Was documentary stamp tax due when unencumbered trust property ultimately moved into a new LLC?

Plain-English summary

Florida imposed documentary stamp tax when the unencumbered real property entered the new LLC under either proposed route. The trust held commercial property with no mortgage, and its beneficiaries each held a 20% beneficial interest.

Under the first route, the trust could deed each beneficiary that person's existing beneficial share without documentary stamp tax. But the beneficiaries' later deed to the LLC was taxable on fair market value because the LLC membership interests were issued in exchange for the property.

Under the second route, a direct trust-to-LLC deed was also taxable on fair market value. The LLC was not a trust beneficiary, and ownership of an LLC interest was not treated as continued beneficial ownership of the LLC's real estate.

The Department limited Kuro to its facts, emphasizing that the case did not decide a transfer where entity ownership interests were issued for the real property or where a trust was the grantor.

What this means for you

An intermediate transfer to trust beneficiaries did not eliminate tax on the later contribution to an LLC. Transaction sequence, grantee identity, and whether entity interests are consideration must be reviewed separately for each deed.

Common questions

Q: Was the trust-to-beneficiary step taxable?
A: No, to the extent each beneficiary received the same beneficial share held before the deed.

Q: Was the beneficiary-to-LLC step taxable even without a mortgage?
A: Yes, based on fair market value.

Q: Was a direct trust-to-LLC transfer exempt?
A: No. The LLC was not a trust beneficiary.

Citations and references

• Fla. Stat. § 201.02(1) — documentary stamp tax and noncash consideration
• Fla. Admin. Code r. 12B-4.012 — conveyances to artificial entities
• Fla. Admin. Code r. 12B-4.013(32) — trustee conveyances to beneficiaries and non-beneficiaries
• Kuro, Inc. v. Department of Revenue, 713 So. 2d 1021 (Fla. 2d DCA 1998) — limited to its facts
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 03B4-005

Original ruling text

SUMMARY

QUESTION: Under the scenario where a Trust is proposing
transferring real property to its beneficiaries each having
a 20% beneficial interest, who would subsequently transfer
the property to a new Florida limited liability company
where membership certificates are issued after the transfer
in exchange for the property, are documentary stamp taxes
due on the transfer from the beneficiaries to the limited
liability company? Alternatively, if the real property was
transferred directly from the trust to the newly formed
limited liability company, where membership certificates
would not be issued until after the transfer, would
documentary stamp tax be due on such transfer?

ANSWER - Based on Facts Below: Under the first scenario,
the transfer from the trust beneficiaries to the limited
liability company would be subject to documentary stamp tax
under s. 201.02(1), F.S., based on the fair market value of
the property coming to rest in the limited liability
company, since such membership interests will be issued in
exchange for the property transferred to the limited
liability company. Under the second alternative, based on
the provisions of Rule 12B-4.013(32(g), F.A.C., the
transfer of the property directly from the trust to the
limited liability company would also be subject to
documentary stamp tax based on the fair market value of the
property transferred from the Trust to the non-beneficiary,
the limited liability company.

Apr 15, 2003

Re: Technical Assistance Advisement No. 03B4-005
Documentary Stamp Tax
Transfer of Real Property to Artificial Entity
Section 201.02(1), F.S.
Rule 12B-4.012, F.A.C.
Rule 12B-4.013(32), F.A.C.

XXX ("Trust")
XXX ("Beneficiaries")

Dear :

This is in response to your recent request for a Technical
Assistance Advisement dated March 4, 2003, pertaining to the
applicability of the Florida documentary stamp tax on a transfer
of real property under two alternatives as described below.

FACTS PRESENTED BY THE PETITIONER

Trust owns certain improved commercial real property
("Property") in Florida. Property was transferred to Trust in
1993. Beneficiaries each have a 20% beneficial interest in
Trust. There are no mortgages currently on the property.

Trust is considering two alternative forms of transferring
Property to a new Florida limited liability company ("LLC").
Under Alternative A, Property would first be transferred to
beneficiaries as tenants-in-common, whereupon Beneficiaries
would form LLC and transfer Property to the LLC. Alternative B
would transfer Property directly from Trust to LLC. Under
either Alternative, membership certificates would not be issued
until after the Property has been transferred to the LLC.

REQUEST FOR ADVISEMENT

The parties request that the Florida Department of Revenue
confirm that the transfers of Property described in Alternatives
A and B will not be subject to documentary stamp taxes for the
following reasons as summarized below:

Alternative A

1. Transfer of the Property from the Trust to the
   Beneficiaries

Rule 12B-4.013(32)(e), F.A.C., provides, in relevant part,
that:

A deed of real property from a trustee to X is not subject
to the stamp tax to the extent of X's beneficial ownership
interest as a trust beneficiary immediately before the
conveyance, whether or not the real property is encumbered
by a mortgage.

Trust requests confirmation that Trust's proposed transfer
of Property to Beneficiaries will not be subject to
documentary stamp tax.

2. Transfer of the Property from the Beneficiaries to the
   LLC

(a) The proposed transfer of Property by Beneficiaries to
LLC should not be subject to documentary stamp tax
because the LLC will not be a purchaser and no
consideration will be given to Beneficiaries as a
result of the transfer. Each Beneficiary would have a
20% beneficial interest in Property prior to the
transfer, and, after the transfer of Property to LLC
and issuance of membership certificates in LLC to
Beneficiaries, each Beneficiary would continue to have
a 20% beneficial interest in the Property through such
Beneficiary's 20% membership interest in LLC.

(b) There is no mortgage on the Property that LLC would be
assuming or taking subject to as a result of the
transfer.

(c) Facts in this situation are analogous to those in
Kuro, Inc. v. Department of Revenue, 713 So.2d 1021
(Fla. 2nd DCA 1998).

(d) Although Rules 12B-4.012(2)(b) and 4.013(7), F.A.C.,
may appear to be contrary to the requested position to
the extent they conclude that the transfer of real
property to an entity in exchange for an ownership
interest in the entity is a transfer for consideration
presumed to be equal to the fair market value of the
real property, these authorities have been superseded
by Kuro.

Alternative B

The proposed transfer of Property from Trust directly to
LLC should not be subject to documentary stamp tax for the
following reasons:

(a) The provisions of Rule 12B-4.013(32)(e), F.A.C., and
Rule 12B-4.013(32)(h)2., F.A.C., are applicable. Rule
12B-4.013(32)(h)2., F.A.C., provides, in relevant
part, that all conveyances from a trustee are equally
taxable or exempt as provided in Rule 12B-4.013,
F.A.C., regardless of whether the grantee is a natural
person or an entity.

(b) The decision rendered in TAA 97(B) 4-007, where the
Department concluded documentary stamp tax did not
apply to a transfer of encumbered property from a
trustee to an IRA where the same individual was the
sole beneficiary of both the trust and the IRA.

(c) Transfer should be exempt because each Beneficiary
will have a 20% beneficial interest in Property both
before and after transfer.

(d) Rules 12B-4.012(2)(b) and 12B-4.013(7), F.A.C., have
been superseded by Kuro.

DISCUSSION AND LAW

Section 201.02(1) , F.S. (2001), provides as follows:

201.02 Tax on deeds and other instruments relating to real
property or interests in real property.--

(1) On deeds, instruments, or writings whereby any lands,
tenements, or other real property, or any interest therein,
shall be granted, assigned, transferred, or otherwise
conveyed to, or vested in, the purchaser or any other
person by his or her direction, on each $100 of the
consideration therefor the tax shall be 70 cents. When the

full amount of the consideration for the execution,
assignment, transfer, or conveyance is not shown in the
face of such deed, instrument, document, or writing, the
tax shall be at the rate of 70 cents for each $100 or
fractional part thereof of the consideration therefor. For
purposes of this section, consideration includes, but is
not limited to, the money paid or agreed to be paid; the
discharge of an obligation; and the amount of any mortgage,
purchase money mortgage lien, or other encumbrance, whether
or not the underlying indebtedness is assumed. If the
consideration paid or given in exchange for real property
or any interest therein includes property other than money,
it is presumed that the consideration is equal to the fair
market value of the real property or interest therein.

The documentary stamp tax is a tax on certain documents. It
is an excise tax imposed by the legislature on the privilege of,
among other things, executing or delivering any document that
conveys any interest in real property located in Florida. For a
deed that is subject to tax (that is, a deed that conveys an
interest in real property), it is necessary to compute the
amount of tax. The amount of tax is equal to the rate of $0.70
on every $100 (or part thereof) of the tax base. The base is set
by statute as the amount of any consideration received in
exchange for the real property interest conveyed.

Effective July 1, 1990, Section 7, Chapter 90-132, Laws of
Florida amended s. 201.02(1), F.S., by adding, in pertinent
part, the following language:

... If the consideration paid or given in exchange for real
property or any interest therein includes property other
than money, it is presumed that the consideration is equal
to the fair market value of the real property or interest
therein.

Prior to the 1990 amendment, agency rules concluded that
the amount of tax due on deeds that conveyed real property to
certain artificial entities, such as corporations, as a
contribution to capital, was zero where the property was
unencumbered. This was inferred from certain court decisions

that found, in certain circumstances, where consideration took
the form of property other than money, the amount of
consideration was not reasonably determinable. The 1990
amendment was intended to close certain loopholes in the tax
laws. Thus, the amendment expressed specifically that, when
consideration took a form other than money, the amount of
consideration for the real property was presumed to be an amount
equal to the fair market value of the real property. Thus, when
a deed conveyed real property, it was subject to tax; and if the
consideration was in a form other than money, including where
the precise amount was not reasonably determinable, the tax base
was presumed to equal to the fair market value of the real
property, and the amount of tax imposed was capable of
computation.

Thus, the Florida Legislature has imposed this tax on every
deed that transfers real property in Florida. Only four discrete
exemptions for transfers of real property are specified in
chapter 201, F.S. One is found in s. 201.02(6), F.S., involving
transfers of property from certain nonprofit organizations to
the Board of Trustees of the Internal Improvement Fund, to any
state agency, to any water management district, or to any local
government. Another is found in s. 201.02(7), F.S., involving
deeds between spouses or former spouses resulting from
dissolution of marriage proceedings. The other two are contained
in s. 201.24 (1) and (2), F.S., involving obligations to pay
money by a Florida political subdivision and transactions
involving educational facility sites.

It is unquestionably established and fundamental law that,
except in the case of certain trusts, artificial legal entities
are separate and distinct from those persons that own the
interests in the entities. The classic example is that a
corporation is a separate legal entity that enjoys an existence
apart from its members. See Curcio v. U.S., 354 U.S. 118
(1957); Bellis v. U.S., 417 U.S. 85 (1974). The Florida Supreme
Court has also concurred on this point when it stated that:

Every corporation is organized as a business organization
to create a legal entity that can do business in its own
right and on its own credit as distinguished from the

credit of its individual stockholders.

Danai Jai-Alai Palace, Inc. V. Sykes, 450 So.2d 1114, 1120
(Fla. 1984, citing Advertects, Inc. v. Sawyer Industries, Inc.,
84 So.2d 21, 23 (Fla. 1955).

Kuro, Inc. v. Department of Revenue, 713 So.2d 1021 (Fla.
2nd DCA 1998), rev. den., 728 So.2d 201 (Fla. 1998), involved a
father and son who formed a corporation so that they could avail
themselves of the benefits of incorporation. The father and son
had equal shares of the ownership interests in the corporation.
They also had equal ownership interests in certain real property
and conveyed the property by deed into the corporation, as a
contribution to the capital of the corporation. The Second
District Court of Appeal, in reversing the opinion of an
Administrative Law Judge, wrote that although the "transactions
effected a change in the legal ownership of the property, the
beneficial ownership of the land remained unchanged." Kuro, at
1209. The court's opinion on this matter departs from the
uniform view of Florida law that a stock certificate does not
vest the owner thereof with any legal right or title to the
corporate property. See, e.g., Fla.Jur. 2nd Business
Relationships s.11; Damico v. State, 16 So.2d 43 (Fla. 1943).

The decision rendered in Kuro conflicted with many cases.
For example, in Marks v. Green, 122 So.2d 491 (Fla. 1st DCA
1960), the First District Court of Appeal rejected a claim of
beneficial ownership of corporate property by a sole shareholder
assessed for Florida intangible tax. The court applied the
intangible tax against the individual (on the ownership interest
in the artificial legal entity), even though the artificial
legal entity had already paid intangible tax on the property
owned by the entity. The court rejected a claim of beneficial
ownership (and improper double taxation), because the artificial
legal entity's property did not constitute a trust estate.
Green, at 494. The Kuro decision departed from these
foundational and established principles; instead, the Kuro court
treated corporate property as if held in a trust when it
suggested that the corporation held bare legal title, while the
beneficial interest was retained by the stockholders.

The term "beneficial ownership" or "beneficial owner" is
not defined in Chapter 201, F.S. The Securities Exchange Act of
1934, Rule 13d-3, entitled "Determination of Beneficial
Ownership," states in (a) that:

For the purposes of sections 13(d) and 13(g) of this Act, a
beneficial owner of a security includes any person who,
directly or indirectly, through any contract, arrangement,
understanding, relationship, or otherwise has or shares:

1) Voting power which includes the power to vote, or to
direct the voting of, such security; and/or

2) Investment power which includes power to dispose, or
to direct the disposition of, such security.

The term "beneficial owner," as defined under the
Securities and Exchange Act, clearly shows that the use of the
term by the Kuro court departs from general legal understanding
and application of the concept. Under the SEC definition,
"beneficial owner" is clearly connected with ownership of the
interest in the artificial legal entity, as opposed to ownership
of real property owned by that entity, and it is limited to
attributes of ownership interests in the entity itself. In
Kuro, the Court did not define "beneficial ownership." However,
plain language clearly indicates that the term means "benefits
of ownership," and further, as related to an artificial legal
entity such as a corporation, it is limited to the "benefits of
ownership" of the shares of stock.

Additionally, in Kuro, Footnote 1 stated: "The sequence of
events was this: Kurt Rabau and Ronald Rabau bought the real
estate in question. The Rabaus then formed a corporation which
the two of them owned. The Rabaus then transferred their
interests in the real estate to the corporation. These facts do
not support the hearing officer's recommended findings that the Kuro, Inc. stock was issued in exchange for the contribution of the [real estate] to the corporation.' It was conceded at oral argument that the stock had never been literallyissued.'
Thus, we need not address the applicability of the presumption
of consideration if the stock had, in fact, been issued in

exchange for real estate." (E.S.)

Thus, in the Kuro case, the court clearly stated that both
parties stipulated that no shares of stock had literally been
issued. The ruling in Kuro, as shown in Footnote 1 above, did
not address the situation where shares of stock or membership
interests were issued in exchange for the real property.

Furthermore the ruling in Kuro did not address this
situation where a trust was the grantor on the deed.

DETERMINATION

Alternative A

The proposed transfer of the real property from the trustee
to the beneficiaries is not subject to documentary stamp tax
under the provisions of Rule 12B-4.013(32)(e), F.A.C.

The proposed transfer from Beneficiaries to LLC would be
subject to the documentary stamp tax based on the fair market
value of the property coming to rest in the LLC, since such
membership interests will not be issued until after Property is
transferred to the LLC. The membership interests are to be
issued in exchange for the transfer of Property, and they would
be taxable under s. 201.02(1), F.S.

Alternative B

In the case where Property is transferred directly from
Trust to LLC, conveyance would be subject to tax based on fair
market value of property transferred. The Kuro case is limited
in its scope, because it involved individuals and their solely
owned corporation. Broad application of the Kuro decision is
beyond the scope of the facts and circumstances of the case
itself. Because a trust is an artificial entity with legal
title to the trust assets, and membership interests in the LLC
are to be issued to Beneficiaries in exchange for the
transferred Property, the provisions of s. 201.02(1), F.S.,
apply upon transfer from Trust to LLC. Section 201.02(1), F.S.,
provides in pertinent part that if the "consideration paid or

given in exchange for real property or any interest therein
includes property other than money, it is presumed the
consideration is equal to the fair market value of the real
property or interest therein."

Also, Rule 12B-4.013(32)(g), F.A.C., states, in pertinent
part:

The stamp tax applies to a trustee's deed of real property
to grantees that are not beneficial owners as trust
beneficiaries immediately before the conveyance, to the
extent of the consideration given, if any, for the interest
in the real property transferred to the non-beneficiary
grantees.

Because LLC is not a beneficiary of Trust, the provisions
of the above Rule are applicable. Therefore, documentary stamp
tax would be based on the fair market value of the property
transferred from Trust to non-beneficiary, the LLC.

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, F.S. 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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