Were rent payments between related corporations exempt as mortgage-debt payments when the mortgage was signed by one corporation and individual shareholders?

Subject

Rental of Real Property by Related Entities

Plain-English summary

The rent between the related corporations remained subject to Florida sales tax because both corporations were not equally liable co-makers on the property debt. The lessor and lessee were related through common individual owners, but the mortgage named the lessor corporation and the two shareholders personally.

The Department read the rule narrowly. It treated payments as nontaxable debt service only when two related corporations were equally liable on the third-party debt secured by the leased property. Liability of individual shareholders did not satisfy that condition.

What this means for you

Common ownership and shared economic responsibility did not convert rent into an exempt debt payment. The exact parties and liability on the note and mortgage controlled.

Common questions

Q: Were the corporations related? Yes.

Q: Why did the exemption fail? The lessee corporation was not an equally liable co-maker on the mortgage debt.

Q: How were the payments treated? As taxable rent.

Citations and references

• Fla. Stat. § 212.031 — commercial real-property rentals
• Fla. Admin. Code r. 12A-1.070(19)(c) — related-corporation debt-payment exception
• 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)
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 93A-061

Original ruling text

Sep 03, 1993

RE: TAA 93A-061
Sales and Use Tax on Rental of Real Property by Related
Entities
212.031, F.S.
Rule 12A-1.070(19)(c), F.A.C.

Dear :

This acknowledges receipt of your letters of April 6, 1993,
and April 19, 1993, to the Department of Revenue, regarding the
application of Rule 12A-1.070(19)(c), F.A.C., to the lease
payments between related corporations when used to amortize a
third-party debt.

FACTS

As ascertained from your letters of April 6, 1993, and
April 19, 1993, the following conclusions of facts have been
reached by the Department. Your letter of April 6, 1993,
provides in pertinent part as follows:

"XXX [hereinafter, Mr. Shareholder] and myself, XXX
[hereinafter, Ms. Shareholder], of XXX [hereinafter,
Taxpayer] have recently purchased a building which our
other corporation, XXX [hereinafter, Affiliate], will be
leasing. In other words, we are leasing from ourselves. It
is my understanding that as long as both lessor and lessee
entities are Corporations and 100% shareholders of both
corporations are liable on the mortgage, sales tax is
exempt for the amount of the mortgage payment."

In your subsequent letter of April 19, 1993, you submitted
to the Department the following documents for review:

• a complete copy of mortgage agreement;
• a copy of the lease between Taxpayer and Affiliate;
• a copy of the resolution of the Board of Directors for

Affiliate;

• a copy of the resolution of the Board of Directors for
  Taxpayer;
• a copy of a shareholder agreement for Affiliate, dated
  June 8, 1979, and another shareholder agreement for
  Taxpayer, dated December 2, 1992.

The mortgage agreement provides, in pertinent part, as
follows:

"This mortgage made and entered into this 22nd day of
December 1992, by and between XXX, a Florida corporation,
as to Parcel 1, XXX, a single woman, as to Parcel 2, and
XXX, a single man, as to Parcel 3 (hereinafter referred to
a mortgagor) and XXX association (hereinafter referred to
as mortgagee), who maintains an office and place of
business at XXX."

The Commercial Lease agreement provides, in pertinent part,
as follows:

"This lease is made between XXX,... herein called Lessor,
and XXX d/b/a XXX, herein Lessee."

RELEVANT PROVISIONS

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."

DISCUSSION AND DETERMINATION

The Department has determined that the two parties to a
lease transaction must be two related corporations, in order
that the transaction may qualify for the exemption under Rule
12A-1.070(19)(c), F.A.C. Since the rent payments are made by
Affiliate, as lessee, to Taxpayer, as lessor, the Department
concludes that the rent payments are made between corporations.
Moreover, since Mr. Shareholder and Ms. Shareholder are the sole
shareholders of both corporations, the Department further
concludes that the corporations are related.

However, as evidenced by the Mortgage agreement, the
parties to the mortgage are Taxpayer, as a Florida corporation,
Ms. Shareholder, as a single woman, and Mr. Shareholder, as a
single man. Therefore, the Department considers this mortgage
agreement to be between a corporation and two individuals.

Accordingly, the Department has determined that if the
parties to a mortgage agreement are two individuals and a
corporation in which the two individuals are the sole
shareholders of the 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 in discharge of
a third-party debt, in which both corporations are equally
liable, not a third-party debt between individuals and a
corporation. Additionally, there is no basis for exempting
consideration paid between individuals and a corporation in the
statutes.

Upon review of the enclosed lease and mortgage agreements documents evincing the relationship between lessee and lessor,
and the relationship and status of both such entities to the
leased real property - and conversations with Mr. Shareholder

and Ms. Shareholder, it is the Department's position that the
aforementioned leasing transaction is not exempt from sales tax
liability, under Rule 12A-1.070(19)(c), F.A.C., since the
exemption only applies to consideration paid between related
corporations in discharge of a third-party debt in which both
corporations are equally liable.

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 treat rental payments as nontaxable 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. #8458