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