Was a Florida collector's contribution of a lien-encumbered art collection to a controlled family limited partnership subject to sales tax?

Subject

Transfer of an Art Collection to a Limited Partnership

Plain-English summary

The proposed contribution of the lien-encumbered art collection to the family limited partnership was a taxable sale. The collector said sales from the collection could occur three or more times in a 12-month period. Florida counted out-of-state sales through out-of-state brokers in that frequency test, so the collector did not qualify for the occasional or isolated sale exemption.

The partnership was a separate person for sales-tax purposes, and the capital contribution transferred title or possession. The Department treated the outstanding loan lien taken with the art as consideration flowing from the partnership.

The ruling recognized a different result for art first released from the lien: an unencumbered portion contributed with no other money or valuable consideration would not constitute a taxable sale.

What this means for you

An estate-planning contribution was still tested as a sale based on dealer frequency, separate legal persons, and debt or other consideration attached to the property.

Common questions

Q: Did out-of-state broker sales count toward the frequency test? Yes.

Q: Why did the lien matter? The Department treated it as consideration for the transfer.

Q: Could unencumbered art be contributed without tax? Yes, if no other true and valuable consideration flowed from the partnership.

Citations and references

• Fla. Stat. § 212.02(2), (13), (16)(a) — business, person, and sale definitions
• Fla. Admin. Code r. 12A-1.037(1) — occasional or isolated sales
• Green v. Pederson, 99 So. 2d 292 (Fla. 1957)
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 93A-054

Original ruling text

Aug 03, 1993

Re: TAA 93A-054
Application of Sales Tax to the Transfer of an Art
Collection to a Limited Partnership Controlled by the
Collector
Taxpayer: XXX (Herein the "Collector")
SSN: XXX
Address: XXX
Dear :

This reply is to your March 2, 1993, petition for the
Department's issuance of a Technical Assistance Advisement
("TAA") pursuant to s. 213.22, F.S., concerning the captioned
matter and party. Your petition has been carefully examined and
the Department finds it to be in compliance with the requisite
criteria set forth in Chapter 12-11, F.A.C. Therefore, the
Department is herewith granting your request for the issuance of
a TAA and the ensuing discourse shall embody said ruling.

DISCUSSION OF FACTS

Your petition sets forth the following portrayal of facts
relating to the issues under advisement:

"[The Collector] for many years has collected and invested
in art work (the `Art Collection'). The Art Collection is
currently used as collateral to secure a loan to the
Collector. The Collector is a resident of the State of
Florida. The Collector does not hold himself out as
engaged in the business of selling art but on occasion will
sell a piece of his Art Collection. All the sales of such
art, however, are sold through an agent or broker outside
of Florida. Such sales do not occur frequently but may
occur three times or more in any 12-month period. No sales
of the Art Collection have occurred in Florida. For estate
planning purposes, the Collector desires to transfer some
or all or his Art Collection to the Partnership. The
Collector and members of the Collector's family will be the

limited partners, with the majority of the partnership
interests owned by the Collector. A corporation controlled
by the Collector will be the general partner. The
Collector desires to transfer his Art collection to the
partnership as a capital contribution subject to the
existing lien."

In our telephone conversation of August 3, 1993, you advised
that an adverse determination by the Department as to the
taxability of the transfer of the Art Collection to the
Partnership subject to the outstanding lien balance will
probably result in a restructuring of the transfer so that only
portions of the Art Collection which are unencumbered will be
transferred to the Partnership.

RULING REQUESTED

You endeavor to be advised that: "[t]he transfer of the Art
Collection to the Partnership is not subject to the Florida
sales tax."

You favor a ruling that the proposed transfer of the Art
Collection to the Partnership is not subject to the Florida
sales tax for two reasons. First, you contend that the proposed
transfer is not supported by consideration. Second, you contend
that the proposed transfer is not subject to tax on the basis of
being an occasional or isolated sale as the Collector has not
made more that two sales in 12 months within the State of
Florida.

You further request advice that any portion of the Art
Collection which is transferred to the Partnership unencumbered
as a capital contribution will qualify as exempt from sales or
use tax in the absence of any other true and valuable
consideration in money or other form flowing from the
Partnership in exchange for the transfer.

DISCUSSION AND ANALYSIS OF LAW AND POLICY

The question of whether the proposed transfer of the Art
Collection to the Partnership by the Collector is susceptible to

sales tax turns on whether the Collector can be deemed as in the
business of selling art works from the collection. In making
this determination, we consult the definition of the term
"business" for Florida sales tax purposes set out in s.
212.02(2), F.S., which states in significant part:

"Business' means any activity engaged in by any person, or caused to be engaged in by him, with the object of private or public gain, benefit, or advantage, either direct or indirect. Except for the sales of any aircraft, boat, mobile home, or motor vehicle, the termbusiness' shall
not be construed in this chapter to include occasional or
isolated sales or transactions involving tangible personal
property or services by a person who does not hold himself
out as engaged in business...." (Emphasis Supplied)

This statutory definition is further elucidated by the
guidelines set forth in Rule 12A-1.037(1), F.A.C., for
ascertaining whether a given transaction may qualify for
exemption from sales tax as an occasional or isolated sale by a
person not in "business". This portion of the rule states in
pertinent part:

"(1)(a) Occasional or isolated sales of tangible personal
property made by a person who does not hold himself out as
engaged in business are exempt. However, this exemption
never applies to occasional or isolated sales of aircraft,
boats, mobile homes, motor vehicles, or other vehicles in
this state of a class or type required to be registered,
licensed, titled, or documented in this state or by the
United States Government (see Rule 12A-1.007, F.A.C.), or
to sales made by those persons who hold themselves out as
engaged in a business, notwithstanding the fact that their
sales may be few and infrequent.
"(b) An exempt occasional or isolated sale occurs when the
sale is made by the owner of tangible personal property
under the following circumstances:
"1. The seller does not hold himself out as engaged in
business and such sales or series of sales occur no more
frequently than 2 times during any 12 month period. The
third sale or series of sales of tangible items during any

12 month period makes that person engaged in that business,
and that person is required to register as a dealer and to
collect and remit tax on the third sale or series of sales
and on all subsequent sales...."

In construing the above rule provision, the Department must
adhere to and be guided by the long-standing and fundamental
precept of statutory construction, established by the Florida
Supreme Court, which mandates that exemptions from or exceptions
to taxing statutes must be strictly construed against the
taxpayer. See Asphalt Pavers v. Dept. of Revenue, 584 So.2d 57
(Fla. 1st DCA 1991); Dade Cty. Taxing Auth. v. Cedars of
Lebanon, 355 So.2d 1205 (Fla. 1978), reh. den. April 5, 1978;
Williams v. Jones, 326 So.2d 425 (Fla. 1975), reh. den. March 4,
1976; Straughn v. Camp, 293 So.2d 689 (Fla. 1974); United States
Gypsum Company v. Green, 110 So.2d 409 (Fla. 1959).

Thus, the Florida Supreme Court doctrine of strict construction
must be followed in applying this rule to the instant case for
the purpose of determining whether the Collector is engaged in
the business of selling art works from the Art Collection.
Under a strict construction, the sales made to purchasers
outside the state through an out of state agent or broker cannot
be ignored. The statutory definition of the term "business"
quoted from s. 212.02(2), F.S., above, does not preclude sales
made by persons in this state simply because they are made to an
out of state buyer through an out of state broker or agent.
Similarly, neither does Rule 12A-1.037, F.A.C., above, preclude
from the frequency test set out therein sales made to out of
state buyers through an out of state broker or agent. Also, in
Green v. Pederson, 99 So.2d 292, 295 (Fla. 1957), the Supreme
Court of Florida held that the occasional or isolated sale
exemption applies to out-of-state and in-state purchases, alike.
Therefore, in determining eligibility for the exemption, it
stands to reason that the Department must consider both the
occurrence of out-of-state and in-state sales, alike.

As conceded in the disclosure of facts under advisement, the
sales of art works from the Art Collection "may occur three
times or more in any 12-month period." Based on this
disclosure, the Department is persuaded to conclude that the

Collector has violated the frequency test of no more than two
sales in 12 months set forth in the rule, above, as requisite to
qualifying for the occasional or isolated sale exemption.
Therefore, the Collector is estopped from asserting a non-dealer
status by his own concession of facts.

Taking up now your alternative argument that the proposed
transfer is not supported by consideration, we refer to the
elements requisite to a "sale" as specified in s. 212.02(16)(a),
F.S., which defines the term "sale" for sales tax purposes to
mean and include:

"Any transfer of title or possession, or both, exchange,
barter, license, lease, or rental, conditional or
otherwise, in any manner or by any means whatsoever, of
tangible personal property for a consideration." (Emphasis
Supplied)

Therefore, the requisite elements of a sale make up a two prong
test both prongs of which must be satisfied in order for a
transaction to constitute a sale. These prongs are, namely: (i)
the transfer of title or possession, or both, of personalty; and
(ii) the flow of consideration in exchange for the transfer of
title or possession, or both, of the personalty.

In terms of the first prong of the test, both the Collector and
the Partnership are contemplated and embraced as "persons"
within the meaning of such term as provided in s. 212.02(13),
F.S., which states:

"`Person' includes any individual, firm, copartnership,
joint adventure, association, corporation, estate, trust,
business trust, receiver, syndicate, or other group or
combination acting as a unit and also includes any
political subdivision, municipality, state agency, bureau,
or department and includes the plural as well as the
singular number."

Consequently, Florida sales tax law does encompass the Collector
and the Partnership as distinctive persons between whom a sale
is capable of occurring. Therefore, the transfer of the Art

Collection from the Collector to the Partnership as a
contribution to capital does result in a transfer of "title or
possession, or both" as specified in the statutory definition of
"sale" quoted, above. Consequently, the facts of the instant
case do satisfy the first prong of the test.

As to the second prong of the test, a substantial body of case
law has evolved in the area of real estate transactions which
supports the notion that a consideration flows from transferee
to transferor when real property is transferred subject to
mortgage debt. See Win-San Bldg. Corp. v. State Dept. of
Revenue, 358 So.2d 112 (Fla. 3rd DCA 1978); Andean Inv. Co. v.
State Dept. of Revenue, 370 So.2d 377 (Fla. 4th DCA 1978);
Abramson v. Straughn, 348 So.2d 1172 (Fla. 4th DCA 1977); State
Dept. of Revenue v. Zuckerman-Vernon Corp., 354 So.2d 353 (Fla.
1977), reh. den. January 31, 1978; Florida Dept. of Revenue v.
De Maria, 338 So.2d 838 (Fla. 1976); Kendall House Apartments,
Inc. v. Florida Dept. of Revenue, 245 So.2d 221 (Fla. 1971),
reh. den. March 10, 1971. Drawing from this case law, we view
the same rationale as applying when personalty is transferred
subject to indebtedness. Thus, the outstanding lien balance
subject to which the Art Collection is transferred does
constitute consideration with respect to the proposed transfer.

CONCLUSIONS

Based on the forgoing discussion and analysis of law, the
Department hereby enters its findings as follows. First, the
Department rejects Collector's assertion that due to the sales
to date being exclusively to out of state buyers by and through
out of state agents or brokers he is not in the business of
selling artworks from the Art Collection with respect to the
frequency test set forth in Rule 12A-1.037(1), F.A.C., above.
We find no basis in law for excluding such sales in the process
of evaluating whether the Collector has violated the frequency
test and thereby tainted his eligibility to make an occasional
or isolated sale of the Art Collection. Therefore, in light of
the fact that the Collector has virtually stipulated that as
many as three or more sales in a 12-month period have occurred
from the Art Collection, the Department is persuaded that the
Collector should be deemed a dealer for sales tax purposes with

respect to the proposed transfer. Accordingly, the proposed
transaction does not qualify as an occasional or isolated sale.

Second, the Department finds that the proposed transfer does
objectively manifest all the essential elements of a "sale" as
prescribe in s. 212.02(16), F.S., namely: (i) transfer of title
or possession, or both; and (ii) consideration.

Therefore, in view of the above findings, the Department must
conclude and hereby affirms that the proposed transfer of the
Art Collection from the Collector to the Partnership does
constitute a taxable sale within the purview of Chapter 212,
F.S.

However, the Department does hereby acknowledged that if any
portion of the Art Collection is released from its position as
collateral for the loan to the Collector and such portion is
transferred to the Partnership free and clear of any liens or
encumbrances, the transfer of such portion of the Art Collection
to the Partnership will not constitute a sale for sales tax
purposes provided the transfer is absent of any other true and
valuable consideration in money or other form flowing from the
Partnership in exchange for the transfer.

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,

Daniel M. Wagner, Jr.
Tax Law Specialist

DW/