to offset its future taxable profits.
Congress originally approved the NOL carryover as a 14-month tax break to help struggling companies after World War I. Pressed by business lobbyists, Congress eventually extended the carryover period to five years. Then seven years. Then 15. Then 20.
Florida adopted all the extensions. Now, though NOLs drain an estimated $17.9-million a year from the state treasury, businesses are allowed to roll over their loss deductions - and offset taxable income - for as long as 20 years.
Some states have cut back on use of NOLs because they cost too much. And there are limits to Florida's generosity, too.
When NationsBank and other corporations used NOLs to reduce their taxes dramatically, the Department of Revenue said they broke a rule designed to prevent companies "from avoiding income taxes through the unfair and abusive use of losses."
Specifically, the rule puts limits on when companies may use those loss deductions. Revenue officials questioned the timing of NationsBank's use of the NOLs and whether they were valid Florida losses.
The state initially said NationsBank owed $8,099,915 in taxes and $3,108,866 in interest through June 11, 1999. Then it reduced the assessment to $6,558,335.66, and the bank settled most of the issues for $2,829,177.
Neither side would budge, however, on the NOL carryover dispute and the $4,044,487.46 (including interest through Sept. 21, 2001) that the state says the bank still owes.
Seeking to overturn Florida's NOL-limitation rule, the bank lined up two heavyweights - Jay Koren, a PricewaterhouseCoopers tax lawyer, and Arthur England Jr., a former chief justice of the Florida Supreme Court.
Koren contends the Florida rule is illogical and discriminates against multistate companies.
England said in an interview that the rule violates Florida law and "makes no sense."
England was a legislative tax counsel in 1971 and a principal author of Florida's corporate income tax law. He joined the Supreme Court in 1975 and quit in 1981 in part because it didn't pay enough. He is now shareholder and chairman of the corporate law firm Greenberg Traurig.
He won't say how much the bank paid for his legal opinion.
NationsBank, now named Bank of America, is not trying to avoid taxes, spokeswoman Hale said, calling the Charlotte, N.C.-based bank among America's biggest taxpayers.
She said the bank paid $7.3-million in intangible taxes in 1993, $7.2-million in 1994 and $8.1-million in 1995. It also has "essentially doubled" its state income tax payments around the country in the last four years, she said. And while bank officials won't disclose Florida numbers, they say it paid all the states $472-million last year - almost twice what it paid in 2001.
Still, that amount is relatively small, considering the bank's pretax profits. It suggests Bank of America, like rival AmSouth, has income escaping state revenue authorities.
Columbia/HCA: "Nonbusiness income'
In its Florida tax returns for 1991-99, the giant hospital chain Columbia/HCA reduced its tax bills by classifying certain transactions as "nonbusiness income" that therefore was not taxable in Florida.
Florida auditors disagreed, contending the transactions were "business income" that is taxable.
So far, the company, now called HCA Inc., says the state has issued six assessments totaling $9,632,158.
HCA has filed lawsuits seeking to get at least three of those assessments overturned.
Florida, like most states, specifies two kinds of corporate income: "Business income," which a company apportions to all the states where it does business, and "nonbusiness income," which it allocates to a single state, usually the place where it has its headquarters.
When state auditors examined HCA's books, they found transactions that HCA claimed were not subject to Florida tax.
The auditors said the ventures were intertwined with the company's hospital business. HCA used income from the deals as working capital to generate even more income in HCA's hospital operations, the auditors said.
HCA countered: The transactions Florida wants to tax are "corporate investments" that had nothing to do with the company's "core" business of owning or operating hospitals in Florida.
The gains were taxable only in Tennessee, where the company has its headquarters, HCA says.
What's the difference between "nonbusiness income" and "business income"?
"It's like the quote from (former U.S. Supreme Court Justice) Potter Stewart in the obscenity cases," Benjamin A. Jablow, a state tax lawyer, wrote last December in the Florida Bar Journal. "I know it when I see it.' "
In essence, Columbia/HCA and a growing number of companies in Florida say that not even Potter Stewart could make sense of Florida's definitions.
Florida defines nonbusiness income, in part, as "any amounts which could be included in apportionable income without violating the due process clause of the United States Constitution."
Elaborating, Florida offers Rule 12C-1.003(4), F.A.C. It says in part:
"The income of a taxpayer is business income unless clearly classifiable as nonbusiness income."
"We have tax accountants, but the tax laws are incredibly complex," said HCA spokesman Prescott.
HCA, the world's richest for-profit hospital company, operates 67 hospitals and surgery centers in Florida. It has a $1.5-billion payroll and employs 45,000 people.
It earned $1.46-billion before taxes last year.
"Every year, we have these discussions on taxes and it's not uncommon for us to have a difference of opinion with the taxing entity," Prescott said.
When Florida's assorted taxes are totaled, HCA says, it paid more than $165-million to the state last year, including $15-million in income taxes. That puts the hospital chain in the top 1/10th of 1 percent of corporate taxpayers here.
HCA applied for an $8,669,185 refund in 2001, but it's still waiting.
"We want to pay our fair share of taxes, but we don't want to overpay," Prescott said.
-Times researchers Kitty Bennett and Caryn Baird, computer-assisted reporting specialist Constance Humburg and editorial assistant Eden McDowell contributed to this report.
