) CASE NO. 83-910
vs. )
Respondent. )
By Petition For Formal Hearing forwarded to the Division of Administrative Hearings by the Department of Revenue letter dated March 28, 1983, Timber River, Inc., Petitioner, by and through its attorney, Stephen A. Scott, Esquire, contests the Department of Revenue's determination that the deed conveying certain real property in Suwannee County, Florida, to a corporation owned by the grantors of the property in exchange for stock in the corporation is subject to documentary stamp taxes based on the face amount of all existing mortgages.
After this cause was scheduled for hearing, the parties waived a formal hearing and submitted the case to the Hearing Officer upon stipulated facts and memoranda of law for the Hearing Officer to prepare this Recommended Order. The facts below are limited to those so stipulated. Those stipulations contested by Respondent on grounds of relevancy are also included. Their relevancy is determined by the conclusions of law reached.
Each party submitted a memorandum of law which has been considered in the conclusions below. In its memorandum of law Petitioner appears to contend that it is entitled to a rebate for excess documentary stamp taxes paid on the original mortgage document given to the mortgagee; however, that issue was neither raised by the petition for hearing nor was the proper party, viz., the Comptroller, joined as a party to these proceedings. Accordingly, that non- issue will not be given consideration in this Recommended Order.
On or about August 15, 1979, Mead Timber Company and Scott Timber Company conveyed certain property located in Suwannee County, Florida (hereinafter referred to as the "Property"), to Tommy M. Faircloth, Sam L. Rudd, and Alvin C. Futch (hereinafter referred to as the "Original Conveyance").
The warranty deed for the Original Conveyance was recorded on August 15, 1979, at Official Records Book 187, page 444, of the Public Records of Suwannee County, Florida.
In connection with said Original Conveyance the closing statement therefor showed a purchase price of Two Million Four Hundred Thousand Dollars ($2,400,000.00), said amount being the actual amount of the purchase and sale.
In connection with the deed for said Original Conveyance, the closing statement indicated that Seven Thousand Two Hundred Dollars ($7,200.00) of documentary stamp taxes were paid based upon Thirty Cents ($.30) per One Hundred Dollars ($100.00) of consideration, and said Seven Thousand Two Hundred Dollars ($7,200.00) for documentary stamps was in fact paid.
In connection with said Original Conveyance, a first mortgage and security agreement was given by Tommy M. Faircloth, Sam L. Rudd, and Alvin C. Futch, to the Mutual Life Insurance Company of New York, said mortgage dated and filed August 15, 1979, at Official Records Book 187, page 451, of the Public Records of Suwannee County, Florida (hereinafter referred to as "First Mortgage"). The mortgage secured a note with a face amount of Three Million Dollars ($3,000,000.00) dated August 15, 1979.
The First Mortgage showed a face amount of Three Million Dollars ($3,000,000.00).
In connection with the First Mortgage, pursuant to the loan commitment dated April 13, 1979, only One Million Eight Hundred Thousand Dollars ($1,800,000.00) was disbursed thereunder. The parties thereto anticipated that an additional One Million Two Hundred Thousand Dollars ($1,200,000.00) would be disbursed at some future date, subject to conditions precedent that (a) the Borrowers place all of the Property encumbered thereby into cultivation, after having first cleared and prepared same for cultivation, and (b) that the Borrowers install twenty (20) 12-inch irrigation wells which would be appropriately drilled and equipped, and (c) that the Borrowers install twenty
(20) automatic center-pivot irrigation systems thereon. The aforementioned conditions precedent have not been accomplished to date.
The time period during which the conditions precedent set forth in paragraph seven (7) above could be completed, and during which time period the Borrowers could require the First Mortgage lender to make the additional disbursement under the First Mortgage, has expired, and the Borrowers have no further legal right to require any additional disbursements under the First Mortgage.
The Petitioner has waived any right to seek or obtain the additional One Million Two Hundred Thousand Dollars ($1,200,000.00) from the holder of the First Mortgage.
In connection with the First Mortgage for the Original Conveyance, the Borrowers paid Four Thousand Five Hundred Dollars ($4,500.00) as documentary stamp taxes on the promissory note secured by the First Mortgage, and paid Six Thousand ($6,000.00) in intangible taxes.
In connection with the Original Conveyance, a second mortgage was given by Tommy M. Faircloth, Sam L. Rudd and Alvin C. Futch to Mead Timber Company and Scott Timber Company in the original principal sum of Three Hundred Thousand Dollars ($300,000.00), said mortgage dated and filed August 15, 1979, at Official Records Book 187, page 461, of the Public Records of Suwannee County, Florida (hereinafter referred to as the "Second Mortgage").
On or about October 1, 1980, Tommy M. Faircloth, Sam L. Rudd, and Alvin C. Futch conveyed a portion of the Property to Timber River, Inc., a Florida corporation, by warranty deed which instrument was filed October 2,
1980, at Official Records Book 203, page 790, of the Public Records of Suwannee County, Florida (hereinafter referred to as the "Second Conveyance").
In connection with the deed for said Second Conveyance, only minimum documentary stamps in the amount of Forty Cents ($.40) were attached and affixed thereto.
The Respondent herein has alleged that, since the Second Conveyance was subject to both the First Mortgage and the Second Mortgage, the taxable consideration should be Three Million Three Hundred Thousand Dollars ($3,300,000.00)(the face amount of the two [2] mortgages combined), and therefore the documentary stamps which should have been affixed to the deed would be Thirteen Thousand Two Hundred Dollars ($13,200.00), leaving an additional tax due in the amount of Thirteen Thousand One Hundred Ninety-nine and Sixty One-hundredths Dollars ($13,199.60).
Timber River, Inc., the grantee of the Second Conveyance, is a corporation which was wholly owned by Tommy M. Faircloth, Sam L. Rudd, and Alvin C. Futch in equal proportions at the time of the Second Conveyance.
Timber River, Inc., in consideration of Tommy M. Faircloth, Sam L. Rudd, and Alvin C. Futch conveying to said corporation the property described in the deed of the Second Conveyance, issued its common stock to said individuals in equal proportions.
Timber River, Inc., took the Property subject to the First Mortgage and second Mortgage, and did not assume or agree to assume either the First Mortgage or the second Mortgage.
Tommy M. Faircloth, Sam L. Rudd, and Alvin C. Futch, individually, have at all times been or are presently liable to the mortgagee, Mutual Life Insurance Company of New York, and are personally responsible for making all payments under said mortgage. All payments under said mortgage both prior to and subsequent to the Second Conveyance have been made by Tommy M. Faircloth, Sam L. Rudd, and Alvin C. Futch, individually.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction over the parties to, and the subject matter of, these proceedings.
Section 201.02, Florida Statutes (1983), is the basis for the requirement that documentary stamp taxes be placed on instruments relating to land and provides in pertinent part:
On deeds, instruments, or writings whereby lands, tenements, or other realty, or any interest therein, shall be granted, assigned,
transferred, or otherwise conveyed to, or invested in, the purchaser, or
any other person by his direction, on each $100 of the consideration therefor the tax shall be 45 cents. When the full amount of the con- sideration for the execution, assignment, transfer, or convey-
ance is not shown in the face of such deed, instrument, document, or writing, the tax shall be
at the rate of 45 cents for each $100 or fractional part
thereof of the consideration therefore.
The transaction on which the issue here arises is the deed of the property from the three grantors to Timber River, Inc., in exchange for stock in Timber River, Inc. The transaction was simply a capitalization of Timber River, Inc., by the investors therein. The sole question at issue here is the consideration given for the real property conveyed.
The first requirement for the taxation of an instrument, in the nature of a deed, under Section 201.01 is that such instruments convey title to the lands or water or an interest therein to a purchaser; and the second is that a consideration measured in United States currency be given therefor. If the instrument affecting a parcel of real property has the effect of transferring such property from one legal entity to another, such an instrument would appear to be within the purview of Section 201.01, Florida Statutes, and subject to taxation if there is a taxable consideration passing from grantor to grantee. AGO 063-18. Neither "monetary value," "value," nor "market value" can be substituted for the word "consideration" in Section 201.01. Culbreath v. Reid, 65 So.2d 556, 557 (Fla. 1953).
Several cases involving documentary stamp tax on transfers of real property between stockholders and the corporation in which they own stock have been before the courts. Florida Department of Revenue v. De Maria, 338 So.2d 838 (Fla. 1976) involved the transfer of property subject to a mortgage from a corporation to its sole shareholder by quit claim deed where the shareholder did not assume the mortgage. The courts below held the instrument accomplishing this transfer was not subject to documentary stamp tax since no consideration flowed to the seller, citing State ex rel. Palmer-Florida Corporation v.
Green, 88 So.2d 493 (Fla. 1956) as authority. Palmer-Florida Corporation, supra, involved a conveyance of unencumbered real property from a corporation to its shareholders. In reversing the lower courts in De Maria, the court held the transfer of the property carried with it the shifting of the economic burden of paying the purchase money mortgage from the grantor to the grantee. Even though the grantee did not assume the mortgage, he made the mortgage payments subsequent to the conveyance of the property. A benefit to the grantor, a commensurate liability to the grantee, and hence, consideration, flowed even though the grantee did not assume the mortgage. As stated in Kendall House Apartments v. Florida Department of Revenue, 245 So.2d 21 (Fla. 1971), and repeated in De Maria at p. 840:
...It is an economic fact that persons who acquire property 'subject to' a mortgage normally paid the indebtedness represented by the mortgage in order to pre- vent the loss of the property
to the same extent as those persons acquiring property assuming and agreeing to pay the mortgage.
Petitioner distinguishes the facts here from De Maria in that this grantee. Timber River, Inc., did not make the mortgage payments but these payments were continued to be made by the grantors. This is a fact stipulated to by the parties and is not subject to question.
A case with facts somewhat analogous to those here involved is Gruman
v. State of Florida, Department of Revenue, 379 So.2d 1313 (Fla. 2nd DCA 1980). There, Gruman's wholly owned corporation A built an apartment complex on which he and his wife guaranteed a $1.85 million mortgage. Corporation A became insolvent and transferred the property to Gruman, who transferred it to another wholly owned corporation, B. Corporation B never made any payments on the mortgage but instead went into bankruptcy almost immediately. The mortgagee foreclosed on the property and obtained a deficiency judgment against Gruman and his wife for over $500,000. Under these facts the court held the conveyances from A to Gruman and from Gruman to B were without consideration and documentary tax stamps were not owed on these conveyances. The differences between the facts here involved and those in Gruman, supra, are that here there were three grantors instead of one and the grantee is presumably solvent and able to make the mortgage payments. No evidence was submitted as to how these mortgage payments made on behalf of the Petitioner were treated by the shareholders. It could have been additional contributions to capital of Petitioner or as a loan to Petitioner. Since the corporation is a separate entity, these mortgage payments made on its behalf by the shareholders are not business expenses for income tax purposes of the shareholders (unless, of course, the Petitioner is a subchapter S corporation under the Internal Revenue Code). Furthermore, in Gruman, the property involved was worth less than the balance due on the mortgage encumbering it and the transferee became insolvent immediately after the transfer was accomplished. No evidence was presented that such is true in this case.
A case with facts closer than those here involved is Andean Investment Company v. State of Florida, Department of Revenue, 370 So.2d 377 (Fla. 4th DCA 1979). In Andean several property owners conveyed real property to a general partnership of which they were members. When these properties were transferred to the general partnership, they were taken subject to the mortgage but minimal documentary stamp taxes were placed on the deeds. The court held this constituted a shifting, of the burden represented by the mortgage, constituted consideration for the conveyance, and documentary stamp taxes computed on the unpaid balance due on the mortgage debt were due. Accord, Abramson v. Straughn,
348 So.2d 1172 (Fla. 4th DCA 1977). In Abramson, the court stated the rationale of De Maria, supra, and Kendall House Apartments, supra, to be:
That where the burden of making the mortgage payment has shifted from the grantor to the grantee, consideration is given by the grantee. The Supreme Court in Florida Department of Revenue
v. De Maria, supra, referred to this change in financial res- ponsibility as "... shifting
of the economic burden and benefit which supplies the consideration required by
Section 201.02, Florida Statutes" at 840.
Petitioner here took the property subject to the mortgage and, by implication, agreed to make the payments thereon when due. The fact that up to the time of this hearing Petitioner had not accumulated sufficient operating capital to make these mortgage payments does not change the fact that if these mortgage payments are not made Petitioner is the entity against whom foreclosure action will be brought and is the only entity that can lose the property in foreclosure proceedings. The shareholders, who are personally liable on the note secured by the mortgage will only be liable if, on foreclosure and sale, the property sells for less than the existing mortgages. Accordingly, consideration flowed between the parties when the deed conveying the property here involved to Petitioner was executed and documentary tax stamps based on the existing mortgages were due on such conveyance.
Respondent contends that the documentary stamp taxes are to be calculated on the face amounts of the existing mortgages and one cannot look behind the face amount shown on the documents. For this he cites Choctowhatchee Electric Corporation, Inc. v. Green, 132 So.2d 556 (Fla. 1961). The issue in that case, although the opinions stated they would follow the federal rule on documentary stamp taxes that the tax is imposed on the document; that both liability for the tax as well as the amount of the tax must be determined by reference to the document only; and that proof of extrinsic facts to establish liability for the tax or its amount will not be countenanced, involved liability for documentary stamp tax on promissory notes made by the taxpayer to the United States. The amount of the promissory note owed and secured by a mortgage was not an issue in that case. Even under the so-called Choctowhatchee Rule, the face of the note was looked at. By looking at the promissory note secured by the First Mortgage here under consideration, it is clear that although the note authorized a total of $3 million to be borrowed by the purchasers, $1.2 million of that was intended as a future advance conditioned upon the grantee's clearing the land and installing irrigation equipment.
To say that the documentary stamp tax is based solely of the face amount shown on the document certainly goes counter to the position taken by Respondent on documentary stamp taxes due on deeds involving real property which recite the property is conveyed for "Ten dollars and other good and valuable consideration." It is also contra to the specific provisions of Section 201.02, Florida Statutes, that provides documentary stamp taxes shall be based on the "consideration" for the conveyance. All of the cases above-cited which involve consideration based upon a mortgage, to which the property conveyed was subject, contemplates taxes based on the outstanding mortgage balance. Extrinsic evidence to establish the quantum of consideration upon which the tax is based is admissible in such proceedings. This should be evident from the cases above- cited which hold that transfer of unencumbered real property between shareholder and corporation is not a taxable transaction while transfer of encumbered property is a taxable transaction. The only difference between these cases is the consideration comprised of the economic burden of taking the property subject to the mortgage. The unpaid balance due on the note secured by that mortgage is the consideration upon which the documentary stamp tax is based and this cannot always be shown from the note itself. For example, if the entity conveying the property subject to a mortgage has been paying on this mortgage for many years, the balance due will be much lower than the face amount of the note secured by the mortgage, and the documentary stamp tax is to be based on the outstanding balance owed on the note secured by the mortgage. Accord, Department of Revenue v. Dix, 362 So.2d 420 (Fla. 1st DCA 1978) which states at p. 422:
The amount of mortgage indebted- ness assumed by an assignee clearly would be a reasonably determinable consideration and could support
a documentary stamp tax. When there is a fee conveyance subject to a mortgage, as in Kendall House Apartments, Inc. v. Department of Revenue, 245 So.2d 221 (Fla.
1971), there is a reasonably determinable consideration since the fee purchaser must pay the entire outstanding mortgage to protect his property.
The outstanding mortgages on the property are $2,100,000 comprised of
51.8 million first mortgage and $300,000 purchase money second mortgage. Accordingly, the documentary stamp taxes on the conveyance should be computed on the basis of $2.1 million and not on $3.3 million as contended by Respondent.
From the foregoing it is concluded that the transfer of the property here involved from Tommy M. Faircloth, Sam L. Rudd, and Alvin C. Futch to Petitioner subject to first and second mortgages on the property was a transaction subject to documentary stamp taxes computed on the outstanding mortgages at the time of the conveyance which totaled $2,100,000. It is
RECOMMENDED that a Final Order be issued requiring Timber River, Inc., to pay documentary stamp taxes on the conveyances to it represented by warranty deed filed October 2, 1985, based on the mortgages encumbering the property in the amount of $2,100,000.
ENTERED this 19th day of April, 1985, at Tallahassee, Florida.
K. N. AYERS Hearing Officer
Filed with the Clerk of the Division of Administrative Hearings this 19th day of April, 1985.
Stephen A. Scott, Esquire Post Office Box 2218 Gainesville, Florida 32602
