Did mortgages securing contingent interest-rate swap obligations trigger Florida document taxes?

Subject

Interest Rate Swap Agreements

Plain-English summary

The Florida mortgages securing the interest-rate swap obligations did not trigger documentary stamp tax or nonrecurring intangible tax for those obligations. The counterparties exchanged only the net difference between interest amounts calculated on a hypothetical notional principal; neither advanced principal or signed a note for that principal.

Future payments were contingent on rate movements, uncertain in amount, and uncertain as to which counterparty would owe them. The Department treated them as interest rather than taxable principal indebtedness and as conditional obligations for intangible-tax purposes.

What this means for you

The result depended on the swap's structure. A stated maximum debt, principal advance, unconditional guaranty, or different mortgage language could produce a different analysis.

Common questions

Q: Was the notional principal actually lent? No.

Q: Were net swap interest payments subject to documentary stamp tax? No, under the ruling.

Q: Did the mortgage make the contingent obligation subject to nonrecurring intangible tax? No, while the obligation remained conditional and uncertain.

Citations and references

• Fla. Stat. § 201.08(1) — notes and recorded mortgages
• Fla. Stat. § 199.133 — nonrecurring intangible tax
• Fla. Admin. Code r. 12B-4.052(1)(a) — interest and finance charges
• Fla. Admin. Code r. 12C-2.002(2)(e) — conditional guaranties
• West Flagler Associates, Ltd. v. Department of Revenue, 663 So. 2d 555 (Fla. 3d DCA 1994) — contingent mortgage obligations
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 00M-001

Original ruling text

SUMMARY

QUESTION: Are interest rate swap agreements subject to the
documentary stamp tax and/or the non-recurring intangible
tax?

ANSWER - Based on Facts Below: Since the payments required
under a swap agreement consist only of the net amount of
interest owed by one of the counterparties, the payments
are exempt from the documentary stamp tax and the nonrecurring intangible tax. In addition to the generally
contingent nature of the interest payments, interest swap
agreements are also uncertain as to the amount that may be
payable and uncertain as to the identity of the obligor.

Apr 19, 2000

Re: Technical Assistance Advisement No. 00M-001
Documentary Stamp Tax and Intangible Tax
Interest Rate Swap Agreements
Sections 201.08, and 199.133, F.S.
XXX ("Mortgagor")
XXX (Collectively referred to as "Mortgagee")

Dear :

This is in response to your request for a Technical
Assistance Advisement dated February 11, 2000, requesting
technical advice regarding taxes on mortgages securing ISDA swap
agreements. In a previous request for a Letter of Technical
Advice, you enclosed copies of the 1992 standard ISDA forms of
swap agreements for local currency/single jurisdiction swaps and
for multiple currency/multinational swaps.

FACTS PRESENTED BY THE PETITIONER

The Mortgagor has acquired several Florida multifamily
residential properties that are subject to first and second

mortgages securing housing finance authority bonds and
reimbursement obligations relating to credit enhancements of the
bonds, all of which are exempt from Florida documentary stamp
taxes and intangible personal property taxes pursuant to the
provisions of Chapter 159, F.S. The holder of the second
mortgages (the Mortgagee) has required the Mortgagor to modify
the second mortgages in order to secure certain International
Swap Dealers Association ("ISDA") master swap agreements being
made by the Mortgagor and Mortgagee.

Generally speaking, a swap agreement is a "derivative"
contract used to limit or "hedge" against the risk of future
fluctuations in interest rates and/or currency exchange rates.
In a typical ISDA form of interest rate swap agreement, the two
counterparties agree to swap, or pay each other, the amount of
interest that would accrue periodically at two different rates
on a hypothetical "loan" in an agreed "notional" principal
amount for a specific length of time. For example, one
counterparty might agree to pay interest at a fixed rate, while
the other counterparty might agree to pay interest at a floating
market rate, such as LIBOR or the prime rate. These interest
obligations are calculated periodically (monthly, quarterly,
etc.) and netted against each other, so that one counterparty
pays the other counterparty only the difference (if any) between
the two interest amounts accruing during each calculation
period. Depending upon which counterparty made the best initial
guess about future variations in market interest rates during
the term of the hypothetical loan, one counterparty usually
winds up paying more net interest than the other company.
Neither counterparty owes or pays the notional principal amount
to the other under the swap agreement, however, because the
"loan" is only hypothetical. No promissory notes are signed and
no principal amounts are actually advanced under the swap
agreement by either party, and each counterparty is potentially
both an obligor and obligee. A counterparty's future payment
obligations or rights under a swap agreement are contingent upon
future rate fluctuations, and the total amount payable to or by
a counterparty under the swap agreement cannot be determined
until the swap expires or is terminated.

Because the obligations of the counterparties under a swap

agreement are contingent upon future events and are uncertain as
to amount, Florida documentary stamp taxes and intangible
personal property taxes are not payable on a swap agreement. In
this case, however, the Mortgagor's obligations under the swap
agreement are to be secured by the modified second mortgages on
Florida real property, raising the issue whether Florida
documentary stamp taxes or intangible personal property taxes
might be required when the mortgages are modified. The parties
believe that the modified second mortgages in this transaction
are probably exempt from such taxes under the housing finance
exemption under Chapter 159, F.S., but it is possible that the
secured swap agreement obligations might remain outstanding
longer than the housing bonds and might need an independent
basis for exemption. In addition, the parties desire guidance
from the Department with respect to the mortgages securing swap
agreements outside of the housing bond context.

RULING REQUESTED

Based on the foregoing facts of the transaction and the
relevant authorities, the taxpayers respectfully request the
Department's ruling that when the Florida mortgage secures a
counterparty's obligations under a swap agreement, no Florida
documentary stamp taxes or intangible personal property taxes
are required on that mortgage with respect to the secured swap
agreement.

DISCUSSION AND LAW

Section 201.08(1), F.S., imposes a documentary stamp tax on
notes, or written obligations to pay money, which are signed,
executed or delivered in Florida at the rate of $.35 per $100 of
the indebtedness evidenced thereby. A similar tax, at the same
rate, is imposed on mortgages recorded in this state that
incorporate the certificate of indebtedness. Based on the cases
of Department of Revenue v. Lincoln Pointe Associates, Ltd., 544
So.2nd 291 (Fla. 1st DCA 1989), and Barnett Bank of South
Florida v. Department of Revenue, 571 So.2nd 527 (3d DCA 1990),
the Department promulgated Rule 12B-4.053(34), F.A.C., which
provides that the documentary stamp tax is due upon the
recordation of any mortgage, including a mortgage securing a

contingent obligation, such as a guaranty, indemnification
agreement, a bail bond, letter of credit, or a line of credit,
based on the maximum stated amount of the contingent obligation
secured.

Rule 12B-4.052(1)(a), F.A.C., provides that, in regard to
notes and written obligations to pay money, the amount upon
which the tax is measured, when the documents provide for a
discount of unearned interest or finance charges for early
payment, is the amount financed or principal indebtedness. The
payment of interest or finance charges is a contingent
obligation, and generally not subject to the documentary stamp
tax.

DETERMINATION

Since the payments required under a swap agreement consist
only of the net amount of interest owed by one of the
counterparties, the payments are exempt from documentary stamp
tax under the foregoing rule because the rule exempts interest
payments from the tax. In addition to the generally contingent
nature of the interest payments, interest swap agreements are
also uncertain as to the amount that may be payable and
uncertain as to the identity of the obligor.

With respect to the Florida intangible personal property
tax, based on West Flagler Associates, Ltd. v. Department of
Revenue, 663 So.2nd 555 (Fla. 3d DCA 1994), this tax does not
apply to a mortgage securing a contingent obligation, such as a
guaranty. Also, Rule 12C-2.002(2)(e), F.A.C., provides that the
nonrecurring intangible tax applies to an unconditional guaranty
when secured by a lien on Florida real property, but that a
conditional guaranty is not subject to tax until the condition
is met or removed. Since the Mortgagor's obligations under the
swap agreement are contingent and uncertain, the intangible tax
is not required on a Florida mortgage securing those
obligations.

This response constitutes a Technical Assistance Advisement
under s. 213.22, F.S., which is binding on the Department only
under the facts and circumstances described in the request for

this advice, as specified in s. 213.22. Our response is
predicated on those facts and the specific situation summarized
above. You are advised that subsequent statutory or
administrative rule changes or judicial interpretations of the
statutes or rules upon which this advice is based may subject
similar future transactions to a different treatment from that
which is expressed in this response.

You are further advised that this response, your request
and related backup are public records under Chapter 119, F.S.,
and are subject to disclosure to the public under the conditions
of s. 213.22, F.S. Confidential information must be deleted
before public disclosure. In an effort to protect
confidentiality, we request you provide the undersigned with an
edited copy of your request for Technical Assistance Advisement,
the backup material and this response, deleting names, addresses
and any other details which might lead to identification of the
taxpayer. Your response should be received by the Department
within 15 days of the date of this letter.

Sincerely,

Joy B. Eldred, C.P.A.
Tax Law Specialist
Technical Assistance and Dispute Resolution
Office of the General Counsel

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