STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

WISCONSIN REAL ESTATE )

INVESTMENT TRUST, )

)

Petitioner, )

)

vs. ) CASE NO. 76-1769

) STATE OF FLORIDA, DEPARTMENT ) OF REVENUE, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, a hearing was held before Charles C. Adams, a hearing officer with the Division of Administrative Hearings, at Room 16, 2nd Floor, State Office Building, 941 West Morse Boulevard, Winter Park, Florida at 2:00 P.M., September 19, 1977.

APPEARANCES

For Petitioner: R. Lee Bennett, Esquire

Lowndes, Peirsol, Drosdick & Doster, P.A.

First Federal Building, Suite 433 Post Office Box 2809

Orlando, Florida 32802

For Respondent: Edwin J. Stacker, Esquire

Assistant Attorney General Department of Legal Affairs The Capitol

Tallahassee, Florida 32304 ISSUES

1. Whether or not the State of Florida, Department of Revenue, is entitled to collect documentary surtax pursuant to 201.17, F.S. on the portion of the amounts reflected in the warranty deed from James E. Russell, Jr. as trustee, to Wisconsin Real Estate Investment Trust dated April 11, 1975, and recorded May 20, 1975 in Official Records Book 2620, Page 1812, Public Records of Orange County, Florida; the portion spoken of being for "second" mortgages to the Petitioner herein, said mortgages being in the total amount of $865,854.00.

   
   

2. If the documentary surtax is owed, what penalty should be assessed against the Petitioner under the terms of 201.17, F.S.

FINDINGS OF FACT

1. At the beginning of the hearing in this cause, it was stipulated and agreed to that certain pleadings and exhibits would constitute the factual basis for consideration of the case. Specifically, the parties agreed that the First Amended Petition and its parts that were admitted by the Respondent; together with interrogatories propounded by the Respondent to the Petitioner and the answers thereto; and Exhibits A and C attached to the First Amended Petition; would be the underlying facts that could be examined in arriving at a statement of the facts, and ultimate conclusions of law. A further refinement in the stipulation and agreement of the parties was their acceptance of the stated amount of $952.05 in surtax owed, if it were concluded that any amount of surtax was properly assessed. Finally, the parties agreed that copies of the aforementioned Exhibits A and C could be utilized in deliberating this case. (Copies of the First Amended Petition, Answer to that Petition, Interrogatories propounded by the Respondent and Answers provided by the Petitioner, and Exhibits A and C attached to the First Amended Petition, are hereby made a part of the record herein and forwarded to the agency head in lieu of a transcript.)

   
   

2. The Petitioner in this action is Wisconsin Real Estate Investment Trust, whose address is Marine Plaza, 111 East Wisconsin Avenue, Milwaukee, Wisconsin 53202.

   
   

3. On or about April 11, 1975 the Petitioner was a grantee in the certain Warranty Deed from James E. Russell, Jr., as trustee to Wisconsin Real Estate Investment Trust, dated April 11, 1975, and recorded May 20, 1975, in Official Records Book 2620, Page 1812, Public Records of Orange County, Florida (hereinafter referred to as the "Warranty Deed"). A copy of the said Warranty Deed is a part of the First Amended Petition found as Exhibit A.

   
   

4. The conveyance of the property as set forth in the Warranty Deed was subject to certain mortgages described in detail upon Exhibit A attached to the Warranty Deed and identified briefly as follows, to wit:

   
   

   1. A first mortgage to Prudential Insurance Company of America in the amount of three million three hundred thousand dollars ($3,300,000);

   2. Four "Second" mortgages to the Petitioner herein, said mortgages being in the total amount of eight hundred sixty five thousand, eight hundred fifty four dollars ($865,854);

   3. A "third" mortgage granted by Orlando Quadrant Development Limited to United Associates, Inc. in the amount of five hundred thousand dollars ($500,000).

5. Exhibit A to the Warranty Deed also contained the following provision: "It is the intent of the Grantor and the

   Grantee that this conveyance shall not cause a

   merger of the mortgages held by the Grantee which are described above, and the fee simple title of the Grantee received hereby in that said mortgage shall remain in full force and effect and shall continue to be a lien on the property."

6. Documentary stamps were paid with respect to the full amount of the purchase price in the amount of four million, six hundred sixty five thousand, eight hundred fifty four dollars ($4,665,854.) and minimum stamps for surtax in the amount of fifty five cents ($.55) were paid.

   
   

7. On or about August 20, 1975, the Respondent delivered to Petitioner a form letter styled "Request for Information and Response" requesting the reason why minimum surtax was paid. Petitioner replied that minimum surtax was paid because the transaction constituted a sale and not a deed in lieu of foreclosure. A copy of the "Request for Information and Response" was attached as Exhibit B to the First Amended Petition.

   
   

8. On or about November 20, 1975, the Respondent sent to Petitioner a "Proposed Notice of Assessment" informing Petitioner of a proposed imposition of tax in the amount of nine hundred fifty two and 05/100 dollars ($952.05) and a penalty in the amount of nine hundred fifty two and 05/100 dollars ($952.05), for a total assessment of one thousand nine hundred four and 10/100 dollars ($1,904.10). A copy of the "Proposed Notice of Assessment" was attached to the First Amended Petition as Exhibit C.

   
   

9. In response to the Proposed Notice, the Petitioner, through counsel, wrote to Respondent on December 11, 1975, questioning the necessity for surtax charge under the present status of Florida Law. In that letter there was a formal request for conference within thirty (30) days of the proposed assessment to discuss the assessment before it became final. A copy of the letter of December 11, 1975 was Exhibit D to the First Amended Petition.

   
   

10. On December 24, 1975, the Petitioner wrote the Respondent with respect to a telephone conference that was held with Respondent wherein the Respondent indicated there was a legal authority for imposition of surtax against Petitioner. The Respondent sent the information to Petitioner under cover of a letter dated January 2, 1976, and the Petitioner responded to said letter by letter dated January 9, 1976 wherein the position of the Petitioner with respect to the imposition of the surtax was set forth in detail. A copy of the Petitioner's letter of January 9, 1976, was made Exhibit E to the First Amended Petition.

    
    

11. Subsequent to the letter of January 9, 1976, Respondent requested by telephone that Petitioner provide Respondent with a copy of the Declaration of Trust of Petitioner, which said Declaration of Trust was sent to Respondent under cover letter dated June 7, 1976.

    
    

12. On September 8, 1976, Respondent sent Petitioner a notice that a Tax Warrant and Execution had been prepared and would be filed. A copy of said letter of September 8, 1976 was made Exhibit F to the First Amended Petition.

    
    

13. Informal efforts to resolve the dispute were not effective and this led to a formal hearing.

    
    

14. A closer look at the events involved in the conveyance of the Warranty Deed points out that the first mortgage held by Prudential Life Insurance Company of America was in default at that time, and the institution of foreclosure proceedings was eminent. The Grantee, Petitioner, held three mortgages subordinate to the first mortgage held by Prudential Life Insurance Company, and it was felt that the conveyance from Grantor to Grantee was the best method of protecting Grantee's interest. The conveyance did not provide for merger of the ownership interest and the mortgage interest in favor of the

    Grantee, on the face of the Warranty Deed. In fact, the Warranty Deed disclaims such merger, as stated before.

    
    

15. There was no agreement either in writing or verbally between the Grantor and the Grantee with respect to payment or non-payment of the second mortgages held by the Grantee, subsequent to the transfer. None of the second mortgages held by the Grantee, Petitioner, have been satisfied of record at the time of conveyance or since that time. There has been no payment of principal and interest on the second mortgages in question since the conveyance under the Warranty Deed.

    
    

16. The Petitioner advances its argument in opposition to the documentary surtax premised on the assertion that such tax does not apply to amounts of existing mortgages on the real estate sold, and therefore no surtax should be levied, because the four second mortgages at issue are still in existence. In stating this position the Petitioner refers to 201.021, F.S. which states:

    
    

    "(1) A documentary surtax, in addition to the tax levied in s. 201.02, is levied on those documents taxed by s. 201.02 at the rate of 55 cents per $500 of the consideration paid; provided, that when real estate is sold, the consideration, for purposes of this tax, shall not include amounts of existing mortgages on the real estate sold. If the full amount of the consideration is not shown on the face of the document, then the tax shall be at the rate of 55 cents on each $500 or fractional part thereof of the consideration."

    
    

    The Petitioner also makes reference to Rule 12A-4.12(4)(e) pertaining to the definition of consideration as found in 201.021, F.S. The pertinent provision of that rule says:

    
    

    "For Consideration - Surtax: The term "consideration" under 201.021, F.S., includes but is not limited to:

    (e) Conveyance where outstanding mortgage debt, lien or encumbrance is cancelled, satisfied,

    or otherwise rendered unenforceable by the conveyance."

    
    

17. According to the Petitioner the four subject mortgages are not cancelled, satisfied, or otherwise rendered unenforceable by the conveyance, and consequently there is no taxable "consideration". They rely on the aforementioned language of the Warranty Deed which disclaims the merger of the mortgage debt with the equity of redemption when the conveyance was made. Moreover, under the Petitioner's argument, because it has stated its intention not to have a merger that stated intention should control and no merger should apply. For this proposition the Petitioner cites the case of Friedman v. Pohnl,

    143 So.2d 690, (3 DCA Fla. 1962). Within the language of the case is reference to the case of Jackson v. Relf, 26 Fla. 465, 8 So. 184 (Fla. 1890). The Jackson case, supra, states that it is the intention of the person in whom the debt and equity of redemption are united that determines if there is a merger of the mortgage debt and equity of redemption, or if the mortgage debt continues to be in force and effect. The Petitioner also argues that the reason it elected not to merge the debt claim and equity of redemption, was to protect its priority

    position under the second mortgages over the third mortgage holder in the case of any sale to any third party and assumption of a second mortgage by a third party or in the case of any formal foreclosure.

    
    

18. The Respondent counters the Petitioner's argument by claiming that the four subject second mortgages have been extinguished, thereby entitling the Respondent to impose a documentary surtax under the authority of 201.021(1),

    F.S. and Rule 12A-4.12(4)(e) F.A.C. The Respondent feels that you may look behind the disclaimer statement found in the Warranty Deed and by the facts of the conveyance determine that there is a merger for purposes of taxation. The Respondent relies upon a series of case decisions in arriving at this position. The first two cases Gay v. Inter-County Tel & Tel. Co., 60 So.2d 22 (Fla. 1952) and Choctawhatchee Electric Corp. v. Green, 132 So.2d 556 (Fla. 1961), it argues, stand for the proposition that the Documentary Stamp Tax Act in Florida is similar to the Federal Act 26 U.S.C.A. 1800 et. seq. and the same construction given to the federal tax cases in the federal courts, may be given to the Florida documentary stamp tax cases in the Florida cases. Using that theory as a basis for the persuasiveness of the federal authority, the Petitioner then cites the cases of Mutual Life Ins. Co. of New York v. United States, 110 F Supp. 606 (1953) and Railroad Federal Sav. & Loan Ass'n. v. United States, 135 F.2d 290. According to the Respondent, the two federal cases were sufficiently close in their facts to be applicable to the case at bar. Furthermore, since these cases required the payment of federal documentary tax, the Respondent believes that the rationale used in those cases would sustain a claim for documentary surtax and penalty in the case sub judice.

    
    

19. An examination of the two federal cases shows them to be distinguishable in their facts. Mutual Life, supra, is distinguishable for two reasons. The first reason being that certain mortgage debts spoken of in that case had clauses indicating that the mortgage on the property was not to merge with the fee and that the mortgage would remain with the property notwithstanding conveyance; however, in all those cases a covenant had been given not to sue on the mortgage debt, which extinguished the mortgage debt. No such covenant has been given in the case at bar, and consequently the consideration, constituted of the extinguishment found in Mutual Life, supra, is not found in the case at bar. There is a second distinguishing factor between the Mutual Life case and the present case. That pertains to the fact that the action in Mutual Life involved the laws of the State of New York, which were being applied to a different set of facts. Under the New York Law, consideration was also found to exist notwithstanding a clause which disclaimed any merger of the fee and mortgage. This situation pertained to five mortgage cases in which no covenant not to sue had been given. The New York Law, according to the opinion in Mutual Life, called for the extinguishment of the mortgages in those five cases, due to the statutory statement which prohibited deficiency judgments on the mortgage indebtedness, because the fair market value of the property exceeded the debt claim. Therefore under the statement of the case, the mortgage indebtedness was extinguished as a matter of law, by transferring the interest in the fee to the mortgagee. A tax was placed on that transfer, based upon the extinguishment of the mortgage debt as consideration. The law in Florida does not prohibit a foreclosure suit by the second mortgage holder in the way set forth in the New York Law. In addition, the five mortgages in the Mutual Life case were not surrounded by first and third mortgages as is the case herein. The existence of the first and third mortgages, is a legitimate reason to maintain the second mortgages held by the Petitioner, as a protection against the other mortgagees.

20. The other federal case cited by the Petitioner is the Railroad Federal case, supra. This case involved a deed in lieu of foreclosure and the imposition of a tax on the balance of principal and accrued interest due on the mortgages plus any cash amount paid. These mortgages involved in the Railroad Federal case were later cancelled by the resale or the subsequent purchase subject to the mortgages. The deed also contained an agreement not to seek a deficiency judgment on the part of the mortgagee which made it clear that the mortgagee was taking the property in full satisfaction of the mortgage indebtedness. In fact the mortgagee did not seek a deficiency judgment, nor was any further interest paid or demanded. This is distinguishable from the case at bar, in that the clear intent of the mortgagor and mortgagee herein is to keep active the second mortgages.

    
    

21. The Respondent cited several administrative cases namely: Friedman v. State of Florida, Department of Revenue, Case No. 75-1304: Hutner v. State of Florida, Department of Revenue, Case No. 75-1771; and Atico Mortgage Investors

    v. State of Florida, Department of Revenue, Case No 77-1124. Respondent cited too, Opinion of the Attorney General, 059-203. Without discussing those administrative cases and the Attorney General's Opinion, they are all distinguishable in their facts and would not appear to have application to the case at bar.

    
    

22. Based on an analysis of the evidential facts and the argument of the parties, the position of the Petitioner is well founded and the documentary surtax and penalty should not be paid.

    
    

    CONCLUSIONS OF LAW

    
    

23. The Division of Administrative Hearings has jurisdiction in this cause.

    
    

24. Based upon the consideration of the facts and the arguments of the parties, it is concluded as a matter of law, that the Petitioner does not owe documentary surtax under 201.021(1) nor penalties associated under 201.17, F.S.

RECOMMENDATION

It is recommended that the subject assessment of documentary surtax and penalty be set aside.

DONE and ENTERED this 6th day of October, 1977, in Tallahassee, Florida.

CHARLES C. ADAMS, Hearing Officer Division of Administrative Hearings Room 530, Carlton Building Tallahassee, Florida 32304

(904) 488-9675

COPIES FURNISHED:

R. Lee Bennett, Esquire Lowndes, Peirsol, Drosdick

& Doster, P.A.

Suite 443, First Federal Building

Post Office Box 2809 Orlando, Florida 32802

Edwin J. Stacker, Esquire Assistant Attorney General Department of Legal Affairs The Capitol

Tallahassee, Florida 32304

John D. Moriarty, Esquire Department of Revenue Division of Administration Carlton Building Tallahassee, Florida 32304

Docket for Case No: 76-001769

Orders for Case No: 76-001769