Was an executed promissory note held for possible funding under a letter of credit subject to Florida documentary stamp tax even if no funds were advanced?

Subject

Promissory Note with Letter of Credit

Plain-English summary

The executed promissory note was taxable even though no money had been advanced and the triggering contingency might never occur. The Department found that the note itself contained an absolute written promise to pay a specific sum and was executed by the borrower.

The separate letter of credit was not taxable where it did not contain the debtor's executed written obligation to pay a stated sum. Merely collecting and holding money for documentary tax was not enough; the tax had to be affixed to the taxable note when executed.

What this means for you

The ruling looked at the four corners of each document. A contingent commercial arrangement did not make an otherwise absolute signed note contingent for documentary-stamp purposes.

Common questions

Did the bank have to wait until funds were advanced? No.

Was the letter of credit itself taxable? No, on the described language and execution facts.

Could the bank hold a tax reserve and return it if nothing was funded? No. The ruling required tax to be affixed when the taxable note was executed.

Citations and references

• Fla. Stat. §§ 201.08(1), 201.09, and 213.22
• Fla. Admin. Code rr. 12B-4.05, 12B-4.51(1)(a), 12B-4.52(6), 12B-4.53(29), and 12B-4.54(19)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 84B4-003

Original ruling text

Jun 29, 1994

Re: Technical Assistance Advisement #84(B)4-003
Promissory Note with Letter of Credit

Dear

This is in response to your March 23, 1984 request for a
Technical Assistance Advisement concerning the taxability of the
following transaction and the promissory note attached to your
request. From your February 3, 1984 request, you gave the
following information:

"... the necessity for providing for documentary tax stamps
when a letter of credit is issued in lieu of a surety bond
containing a promise to pay a sum only in the event of a
happening of a named contingency (12B-454(19)8) and a
promissory note is held in safekeeping by the Bank for the
convenience of the customer. Willingness to hold the
promissory note, in this case, reflects a commitment on the
part of the Bank to lend to the customer only if necessary
to cover the contingency. If the contingency occurs, the
customer may request funding under the commitment or he may
pay for the contingency out of pocket. If the contingency
never happens - no obligation to pay exists under the
letter of credit or the note. No obligation to pay under
the note exists unless the customer elects to borrow to pay
for an occurred contingency.
"Our current practice is to provide for the payment of the
documentary tax to cover the Bank if the note is funded or
an acceptance is created. If neither of these two options
are elected by the customer and the letter of credit
expires, no obligation to pay under the note was created,
the contingency note held in safekeeping is cancelled and
returned to the customer along with the contingency
provision for the documentary tax."

You asked the following questions:

"If no monies are ever funded under a note which is held in
safekeeping for the convenience of the customer in the
event of a contingency which never occurs, is a provision
for documentary tax stamps required?
"If the provision is required, may the provision be
returned to the customer if the term of the contingency
expires without the occurrence of the contingency?"

Rules 12B-4.51(1)(a) and 12B-4.52(6), F.A.C., provide:

"(1) Scope of Tax:
"(a) A tax is imposed on promissory notes, non-negotiable
notes, written obligations to pay money, assignments of
salaries, wages, or other compensation, which are made,
executed, delivered, sold, transferred or assigned in the
state. A renewal note is also taxable unless it qualifies
for the exemption provided for under Section 201.09(1),
F.S. (See Rule 12B-4.54(1)) The rate of tax is 15 cents on
each $100 or fraction thereof of the indebtedness or
obligation evidenced by the document.
"(6) Written Obligation or Promise to Pay Money: The tax
levied by Section 201.08(1), F.S., is an excise tax on the
promise to pay and the terms and certainty of payment are
not material. (Plymouth Citrus Growers Ass'n. v. Lee (1946)
157 Fla. 893, 27 So.2d 415). `Obligation to pay money'
refers to a direct written promise to pay stated sum and
not to the duty that may be established by extrinsic facts.
(Lee v. Kenan (1935) 78 F..2d 425, 100 ALR 869) It is
necessary that documents be signed by the obligor. (Lee v.
Quincy State Bank (1937) 127 Fla. 765, 173 So. 909)"

Also, Rule 12B-4.53(29), F.A.C., provides:

"(29) Note Executed and Delivered: All notes or written
obligations to pay money delivered to the lender,
including, but not limited to, master notes, and notes
drawn in connection with a line of credit, letter of
credit, bail bond or otherwise, executed in Florida or
approved and accepted in Florida, are subject to Florida
documentary stamp tax. Tax is due based on the face amount
of the note whether or not funds are advanced at time of

delivery. If the note is secured by a recorded mortgage,
stamps shall be affixed to the mortgage at time of
recording and a notation made on the note that proper
stamps and amount thereof are affixed to the mortgage.
Renewals are also taxable unless exempted under Section
201.09, F.S."

Further, Rule 12B-4.54(19), F.A.C., provides:

"(19) Surety Bonds: Surety bonds which are to insure the
doing of certain things required by the conditions of such
bonds and which contain a promise to pay a sum only in the
event of the happening of the named contingency are not
taxable. (Attorney General Opinion 044-356, Dec. 6, 1944,
1943-44 Biennial Report, Page 224)"

Therefore, a letter of credit that is given to a customer
from your bank that does not contain a written obligation to pay
a stated sum and is not executed by the debtor is not taxable.
However, the promissory note that is executed by the borrower
that contains a specific promise to pay a stated sum and is
executed by the debtor is taxable even though funds are not
advanced. Your note does not contain a contingency as to the
promise to pay, but merely states how and when advances and
payments will be made. Since the note is an absolute promise to
pay, documentary stamp tax must be paid and affixed to the note
at the time the note is executed. The fact that you have
collected the tax and are holding them will not satisfy the
requirements under Rule 12B-4.05, F.A.C., which requires the tax
to be affixed to the taxable document upon execution or a
penalty can be assessed.

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 than

expressed in this response.

You are further advised that this response and your request
are public records under Chapter 119, F.S., which are subject to
disclosure to the public under the conditions of s. 213.22, F.S.
Your name, address, and any other details which might lead to
identification of the taxpayer must be deleted by the department
before disclosure. In an effort to protect confidential
information, we request you notify the undersigned in writing
within 15 days of any deletions you wish made to the request or
this response.

Sincerely,

James E. Silvey
Technical Assistant

JES/ll
Enclosures