How were Florida documentary stamp and nonrecurring intangible taxes calculated on limited-recovery mortgages securing a new subsidiary's guaranties?

Plain-English summary

The contingent guaranties were not subject to intangible tax, but recording the Florida mortgages securing them was subject to documentary stamp tax.

The new subsidiary had not been a debtor in the bankruptcy case, so its new mortgages did not receive the cited bankruptcy-plan stamp-tax exemption.

No nonrecurring intangible tax was due because the mortgages secured contingent guaranty obligations rather than unconditional obligations to pay money. The guaranties themselves also were not subject to documentary stamp tax merely upon execution and delivery.

The recorded mortgages were taxable. Each mortgage limited the noteholders' recovery against the property, so stamp tax was based on the respective $1.5 million and $1.8 million caps, even where the underlying guaranty could be larger.

What this means for you

The ruling separated the guaranty from the recorded mortgage and then used the mortgage's property-recovery limit as the stamp-tax base.

Common questions

Q: Did the bankruptcy-plan exemption cover the new subsidiary's mortgages? A: No. The new subsidiary was not a debtor in the bankruptcy proceedings.

Q: Was nonrecurring intangible tax due? A: No. The guaranties were contingent obligations.

Q: Were the guaranties themselves subject to documentary stamp tax? A: No, but the recorded mortgages securing them were.

Q: What amounts were used for stamp tax? A: The mortgages' maximum recovery amounts of $1.5 million and $1.8 million.

Citations and references

• 11 U.S.C. § 1146(c) — confirmed-plan stamp-tax exemption cited in the ruling
• Fla. Stat. ch. 199 — nonrecurring intangible tax
• Fla. Admin. Code rr. 12B-4.053(32), (34) and 12B-4.054(31) — limited recovery, guaranty mortgage, and bankruptcy-plan exemption
• West Flagler Associates, Ltd. v. Department of Revenue, 633 So. 2d 555 (Fla. 3d DCA 1994) — contingent-guaranty treatment
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 95M-005

Original ruling text

May 17, 1995

Re: Technical Assistance Advisement No. TAA 95(M)-005 Documentary Stamp and Intangible Tax Recordation of a Florida Mortgage with Limited Recovery to Secure a Guaranty of a Promissory Note that is exempt from such taxes under 11 U.S.C. s. 1146(c) XXX (the Company) XXX (New Subsidiary) XXX (Collateral Agent) XXX (Agent and Noteholder)

Dear :

This is in answer to your letter of March 6, 1995, in which you have petitioned for a Technical Assistance Advisement pursuant to s. 213.22, F.S., and Rule 12-11.003, F.A.C.

Background and Statement of Facts

In XX the Company and certain existing subsidiary corporations (the "Debtor Subsidiaries") filed voluntary bankruptcy petitions for reorganization under Chapter 11 of the Code in the United States Bankruptcy Court for the Southern District of Florida. On XXX the bankruptcy court confirmed the Company's plan of reorganization (the "Confirmed Plan"), which directed the Company to execute a Working Capital and Term Loan Agreement and a Secured Floating Rate Note Agreement, both dated as of XXX (as amended from time to time, the "Loan Agreement") and certain negotiable promissory notes (as amended and renewed from time to time, the "Notes") in favor of each of the various banks extending credit thereunder to the reorganized Company.

As required by the original Loan Agreements, the Debtor Subsidiaries executed guaranties of payment of the Company's Notes (as amended and renewed from time to time, the "Debtor Guaranties"), and both the Company and the Debtor Subsidiaries issued and recorded mortgages (as amended and renewed from time to time, the "Debtor Mortgages") on certain Florida real

property owned by them to secure the Notes and the Debtor Guaranties. The Notes, the Loan Agreement, the Debtor Mortgages and the Debtor Guaranties have all been amended and renewed from time to time as permitted by the Confirmed Plan, and some of them have been transferred to new holders (i.e., the Collateral Agent and the Noteholders). These previous amendments, renewals and transfers were exempt from Florida documentary stamp taxes and Florida intangible taxes pursuant to 11 U.S.C. s. 1146(c) and applicable exemptions in the Florida Statutes, as more particularly described in the following Technical Assistance Advisements issued by the Department: TAA No.92(M)-006 dated August 5, 1992 (the "First TAA"); TAA No.94(M)-006 dated June 2, 1994 (the "Second TAA"); and TAA No. 94(M)-009 dated September 22 1994 (the "Third TAA").

In addition to the Debtor Subsidiaries, the Loan Agreements also provide that whenever the Company creates a new subsidiary corporation (such as the New Subsidiary) to acquire property, the New Subsidiary must also guarantee the payment of the Company's Notes to the Noteholders (the "New Guaranties") and must grant new mortgages on that property (the "New Mortgages") in favor of the Collateral Agent for the respective Noteholders to secure the New Guaranties. Because the New Subsidiary did not exist at the time of the Confirmed Plan and was not a debtor in the bankruptcy proceedings, the Department has previously orally advised the taxpayers that s. 1146(c) does not exempt the New Mortgages from Florida documentary stamp taxes or Florida intangible taxes.

Each of the New Mortgages by the New Subsidiary contains an agreement that limits the Noteholders' recovery against the property under the New Mortgages to a specified maximum dollar amount. The sum of $1,500,000 is the maximum amount recoverable under the New Mortgage that secures the New Guaranty for the Working Capital and Term Loan Agreement, and the amount recoverable under that New Guaranty is also temporarily limited to $1,500,000. The sum of $1,800,000 is the maximum amount recoverable under the New Mortgage that secures the New Guaranties for the Secured Floating Rate Note Agreement, although the amount recoverable under those New Guaranties is not limited to $1,800,000. The New Subsidiary proposes to

execute and deliver the New Guaranties and the New Mortgages in Florida and to record the New Mortgages against the Florida property acquired by the New Subsidiary. The taxpayers seek confirmation from the Department that the amount of documentary stamp tax and intangible tax payable on this transaction is the same regardless of whether the New Guaranties and the New Mortgages are executed and delivered within Florida or outside of Florida.

Ruling Requested

Based on the foregoing facts of the transaction and the relevant authorities, the taxpayers respectfully request the Department's ruling that:

1. No Florida intangible taxes are due on the execution,
   delivery and recordation of the New Mortgages in Florida because the New Mortgages secure the New Subsidiary's contingent obligations under the New Guaranties.
2. No Florida documentary stamp taxes are due on the
   execution and delivery of the New Guaranties and the New Mortgages in Florida because neither the New Guaranties nor the New Mortgages are unconditional written obligations to pay money, such as a promissory note.
3. Florida documentary stamp taxes are due on the
   recordation of the New Mortgages in Florida to secure the New Guaranties, based on the respective maximum dollar amounts to which the Noteholders' recovery is limited under the respective New Mortgages ($1,500,000 and $1,800,000 respectively). The Limitations on recovery (if any) contained in the New Guaranties are irrelevant to the amount of stamp tax payable in the limited recovery amounts set forth in the New Mortgages.

Relevant Authorities

Pursuant to 11 U.S.C. s. 1146(c) of the Code, the issuance, transfer or exchange of a security, or the making of or delivery

of an instrument of transfer under a plan confirmed under 11 U.S.C. s. 1129 may not be taxed under any law imposing a stamp tax or similar tax. Furthermore, federal case law has held that acts in furtherance of a confirmed plan of reorganization are exempt from the imposition of stamp taxes and similar taxes pursuant to 11 U.S.C. s. 1146(c) of the Code. City of New York v. Jacoby-Bender, Inc., 758 F.2d 840 (2d Cir. 1985); City of New York v. Smoss Enterprises Corp., 54 Bankr. 950 (E.D.N.Y. 1985).

The Notes originally delivered by Company pursuant to the Confirmed Plan were therefore exempt from Florida documentary stamp tax and intangible tax. As provided in the Confirmed Plan and the Department's First TAA, Second TAA and Third TAA, the Notes and the security documents securing the Notes may be renewed or modified without affecting the tax exemption. In the Department's view, expressed in recently amended Rule 12B4.054(31) of the Florida Administrative Code, the s. 1146(c) exemption does not extend to a transaction unless a debtor (i.e., the Company or a Debtor Subsidiary) is a party. Since the New Subsidiary was not a debtor in the bankruptcy proceedings, the New Mortgages securing the New Guaranties of the exempt Notes and exempt Loan Agreement are not themselves exempt under s. 1146(c) and are to be analyzed in the same manner as any other recorded mortgage securing a guaranty of an exempt promissory note (such as a note executed outside of Florida).

Under the case of West Flagler Associates, Ltd. v. Department of Revenue, 633 So. 2d 555 (Fla. 3d DCA 1994), the Florida non-recurring intangible tax does not apply to a mortgage recorded in Florida to secure a guaranty because the guaranty is a contingent obligation. Similarly, the Florida annual intangible tax does not apply to a secured or unsecured guaranty executed and delivered in Florida for the same reason: The intangible tax applies to notes, bonds and other obligations for the payment of money, not to contingent obligations such as guaranties.

Under Rule 12B-4.053(34), F.A.C., and case law the documentary stamp tax applies to a mortgage recorded in Florida to secure a guaranty, even though the guaranty itself is a

contingent obligation. Under Rule 12B-4.053(32)(c), F.A.C., states in part the following: "in no event will the tax be due on more than the indebtedness secured by the Florida mortgage or any other amount which the mortgagee limits its recovery".

Accordingly, even though the contingent indebtedness evidenced by some of the New Guaranties may be greater, the documentary stamp tax on the New Mortgages is in each case based on the amount to which the New Mortgages limit the Noteholders' recovery against the mortgaged property ($1,500,000 and
$1,800,000 respectively).

Discussion and Law

Intangible Tax

Chapter 199, F.S., imposes a nonrecurring tax of two mills on obligations for the payment of money which are secured by Florida real property. The recent court ruling of West Flagler Associates, Ltd. v. Department of Revenue, 633 So. 2d 555 (Fla. 3d DCA 1994) provided that even if intangible taxes are not paid on the promissory note given by the borrower, nonrecurring intangible taxes are not due on the execution or recordation of the mortgage securing the guaranty because the guaranty is a contingent obligation.

Documentary Stamp Tax

Rule 12B-4.053(34), F.A.C., has been amended to reflect case law holding that mortgages recorded in Florida to secure a guaranty are subject to documentary stamp tax even though the guaranty itself is a contingent obligation. Also Rule 12B4.053(32)(c), F.A.C., states in part: "in no event will the tax be due on more than the indebtedness secured by the Florida mortgage or any other amount which the mortgagee limits its recovery to". Also Rule 12B-4.053(32)(b), F.A.C., states that if the mortgage limits recovery to less than the amount of the indebtedness secured, the tax is due on the amount to which recovery is limited.

Department's Position

No Florida intangible taxes are due on the execution, delivery and recordation of the New Mortgages in Florida because the New Mortgages secure the New Subsidiary's contingent obligations under the New Guaranties.

No Florida documentary stamp taxes are due on the execution and delivery of the New Guaranties. The Guaranties themselves are exempt from tax but the Mortgages securing the Guaranties are taxable.

Florida documentary stamp taxes are due on the recordation of the New Mortgages in Florida to secure the New Guaranties, based on the respective maximum dollar amounts to which the Noteholders' recovery is limited under the respective New Mortgages ($1,500,000 and $1,800,000 respectively).

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,

Baldan E. Sulker

Tax Audit Specialist III
Technical Assistance

BES/mh