CrescentâDid the Florida Supreme Court Effectively Repeal the Documentary Stamp Tax on Transfers of Real Estate?
The Florida Supreme Court on May 19, 2005, issued a 7-0 decision in Crescent Miami Center, LLC v. Florida Department of Revenue, 903 So. 2d 913 (Fla. 2005), holding that a transfer of real estate from a parent transferor to its wholly owned transferee, absent any exchange of value, is not subject to the Florida documentary stamp tax on deeds. The Florida Supreme Court’s opinion reversed the Third District Court of Appeal’s decision in the case.1
As described in this article, the Crescent decision may result in the Florida documentary stamp tax applying to substantially fewer transfers of Florida real estate.
Florida Documentary Stamp Tax
Florida imposes a documentary stamp tax on transfers of real estate by deed at a rate of $0.70 per $100 or part thereof of consideration. The Florida documentary stamp tax statute provides in pertinent part:
On deeds, instruments, or writings whereby any lands, tenements, or other real property, or any interest therein, shall be granted, assigned, transferred, or otherwise conveyed to, or vested in, the purchaser or any other person by his or her direction, on each $100 of the consideration therefor the tax shall be 70 cents. When the full amount of the consideration for the execution, assignment, transfer, or conveyance is not shown in the face of such deed, instrument, document, or writing, the tax shall be at the rate of 70 cents for each $100 or fractional part thereof of the consideration therefor. For purposes of this section, consideration includes, but is not limited to, the money paid or agreed to be paid; the discharge of an obligation; and the amount of any mortgage, purchase money mortgage lien, or other encumbrance, whether or not the underlying indebtedness is assumed. If the consideration paid or given in exchange for real property or any interest therein includes property other than money, it is presumed that the consideration is equal to the fair market value of the real property or interest therein. (Emphasis added.)2
The prima facie elements for the application of documentary stamp tax are a conveyance of an interest in real property to a purchaser for consideration.
The Florida Supreme Court granted review of the Third District’s decision in Crescent based on a direct conflict with the Second District Court of Appeal’s decision in Kuro, Inc. v. State Department of Revenue, 713 So. 2d 1021 (Fla. 2d DCA 1998), appeal dismissed, 728 So. 2d 201 (Fla. 1998). The conflict resulted from each court’s differing conclusions regarding whether there is a “purchaser” or “consideration” when a grantor transfers real estate to a wholly-owned transferee.3
Second District Opinion in Kuro
In Kuro, a father and son were equal owners of the stock of Kuro, Inc., and were likewise equal owners of eight unencumbered condominium units. The father and son transferred the condominium units by warranty deed to Kuro to avoid exposure to potential personal liability arising from the management of the properties. Each deed recited nominal consideration of $10. Kuro paid the minimum documentary stamp tax on each transaction. On audit, the DOR determined that additional documentary stamp taxes were due. Kuro filed a protest, which resulted in a formal hearing before an administrative law judge, who recommended the assessment of additional documentary stamp taxes. The DOR entered a final order, adopting the recommendation of the administrative law judge, and Kuro appealed the final order. The DOR argued on appeal that the stock issued by Kuro to the transferors constituted consideration of property other than money, which is presumed to be equal to the fair market value of the condominiums. The Second District found that the presumption set forth in the statute is a rebuttable presumption and further determined that Kuro successfully rebutted the presumption. The Second District further concluded that Kuro was not a “purchaser” within the meaning of the statute. The court cited the Florida Supreme Court’s decision in Florida Department of Revenue v. De Maria, 338 So. 2d 838 (Fla. 1976), in which the court defined “purchaser” under the statute as “one who obtains or acquires property by paying an equivalent in money or other exchange in value.”4 The Second District noted that Kuro paid nothing for the transfer of the condominiums and the beneficial ownership of the land remained unchanged. The transfers were mere book transactions and were not sales to a purchaser as contemplated in the statute. The Second District reversed the Florida Department of Revenue’s final order.
The Crescent Facts
The Crescent case arose from the transfer of a 35-story downtown Miami office building, known as Miami Center. Before the transfer, Miami Center was owned by Crescent Real Estate Equities, LP (Crescent Equities), an affiliate of a publicly traded real estate investment trust. On February 24, 2000, Crescent Equities formed Crescent Miami Center, LLC (CMC). Crescent Equities then transferred 99.9 percent of its interest in CMC to Crescent Real Estate Funding IX, LP (Crescent Funding) and 0.1 percent of its interest in CMC to CRE Management IX, LLC (CRE). On the same day, CRE transferred its 0.1 percent interest in CMC to Crescent Funding, so that Crescent Funding became the sole owner of CMC. Crescent Equities was the sole limited partner of Crescent Funding and was also the sole owner of CRE, which served as the general partner of Crescent Funding.
On February 25, 2000, Crescent Equities transferred the Miami Center property by deed to CMC. The deed provided that CMC paid $10 and “other good and valuable consideration” for the property. The purpose of the transfer was to segregate the property in order to facilitate future unsecured financing. CMC recorded the deed and paid $1,212,750 in documentary stamp tax.5
After paying the tax, CMC filed for a refund of the documentary stamp tax. The DOR denied the application, and CMC filed suit in Miami-Dade Circuit Court challenging the refund denial. Both parties moved for summary judgment in the circuit court, and final summary judgment was entered in favor of the DOR. CMC appealed the adverse summary judgment to the Third District Court of Appeal, which affirmed the order of the lower court in favor of the DOR.
Third District Opinion in Crescent
CMC contended that no documentary stamp tax was due on the transfer from Crescent Equities to CMC because beneficial ownership of the real estate did not change. Crescent Equities owns Crescent Funding, and Crescent Funding owns CMC. CMC argued that the transfer of the real property was merely a book transaction, and, therefore, it could not be considered a “purchaser” as required by the statute. The Third Circuit Court of Appeal disagreed, focusing its analysis on the impact of a 1990 amendment to §201.02(1) on prior law.
Prior to 1990, the Florida Supreme Court had rendered several opinions that essentially supported CMC’s contention. In 1956, in State ex rel. Palmer-Florida Corp. v. Green, 88 So. 2d 493 (Fla. 1956), the Florida Supreme Court held that grantee shareholders who had been transferred undivided interests in unencumbered property from a corporation were not “purchasers” because the transfer was a “mere book transaction.”6 The court held that the grantees were not purchasers because they did not pay “reasonably determinable, consideration for the conveyance as contemplated by [the statute].”7 The court further stated that it found “no legal support for the theory that the documentary stamp tax should be measured by the market value of the land transferred.”8
In its 1976 decision in De Maria, the Florida Supreme Court examined a transfer of property that was subject to an outstanding mortgage from a corporation to its sole shareholder. In De Maria, the Florida Supreme Court held that there was no taxable exchange in the transfer of a corporation’s equity in real property to its sole shareholder.9 However, the shareholder was considered a “purchaser” of the real property to the extent of the mortgage.10 Citing Webster’s New Twentieth Century Dictionary, (2d unab. ed. 1971), the court discerned that the plain and ordinary meaning of “purchaser” for purposes of the documentary stamp tax on deeds is “one who obtains or acquires property by paying an equivalent in money or other exchange in value.”11 The court held that since there was reasonably determinable consideration flowing from the taxpayer to the corporation for the conveyance based on the assumed mortgage, the taxpayer was a purchaser to the extent of the mortgage on the property.12
In 1990, §201.02(1) was amended to provide three nonexclusive definitions of “consideration.”13 The amended statute provides
that for purposes of §212.02(1), the term consideration, includes, but is not limited to, the following three items: 1) money paid or agreed to be paid; 2) the discharge of an obligation; or 3) a mortgage on property whether discharged or not. In addition, the amendment provides a means for determining the value of nonmonetary consideration, stating that if the consideration paid or given in exchange for real property includes property other than money, it is presumed that the consideration is equal to the fair market value of the property transferred.
Following the 1990 amendment to the statute, the DOR amended its rules concerning the imposition of the tax on transfers to corporations. Before the 1990 amendment, the Florida Administrative Code provided that transfers of real property to corporations by their shareholders as a contribution to capital were not subject to the documentary stamp tax if the transfer was not in exchange for valuable consideration.14 Following the 1990 amendment, the rule stated that “[a] conveyance of realty to a corporation in exchange for shares of its capital stock, or as a contribution to the capital of a corporation, is subject to tax. There is a presumption that the consideration is equal to the fair market value of the real property interest being transferred.”15
After analyzing prior Florida Supreme Court decisions and the 1990 amendment to the statute, the Third District set forth three reasons for concluding that the deed from Crescent Equities to CMC was subject to the documentary stamp tax. First, the Third District noted that the documentary stamp tax is an excise tax which is imposed on the document itself and is measured by the particular instrument and conveyance involved. The deed from Crescent Equities to CMC clearly conveyed title in the Miami Center property. Second, the Third District stated that the deed reflected a change of ownership in exchange for consideration, in that “[c]onsideration follows as a natural consequence of the commercial transaction transferring intangible property with exchangeable value, as evidenced by the ‘other good and valuable consideration’ recitation on the deed.”16 Finally, the Third District concluded that, pursuant to the 1990 amendment to §201.02(1), consideration could be reasonably determined by reference to the property deeded. According to the Third District, the value of the consideration is the amount Crescent Equity’s equity interest in Crescent Funding increased, as a result of Crescent’s deeding the property to CMC. De Maria was citedfor the somewhat circular proposition that there is a “purchaser” whenever there is “consideration” and likewise there is “consideration” whenever there is a “purchaser,”17 and, therefore, concluded that CMC met the statutory definition of “purchaser.” The Third District refused to create a judicial exemption from the documentary stamp tax where real property is conveyed between affiliated entities.
Florida Supreme Court Settles the Conflict
The Florida Supreme Court disagreed with the Third District’s conclusions about the impact of the 1990 amendments on prior law and its interpretation of Palmer-Florida and De Maria. The Florida Supreme Court concluded that the 1990 amendments to §201.02 did not eliminate the requirements of “consideration” and “purchaser” that existed at the time of the Palmer-Florida and De Maria. The 1990 amendment “simply provided nonexclusive examples of consideration” that “did not change the requirement that consideration actually exist for the transfer.”18 The court further stated, “[t]he statute still covers only those situations in which property is exchanged for something of value.”19
The Florida Supreme Court stated that the Third District erred in its conclusion that the conveyances in Palmer-Florida and De Maria could not be taxed prior to the 1990 amendment, because the conveyances had neither reasonably determinable consideration nor a purchaser, and that the 1990 amendment implicitly altered this result by providing a means by which to value the interests in the company that were exchanged for the real estate transfer. The Florida Supreme Court clarified reaching its decisions in Palmer-Florida and De Maria “not because consideration was not reasonably determinable but, rather, because there was no consideration at all involved in the transactions.” According to the court, the 1990 amendments to §201.02(1) did not alter its holdings in Palmer-Florida or De Maria.
According to the court, there was no consideration or purchaser with respect to Crescent Equities’ transfer of the Miami Center property to CMC, since “nothing was exchanged by CMC for the grant of property from Crescent Equities; [and] thus, there was no consideration or purchaser in the transaction, just a ‘mere change in form of the stockholder’s equity in the corporation.’”20 Furthermore, the court stated that “[t]he argument that the increase in the value of Crescent Equities’ interest in CMC constituted consideration is not persuasive, as this increased interest resulted from the transfer and was not the consideration for making the transfer.”21 The Florida Supreme Court quashed the lower court’s decision in the case and remanded the case to the district court for further consideration consistent with the Florida Supreme Court’s opinion.22
Consequence of Crescent
Following the 1990 amendment to §201.02, the DOR amended the Florida Administrative Code to provide that a conveyance from a shareholder to a corporation in exchange for stock is subject to the documentary stamp tax. This revision reflected the belief that the legislature’s 1990 amendment implicitly overturned the Florida Supreme Court decisions in Palmer-Florida and De Maria. The DOR’s position appeared to be well- founded, but the Second District’s 1998 decision in Kuro reopened the debate about the application of the documentary stamp tax to affiliated transfers. In response to Kuro, the DOR issued a number of technical assistance advisements that essentially provided that the DOR would follow Kuro only in those instances where the applicable facts are substantially similar to Kuro, specifically the transfer of unencumbered real property as a capital contribution from an individual to an artificial entity.23 The Third District’s 2003 opinion in Crescent generated further ambiguity for taxpayers residing outside the Second District or Third District. Therefore, the Florida Supreme Court’s opinion in Crescent has provided much needed clarity in this area.
Florida practitioners must carefully consider both the retroactive and prospective application of Crescent. The retroactive application of Crescent refers to the opportunity for taxpayers to obtain refunds of documentary stamp tax for real estate transfers that are governed by the Crescent opinion and for which documentary stamp tax was previously paid. Section 215.26 provides that a taxpayer who makes a tax payment in error may file an application for refund within three years after the right to the refund has accrued or else the right is barred.24 With respect to erroneously paid documentary stamp, the right to refund would accrue at the time the documentary stamp tax was originally paid. Practitioners should carefully review all transfers of real estate within the past three years to determine whether documentary stamp tax was erroneously paid in light of Crescent.
Transactions that would be eligible for refunds would include transfers of real estate from a parent entity to a wholly owned subsidiary or from a subsidiary to its sole parent; from an owner to a single member limited liability company or from a single member limited liability company to its sole owner; from a husband and wife as tenants by the entirety to a limited liability company in which the husband and wife each own one-half of the membership interests or a transfer from such limited liability company to the husband and wife; from owners of real estate in a joint tenancy to an entity in which the ownership is proportionate to the ownership in the joint tenancy or a proportionate transfer of such real estate from the entity to its owners who received undivided interests in the property. In addition, pursuant to De Maria, refunds would be available for prior transfers of encumbered property to the extent of any equity in the property at the time of transfer.
A critical consequence of Crescent is the prospective application of the case for documentary stamp tax planning thatcould avoid the imposition of Florida’s documentary stamp tax. In certain instances, practitioners could conceivably utilize Crescent to avoid the application of the documentary stamp tax on future transfers of real estate. A simple example demonstrates the planning potential in this area.
Assume seller (S) and purchaser (P) have entered into a purchase and sale contract with a purchase price of $5 million in connection with the sale of real estate. Absent any documentary stamp tax planning, the sale of the real estate would generate documentary stamp tax of $35,000. However, the transaction could alternatively be structured as follows: 1) S contributes the real estate to a wholly owned special purpose limited liability company formed solely for the transaction (S LLC); 2) S then sells the membership interest in S LLC to P for the $5 million purchase price; 3) P then dissolves S LLC and takes title to the real estate. S and P end up in the same exact place, except that the documentary stamp tax has been avoided. Under Crescent, there would be no documentary stamp tax due on steps 1 or 3 since each of these transfers is a mere book transaction where beneficial ownership of the property has not changed. Step 2 would not be subject to the documentary stamp tax because there is no conveyance of real estate, since S is assigning a membership interest in a limited liability company. This example illustrates how with proper planning the application of Crescent may effectively avoid the documentary stamp tax for a significant number of real estate transactions.
It is unclear whether the DOR would assert a substance over form or step-transaction type argument in response to this type of planning approach. In informal conversations, a DOR representative indicated that the DOR anticipates this planning approach as a natural consequence of the Crescent decision. In the wake of Crescent, it is likely that Florida practitioners will soon seek written advice from the DOR about the application of Crescent in a variety of different circumstances, including the planning approach described above.
In 2004, the Florida documentary stamp tax raised roughly $2.6 billion in general revenue funds for the State of Florida, the second highest source of funds for Florida after sales tax.25 Florida relies on these revenues to partially fund the payment of debt service on various bond issuances.26 While there are no estimates of the potential tax revenue loss, the Florida Supreme Court’s decision in Crescent will certainly impact the revenues generated by the documentary stamp tax. Florida taxpayers who erroneously paid the documentary stamp tax will seek refunds, and future real estate transactions will likely be structured to minimize the application of the tax. The lingering question for Florida taxpayers and practitioners is whether the Florida Legislature, which has recently been reluctant to increase taxes, will pass legislation that will reverse Crescent. Depending on Crescent’s impact on revenue collection, the Florida Legislature may be left with no choice.
1 Crescent Miami Center, LLC v. Department of Revenue, 857 So. 2d 904 (Fla. 3d D.C.A. 2003).
2 Fla. Stat. §201.02(1) (2004). The emphasized text was added to the statute by a 1990 amendment and was critical to the Third District Court of Appeal’s decision in Crescent. This is the same statute that the Florida Supreme Court analyzed in Crescent. Unless noted otherwise, all section references in this article are to the Florida Statutes (2004).
3 Crescent is the second time that the Florida Supreme Court granted review in connection with a district court of appeal conflict with Kuro. The Florida Supreme Court previously granted review in Muben-Lamar, L.P. v. Department of Revenue, 763 So. 2d 1209 (Fla. 1st D.C.A. 2000), rev. granted, 779 So. 2d 272, rev. dismissed, 789 So. 2d 337 (Fla. 2001), based upon conflict with Kuro. After oral arguments were held, the Florida Supreme Court reversed course and dismissed its review. Muben-Lamar involved a partnership that was made up of three partners, only two of whom owned the real estate prior to transferring it to the partnership as a capital contribution. The third partner, who was a one percent general partner, contributed a promissory note as a capital contribution. Muben-Lamar apparently did not conflict with Kuro because the case involved a nonproportionate contribution of real estate by the partners, as opposed to the proportionate contribution that was made by the father and son in Kuro.
4 De Maria, 338 So. 2d at 840.
5 The tax was comprised of $693,000 in state documentary stamp tax pursuant to Fla. Stat. §201.02(1) (2000), and $519,750 in Miami-Dade County documentary stamp tax pursuant to Fla. Stat. §201.0205(1) (2000), and Fla. Admin. Code. R. 12B-4012(3).
6 Palmer-Florida, 88 So. 2d at 495.
9 De Maria, 338 So. 2d at 840.
12 Id. See also Devore v. Gay, 39 So. 2d 796 (Fla. 1949) (consideration must have a reasonably determinable pecuniary value).
13 See 1990 Fla. Laws ch. 90-132, § 7.
14 Fla. Admin. Code R. 12B-4.13(7) (1982).
15 Fla. Admin. Code R. 12B-4.013(7) (1990). Similarly, when the value of an interest in a partnership is increased by a conveyance of real property to the partnership, this transaction is also subject to the tax. Fla. Admin. Code R. 12B-4.013(10) (1990).
16 Crescent Miami Center, LLC v. Department of Revenue, 857 So. 2d 904, 909 (Fla. 3d D.C.A. 2003).
17 Id. at 910.
18 Crescent Miami Center, LLC v. Florida Department of Revenue, 903 So. 2d at 918 (Fla. 2005).
20 Id. at 919.
21 Id. at 919.
22 Id. at 919.
23 See TAA 04B4-002 (February 11, 2004) (a transfer of unencumbered real property from individuals to a general partnership is not subject to the documentary stamp tax); TAA 04B4-004 (March 15, 2004) (a transfer of unencumbered real property from a sole member to a limited liability company is not subject to the documentary stamp tax).
24 See also Fla. Admin. Code R. 12B-4.004 (2004). The application for refund is made by filing form DR-26, Application for Refund.
25 State of Florida 2004 Comprehensive Annual Financial Report.
26 Fla. Stat. §201.15 (2004); 2005 Fla. Laws. ch. 2005-92.
Stephen G. Vogelsang is a shareholder of Gunster, Yoakley & Stewart, P.A., residing in the firm’s West Palm Beach office. He is board certified by The Florida Bar in taxation. He earned both his B.A. and his J.D. at the University of California at Los Angeles and earned his LL.M. in taxation at the University of Florida.
Adi Rappoport is an associate in the West Palm Beach office of Gunster, Yoakley & Stewart, P.A. He earned his B.S. in accounting, J.D., and LL.M. in taxation at the University of Florida.
This column is submitted on behalf of the Tax Section, Mitchell I. Horowitz, chair, and Michael D. Miller, Benjamin A. Jablow, and Normarie Segurola, editors.