Were rents taxable when related partnerships leased mortgaged real estate to commonly owned automobile-dealership corporations?

Subject

Rental of Real Property/Related Entities

Plain-English summary

The lease payments were subject to Florida sales tax. Related individuals and partnerships owned mortgaged real estate and leased it to automobile-dealership corporations. Although the leases, notes, mortgages, and common ownership connected the parties, the Department held that Rule 12A-1.070(19)(c) covered payments between related corporations only.

The transactions here were between partnerships and corporations. Shared or joint liability on third-party debt did not turn rent due under enforceable leases into nontaxable debt payments.

What this means for you

The ruling treated entity type as controlling. Common ownership and mortgage obligations were not enough when the lessors were partnerships rather than related corporations. The Department said it would respect the existing rule but would not extend it beyond its express terms.

Common questions

Q: Did the common owner of the partnerships and tenant corporations create an exemption? No. The rule required a transaction between related corporations.

Q: Did joint and several liability on the notes eliminate tax? No. The Department found no statutory basis for recharacterizing partnership-to-corporation rent as nontaxable debt payments.

Q: What related-corporation arrangement did the Department describe? It said the rule covered related corporations that were equally liable as co-makers on the note secured by the leased property's mortgage debt.

Citations and references

• Fla. Stat. § 212.031 — renting or leasing real property
• Fla. Admin. Code r. 12A-1.070(19)(c) — related corporations and mortgage debt
• Fla. Stat. § 213.22 — Technical Assistance Advisements
• In re Regal Kitchens, Inc., 15 F.A.L.R. 1467 (Fla. Dep't of Revenue Mar. 1993)
• State ex rel. Szabo Foods v. Dickinson, 286 So. 2d 529 (Fla. 1974)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 93A-019

Original ruling text

Title:

Rental of Real Property/Related Entities

Apr 02, 1993

RE: TAA 93A-019
Sales and Use Tax on Rental of Real Property by Related
Entities
s. 212.031, F.S.
Rule 12A-1.070(19)(c), F.A.C.

Dear :

Your letter of January 14, 1993, requested a Technical
Assistance Advisement on the application of the sales and use
tax to the above referenced matter. This response to your
request constitutes a Technical Assistance Advisement under
Chapter 12-11, Florida Administrative Code, and is issued to you
under the authority of s. 213.22, Florida Statutes.

FACTS

XXX is the sole shareholder of XXX, an automobile
management holding company. XXX is the sole shareholder of
several corporations which also operate automobile dealerships.
The automobile dealerships concerned are:

XXX and various partnerships, of which he is general
partner, own real property which they lease to XXX dealerships.
As per our conversations of February 10, 1993, and February 22,
1993, and your correspondence to me on February 23, 1993, other
relevant facts concerning the partnerships are the following.

The partners of Mort Partnership are: XXX.

XXX is the sole partner of XXX.

The Partners of XXX Partnership are: XXX.

Enclosed for review, as Exhibits A1-A6, are six leases,

which have been entered into between parties, as listed below.

EXHIBIT DOCUMENT PARTIES TO THE TRANSACTION

A1 -

Lease agreement XXX (Lessee) and XXX (Lessor)

A2 -

Lease agreement XXX (Lessee)and XXX (Lessor)

A3 -

Lease agreement XXX (Lessee), and XXX (Lessor)

A4 -

Lease agreement XXX (Lessee) and XXX and the trustee
of the XXX 1982 Irrevocable Trust (Lessors)

A5 -

Lease agreement XXX (Lessee), and XXX (Lessor)

The leased properties are mortgaged and act as security for
two notes, (Exhibits B2 and B3), and a third note/consolidation
(Exhibit E-1). The Notes are also secured by the tangible
personal property on the premises of the leased/mortgaged real
property.

The first note is in the amount of $8.5 million. This Note
is signed by XXX for XXX, three different partners for XXX, and
XXX, as trustee of the XXX Irrevocable Trust. The parties
executing this note have agreed to be jointly and severally
liable for the note.

The second note is in the amount of $5.7 million. This
Note is signed by XXX. The parties to this note have agreed to
be jointly and severally liable for the note.

The third note/consolidation involved a new loan amount of
$2,400,000 to XXX as Borrowers, and nine other parties as
pledgers to the note; in addition, the $8.5 million note was
consolidated.

In summary, there are six leases; XXX is 100 percent
shareholder of the tenant corporations. All leased properties
are owned by, and encumbered by outstanding mortgages issued to,
XXX and other partners.

DISCUSSION AND DETERMINATION

Section 212.031, F.S., provides:

"(1)(a) It is declared to be the legislative intent that
every person is exercising a taxable privilege who engages
in the business of renting, leasing, letting, or granting a
license for the use of any real property ..."

Rule 12A-1.070(19)(c), F.A.C., provides, in pertinent part
as follows:

"(c) The total consideration furnished by one corporation
to a related corporation for the occupation of real
property ... is subject to tax ... However, such
consideration is not rent but the payment on a debt if the
corporation furnishing the consideration is as equally
liable on the debt secured by the real property as the
related corporation; any amount furnished to the related
corporation over the amount legally necessary to amortize
that debt is subject to tax unless specifically exempted by
statute."

The Department has determined that if the two parties to a
lease transaction are a partnership and a corporation, then the
transaction does not qualify for the exemption under Rule
12A-1.070(19)(c), F.A.C., since the exemption contained in the
Rule addresses consideration paid between related corporations,
not consideration paid between a partnership and a corporation.
Additionally, there is no basis for exempting consideration paid
between a partnership and a corporation in the statutes.

Upon review of the enclosed lease and mortgage agreements documents evincing the relationship between lessee(s) and
lessor(s), and the relationship and status of these entities to
the leased real property, the Department concludes that the
leasing transactions between the tenant corporations and the
leasing partnerships do not qualify for the exemption in Rule
12A-1.070(19)(c), F.A.C., since the transactions were not
between related corporations, as provided in the Rule, instead
the leasing transactions were between corporations and
partnerships.

Please be advised that there is no basis in the statutes
for converting rent payments, made pursuant to an enforceable

lease between related entities, to non-taxable debt payments
because of joint liability to third parties. However, since the
exemption contained in Rule 12A-1.070(19)(c), F.A.C., has been
duly promulgated, it will be respected until it is repealed.
Nevertheless, the application of the Rule will not be expanded
beyond the its express terms.

The Department has recently held In RE Regal Kitchens,
Inc., 15 F.A.L.R. 1467 (Fla. Dept. of Revenue, March 1993), that
the express terms of the Rule treats rental payments as
non-taxable debt payments if the related corporations are as
equally liable on the leased property's mortgage debt. It is
the Department's position that the required narrow construction
(see, State ex rel. Szabo Foods v. Dickinson, 286 So.2d 529
(Fla., 1974), in the Rule must be limited to related
corporations which are co-makers on the note secured by the
mortgage debt.

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
based 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 the confidentiality
of such information, we request you notify the undersigned in
writing within 15 days of any deletions you wish made to the
request or the response. Please note that we already have in
file some documents evincing some desired deletions.

Sincerely,

Nydia Men‚ndez
Technical Assistant

NM/pb
Con. #6595