STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

PORT CHARLOTTE BANK ) AND TRUST COMPANY, )

)

Petitioner, )

)

vs. ) CASE NO. 76-024

) DEPARTMENT OF REVENUE, )

)

Respondent. )

)

RECOMMENDED ORDER

By Stipulation received February 6, 1976, the parties hereto agreed there is no issue of material fact and that the determination of the issues herein involved therefore becomes a question of law.

APPEARANCES

For Petitioner: Robert G. Jacobson, Esquire

FARR, FARR, HAYMANS, MOSELEY & ODOM

166 North Tamiami Drive Northeast Port Charlotte, Florida 33952

For Respondent: Caroline Mueller, Esquire

Assistant Attorney General Department of Legal Affairs The Capitol

Tallahassee, Florida 32304 FINDINGS OF FACT

1. Petitioner holds promissory notes secured by mortgages from Roho, Inc., Dr. and Mrs. Spoont, and Mr. and Mrs. Frank Cole.

   
   

2. The note executed by Roho, Inc. is in the principal amount of $300,000 with interest at 9.25 percent payable in equal monthly payments of $3,800.33 for ten years and provides the maker has the right to repay all or any part of the loan at any time without penalty. By this note the makers promise to pay

   $460,539.60 in 120 equal monthly installments of $3,800.33 commencing September 10, 1975. The note provides the amount of the note Includes the proceeds of

   $300,000 resulting in an amount financed of $300,000 plus a finance charge of

   $160,539.60, including interest of $156,039.60 at an Annual Percentage Rate of

   9.25 percent. The note further provides for date of commencement of payments, charges for late payments, costs of collection, acceleration of note at option of holder if principal installment not paid when due, and describes the security for the note. All of this information is on the same page and over the signature of the maker who acknowledges a copy of same.

3. Similar provisions are contained in the promissory notes executed by the Spoonts and the Coles. In the Spoonts' note the makers promise to pay

   $78,837.60, payable in 240 equal monthly payments of $322.24 each and every month commencing February 10, 1974. The amount of the note includes the proceeds of $40,000 resulting in an amount financed of $40,000 plus a finance charge of $38,837.60,including interest of $38,837.60 resulting in an Annual Percentage Rate of 7.5 percent.

   
   

4. In the Coles' note the makers promise to pay $100,593.07 payable in 240 equal monthly payments of $407.88 commencing February 19, 1975. The amount of the note includes the proceeds of $47,000 resulting in an amount financed of

   $47,000, plus a finance charge of $53,593.70 including interest of $52,888.70 resulting in an annual Percentage Rate of 8.75 percent.

   
   

5. Petitioner contends that documentary stamps required on the notes should be based upon the amount financed (or loaned) while the Respondent contends that the tax required on the notes are based upon the sum following the promise to pay which includes principal) cost of financing, if any, and unearned interest for the stated term of the note.

   
   

6. The issue for resolution is what is the amount of the indebtedness evidenced by said instruments. Stated somewhat differently, does the indebtedness include unearned interest for the purpose of determining the required amount of documentary tax stamps to be placed on the note.

   
   

   CONCLUSIONS OF LAW

   
   

7. The tax on promissory notes is provided for in Sec. 201.08(1), F.S. which states:

   
   

   "On promissory notes, non-negotiable notes, written obligations to pay money, assignment of salary, wages or other compensation, made, executed, delivered, sold, transferred, or assigned in this state, and for each renewal of the same on each $100 of the indebtedness or obligation evidenced thereby, the tax shall be 15 cents on each $100 or fraction thereof. Mortgages which incorporate the certificate of indebtedness, not otherwise shown in separate

   instruments, are subject to the same tax at the same rate." (Emphasis added).

   
   

   As stated by the Supreme Court in Maas Bros., Inc. v. Dickinson 195 So.2d 193, 198:

   
   

   "It is a fundamental rule of construction that tax laws are to be construed strongly in favor of the taxpayer and against the government, and

   that all ambiguities and doubts are to be resolved in favor of the taxpayer. This salutory principal is found in the reason that the duty to pay taxes, while necessary to the business of the sovereign, is still a duty of pure statutory creation and taxes may be collected only within the clear definite boundaries recited by statute. State

   ex rel. Seaboard Airline R. Co. v. Gay (1948)

   160 Fla. 445, 35 So.2d 403; 51 Am Jur Taxation Section 650."

   
   

8. It is clear that the instruments in question are subject to taxation pursuant to Section 201.08(1) F.S. The Petitioner does not dispute the determination that these instruments are taxable.

   
   

9. This statute levying and imposing excise tax on documents was intended to create a selective tax applicable to class of instruments recognized by the law merchant as particularly susceptible to imposition of documentary tax, and was not intended to be all-embracing and cover every kind and grade of commercial instrument. Metropolis Publishing Co. v. Lee 170 So. 442 (1936).

   Not only are the instruments herein involved labeled promissory notes, they also fulfill all of the law merchant requirements that make these notes negotiable instruments and therefore clearly within the ambit of Section 201.08 F.S.

   
   

10. Most of the judicial decisions involving 201.08 F.S., and there have been many, involve the question whether or not the instrument before the court was taxable. That is not an issue here. All that is involved here is a determination of the indebtedness or obligation evidenced by these notes. Liability of instruments for stamp duty and amount of such stamp duty is determined by the face of the instrument and cannot be affected by proof of extrinsic facts. Bankers Trust Co. v. Fla. East Coast R. Co., D. C. 8 F. Supp. 874 (1935) Aff'd Lee v. Kenan 78 F.2d 425, cert. den. 296 US 637. Here the notes clearly show an obligation to pay principal and unearned interest. They also show the principal amount of the indebtedness. Further the notes contain a clear provision that the maker of each note has "the right to prepay all or any part of this loan at any time without penalty." Interest is computed on the unpaid principal balance.

    
    

11. Prior to the passage of the Truth in Lending Act, 15 USC 1601 et seq. promissory notes secured by mortgages on real property generally indicated a promise to pay the amount financed plus interest at a stated percentage in X number of equal monthly installments of Y dollars each month for the number of years or months required to amortize the loan. On these promissory notes the obligation to pay, on which documentary stamps were computed, was the amount financed. 15 USC Section 1639 entitled Consumer loans not open end credit plans, provides in pertinent part:

    
    

    "(a) Any creditor making a consumer loan or otherwise extending consumer credit in a transaction which is neither a consumer credit sale nor under an open end consumer credit plan shall disclose each of the following items, to the extent applicable:

    1. The amount of credit of which the obligor will have the actual use, or which is or which will be paid to him or for his account or to another person on his behalf.

    2. All charges, individually itemized, which are included in the amount of credit extended but which are not part of the finance charge.

    3. The total amount to be financed (the sum of the amounts referred to in paragraph (1) plus the amounts referred to in paragraph (2)).

       * * *

       1. The number, amount, and the due dates or periods of payments scheduled to repay the indebtedness.

       2. The default, delinquency, or similar charges payable in the event of late payments.

       3. A description of any security interest

       held or to be retained or acquired by the creditor in connection with the extension of credit and a clear indication of the property to which the security interest relates.

       * * *

       (b) Except as otherwise provided in this chapter [Sec. 1631 - 1644 of this title] the disclosure required by subsection (a) shall be made before the credit is extended, and may be made by disclosing the information in the note or other evidence of indebtedness to be signed by the obligor."

       
       

       15 USC Sec. 1640 contains a provision for civil liability for violation of the above-quoted provisions of the statute and provides:

       
       

       "(a) Except as otherwise provided in this section, any creditor who fails in connection with any consumer credit transaction to disclose to any person any information required under this chapter [ 1631 - 1634 of this title] to be

       disclosed to that person is liable to that person in an amount equal to the sum of (1) twice the amount of the finance charge in connection with the transaction except that the liability under the paragraph shall not be less than $100 nor greater than $1,000; and (2) in the case of any successful action to enforce the foregoing liability the costs of the action together with reasonable attorneys fees as determined by the court."

       
       

12. Here the notes tracked the requirements of the above-quoted provisions of the statute. The notes clearly showed thereon the total amount actually loaned plus unearned interest and other finance charges, if any. The obligation of the maker of the note under 15 USC Sec. 1601 et seq. was the same as it was on promissory notes issued prior to July 1, 1969 where the total amount of the finance charges normally was not indicated on the face of the note. At the time the notes here involved were signed the obligation evidenced thereby could be satisfied by repaying the amount financed. If the note was repaid in equal monthly installments for the full term of the note, the promisor would pay the entire principal plus the total interest earned over the life of the note.

    
    

13. On these notes issued prior to July 1, 1969 the documentary tax stamps were computed on the amount borrowed and not on the amount borrowed plus unearned interest. It is worthy of note that 15 US Sec. 1601 entitled Findings and declaration of purpose provides:

    
    

    "The Congress finds that economic stabilization would be enhanced and the competition among the various financial institutions and other firms

    engaged in the extension of consumer credit would be strengthened by the informed use of credit.

    The informed use of credit results from an awareness of the cost thereof by consumers. It is the purpose of this title [Sec. 1601 and notes 1613, 1631 - 1644, 1661 - 1665 of this title] to assume a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to

    him and avoid the uninformed use of credit."

    
    

    In implementing the provisions of the Truth in Lending Act 12, CRF 226.8 provides in pertinent part:

    
    

    "(A) General Rule. Any creditor when extending credit other than open end credit shall, in accordance with 226.6 and to the extent applicable, make the disclosures required by this section

    with respect to any transaction consummated on and after July 1, 1969. Except as provided in paragraphs (g) and (h) of this section, such disclosures shall be made before the transaction

    is consummated. At the time disclosures are made, the creditors shall furnish the customer with a duplicate of the instrument as stated by which

    the required disclosures are made and on which

    the creditor is identified. All of the disclosures shall be made together on either

    1. The note or other instrument evidencing the obligation on the same side of the page and above or adjacent to the place for the customer's signature; or

    2. One side of a separate statement which identifies the transaction."

       
       

14. Thus the creditor is given the option of making the disclosures required by the statute above quoted either on the note or on one side of a separate statement which identifies the transaction. It would appear from the order in which the alternatives are stated that the first is the preferred method.

    
    

15. If the contention of Respondent is correct the creditor will increase the cost to the obligor, in the amount of documentary tax stamps required on the note, by following the preferred method of disclosure as provided by the statute. This is so because the regulations appear to authorize the creditor the alternative method of preparing the promissory note showing only the amount financed; and, on a separate statement, identify the transaction and disclose to the obligor the total amount financed plus total interest to be paid over the full term of the mortgage if not prepaid. Such a result is not in consonance with the declaration of purpose as expressed by Congress in enacting 15 USC Sec. 1601 et seq.

    
    

16. From the foregoing it is concluded that the "indebtedness or obligation evidenced thereby" for the purpose of determining the documentary stamp taxes required by Sec. 201.08(1) F.S. on promissory notes secured by mortgages on real property is the amount financed as shown on the face of the note which does not include unearned interest. It is therefore,

RECOMMENDED that the Department of Revenue issue an order that the documentary stamp tax required on a promissory note secured by a mortgage on real property include only the amount financed and not that amount plus unearned interest.

DONE and ENTERED this 13th day of May, 1976, in Tallahassee, Florida.

K. N. AYERS, Hearing Officer Division of Administrative Hearings Room 101, Collins Building Tallahassee, Florida 32301

(904) 488-9675

COPIES FURNISHED:

Robert G. Jacobson, Esquire

FARR, FARR, HAYMANS, MOSELEY & ODOM

166 North Tamiami Drive Northeast Port Charlotte, Florida 33952

Caroline Mueller, Esquire Assistant Attorney General Department of Legal Affairs The Capitol

Tallahassee, Florida 32304

================================================================= AGENCY FINAL ORDER

=================================================================

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

PORT CHARLOTTE BANK AND TRUST COMPANY,

Petitioner,

vs. CASE NO. 76-024

DEPARTMENT OF REVENUE,

Respondent.

/

FINAL ORDER OF DEPARTMENT OF REVENUE

This cause comes before the Department of Revenue subsequent to proceedings before the Division of Administrative Hearings pursuant to Chapter 120, F.S. By Stipulation, the parties hereto agreed there is no issue of material fact and that the determination of the issues herein involved therefore becomes a question of law. Memoranda were submitted to a Hearing Officer and said Hearing Officer submitted to the Department of Revenue a Recommended Order dated May 13, 1976.

The attorneys in this case are:

Robert G. Jacobson, Esquire, FARR, FARR, HAYMANS, MOSELEY & ODOM, 166 North Tamiami Drive N.E., Port Charlotte, Florida 33952, representing Petitioner.

Caroline C. Mueller, Esquire, Assistant Attorney General, Department of Legal Affairs, The Capitol, Tallahassee, Florida 32304, representing Respondent.

Pursuant to Section 120.57(1)(b)9, F.S., the Department of Revenue, after careful analysis of the Recommended Order elects to modify the conclusions of law contained in said Recommended Order.

The Department of Revenue adopts the following as the Final Order of the Department of Revenue.

FINDINGS OF FACT

Petitioner holds promissory notes secured by mortgages from Roho, Inc., Dr. and Mrs. Spoont, and Mr. and Mrs. Frank Cole.

The note executed by Roho, Inc., is in the principal amount of $300,000 with interest at 9.25 percent payable in equal monthly payments of $3,800.33 for ten years and provides the maker has the right to repay all or any part of the loan at any time without penalty. By this note the makers promise to pay

$460,539.60 in 120 equal monthly installments of $3,800.33 commencing September 10, 1975. The note provides the amount of the note includes the proceeds of

$300,000 resulting in an amount financed of $300,000 plus a finance charge of

$160,539.60 including interest of $156,039.60 at an Annual Percentage Rate of

9.25 percent. The note further provides for date of commencement of payments, charges for late payments, costs of collection, acceleration of note at option of holder if principal installment not paid when due, and describes the security for the note. All of this information is on the same page and over the signature of the maker who acknowledges a copy of same.

Similar provisions are contained in the promissory notes executed by the Spoonts and the Coles. In the Spoonts' note the makers promise to pay

$78,837.60, payable in 240 equal monthly payments of $322.24 each and every month commencing February 10, 1974. The amount of the note includes the proceeds of $40,000 resulting in an amount financed of $40,000 plus a finance charge of $38,837.60, including interest of $38,837.60 resulting in an Annual Percentage Rate of 7.5 percent.

In the Coles' note the makers promise to pay $100,593.70 payable in 240 equal monthly payments of $407.88 commencing February 10, 1975. The amount of the note includes the proceeds of $47,000 resulting in an amount financed of

$47,000, plus a finance charge of $53,593.70 including interest of $52,888.70 resulting in an Annual Percentage Rate of 8.75 percent.

Petitioner contends that documentary stamps required on the notes should be based upon the amount financed (or loaned) while the Respondent contends that the tax required on the notes are based upon the sum following the promise to pay which includes principal, cost of financing, if any, and unearned interest for the stated term of the note.

The issue for resolution is what is the amount of the indebtedness evidenced by said instruments. Stated somewhat differently, does the indebtedness include unearned interest for the purpose of determing [sic] the required amount of documentary tax stamps to be placed on the note.

CONCLUSIONS OF LAW

The documentary stamp tax on promissory notes Is provided for in 201.08(1), F.S., which states:

On promissory notes, non-negotiable notes, written obligations to pay money, assignment of salary, wages or other compensation, made, executed, delivered, sold, transferred, or assigned in this state, and for each renewal of the same on each $100 of the indebtedness or obligation evidenced thereby, the tax shall be 15 cents on each $100 or fraction thereof.

Mortgages which incorporate the certificate

of indebtedness, not otherwise shown in separate instruments, are subject to the same tax at the same rate. (e.s.)

It is clear that the instruments in question in this case are subject to taxation pursuant to Section 201.08(1), F.S. The Petitioner does not dispute the determination that these instruments are taxable. All that is in issue here is a determination of the indebtedness or obligation evidenced by the notes for purposes of determining the required amount of tax to be placed on the notes.

The Petitioner contends that the tax is based upon the amount of money loaned. The Respondent claims that the tax is based upon the amount the maker promises to pay to the lender.

To resolve this issue, it is necessary to look at Florida case law relating to documentary stamp tax principles. It is well-settled in the State of Florida that the liability to pay the documentary stamp tax and the amount of the tax are governed by the form and face of the document. State Department of Revenue

1. McCoy Motel, Inc., 302 So.2d 440 (1 DCA Fla. 1974).

   
   

   It is also well-settled that the documentary stamp tax is said to be an excise tax on the promise to pay. Plymouth Citrus Growers Ass'n. v. Lee, 27 So.2d 415 (Fla. 1946); Choctawhatchee Electric Cooperative Inc. v. Green, 132 So.2d 556 (Fla. 1961).

   
   

   On the notes in issue here, the first line of the promissory notes states: "For value received, the undersigned promise to pay to the order of Port

   Charlotte Bank and Trust Company, Port Charlotte, Florida, the sum of ." The amounts found in the blanks on the promissory notes in question include the principal of the note plus charges and precalculated interest. These amounts were subjected to the documentary stamp tax. This was proper since these amounts represent the promise to pay amounts found on the face of the documents.

   
   

   This conclusion is supported by wording on the face of the documents. One provision provides that:

   
   

   In the event any installment of principal is not paid when it becomes due, the entire amount of this note less the amount of any rebates required by law shall become due and payable

   at the option of the holder. (e.s.)

   
   

   Obviously the "amount of this note" referred to above is not just principal but is the promise to pay amount found on the document. The use of the word "rebate" also supports the conclusion. When payments are delinquent, the entire promise to pay amount may become due and payable. There is a rebate, but the amount of the note--the promise to pay amount on the face of the document-- becomes due and payable according to the document.

   
   

   Thus, looking at the face of the documents in issue here and applying the documentary stamp tax principles, the amounts on the notes which are subject to taxation are the promise to pay amounts.

   
   

   The promise to pay amount is a "sum certain" even though it is payable in installments. The fact that the entire amount might not be paid in the event of prepayment should not be considered. This is supported by the Florida case law. In Plymouth Citrus Growers Ass'n, supra, at p. 416, the Court stated:

   
   

   The documentary stamp tax is an excise tax on the promise to pay. The terms and certainty of payment are not material.

   
   

   Under 160, American Jurisprudence 2d, Bills and Notes, it states:

   
   

   Instruments have been held non-negotiable or not to constitute bills or notes, where they contained, in addition to an order or promise to pay a sum certain (usually principal and interest), a provision for the payment of something else, the value of which is not ascertained, but depends on extrinsic evidence, or for payment of another indefinite sum, either absolutely or upon a contingency.

   
   

   Under the Commercial Code, the sum payable is a sum certain, even though it is to be paid with a stated addition if paid before or after the date fixed for payment. It is sufficient that at any time of payment the holder is able to determine the amount then payable from the

   instrument itself with any necessary computation, but the computation must be one which can be

   made from the instrument itself without reference to any outside source.

   The Uniform Commercial Code, Section 673.106, Florida Statutes, defines Sum Certain as:

   
   

   1. The sum payable is a sum certain even though it is to be paid: (a) With stated interest or by stated installments; or (b) With stated different rates of interest before and after default or a Specified date; or (c) With a stated discount or addition if paid before or after the date fixed for payment;

or (d) With exchange or less exchange, whether at a fixed rate or at the current rate; or (e) With costs of collection or an attorney's fee or both upon default. (e.s.)

The Florida law dealing with documentary stamp taxation on bonds, taxes the face value of the bonds. Florida law is based on the federal case law dealing with the former federal documentary stamp tax. See Choctawhatchee Electric Cooperative, Inc. v. Green, 132 So.2d 556 (Fla. 1961). The federal courts have consistently held that the face value of a bond is the value at maturity. In Willcuts v. Investors' Syndicate, 57 .2d 811, the Court stated:

The fact that there was not an absolute unconditional liability for the full maturity value at the time of issuing the certificate is Immaterial. There was a conditional obligation to pay the full amount at maturity. The statute makes no distinction for taxing purposes between absolute and conditional obligations to pay; the latter as well as the former are taxed . . . We hold that the face value of the certificate in question was the maturity value for purposes of taxation under the Statute, and that the tax was properly assessed and collected.

In Matter v. Bankers Mortgage Co. of Topeka, Kan., 93 F.2d 778, the Court stated:

The trustee argues that, if the obligations are taxable under the terms of the statute, the tax should be computed upon the amount paid upon such securities at the time of their issuance. But the statute does not so provide. It provides in plain language that the tax shall be computed on the face value of such securities. For purposes of taxation under the statute, the face value at maturity is the basis of computation

Thus, it is concluded from the law applicable to documentary stamp taxation in Florida that the sum certain on a document or the face value of a document is the amount subject to taxation.

There are other ways to handle promissory note transactions. On the face of the note the promise to pay amount can be just the principal amount plus

interest accrued each year. On the face of the note, the Precomputed interest may never become due and payable.

This is not the case here. The taxpayer chose to handle this transaction as it did. Undoubtedly there are benefits which are obtained by the use of this method. As explained in State Department of Revenue v. McCoy Motel, Inc., 302 So.2d 440 (1 DCA Fla. 1974), the Court should not be concerned with alternative methods by which the taxpayer could have handled a transaction. The Court must look at the way the taxpayer did handle the transaction and in documentary stamp situations, the Court must look to the document itself. As stated in McCoy, supra, at page 443: We may not concern ourselves with what might have been had appellee handled this transaction in a different way. Appellee evidently had a reason for handling the transaction as it did. The Supreme Court in response to a similar contention in North American Company v. Green, Fla., 120 So.2d 603, said:

"We are not privileged to make the taxability of a transaction dependent upon any consideration of some alternative procedure which might not have been taxable."

The Department of Revenue has consistently applied the documentary stamp tax on the promise to pay amount and has made clear its position in regard to this matter. The Federal Truth in Lending Law, 15 U.S.C. 160 et. seq., requires that certain items be explained on the face of a document. To reiterate the Department's position, the Department of Revenue issued Bulletin No. DOR 74-6 on June 25, 1974, to clarify the taxation of documents which comply with the Truth in Lending Law. This Bulletin states:

If the 'promise to pay' covers the 'Amount Financed' (principal amount of loan) plus interest at a specified rate and, upon default, the amount financed plus accrued interest becomes due and payable, only the amount financed requires tax under Section 201.08, Florida Statutes.

If the 'promise to pay' covers the 'Total of Payments', which includes Pre-computed interest, tax is due on the 'Total of payments' under Section 201.08, Florida Statutes, at the time the note is executed even though the amount paid to the lender is reduced by accelerated payments or the amount recoverable by the lender upon

default is reduced by any rebates required by law.

From the foregoing it is concluded that the "indebtedness or obligation evidenced thereby" for the purposes of determining the documentary stamp taxes required by Section 201.08(1), Florida Statutes, on promissory notes is the promise to pay amount which in the instant case includes the amount of principal, precalculated interest and finance charges.

The penalties in the instant case were properly applied pursuant to Section 201.17(2), Florida Statutes. The Constitutionality of this statute were recently upheld in Dominion Land and Title Corporation v. Department of Revenue,

320 So.2d 813 (Fla. 1975). It is therefore,

ORDERED that the documentary stamp tax assessment by the Department of Revenue in the instant case he upheld.

CERTIFICATION

I CERTIFY that the foregoing is the Final Order of the Department of Revenue adopted by the Governor and Cabinet on

J. ED STRAUGHN, Executive Director State of Florida Dept. of Revenue Room 102, Carlton Building Tallahassee, Florida 32304

Dates this * day of August, 1976.

* NOTE: This document was filed with DOAH undated. On or about 8/31/76 has been entered in the ACCESS Index as the FO Issue Date.

Docket for Case No: 76-000024

Orders for Case No: 76-000024