Did rent paid by a related corporation to a grantor trust qualify for Florida's related-entity debt-payment exemption?

Subject

Commercial Property Rental - Related Entity Exemption

Plain-English summary

The grantor trust's receipts from the related corporate lessee were taxable rental consideration. The Department read the rule's exception narrowly: it applied only to payments between related corporations that were co-makers of the debt securing the real property.

The trust and corporation did not fit that wording, and the Department would not extend the exception to transactions involving a trust, partnerships, or guarantors. The reviewed guaranties and trust documents also did not show equal liability for every relevant party, so the arrangement would fail even under a broader interpretation.

What this means for you

Overlapping owners and debt guaranties did not by themselves make related-party commercial rent exempt. The ruling required the entity types and liability structure stated in the rule.

Common questions

Q: Did common ownership make the rent exempt? No.

Q: Did guarantying the property debt qualify the parties? No. The rule was limited to related corporations that were co-makers, and the documents did not show equal liability.

Q: How did Florida treat the trust's receipts? As taxable commercial rent.

Citations and references

• 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. 3, 1993)
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 93A-070

Original ruling text

Oct 12, 1993

RE: TAA 93A-070
Sales Tax
Commercial Property Rental - Related Entity Exemption
Rule 12A-1.070(19)(c), F.A.C.

Dear :

This is in response to your letter dated December 1, 1992,
which requests the issuance of a Technical Assistance Advisement
(TAA) pursuant to Rule 12-11, F.A.C. Accompanying your request
are the following exhibits:

1. Guaranty of Payment (dated May 29, 1987)
2. Guaranty of Payment (refinancing note dated May 21,
   1992)
3. Assignment of Rents (dated May 29, 1987)
4. Land Trust Agreement (dated May 29, 1987)
5. Page 1, 1991 Form 1041

It is your contention that the lease arrangement entered
into between a XXX. [hereinafter "Lessee"] qualifies for the
sales tax exemption granted to related entities pursuant to Rule
12A-1.070(19)(c), F.A.C. Your letter provides in part:

"The taxpayer is a Grantor Trust, pursuant to Sections 671678, IRC 1986, which owns and operates real property located in
XXX. The real property is presently leased to the following
Florida corporation:

"1. [Lessee]

"The following individuals are the shareholders of
[Lessee]. These individuals are also the grantors of the trust,
and therefore the owners of the real property."

Your letter further provides that "Lessee" and its
shareholders have guaranteed the debt secured by the real

property. The shareholders are XXX (effective 1/1/93).

DETERMINATION

The documents provided by you were examined in their
entirety. The following passages from the original "Guaranty of
Payment" dated May 29, 1987, are deemed pertinent to the issue
raised in your request:

"FOR VALUE RECEIVED, the sufficiency of which is hereby
acknowledged, and in consideration of any loan or other
financial accommodation heretofore granted to XXX (the
Borrower') by XXX (theLender'), the undersigned agree that:
"The undersigned hereby unconditionally guarantees the full
and prompt payment when due of the sums hereinafter specified...
It is mutually agreed that this is a continuing guaranty.

"The undersigned further unconditionally guarantee the
faithful, prompt and complete compliance by Borrower with all
terms and conditions of the Note, the Leasehold Mortgage
securing payment of the liabilities and all other agreements,
documents and instruments now or hereafter arising securing
payment of the Liabilities or related thereto (the Note,
Leasehold Mortgage and all other instruments collectively
referred to hereinafter as the `Loan Documents')...

"Any notice, demand or request by Lender, its successors or
assigns, to the undersigned shall be in writing, and shall be
deemed to have been duly given or made if either delivered
personally to the undersigned or mailed by certified or
registered mail addressed to the undersigned at:

"XXX" (Emphasis Supplied)

The agreement contains only your signature (XXX). Neither
the "Lessee" nor the beneficiaries of the trust are listed as
guarantors of this note (nor have the above mentioned parties
applied their signature to this document).

Upon reviewing the Land Trust Agreement dated May 29, 1987,
the following paragraphs were deemed applicable to the issue

raised in your request:

"THIS TRUST AGREEMENT, made effective the 29th day of May,
1987, between XXX... hereinafter called the Trustee', which designation shall include all successor Trustees, and XXX, hereinafter called theBeneficiaries', which designation shall
include all successors in interest to any beneficiary;
witnesseth, that the Trustee has or is about to acquire title to
the following described property...

"1. NAMES AND INTERESTS OF BENEFICIARIES. The following
persons are the Beneficiaries of this Trust, and as such shall
be entitled to all of the earnings, avails and proceeds of the
trust property according to their interests set forth opposite
their respective names:
"XXX

59%

XXX

26%

XXX

10%

XXX

5%

"2. ... No Beneficiary shall have any legal or equitable
right, title or interest, as realty, in or to any real estate
held in trust under this agreement or the right to require
partition of such real estate...
"5. BENEFICIARIES MANAGE AND OPERATE TRUST PROPERTY. The
Beneficiaries in their own right shall have full and exclusive
control over the management and operation of the trust property
and control of the selling, renting, and other handling and
disposition of it, and each Beneficiary, or his or her agent,
shall collect and otherwise handle his or her share of the
rents...
"12. REIMBURSEMENT AND INDEMNIFICATION OF TRUSTEE. If the
Trustee shall pay or incur any liability to pay any money on
account of this Trust, or incur any liability to pay any money
on account of being made a party to any litigation as a result
of holding title to the trust property or otherwise in
connection with this Trust... the Beneficiaries agree that on
demand they will, in proportion to their specific percentage of
ownership, pay to the Trustee, with interest at the rate of 12%
per annum, all such payments made or liabilities incurred by the

Trustee..."

The above referenced document is signed by XXX and by the
following beneficiaries: XXX.

The Land Trust Agreement, dated May 29, 1987, does not name
XXX (shareholders of the "Lessee") as beneficiaries to the trust
(XXX did not become a shareholder until 1/1/93 and is,
therefore, not listed here).

The final document containing language pertinent to the
issue in question is the Guaranty of Payment dated May 21, 1992.
Notable excerpts include:

"THIS GUARANTY OF PAYMENT is executed on May 21, 1992, by
XXX & CO., P.A., Certified Public Accountants, a Florida
professional corporation (collectively the Guarantor') in favor of XXX (theLender')....

"19. Not withstanding any contrary provision of this
Guaranty, Lender agrees by its acceptance hereof that:
"(a) A. XXX liability to Lender under this Guaranty shall
never exceed: ONE HUNDRED THIRTY-ONE THOUSAND ONE HUNDRED
SEVENTY-FIVE AND NO/100 DOLLARS (U.S. $131,175.00); plus (b)
sixteen and one-half percent (16.5%) of all interest, charges,
indemnities, advances, costs...
"(b) XXX liability to Lender under this Guaranty shall
never exceed: THIRTY-NINE THOUSAND SEVEN HUNDRED FIFTY AND
NO/100 DOLLARS (U.S. $39,750.00); plus (b) five percent (5%) of
all interest, charges, indemnities...
"(c) XXX liability to Lender under this Guaranty shall
never exceed: FIFTY-ONE THOUSAND SIX HUNDRED SEVENTY-FIVE AND
NO/100 DOLLARS (U.S. $51,675.00); plus (b) six and one-half
percent (6.5%) of all interest, charges, indemnities,
advances...
"(d) XXX liability to Lender under this Guaranty shall
never exceed: FIFTY-ONE THOUSAND SIX HUNDRED SEVENTY-FIVE AND
NO/100 DOLLARS (U.S. $51,675.00); plus (b) six and one-half
percent (6.5%) of all interest, charges, indemnities, advances,
costs...
"(e) XXX & XXX., P.A., Certified Public Accountants, a

Florida professional corporation shall remain liable to Lender
for one hundred percent (100%) of the Obligations." (Emphasis
Supplied)
The above referenced instrument dated May 21, 1992, was
signed by the shareholders of "Lessee" (except for XXX, who was
not a shareholder until 1/1/93).

As correctly cited in your request, Rule 12A-1.070(19)(c),
F.A.C., exempts consideration paid between related corporations
from tax if the consideration constitutes the payment of a debt.
As noted in your request this department has in the past
recognized other entities as related parties for purposes of the
rule. However, it is this department's position that there is no
statutory basis for the exemption contained in Rule 12A1.070(19)(c), F.A.C. Therefore, the exemption or exception
contained in the Rule may not be extended to transactions
between corporations and partnerships, or to guarantors. The
department will be guided by the express terms of the rule until
it is repealed. Therefore, the tax exemption applies only to
payments between related corporations which are co-makers of the
debt securing the real property.

The Department's position in regard to Rule 12A1.070(19)(c), F.A.C., was stated in a Declaratory Statement
dated March 3, 1993, to Regal Kitchens, Inc., 15 F.A.L.R. 1467
(Fla. Dept. of Revenue, March 1993).

However, even if we extended the rule beyond corporations
which are co-makers of the debt securing the real property, the
transaction described in your request does not qualify for the
exemption. The documents reviewed by this writer did not
support the additional criteria of equal liability existing for
all parties named on the debt instruments. Therefore,
consideration received by "Grantor Trust" from "Lessee" is
subject to tax as rental consideration.

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 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.

Sincerely,

Betsy Turner
Technical Assistant
Statutory Compliance
BT/