Could a renewal note remain exempt when its effective date differed from execution or a corrective document fixed the stated balance?

Subject

Renewal Notes

Plain-English summary

A renewal note could remain exempt from additional documentary stamp tax even when its stated effective date preceded its execution date. When the renewal was effective from the original maturity date, the unpaid principal balance on that effective date controlled. Payments that reduced the balance before the later signing date did not defeat the exemption.

The bank also could execute a corrective document to fix a verifiable mistake in the balance recited in the renewal agreement. Although no specific corrective-document exemption applied, correcting the actual balance did not destroy the renewal's exempt status when every other section 201.09 requirement was satisfied.

What this means for you

The controlling balance followed the date from which the renewal actually operated. Records needed to establish the original taxed obligation, the effective-date balance, intervening payments, and the factual error corrected.

Common questions

Which balance controlled when effective and execution dates differed? The effective-date balance, when the instrument renewed the obligation from that date.

Did later principal payments defeat the exemption? No. The Department allowed the exemption even though the balance fell between the renewal date and execution date.

Could an incorrect balance be corrected tax-free? The exempt status continued when the corrective document merely fixed a verifiable error and all other section 201.09 conditions were met.

Citations and references

• Fla. Stat. §§ 201.08(1), 201.09, and 213.22
• Fla. Admin. Code rr. 12B-4.051(1) and 12B-4.054(1)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 94B4-021

Original ruling text

Dec 12, 1994

Re: Technical Assistance Advisement No. 94(B)4-021 Documentary Stamp Tax; Renewal Notes XXX (Bank) XXX (Borrower)

Dear :

You have petitioned for a Technical Assistance Advisement pursuant to s. 213.22, F.S., and Rule 12-11.003, F.A.C.

Issue I

Whether a renewal instrument containing an effective date different from the actual date of execution, when the actual outstanding principal balance as of the effective date is the amount renewed, is taxable when the principal balance as of the execution date had been reduced between the effective date and the actual date of execution.

Issue II

Whether a corrective note can be issued tax exempt to correct the outstanding balance on a renewal note where the outstanding balance on the books and records is a greater amount than the amount cited on the renewal note.

Facts and Discussion

On or about June 18, 1987, Bank made a loan to Borrower in the amount of $XX evidenced by a promissory note and secured by a mortgage on Florida real property. All appropriate documentary stamp taxes and intangible taxes were paid. On or about October 21, 1988, the Bank made a future advance to the Borrower in the amount of $XX. This future advance was evidenced by a separate promissory note in the amount of $XX and was thereupon consolidated into that certain Amended and Consolidated Note dated October 18, 1988, in the amount of $XX.

Appropriate documentary stamp taxes and intangible taxes were paid in connection with the recording of the Notice of Future Advance and Mortgage Modification Agreement further evidencing the above-referenced Future Advance and Consolidation.

The maturity date of the Consolidated Note was June 18, 1993. On January 13, 1994, the Borrower signed a Modification and Extension Agreement and Waiver which document, pursuant to its terms, was made effective as of June 18, 1993. A copy of this Extension Agreement was enclosed for our information.

Paragraph H of the recitals to the Extension Agreement reflected that the outstanding principal balance due under the Consolidated Note as of the effective date (i.e., June 18, 1993) was $XX. On the execution date of the Extension Agreement (i.e., January 13, 1994), the outstanding balance of the loan was $XX. According to the Bank's trial balance, on the effective date of the Extension Agreement the outstanding balance was actually
$XX. It was not until after the recording of the Extension Agreement that this error in the reference to the outstanding principal balance on the effective date was discovered.

Upon discovery of this error, in February of 1994, the Bank, the Borrower and the Guarantors entered into a Modification Agreement (a copy of which was also attached to your letter) correcting the reference to the outstanding balance as of the effective date.

Issues Upon Which a Technical Assistance Advisement is Requested

Based on the foregoing description of facts, two issues are presented upon which the Bank requests a technical assistance advisement. These issues are as follows:

a. Where the renewal instrument contains an effective date different from the actual date of execution and if the actual outstanding principal balance as of the effective date is the amount renewed, will the renewal be exempt from tax provided all other requirements of s. 201.09, Florida Statutes, are met even though the principal balance as of the execution date may have

been reduced by principal payments received between the effective date and the actual date of execution?

b. Where an unintentional error is made in calculating the outstanding principal balance as of the date of renewal and, as a result of such error, the renewal instrument renews an amount greater than the outstanding principal amount, if the Bank promptly corrects such error upon its discovery will the renewal instrument nevertheless be subject to documentary stamp taxes under the theory that it renews more than the outstanding principal balance of the loan on the effective date of the renewal?

Your Discussion of Issues Presented

a. I am unaware of any statutes, regulations, court decisions or Technical Assistance Advisements which address the first issue set forth above. It would appear only logical, however, that if a promissory note is executed and is to be effective as of a date other than the date of execution, the date upon which the note is effective should be the date used for testing whether the promissory note satisfies the requirements of s. 201.09. In other words, the balance outstanding on the effective date should be the balance renewed under the renewal instrument. If the promissory note is effective as of a certain date, and the parties desire to evidence the Borrower's obligations as of that date, then the outstanding amount on that date must be used. Based on the foregoing, it is my belief that if a renewal promissory note is executed which contains an effective date other than the date of execution, then the renewal note should only renew the outstanding balance as of the effective date and not the outstanding balance on the date of execution.

b. With respect to the second issue presented above, I am not aware of any regulations, court decisions or Technical Assistance Advisements which address this

issue. To impose a tax, however, based on an error as described above, would be to impose a tax upon a taxpayer due to a mistake of fact. In my view, the Department of Revenue should not be so stringent in its interpretation of the statute so as to impose a tax in the case where an honest error is made in calculating the outstanding principal balance and immediately upon discovery of that error, the taxpayer takes steps to correct its own mistake and modify the note and/or mortgage to reflect the correct amount. Florida Administrative Code Rule 12B-4.014(3) exempts from documentary stamp taxes deeds which are executed to correct a deficiency in a previous deed on which the tax has been paid. While I acknowledge that this regulation addresses the tax imposed under s. 201.02 rather than the tax imposed under ss. 201.08 and 201.09, I think it is instructive on how this issue should be resolved. This regulation introduces the concept that a taxpayer should not be penalized for a mistake of fact where such mistake of fact is later corrected.

c. The above-referenced factual situation and issues have previously been presented by the Bank to the Department of Revenue. Mr. James E. Silvey responded to such request by informal letter of technical advice dated June 24, 1994, a copy of which is also enclosed for your information. With this request for Technical Assistance Advisement, we are trying to receive a binding determination from the Department of Revenue on these issues.

Discussion and Law

The tax levied by s. 201.08(1), F.S., is an excise tax on promissory notes, nonnegotiable notes, written obligations to pay money made, executed, delivered, sold transferred, or assigned in Florida and for each renewal of the same. Section 201.09, F.S., exempts the renewal of notes and mortgages that renew the identical contractual obligation.

Rule 12B-4.051(1), F.A.C., provides that tax is required on a note executed in Florida with the tax measured by the amount of the note. In addition, a document executed or recorded which renews or extends an existing obligation is subject to tax, unless it meets the requirements of s. 201.09, F.S. Further, Rule 12B-4.054(1), F.A.C., provides that an original note may be renewed for the unpaid balance of the amount which was previously disbursed provided all other requirements of s. 201.09, F.S., are met without additional tax due. Section 201.09, F.S., provides that a note may be renewed without tax due if it only extends or continues the identical contractual obligations of the original note and evidences part or all of the original indebtedness evidenced thereby. In order to be exempt, the renewal note shall not be executed by any person other than the original obligor and must renew and extend only the unpaid balance of the original contract and obligation.

Department's Position

Section 201.08, F.S., taxes all renewals. Section 201.09, F.S., provides an exception for renewals of the identical contractual obligation. In the first case, the renewal instrument contained an effective date different from the date of execution. In addition, the actual outstanding principal balance as of the effective date was the amount renewed, and the principal balance was reduced between the effective date and the date of execution. Since the tax applies to all notes and their renewal unless the identical obligation is renewed and as the renewal instrument in this case only renews the outstanding balance as of the effective date of the renewal, the renewal is exempt from additional documentary stamp tax under s. 201.09, F.S., if all other requirements under s. 201.09, F.S., are met. The exemption under s. 201.09, F.S., does not require that the renewal date and execution date of a renewal be the same. Further, the exemption may apply when the outstanding balance has been reduced between the renewal date and the execution date of the renewal.

When the renewal instrument renews the original note from the maturity date and is effective from the maturity date and not the execution date, the balance of the renewal instrument on

the maturity date controls. If the renewal renews the original note from the date of execution, and is effective on the execution date, the balance at the time of execution would control.

The other situation consisted of executing a corrective document to correct an error whereby the wrong balance was recited in the renewal agreement. The question is whether a corrective document can be executed and the documentary stamp tax exempt status continued?

There is no specific provision for allowing a corrective document to be exempt. However, as the document is exempt under certain conditions, and as the original document was incorrect and the corrective document merely corrected a verifiable error as to the actual balance on the renewal date, the exempt tax status would continue if all other requirements under s. 201.09, F.S., are met.

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,

James E. Silvey
Tax Law Specialist
Technical Assistance

JES/jes