Considering “consideration” in taxing mortgages, notes and other financial instruments, Part II. [i]
Examining the decisions in 1701 Collins Miami Owner, LLC v Department of Revenue, Case Nos. 19-1879 and No. 19-3639 RU
These decisions were based upon a determination by the ALJ that an unlawful legal policy ( unadopted rule) was applied to deny a refund of overpayment of excise tax on transfer of real property. The ALJ described Petitioner’s claim of the application of the illegal policy as a “Position of Disputed Scope and Effect (“PDSE”). This PDSE was determined to have been applied as alleged and, further it was determined that this PDSE was an unadopted “rule” under Section 120.52(20) Florida Statutes. The context for the PDSE was the overpayment of excise tax on a deed recorded following the purchase and sale of real and personal property as one transaction between two private parties for a specific amount of consideration, a lump sum of $125 million. This sum was referred to in the opinion as “undifferentiated consideration”.
Long before the transaction in 1701 Collins Miami occurred, Department of Revenue in its Technical Assistance Advisement No. 83(B)4-003; 1983 WL 15013 acknowledged, not unexpectedly, that consideration for purposes of calculating documentary taxes should be solely based on the dollar value attributable to the real property, without inclusion of consideration attributable to personal property.
However, despite its pronouncement years earlier in the above mentioned TAA, Revenue denied an application for refund made by 1701 Collins for overpayment of tax mistakenly paid on transfer of real property and personal property. This denial occurred despite statutory authority to seek a refund of taxes paid in error. See: Section 215.26 Florida Statutes.
Description of the 1701 Collins litigation in DOAH
The denial of the refund application was protested and sent to the Division of Administrative Hearings (DOAH) for disposition. The ALJ found the following undisputed key facts comprising the financial transaction involved in the decision:
“In 2015, Petitioner 1701 Collins (Miami) Owner, LLC, sold an operating hotel business comprising real estate, tangible personal property, and intangible personal property for an undifferentiated, lump-sum of $125 million. Upon recordation of the deed, Petitioner paid stamp tax on the entire $125 million. This, Petitioner later came to believe, was a mistake, because the lump-sum purchase price had included consideration for tangible personal property and intangible personal property.
The hotel business comprised two categories of property, i.e., real estate ("RE") and personal property ("PP"). The PP, in turn, consisted of two subcategories of property, tangible personal property ("TPP") and intangible personal property ("ITPP"). It is undisputed that the property transferred pursuant to the Agreement included RE, TPP, and ITPP.” Id.
The Petitioner in addition to the protest of the refund denial separately filed a petition/complaint against the agency on the basis of denying the refund because of its “unadopted rule”. As the ALJ observed in his Final Order decision in case No. 19-3639 RU, the agency is prohibited from basing agency action ( e.g. its decision affecting substantial interests of a party) on an “unadopted rule”. Essentially, this phrase represents a legislative prohibition against applying legal reasoning which has not been placed into a rule (regulation) and cannot can be found in the statutes which apply to the transaction. The ALJ found that the “unadopted rule” issue and the refund application and denial ( substantive reasons why the amount of tax remitted represented an overpayment) grew out of a common set of facts and therefore, the two cases were consolidated for hearing. The decisions of the ALJ are reflected in Orders issued in Case Nos. 19-1879 and No. 19-3639 RU
Examining the legal reasoning of the ALJ
The ALJ found the following unlawful policy existed taking the form of an unlawful irrebuttable presumption concerning consideration for the deed transfer:
In determining the amount stamp tax due on an instrument arising from the lump-sum purchase of assets comprising both RE and PP, then, absent an agreement by the contracting parties to apportion the consideration between the categories or subcategories of property conveyed, made not later than the date of recordation (the “Deadline”), it is conclusively presumed that 100% of the undifferentiated consideration paid for the RE and PP combined is attributable to the RE alone.
Essentially, the determination above was based on finding of fact of the existence of a irrebuttable legal presumption, referred to by the ALJ as the “Default Allocation Presumption”. This “Default” presumption was applied by the agency in deciding whether an overpayment of tax had occurred. The key facts demonstrated that notwithstanding that the taxing statute applied exclusively to consideration for transfer of a deed and did not apply to funds paid for personal property ( PP), tax had been paid on both real and personal property. The reason why 100% of the consideration was considered taxable had nothing to do with the value of the real estate or personal property, but the timing of presenting evidence of the value.
Application of the “Default Allocation Presumption”
The testimony and documentation, as found by the ALJ, demonstrated that DOR denied the refund notwithstanding the fact that evidence had been presented as to the value of the real property as part of the refund request. The stand-alone value of the real estate established that the amount of tax paid ( given the statutory tax rate) exceeded what was required by statute. The reasoning for the denial according to Revenue stemmed not from the value of the real estate but from the fact the evidence of the value of real and personal property had not been available at the time of the transfer of the deed. The testimony demonstrated that Revenue viewed all monies paid as consideration between the parties to the underlying transaction were attributed to real property ( RE) after the date of recordation of the deed ( the Deadline). The ALJ referred to this presumption as the “Default allocation presumption”. Since the taxing statute ( Section 201.02) contains no such legal presumption and the Revenue rules did not contain such a presumption, the agency had acted outside of its legal authority in denying the refund.
Take Away Points
- A transaction for transfer of real property and property other than real property is taxable only with respect to the consideration fairly attributable to the real property ( for purpose of calculation of tax due under Section 201.02 Florida Statutes.)
- If documentary tax was paid in Florida within the last 3 years on recorded instruments and you believe tax was overpaid because of facts similar to those described in this article, it may be possible to obtain a refund of tax. Our law firm will assist anyone in evaluation of this possibility.
About the Firm: Formed in 1991, the Law Offices of Moffa, Sutton, & Donnini, P.A. is a law firm with a primary practice area of Florida tax controversy and a heavy emphasis on Florida sales and use tax. With offices in Fort Lauderdale, Tampa, and Tallahassee, the firm defends business owners against the Florida Department of Revenue from the initial audit notice through administrative protest and litigation as well as collections, revocations, and criminal investigations. Call our offices today for a FREE INITIAL CONSULTATION to confidentially discuss how we can help put this nightmare behind you.
About the Authors:
James (Jim) F. McAuley is an experienced attorney, joining the firm in 2015 after an exemplary career with the state of Florida. Holding the Florida Bar board certification as a specialist in State and Federal Administrative Law, Mr. McAuley represented the State of Florida for more than 20 years in the area of state and local taxation and administrative law with an emphasis on litigation. Mr. McAuley is Board Certified by the Florida Bar in the area of State and Federal Government Administrative Practice. Mr. McAuley holds the highest rating given to lawyers by Martindale Hubbell (Av) and has maintained that rating for more than 15 years. He is also a published legal author in both State taxation and Administrative law. He is an alumni & author of the Nova Law Review (Fall 2007). You can read more about Mr. McAuley in his firm bio HERE.
Rex Ware, Esq. practices primarily in the areas of State & Local Taxation and Administrative Law. He regularly represents clients in both formal and informal proceedings before the Florida Department of Revenue and most of the other state administrative agencies including the Florida Department of Transportation, the Florida Department of Business and Profession Regulation and the Florida Division of Alcoholic Beverages and Tobacco. Rex represents clients in administrative proceedings including in tax assessment challenges, procurement disputes, professional licensing and rule challenge proceedings. He also advocates for clients in circuit court and appellate proceedings. You can read more about Rex in his firm bio HERE.
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1701 Collins (Miami) Owner, LLC vs FL Department of Revenue, Case No 19-1879, Recommended Order filed December 17, 2019.
ADDITIONAL RESOURCES
FL Tax Alert - New Taxpayer Favorable Doc Stamp Case - Part I, published December, 18, 2109, by James McAuley, Esq. and Rex Ware, Esq.
Burden of Proof & Persuasion in FL Tax Cases, published May 31, 2015, by James McAuley, Esq.
Florida Doc Stamp Taxes on Short Sales – TAA 08B4-006, published August 10, 2017, by Amanda Levine, Esq.
FL Doc Stamps Due on Bankruptcy Trustee Deeds, published February 15, 2014, by James Sutton, CPA, Esq.
FL Dor Targets Home Owners After Foreclosure, published February 5, 2013, by Jerry Donnini, Esq.
[i] This article was prepared by Rex Ware and James McAuley, both attorneys for the firm. Their credentials are available on the firm website.