Did a nonresident estate owe Florida estate tax on unencumbered Florida property passing to a spouse by survivorship and marital deduction?

Subject

All Properties of Estate Included; Marital Deduction

Plain-English summary

The nonresident estate owed Florida estate tax based on the Florida property's share of the total federal gross estate. The property counted even though it passed directly to the wife by survivorship, was outside probate, and qualified for the federal marital deduction. What mattered was inclusion in gross estate, not taxable estate.

Because the property was unencumbered, its full value entered the formula. The ruling separately explained that a nonrecourse mortgage reduces the property's included value, not below zero, while recourse debt is reported separately and leaves full property value in gross estate.

What this means for you

For this historical nonresident formula, Florida situs and federal gross-estate inclusion controlled. Marital-deduction and probate treatment did not remove the property from the calculation.

Common questions

Did tenancy by the entireties avoid the tax? No.

Did the marital deduction remove the property from Florida's formula? No, because the formula used gross-estate values.

How did mortgage type matter? Nonrecourse debt reduced the property's included value; recourse debt was separately reported.

Citations and references

• Fla. Stat. §§ 198.02, 198.03, and 213.22
• Fla. Admin. Code rr. 12C-3.001, 12C-3.002, and 12C-3.003
• Treas. Reg. § 20.2053-7

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 94C3-001

Original ruling text

Feb 03, 1994

Re: Technical Assistance Advisement No. 94(C)3-001
Estate Tax, Section 198.03, F.S.
All Properties of Estate Included; Marital Deduction
XXX (hereinafter Estate)
XXX (hereinafter Decedent)
XXX (hereinafter Wife and Personal Representative)
XXX (hereinafter Personal Representative)
XXX (hereinafter Personal Representative)
XXX (hereinafter Property)

Dear :

This is in response to your request for a Technical Assistance
Advisement concerning estate tax authorized by s. 198.03, F.S., as
it applies to substantially the following question:

Where a Florida nonresident Decedent and Wife owned a Florida
Property as tenants by the entireties and this property was
unencumbered, passed directly to Wife by survivorship, did not
pass under Decedent's Will, was included in the marital
deduction, and was not part of the probate estate, would any
Florida estate tax be due?

BACKGROUND

Nonresident Decedent and Wife owned Property in Florida as
tenants by the entireties. The portion of Property owned at death
formed the value of Decedent's nonresident Florida property and
accordingly was included in Decedent's Gross Estate. Decedent's
federal estate tax return (Form 706) included this Florida Property
in "Gross Estate" and took a deduction for Property under the
marital deduction to arrive at the "Taxable Estate".

DISCUSSION AND LAW

The Florida Constitution and statutes support different methods
of taxing the estates of residents (s. 198.02, F.S., and Rules 12C-

3.001 and 12C-3.002, F.A.C.) versus nonresidents (s. 198.03, F.S.).
The Florida Constitution limits taxation of resident estates. While
the estates of resident decedents must be allowed to reduce the
amount of the federal credit for state death taxes by the amount of
nonresident estate or inheritance taxes properly paid to other
states (so that the estate of a Florida resident decedent never pays
more than the federal credit for state death taxes), such is not the
case for the estates of Florida nonresidents.

The United States Supreme Court held in Maxwell v. Bugbee, (250
U.S. 525, 40 S.Ct. 2, 63 L.Ed. 1124 (1919)) that there are
reasonable distinctions between residents and nonresidents
sufficient for the states to treat them differently for the
imposition of estate taxes. Florida taxes residents only to the
extent of the credit for state death taxes as shown on the federal
estate tax return. In resident estate cases where estate or
inheritance taxes paid to other states on out-of-state property
equaled or exceeded the federal credit for state death taxes,
because of Florida's constitutional limitation on estate taxation of
Florida residents, Florida would not receive any state estate tax at
all.

However, contrary to dicta contained in the Good case (398
So.2d 938 (1981)), there is no such constitutional limitation
regarding a nonresident's liability for Florida estate taxes. The
sum of a Florida nonresident's Florida estate taxes plus estate
taxes properly paid to all other states involved in the
estate may exceed the amount of the federal credit for state
death taxes.

Rule 12C-3.003, F.A.C. presents the following formula for
calculating the tax upon the estates of nonresident decedents:

" ... an amount equal to such proportion of the amount of the
credit allowable for state death taxes under the Federal
Revenue Act as the gross value (as determined by the United
States Internal Revenue Service) of the property taxable in
this state bears to the value of the entire estate wherever
situate.... "

This is exemplified by the following formula:

Gross value of property

Credit for

Estate

having situs in Florida

State Death

Tax due

----------------------- x

Taxes

=

Florida

Gross value of entire
estate wherever situate

Therefore, the gross value of Property owned by the decedent is
includable in the numerator of the formula as well as in the
denominator. This fraction times the credit for state death taxes
is the amount of estate tax due Florida in the case of a
nonresident. This is so without regard to how much estate and
inheritance tax is paid to all other states.

The fact that Decedent's Property was not part of the probate
estate because it passed automatically to Wife is not of relevance
for estate tax purposes. What matters is that a portion of the
property was part of Decedent's Gross Estate subject to the marital
deduction to arrive at the Decedent's Taxable Estate.

Normally, the full value of marital deduction property is
included in the federal "gross estate". However, if the property
was encumbered by a nonrecourse mortgage, only the net equity of the
property is included in the "gross estate". Accordingly, if the
Florida Property of a nonresident decedent passed to the surviving
spouse by way of marital deduction and the Property was subject to a
nonrecourse mortgage, only the value of the mortgaged property less
the indebtedness (but not below zero) is to be included in Florida's
taxing formula for nonresident estates.

Where a mortgage is a nonrecourse mortgage (as in the Good
case), any excess of the indebtedness over the value of the property
may not be charged against other property of the estate that is not
subject to that mortgage, or if the decedent was not personally
liable for that mortgage, the value of the property must be reduced
by the amount of the nonrecourse mortgage (but not below zero) on
"Schedule A--Real Estate" (Form 706) in accordance with instructions
contained in federal Treas. Reg. 20.2053-7.

Where a mortgage is a recourse mortgage and any excess of the
mortgage over the value of the property may be charged against other

property of the estate, or if the decedent was personally liable for
that mortgage, the associated indebtedness would be reported
separately on "Schedule A--Real Estate" and on "Schedule K--Debts of
the Decedent, and Mortgages and Liens" in the federal Form 706
return.

In the instant case, the request states that the property was
unencumbered at death. Therefore, the full value of Property owned
by the decedent would be included in the appropriate Form 706
schedules and would accordingly be part of the Gross Estate which is
included in the formula for calculation of a nonresident's Florida
estate tax.

As stated in Department of Revenue v. Good (398 So.2d 938 (Fla.
3d D.C.A., 1981)):

The rule [Rule 12C-3.03, F.A.C.,] is to aid in the
implementation of the underlined portion of the formula
embraced under Section 198.03, supra. In the instant case the
rule is not applicable because it ignores the first portion of
the formula which only purports to allow Florida to levy a tax
equal to the proportional credit allowable against the federal
estate tax. Simply stated, Florida receives no proportionate
sum or credit beyond that allowable under the Federal Revenue
Act. Applying this test, it is clear that the Florida property
did not increase the federal estate tax and, consequently,
contributed nothing to the credit allowable to Florida.
Instead, the purchase money encumbrance constituted a liability
and actually decreased the credit allowable in the respective
states under the Federal Revenue Act.

... We are merely construing the non-resident statute in an
analogous way with the resident statute out of respect for
Florida's interest in attracting investors which is summed up
by the statement that "it costs no more to die in Florida"
whether a resident of Florida or an owner of property subject
to taxation in Florida.

It is the Department's position that the immediately preceding
language in Good suggesting that Florida cannot impose a nonresident
estate tax in excess of an amount that, when added to the estate tax

imposed by the domiciliary state, equals the federal credit for
state death taxes, is dicta. The Florida cases limiting the total
Florida estate tax paid by estates to the federal credit have all
dealt with the estates of Florida resident decedents applying the
constitutional and statutory provisions: Green v. State, Fla., 166
So.2d 585; Department of Revenue v. Golder, Fla., 326 So.2d 409; and
Cockrell v. Lewis, Fla. App., 389 So.2d 307.

Representatives of nonresident estates have seized upon the
language in the Good case to argue that since Florida marital
deduction property is not part of the taxable estate, none of the
estate tax (including the portion reflected in the "credit for state
death taxes") is attributable to the Florida marital deduction
property. Therefore, they argue erroneously that such Florida
marital deduction property cannot be subjected to Florida's estate
tax. Likewise, the Good case is cited as authority (also
erroneously), by representatives of nonresident estates, to reduce
the value of Florida real property subject to Florida estate tax by
the amount of any mortgage on the subject property. In Good, the
nonrecourse mortgage exceeded the value of the property and
therefore reduces its value of such property included in the "gross
estate" to zero.

DEPARTMENT'S POSITION

A resident's Florida estate tax is constitutionally limited to
the amount of the federal credit for state death taxes in the
Federal 706 return. A nonresident's Florida estate tax has no such
constitutional or other limitation, and is calculated as a portion
of the federal credit for state death taxes regardless of the total
amount of estate or inheritance taxes paid to other states.

Where property is subject to a recourse mortgage, the property
is includable in Schedule A (Form 706) and the mortgage is
includable in Schedule K (Form 706). The full value of the property
is, therefore, included in the Gross Estate whether or not the
property is deducted as a marital deduction to arrive at the Taxable
Estate.

Where a property is subject to a nonrecourse mortgage, only the
net value of the property should be reflected in Schedule A of Form

706 and included in the "gross estate" and Florida's taxing formula
for the estates of nonresidents. If the nonrecourse mortgage
balance exceeds the value of the property, this excess cannot be
used to reduce the value of the property below zero (Treas. Reg.
20.2053-7) or reduce the value of other estate property.

The Department's position is that "taxable in this state" as
used in defining the numerator of Florida's nonresident estate
taxing formula includes property situate in this state which is part
of the "gross estate" and which is transferred from the estate of
the decedent to the surviving spouse when there is a credit for
state death taxes taken by the nonresident estate on the federal
estate tax return. If a credit for state death taxes is taken on
the federal estate tax return, the Department will assert its
nonresident estate tax as a proportion of the credit for state death
taxes based on the value of the Florida property included in the
"gross estate" over the value of the "total gross estate" whether or
not the total of all estate and inheritance taxes paid exceeds the
amount of the credit for state death taxes. For Florida nonresident
estate taxes, it is irrelevant what constitutes the nonresident's
"taxable estate". Only what is included in the nonresident's "gross
estate" is relevant to the Florida estate taxing formula.

Therefore, nonresident Decedent's estate owes Florida estate
tax based on the proportion which the value of the decedent's
Florida property bears to the total gross estate wherever situate
times the amount of the credit for state death taxes as shown on the
federal estate tax return even where the property was held as
tenants by the entireties and deducted on the federal return as a
marital deduction.

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,

M.E. Clemens
Tax Audit Specialist III
Technical Assistance

MEC/mh