Kuro and Muben-Lamar in the eye of the beholder?

• Author: Barton, Bernard A.
• Position: Transfer of interest in real property - Tax law - Florida

Is a transfer of an unencumbered interest in real property to a newly created or existing artificial person subject to the deed tax? If so, what is the consideration for the transfer? Two recent cases address this issue and, in the authors' minds, cause some doubt about the application of the deed tax in some instances.

Documentary Stamp Tax on Deeds

Florida imposes a documentary stamp tax ("deed tax") on deeds and other instruments conveying an interest in Florida real property. (1) The tax is imposed at the rate of $0.70 per $100 or part thereof (2) of consideration paid for the real property interest. (3) Consideration for this purpose includes money, debt encumbering the property, and consideration in the form of property other than money. (4)

The deed tax dates back to its enactment in 1931 (5) but may only have gained significance as the rates increased and the frequency of conveyances also increased. The revenues to the state coffers from the documentary stamp (6) tax now approximate $1.3 billion (7) annually. To the average Florida taxpayer, the deed tax burden in a typical transaction is ordinarily just a blip on a closing statement. The tax is $2,100 on the purchase of a $300,000 home, for example. In a commercial real estate transaction of any significance, however, the deed tax can be significant. Sophisticated real estate advisors typically estimate the tax on multimillion-dollar transactions by using a $7,000 per $1 million calculation to estimate the tax liability. Thus, in a land transaction wherein a lot and building are sold for $100,000,000, a sophisticated participant knows intuitively that the deed tax is $700,000.

Originally patterned after the federal documentary stamp tax, (8) the Florida and federal tax went their separate ways in 1966 when the federal tax was repealed (9) Because of its lineage, however, the Florida tax has been interpreted with reliance at least in part on federal case law. (10) No recent Florida case has referred to or cited the federal law, however.

Prior to changes passed by the Florida Legislature in 1990 discussed in detail below, after several skirmishes in which the Florida Department of Revenue (the "department") sought to collect tax on a transfer of an unencumbered interest in real property to a wholly owned entity, such as a corporation, by a shareholder (or vice versa), the courts provided an avenue by which such transfers could escape significant taxation, as discussed below. The Florida Legislature, at the behest of the department, attempted to fill this tax void with amendments to [section] 201.02 (11) and the definition of what constitutes consideration for deed tax purposes.

Key Elements to Imposition of the Deed Tax

Generally, there are three key elements that must be present before the deed tax may be imposed. There must be 1) a transfer 2) of an interest in real property 3) to or at the direction of a purchaser. (12) If these three elements are present, the tax is due based on the consideration for the transfer.

The "Purchaser" Element

Neither the applicable statute nor the rules promulgated by the department thereunder has attempted to address the critical question of who is a "purchaser" for purposes of the deed tax. Rather, this threshold question was left to the courts and was definitively answered in 1976 by the Florida Supreme Court in Florida Department of Revenue v. De Maria, 338 So. 2d 838 (Fla. 1976). There, the court held that a purchaser is "one who obtains or acquires property by paying an equivalent in money or other exchange in value." (13) Relying on this definition, the court determined that the sole shareholder of a corporation who received a distribution of encumbered real property from the corporation and who thereafter made the mortgage payments thereon was a purchaser.

The "Consideration" Element

Prior to legislative changes made in 1990, the deed tax statute lacked a definition of the term "consideration." Case law, however, concluded that the term "consideration," for deed tax purposes, "is used in ... the sense of `purchase price'" and that for something to constitute "consideration," it must have a reasonably determinable pecuniary value. (14)

Conveyances to Entities -- Prior to 1990 Legislative Amendment

* Conveyance to a Corporation

Under Rule 12B-4.013(7), (15) prior to the 1990 statutory amendments, the department's promulgated position was that a conveyance of an interest in real property to a corporation in exchange for its shares was subject to deed tax based on the value of the shares given or to be given by the corporation plus any other consideration. Under the same pre-1990 rules, if the shares had no market value or book value, the deed tax was based on the par or "fixed" value of the shares...