When were Florida documentary stamp and nonrecurring intangible taxes due on mortgages securing a contingent stock-repurchase obligation?

Subject

Florida Mortgages Securing a Contingent Stock Put

Plain-English summary

Florida documentary stamp tax was due only once on the maximum stock-repurchase obligation secured by the mortgages. That remained true even though multiple Florida mortgages could secure the same joint-and-several obligation and different collateral agents could hold them for the investor.

Additional mortgages recorded later by an original co-maker, or modifications spreading an existing lien to newly acquired Florida property, did not create more documentary stamp tax as long as they secured the same obligation and did not increase its amount.

The nonrecurring intangible tax had a different trigger. The investor was not required to exercise the preferred-stock put option, so the repurchase instrument did not yet represent a current obligation to pay money. No intangible tax was due until the investor exercised the option; if exercised, tax was due only on the portion of stock required to be repurchased.

Unpaid cumulative dividends did not create documentary stamp tax while there was no sum certain that had to be paid. If exercise of the put later obligated the company or a subsidiary to pay secured dividends, additional nonrecurring intangible tax would become due then to the extent of that obligation.

What this means for you

Multiple security documents do not necessarily multiply documentary stamp tax when they secure one primary obligation and the required tax has been paid once. But adding principal or creating a distinct obligation can change that outcome.

For the historical nonrecurring intangible tax analyzed here, recording a mortgage securing a contingent obligation was not enough by itself. The tax waited until the contingency produced a current payment obligation.

Common questions

Q: Did every Florida mortgage securing the stock put require a separate documentary stamp tax? No. The ruling applied the tax once to the maximum secured obligation.

Q: Did using different collateral agents change the result? No. The mortgages still secured the same obligation for the same investor.

Q: Could later-acquired property be added without more documentary stamp tax? Yes, if an original co-maker supplied the additional mortgage or lien spreader and the secured obligation did not increase.

Q: When did nonrecurring intangible tax become due? When and to the extent the investor exercised the put option, creating a current repurchase obligation.

Q: How were unpaid dividends treated? No documentary stamp tax applied while no sum certain was payable. If exercise created a secured obligation to pay dividends, additional intangible tax became due at that time to that extent.

Q: Did the ruling cover the optional convertible mortgage loan? No. The parties elected not to complete that transaction, so the Department did not address it.

Citations and references

• Fla. Stat. § 201.08(1), (7) — documentary stamp tax on written obligations and multiple security documents
• Fla. Admin. Code rr. 12B-4.052(1)(b), 12B-4.053(34) — contingent obligations and guaranty mortgages
• Fla. Stat. §§ 199.133, 199.145(4) — nonrecurring intangible tax and refinanced obligations
• Department of Revenue v. Lincoln Pointe Associates, Ltd., 544 So. 2d 291 (Fla. 1st DCA 1989); Barnett Bank v. State, Department of Revenue, 571 So. 2d 527 (Fla. 3d DCA 1990) — contingent-obligation mortgage authorities cited in the ruling
• West Flagler Associates, Ltd. v. Department of Revenue, 633 So. 2d 555 (Fla. 3d DCA 1994) — no current obligation under a contingent guaranty
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98M-001

Original ruling text

SUMMARY

Mortgages given by a taxpayer or in addition to the taxpayer obligated under the primary debt are not subject to documentary stamp tax provided tax is paid on the document securing the primary obligation. Mortgages securing a non-current obligation is not subject to intangible tax until such time as the obligation becomes a current debt obligation.

Mar 10, 1998

Re: Technical Assistance Advisement No. 98(M)-001 Documentary Stamp Tax and Intangible Tax - Stock Repurchase Agreement Secured by Florida Mortgages ss. 199.133 and 201.08, F.S. Rule 12B-4.052(1)(b), F.A.C. XXX (hereinafter Company) XXX (hereinafter Investor)

Dear :

Your letter requesting a Technical Assistance Advisement has been referred to this office for response. The specific scenario for which advice has been requested is summarized below.

Presented by Petitioner

The Company and Investor have entered into an Investment Agreement in which the Company proposes to issue $XX (XXX shares at $XX per share) of its convertible preferred stock to the Investor. The Certificate of Designation specifies the terms of the preferred stock. The Investor has the option to "put" back to the Company, all or a portion of the preferred stock under certain terms and conditions. The Investor may exercise the put option with respect to one-third of the preferred stock four years after issuance, two-thirds after five years, and all the

preferred stock after six years. However, the Investor may exercise the put option immediately in the event of a default under the agreement. The required repurchase price under the Certificate of Designation is the original purchase price of $XX per share of the preferred stock, plus any unpaid accumulated dividends thereon, which accrue at 20% per annum. The investor is not obligated to exercise the put option.

The Company and Subsidiaries are liable for the payment of the repurchase price of the preferred stock if the put option is exercised by the Investor. The contingent obligation will be evidenced by the "Secured Evidence of Joint and Several Repurchase Obligation" (Instrument) made by the Company and Subsidiaries as co-makers (Co-Makers). The Instrument is made in favor of the Investor in a face amount equal to the original
$XX repurchase price and will be governed by a Secured Agreement made by the Co-Maker and Investor. The Secured Agreement and the Instrument will be secured by various mortgages. The agreement contains an option to also secure a $XX mortgage loan from the Investor to the Co-Makers that will be convertible into preferred stock. However, the parties have elected to only do the $XX preferred stock purchase transaction and not the convertible loan transaction. Each mortgage will include a future advance clause with a maximum amount sufficient to cover the entire repurchase obligation if the put option is exercised by the Investor.

First and second mortgages will be used to secure the obligation. Some mortgages will not be executed or recorded initially with the execution of the instrument, but will be granted after the closing by one or more of the original CoMakers against new properties as they are acquired. Other mortgage liens will be granted in the form of a mortgage modification agreement that will spread the lien of a previous mortgage to encumber new property when acquired. Notwithstanding the possible variations, all mortgages and spreaders will secure the same obligations of the Co-Makers to the Investor under the Instrument. The mortgages will not secure guaranties nor will they increase the face amount of the Instrument.

Based on the facts presented, the Company requests the Department's rulings that:

1. Because the Company and Subsidiaries are Co-Makers of
   the Instrument and because the Mortgages will be made only by original Co-Makers to secure their Instrument and not to secure any guaranties, Florida documentary stamp tax will be payable only once when the initial Mortgages are recorded in Florida, based on the $XX face amount of the Instrument.
2. Because all the mortgages will secure the joint and
   several obligations of the Co-Makers to the Investor under the Instrument, Florida documentary stamp tax will be payable only once even if some of the Mortgages are held for the Investor by different collateral agents.
3. If any additional Mortgage is subsequently recorded in
   Florida by an original Co-Maker as additional security for the obligations under the Instrument, or if an initial Mortgage is modified to encumber additional Florida property owned or acquired by an original CoMaker as additional security for the Instrument, additional documentary stamp tax will not be due because the subsequent mortgagor will be an original obligor under the Instrument along with the fact that the face amount of the Instrument will not be increased.
4. Nonrecurring intangible personal property taxes will
   not be required on the mortgages securing the CoMakers' repurchase obligation under the Instrument unless and until the Investor exercises the put option for the preferred stock, because the obligations are contingent and do not become absolute unless and until the put option is exercised. If exercised, intangible tax is due only to the extent the put option is exercised.
5. Documentary stamp tax or nonrecurring intangible
   personal property tax will not be due on unpaid cumulative dividends which may have accrued on the preferred stock as of the repurchase date because such dividends are analogous to accrued interest payable on

a loan, even though any such accrued dividends would be obligations secured under the mortgages.

Provision of the Law

Section 201.08(1), F.S., imposes documentary stamp tax on promissory notes, or nonnegotiable notes, or written obligations to pay money executed, delivered, sold, transferred or assigned in this state. Tax is also imposed on mortgages, trust deeds, security agreements or other evidences of indebtedness filed or recorded in this state. When there is both a note or written obligation to pay money and mortgage, trust deed or security agreement, tax shall be paid on the mortgage, trust deed or security agreement, and a notation is to be made on the note or written obligation to pay money that tax was paid on the mortgage, trust deed or security agreement at the time of recordation.

Rule 12B-4.052(1)(b), provides that tax, which is required to be paid on mortgages filed or recorded in this State, is computed on the indebtedness or obligation secured by the mortgage regardless of whether the obligation is contingent.

Based on Department of Revenue v. Lincoln Pointe Associates, Ltd., 544 So.2d 291 (Fla. 1st DCA 1989), and Barnett Bank v. State, Department of Revenue, 571 So.2d 527 (Fla. 3d DCA 1990), Rule 12B-4.053(34), F.A.C., was promulgated to provide for taxing mortgages which secure guaranties or contingent obligations. When a mortgage is given by a party other than the obligor, the hypothecation is that the mortgage is a guaranty and subject to tax.

Section 201.08(7), F.S., as amended July 1, 1997, provides that a mortgage, trust deed or security agreement filed or recorded in this state which is given by a different taxpayer or in addition to the taxpayer obligated under the primary debt shall be deemed to secure the primary obligation and not a separate obligation. To the extent tax is paid on the document securing the primary obligation, such tax shall be paid once notwithstanding more than one mortgage, trust deed, or security agreement may be recorded with respect to such obligation.

Section 199.133, F.S., imposes a nonrecurring tax of 2 mills on each dollar of the just valuation of notes, bonds or other obligations for the payment of money which is secured by a mortgage, trust deed, or other lien upon real property in this State.

Section 199.145(4), F.S., provides that nonrecurring tax will not be due on notes, or other obligations being refinanced, where the nonrecurring tax has previously been paid provided the new obligation is less than or equal to the unpaid principal balance plus accrued but unpaid interest as of the refinancing. If the principal plus accrued but unpaid interest exceeds the original obligation, tax will be computed on the excess of the principal balance of the new obligation over the principal balance of the original plus accrued but unpaid interest. If the original obligee is not liable on the new obligation, the entire principal balance of the new obligation is subject to nonrecurring tax. Additionally, if the new note satisfies the prior obligation, it would be a new obligation in its entirety, making it subject to intangible tax on its full amount. (1972 Op. Att'y Gen. Fla. 072-280 (Aug. 15, 1982))

Conclusion

Providing the Co-Maker(s) of the mortgages and Instrument are the same party, documentary stamp tax will only be due once on the maximum $XX secured by the mortgages. Effective July 1, 1997, documentary stamp tax will be due only once on the maximum obligation regardless of whether or not the Co-Maker of the mortgage and Instrument are the same.

The documentary stamp tax will also be due only once on the maximum secured by the mortgages even though such mortgages are held for the Investor by different collateral agents.

Any additional mortgages subsequently recorded in Florida by an original Co-Maker, as additional security for the Instrument or a modification to any initial mortgage to encumber additional property owned or acquired by an original Co-Maker, will not incur additional documentary stamp tax provided the

obligation secured is not in any way increased.

The nonrecurring intangible tax is imposed on any obligation to pay money which is secured by Florida real property. The instrument discussed in this advisement does not represent a current obligation; rather, it is an obligation which may be created based on the investor's future decision to exercise the put option. In the case of West Flagler Associates, Ltd. v. Department of Revenue,, 633 So.2d 555 (Fla. 3d DCA 1994), the court ruled that a mortgage securing a guaranty did not secure a current obligation to pay money. In such case, intangible tax was not due. In like manner, the obligation under the Instrument is contingent and will not be taxable unless and until the put option is exercised by the Investor. If the put option is exercised, the nonrecurring tax will be due only on the number of shares required to be repurchased.

Finally, the dividends may have been paid if an when the put option is exercised. Thus, there is no sum certain that must be paid such that the dividends would be subject to documentary stamp tax. If Company or a subsidiary does become obligated to pay the dividends upon exercise of the put option, and that obligation is secured by the Instrument, additional nonrecurring intangible tax would become due, at that time, to the extent of the obligation.

Since the parties have elected not to secure the $XX mortgage loan as additionally provided for in the Secured Agreement, it was not addressed in this advisement.

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,

Celestine Grantham
Senior Tax Specialist
Technical Assistance and Dispute Resolution Office of General Counsel

CG/mh