Did documentary stamp tax apply to retirement-plan loans when participants signed only the loan checks?

Plain-English summary

The retirement-plan loan documents were subject to documentary stamp tax. The trustee signed the note as the participant's agent. The participant could negotiate the loan check only by signing an endorsement agreeing to the note and treating it as part of the same transaction.

Together, the note and incorporated endorsement contained all three elements the Department identified: a promise to pay, a sum certain in money, and the borrower's signature. The loan's nonrecourse feature after a distribution event did not change the answer because the tax applied to the document itself, and the certainty or practical ability of repayment was immaterial.

What this means for you

Review connected loan documents as a package when one expressly incorporates another. A signature on a check endorsement can complete a taxable written obligation even when the borrower did not sign the note itself.

Common questions

Q: Did it matter that the trustee, not the participant, signed the note? No. The Department treated the trustee as the participant's agent, and the participant confirmed the obligation through the signed endorsement.

Q: Did the nonrecourse distribution provision prevent tax? No. The ruling said repayment capability was immaterial to tax on the executed document.

Citations and references

• Fla. Stat. § 201.08 — documentary stamp tax on written obligations
• Fla. Admin. Code r. 12B-4.051(1) — taxable notes and obligations
• Fla. Admin. Code r. 12B-4.052(6) — face of document and express incorporation
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 02B4-009

Original ruling text

SUMMARY

QUESTION: Is a promise to pay signed by an agent for the
borrower where the borrower signs an endorsement which
incorporates the promise to pay and the sum certain subject
to documentary stamp tax?

ANSWER - Based on Facts Below: Yes. A document containing
a promise to pay a sum certain in money signed through an
agent and confirmed by the borrower's endorsement on the
check (incorporating the promise to pay and the sum certain
in money) is subject to documentary stamp tax.

Dec 02, 2002

Re: Technical Assistance Advisement No. 02B4-009
Documentary Stamp Tax - Promissory Note and Security
Agreement
Section 201.08, F.S.
Rules 12B-4.051, 12B-4.052, F.A.C.
XXX (hereinafter, Company)

Dear :

This is in response to your request for a technical
assistance advisement asking for an opinion on whether loans
from defined contribution retirement plans administered by the
Company to plan participants who reside in the State of Florida
are subject to documentary stamp tax.

FACTS AS PRESENTED BY PETITIONER

The Company acts as trustee for defined contribution
retirement plans sponsored by various third party employers.
Defined contribution plans are plans which provide "for an
individual account for each participant and for benefits based
solely on the amount contributed to the participant's account,
and any income, expenses, gains and losses, and any forfeitures

of accounts of other participants which may be allocated to such
participant's account." Internal Revenue Code (IRC) Section
414(i). The defined contribution plans administered by the
Company (Plans) include money purchase plans, profit sharing
plans and IRC Section 401(k) plans.

Under the Plans, contributions made by participants and
employers, as well as any reinvested earnings, are used to
purchase various investments for the participants' accounts. A
Plan balance represents the current value of such investments.
The Plans permit participants to borrow from their Plan balances
subject to various requirements of the Employee Retirement
Income Security Act of 1974 ("ERISA"). These loans are made
from participants' vested Plan balances in an amount not to
exceed fifty percent of the Plan balance or an aggregate of XX
for an individual participant.

Participants may request loans through the Company's web
site, orally, or in writing to the employer and/or the Company.
The Truth-in-Lending Disclosure Statement, Promissory Note and
Security Agreement, names the borrower (Participant) and states
the amount of the loan and interest rate, Exhibit A.

In any case, the loan is documented by a form of Promissory
Note and Security Agreement ("Note"), which is signed by the
trustee but not by the participant. The Company obtains the
funds for a loan to a participant by liquidating investment
assets standing in the participant's account. The loan proceeds
are disbursed to the participant by check. The check contains a
restrictive endorsement pursuant to which the participant agrees
to be bound by the terms of the Note. The check cannot be
negotiated by the participant unless the participant signs the
restrictive endorsement.

The Note provides for repayment in accordance with a
payment schedule set forth therein. Pursuant to the terms of
the Note, so long as the participant is employed by the
employer, the loan is to be repaid out of the participant's
salary through payroll deductions.

A provision in the Note states that if the loan is not

repaid in full by the participant upon the occurrence of a
distribution date, the Plan agrees that its sole remedy will be
to charge the unpaid amount of the loan against the
participant's account balance and treat such amount as a
distribution to the participant in satisfaction of the loan
obligation.

According to the request letter, this treatment of the loan
obligation in the case of an event giving rise to the right to
receive distributions under the Plan indicates that the
repayment of the loan is not unconditional. The Company does
not look to the participant individually for repayment of the
obligation. The Company treats the obligation as being
satisfied by the distribution. The repayment obligation is not
unconditional, because it is non-recourse upon the occurrence of
a distribution event.

REQUESTED RULING

The request asks that the promissory notes be ruled not
subject to documentary stamp tax.

DISCUSSION AND LAW

Section 201.08, F.S., requires payment of documentary stamp
tax on documents made, executed, and delivered in Florida that
evidence a written obligation to pay money. Rule 12B-4.051(1),
F.A.C., states in part:

A tax is imposed on promissory notes, non-negotiable notes,
written obligations to pay money, assignments of salaries,
wages, or other compensation, which are made, executed,
delivered, sold, transferred or assigned in the state....

Rule 12B-4.052(6)(a), F.A.C., states that the tax levied by
s. 201.08(1), F.S., is an excise tax on the promise to pay, and
the terms and certainty of payment are not material. Rule 12B4.052, F.A.C., also provides terminology whereby a document is
expressly incorporated into the primary document under
examination:

(6)(b) Taxability of a written obligation to pay money is
determined from the form and face of the document.

1. Whether a document is taxable is determined by reference
   to that document and any other document or documents
   expressly incorporated therein.

2. A document does not expressly incorporate another
   document by implication or by mere reference and
   description of the other document.

3. Express incorporation occurs when words in a document
   under examination provide that another document or
   documents are incorporated into the document under
   examination.

4. Following are examples of terminology whereby a document
   is expressly incorporated into the document under
   examination:
   ...
   d. [document] is a part of [this document]
   ...

The loan check bears a signed endorsement by the
Participant that reads, in part, as follows:

... By endorsing or negotiating this check by deposit or
otherwise, the payee acknowledges receipt of the Note . . .
with this check, as part of the same transaction, and
agrees to be bound by all the terms of the Note, including
any amendment[s] thereto. (e.s.)

ENDORSEMENT OF PAYEE REQUIRED

(Borrower or Participant signs.)

The Participant's signature is required on the above
endorsement on the check, or the check cannot be negotiated. By
the endorsement, the borrower agrees that the check is
incorporated as part of the same promise to pay the sum certain

in money contained in the terms of the Note, which has been
signed by his agent.

The Truth-in-Lending Disclosure Statement, Promissory Note
and Security Agreement states in part:

For value received, I promise to pay the Trustees of the
_ 401(k) Retirement Plan the principal sum of $__
with a stated interest rate of ____% which is equivalent
to....

I further understand that my endorsement of the loan check
constitutes my acceptance of all of the terms and
conditions governing this loan as stipulated in this
document. . . .

Date

Trustee's Signature

In this case, the Trustee is acting as agent for the
borrower (Participant). By the borrower's endorsement on the
back of the check, the borrower (principal) agrees to the terms
of the Note, which are his promise to pay a sum certain in
money. The three elements are present to cause the documents to
be subject to the tax: a promise to pay, a sum certain in money,
and the signature of the borrower on the endorsement that has
been incorporated into the promise to pay.

DEPARTMENT'S POSITION

The documentary stamp tax is due upon the document itself,
not upon the transaction contemplated by the document. Whether
the promissory note is capable of repayment is immaterial. The
fact is that a document has been executed containing a promise
to pay a sum certain in money signed by an agent and confirmed
by the borrower's (principal's) signature on the endorsement on
the check. Therefore, the document is subject to the tax under
s. 201.08, F.S.

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, your request
and related backup documents are public records under Chapter
119, F.S., and are subject to disclosure to the public under the
conditions of s. 213.22, F.S. Confidential information must be
deleted before public disclosure. In an effort to protect
confidentiality, we request you provide the undersigned with an
edited copy of your request for Technical Assistance Advisement,
the backup material and this response, deleting names, addresses
and any other details which might lead to identification of the
taxpayer. Your response should be received by the Department
within 15 days of this letter.

Sincerely,

M.E. Clemens, C.P.A.
Senior Tax Specialist
Technical Assistance and Dispute Resolution
Office of General Counsel

MEC/mh