How much of the mortgage balance was subject to documentary stamp tax when partnership property passed to the remaining partner on dissolution?

Plain-English summary

Florida imposed documentary stamp tax on 50% of the mortgage balance when the dissolving partnership's property passed to its remaining partner.

Before dissolution, the remaining partner bore half the partnership's debt through its partnership interest. After the property transfer, it would hold the entire economic burden even though the renewed loan was nonrecourse and secured only by the property. The Department therefore found a 50% shift in mortgage burden and used that share as taxable consideration.

What this means for you

• A transfer by operation of law could still produce a taxable deed.
• The tax calculation followed the shifted economic burden, not merely record title.
• The relevant amount was 50% of the mortgage balance at recording.

Common questions

Q: Was the dissolution deed taxable?
A: Yes.

Q: What was the tax base?
A: Fifty percent of the mortgage balance when the deed was recorded.

Citations and references

• Fla. Stat. § 201.02(5) — partnership-to-partner conveyances
• Fla. Stat. § 620.63(2) — partners' liability
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96B4-006

Original ruling text

Apr 25, 1996

Re: Technical Assistance Advisement No. 96(B)4-006
Documentary Stamp Tax; Deed Documenting the Transfer
of Property from the Dissolving Partnership
XXX (The Partnership)
XXX (Partner I)
XXX (Partner II)
XXX (New Partner)
XXX (Limited Partner)

Dear :

This is in response to your request dated February 20,
1996, for a Technical Assistance Advisement on behalf of The
Partnership.

Facts

The Partnership was formed XXX and consisted of two
partners, Partner I and Partner II. On XX, the Partnership
purchased a parcel of property (the Property) commonly known as
the XXX. In connection with the purchase, the Partnership
secured a $XX construction loan with a Promissory Note and a
Mortgage on the Property. Each of the partners jointly and
severally guaranteed the obligations of the Partnership to the
lender.

The Partnership refinanced $XX of its loan through a
secondary lender on XX. The original lender assigned the
Mortgage to this replacement lender, and the Partnership
executed an Amended and Restated Note in favor of the
replacement lender. The partners guaranteed the obligations of
the Partnership to the replacement lender; however, the Guaranty
was terminable when the annualized net rentals from the shopping
center on the Property reached a specific level. Upon the
Guaranty's termination, neither the Partnership nor either of
the partners were to be personally liable for repayment of the
loan amount, but the loan would still be secured by the mortgage

on the Property.

The Partnership extended its loan from the secondary lender
pursuant to an Extension Agreement and a Renewal Note for $XX,
both dated XX. The Extension Agreement extended the mortgage on
the Property as security for the loan. Neither partner
guaranteed this renewed loan, and pursuant to the Renewal Note,
neither the Partnership nor its partners were to be personally
liable on the renewed loan.

Subsequently, New Partner replaced Partner II as a partner
of the Partnership. New Partner has two partners: Partner I,
which holds a 99% interest and is the general partner; and (2)
Limited Partner, a wholly owned subsidiary of Partner I, which
holds a 1% interest as a limited partner.

This inquiry arises because Partner I is interested in
dissolving Limited Partner, which will leave New Partner with
only one partner and thereby dissolve that partnership by
operation of law, which will in turn leave the Partnership with
only one partner, Partner I, thereby dissolving the Partnership
by operation of law. Consequently, the Property would be
transferred to Partner I, and Partner I would want to document
its ownership with a deed.

Assuming the facts cited above, would Partner I be
obligated to pay documentary stamp taxes on the deed documenting
the transfer (the transfer occurs by operation of law but the
use of the deed is preferable in order to document the transfer
for the insuring title insurance company) of the Property from
the dissolving Partnership to Partner I?

First, the Florida Statute addressing this situation, s.
201.02(5),F.S., requires taxation of conveyances of real
property to a partner from a partnership only when that property
was conveyed to the partnership after July 1, 1986. The
Property in this case was conveyed to the partnership on XXX.

Second, under the case law that applied to such conveyances
from a partnership to a partner prior to the addition of the
1986 statute, documentary stamp taxes were due on a transfer of

real property only when there was a "genuine shifting of the
economic burden from a grantor who was solely responsible for
mortgage payments to a grantee who, prior to the transfer, had
no share in the financial obligation represented by the
mortgage." Abramson v. Straughn, 348 So.2nd, 1172, 1774 (Fla.
4th DCA 1977). In the present case, no genuine economic burden
would shift from the Partnership to Partner I. Partner I now
has a 100% interest in the Partnership and is therefore funding
the present mortgage payments in their entirety. The
Partnership's current obligation on the note is non-recourse and
is secured only by the mortgage on the Property, neither the
Partnership nor Partner I is personally liable. This will
remain true after the proposed dissolution.

Discussion and Law

Section 620.63, F.S., titled "Nature of partner's
liability," states: All partners are liable:...

"(2) Jointly for all other debts and obligations of the
partnership; but a partner may enter into a separate
obligation to perform a partnership contract."

A case on point is Andean Inv. Co. v. State, Dept. of
Revenue, Fla. App., 370 So.2nd 377 (Fla. 4th DCA 1979), where
the petitioner argued that because each partner took a share in
the general partnership in an exact proportion to the equity in
the property which he transferred to the partnership and since
each partner's liability is limited to his former liability
under his own mortgage there was not shifting of economic
burden. However, the Court stated "that this argument overlooks
the fact that the partnership entity acquired the assets subject
to the mortgages it must pay. If the partnership fails to pay
the mortgage it will lose the asset by foreclosure. All of the
assets were taken subject to mortgages, no matter the individual
former owners agreed to pay their proportionate share. If a
partner breaches his agreement, the partnership pays or the
asset is lost. A shifting of the burden occurred upon the
transfer just as described in Florida Department of Revenue v.
Demaria, 338 So.2nd 838 (Fla. 1976). As to this point, we see
no departure from the essential requirements of law."

However, the Court agreed with the Petitioner that the tax
liability was miscalculated, and that although Rule 12A4.13(10)(c), F.A.C., [later 12B-4.13(10)(c), F.A.C.] is a proper
method for determining the amount of tax owed, the consideration
figure should be reduced "by the proportionate share of the
individual grantor's liability as a partner in the entire
partnership burden of indebtedness.... If we say the
transaction is taxable because an economic burden is shifted
then we must accurately assess that burden shifting by adjusting
the consideration figure. If one partner's transfer reduces his
actual liability then the consideration for his transfer is
proportionately increased. When another partner's actual
liability is increased as a result of the transfer the
consideration for that transfer is proportionately reduced."

Determination

According to the Partnership Agreement, each of the
Partners of the Partnership had a 50% interest in the
Partnership, and were therefore jointly liable under s.
620.63(2), F.S., for the debts and obligations of the
partnership based upon their partnership interest.
Consequently, since Partner I was already liable under the
partnership laws for 50% of the debt of the Partnership, as a
result of the dissolution of the Partnership, the deed
transferring the Property to Partner I would be taxable based on
50% of the balance of the mortgage at the time the deed is
recorded. A shift of 50% of the economic burden will occur when
the property is transferred to Partner I, since it now has a
100% interest in the Partnership to be dissolved.

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,

Joy B. Eldred, C.P.A.
Tax Law Specialist
Technical Assistance

JBE/mh