Was documentary stamp tax due when a corporation transferred unencumbered stores to a new S corporation for its stock?

Plain-English summary

Florida imposed documentary stamp tax on the deed transferring the stores to the new S corporation. The existing corporation received all of the new corporation's shares in exchange for unencumbered commercial real property, so the noncash consideration was presumed equal to the property's fair market value.

Initial 100% ownership of the new corporation did not mean the transferor still owned the real estate. Florida treated the corporation and its shareholder as separate legal owners and limited Kuro to a situation where stock had not literally been issued for the property.

The later transfer of the new corporation's stock to the existing shareholders was not subject to documentary stamp tax because Chapter 201 did not tax the stock transfer itself.

What this means for you

Contributing Florida real estate to a new corporation can be taxable even without debt and even when ownership percentages remain economically aligned. Stock issued for the property is consideration.

Common questions

Q: Did the lack of mortgages make the deed tax-free?
A: No.

Q: What was the tax base?
A: Fair market value of the real property entering the new corporation.

Q: Was the later stock distribution taxable under the deed tax?
A: No.

Citations and references

• Fla. Stat. § 201.02(1) — documentary stamp tax and noncash consideration
• Fla. Admin. Code r. 12B-4.013(7) — property transferred for corporate stock
• Kuro, Inc. v. Department of Revenue, 713 So. 2d 1021 (Fla. 2d DCA 1998) — distinguished
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 03B4-004

Original ruling text

SUMMARY

QUESTION: Under the scenario where a corporation is
proposing to form a new, wholly owned Florida for profit S
corporation and transferring property from the existing
corporation to the new corporation in exchange for all of
the new corporation's stock that would be immediately
distributed to the shareholders, is such transaction
subject to documentary stamp tax?

ANSWER - Based on Facts Below. Yes, the transfer by the
corporation of its property to the newly formed corporation
is subject to documentary stamp tax based on the fair
market value of the property coming to rest in the new
corporation. Rule 12B-4.013(7), F.A.C., supports this
determination, since shares of stock will be issued in
exchange for the real property being transferred.

Apr 08, 2003

Re: Technical Assistance Advisement No. 03B4-004
Documentary Stamp Tax
Transfer of Real Property to Corporation in Exchange for
Shares of Stock
Section 201.02(1), F.S.
Rule 12B-4.013(7), F.A.C.
XXX ("Corporation")
XXX ("Shareholders")

Dear :

This is in response to your recent request for a Technical
Assistance Advisement dated February 12, 2003, pertaining to the
applicability of the Florida documentary stamp tax on a transfer
of real property to a corporation in exchange for shares of
stock.

FACTS PRESENTED BY THE PETITIONER

Corporation owns certain improved commercial real property
("Property"), including four stores ("Stores") and a shopping
center ("Center") in Florida. Corporation acquired Stores in
the 1960's, and Corporation acquired the Center sometime in the
1970's. Common stock of corporation is owned by Shareholders,
with each individual shareholder owning twenty percent. The
Center is encumbered with bank indebtedness. There are no
mortgages currently on the Stores.

Your correspondence states that Corporation is considering
forming a new, wholly-owned Florida for profit S Corporation
("New Corp") and transferring Stores to New Corp in exchange for
all of New Corp's stock, which stock would then immediately be
distributed to Shareholders pursuant to a reorganization ("spinoff") intended to qualify for tax-free treatment under the
Internal Revenue Code. As a result, Shareholders would continue
to own Corporation, which would own the Center, and Shareholders
would also own New Corp, which would own Stores. Each
Shareholder would own twenty percent of the issued and
outstanding stock of both Corporation and New Corp.

REQUEST FOR ADVISEMENT

The parties request that the Florida Department of Revenue
confirm that the transfers of Stores to New Corp will not be
subject to documentary stamp taxes for the following reasons
presented in the request, as summarized below:

1. The transfer by Corporation to New Corp is not subject
   to documentary stamp tax because New Corp is not a
   purchaser and no consideration will be given to
   Corporation as a result of the transfers. After
   transfer and the issuance of stock certificates in New
   Corp to Corporation, Corporation would be sole
   beneficial owner of Stores via 100% stock ownership in
   New Corp.

2. There is no mortgage on Stores that New Corp would
   either assume or take subject to.

3. Facts are analogous to those in Kuro, Inc. v. State of
Florida Department of Revenue, 713 So.2nd 1021 (Fla.
DCA 1998).

4. It is your opinion that the fact that the proposed
   transferor is Corporation rather than one or more
   individuals is not a material distinction. As long as
   the beneficial ownership remains the same before and
   after the transfer, the rationale of Kuro should
   apply.

5. Subsequent transfer by Corporation of New Corp stock
   to Shareholders would not be a transaction subject to
   documentary stamp tax and should not cause
   Corporation's transfer of Stores to New Corp to be
   subject to documentary stamp tax. For reasons stated
   in reasons 1 through 3, Store's subsequent transfer of
   Stores should not be subject to documentary stamp tax,
   and subsequent transfer of shares should not change
   such treatment.

6. If Corporation's proposed transfer of Stores to New
   Corp and Corporation's subsequent transfer of New Corp
   stock to Shareholders is treated as one integrated
   transaction, the transaction should not be subject to
   documentary stamp tax. If the two transfers are
   integrated, the result is that Stores will be
   considered to have been transferred from Corporation,
   owned twenty percent by each of five individuals, to
   New Corp, a corporation owned twenty percent by each
   of same five individuals. TAA 91(B)(4)-009, involving
   a transfer of Florida real property from a Florida
   general partnership owned equally by three individuals
   to a corporation owned equally by the same
   individuals, is cited in support of the non-taxability
   of the transaction.

Your request concludes by stating that although Rules 12B4.012(2)(b) and 12B-4.013(7), F.A.C., may appear to be contrary
to a portion of the analysis set forth in this request, the
rationale of Kuro causes such regulations to be inapplicable to

the requested portion, since it involves transfers for no
consideration.

DISCUSSION AND LAW

Section 201.02(1), F.S. (2001), provides as follows:

201.02 Tax on deeds and other instruments relating to real
property or interests in real property.--

(1) 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.

The documentary stamp tax is a tax on certain documents. It
is an excise tax imposed by the legislature on the privilege of,
among other things, executing or delivering any document that
conveys any interest in real property located in Florida. For a
deed that is subject to tax (that is, a deed that conveys an
interest in real property), it is necessary to compute the
amount of tax. The amount of tax is equal to the rate of $0.70
on every $100 (or part thereof) of the tax base. The base is set
by statute as the amount of any consideration received in
exchange for the real property interest conveyed.

Effective July 1, 1990, Section 7, Chapter 90-132, Laws of
Florida amended s. 201.02(1), F.S., by adding, in pertinent
part, the following language:

... 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.

Prior to the 1990 amendment, agency rules concluded that
the amount of tax due on deeds that conveyed real property to
certain artificial entities, such as corporations, as a
contribution to capital, was zero where the property was
unencumbered. This was inferred from certain court decisions
that found, in certain circumstances, where consideration took
the form of property other than money, the amount of
consideration was not reasonably determinable. The 1990
amendment was intended to close certain loopholes in the tax
laws. Thus, the amendment expressed specifically that, when
consideration took a form other than money, the amount of
consideration for the real property was presumed to be an amount
equal the fair market value of the real property. Thus, when a
deed conveyed real property, it was subject to tax, and if the
consideration was in a form other than money, including where
the precise amount was not reasonably determinable, the tax base
was presumed to equal to the fair market value of the real
property, and the amount of tax imposed was capable of
computation.

Thus, the Florida Legislature has imposed this tax on every
deed that transfers real property in Florida. Only four discrete
exemptions for transfers of real property are specified in
chapter 201, F.S. One is found in s. 201.02(6), F.S., involving
transfers of property from certain nonprofit organizations to
the Board of Trustees of the Internal Improvement Fund, to any
state agency, to any water management district, or to any local
government. Another is found in s. 201.02(7), F.S., involving
deeds between spouses or former spouses resulting from
dissolution of marriage proceedings. The other two are contained

in s. 201.24 (1) and (2), F.S., involving obligations to pay
money by a Florida political subdivision and transactions
involving educational facility sites.

It is unquestionably established and fundamental law that,
except in the case of certain trusts, artificial legal entities
are separate and distinct from those persons that own the
interests in the entities. The classic example is that a
corporation is a separate legal entity that enjoys an existence
apart from its members. See Curcio v. U.S., 354 U.S. 118
(1957); Bellis v. U.S., 417 U.S. 85 (1974). The Florida Supreme
Court has also concurred on this point when it stated that:

Every corporation is organized as a business organization
to create a legal entity that can do business in its own
right and on its own credit as distinguished from the
credit of its individual stockholders.

Dania Jai-Alai Palace, Inc. v. Sykes, 450 So.2nd 1114, 1120
(Fla. 1984), quoting Advertects, Inc. v. Sawyer Industries,
Inc., 84 So.2d 21, 23 (Fla. 1955)

The mere fact that one or two individuals own and control
the stock... of a corporation does not lead inevitably to
the conclusion that the corporate entity... is necessarily
the alter ego of its stockholders.... If this were the
rule, it would completely destroy the corporate entity as a
method of doing business, and it would ignore the
historical justification for the corporate enterprise
system.

Advertects, Inc. at 23 _24. (Emphasis added.) See also
Auto-Owners Ins. Co. v. Brockman, 524 So. 2nd 490, 493 (Fla. 5th
DCA 1988).

As a result of the uniformly held distinction between
artificial legal entities and their owners, title and ownership
of entity property vests solely in the artificial legal entity.
See Klein v. Board of Tax Supervisors of Jefferson County, Ky.,
282 U.S. 19, 24 (1930)[The legal entity is a person and its
ownership is a nonconductor that makes it impossible to

attribute an interest in its property to its members.] Howell
v. Turpentine Co. V. C.I.R., 162 F.2nd 319, 322 (Fla. 5th Cir.
1947) [An owner of an interest in the artificial legal entity
has no title, legal or equitable, to the entity's property.]
Mease v. Warm Mineral Springs, Inc., 128 So.2nd 174, 179 (Fla.
2nd DCA), review denied, 132 So. 2nd 291 (Fla. 1961) [The owners
of an artificial legal entity have no interest in the entity
property.] Chanrai Investments, Inc. v. Clement, 566 So.2d 838
(Fla. 5th DCA 1990) [The individual owner has neither legal nor
equitable title to the property. This is not altered by the
fact that a single member may own all interests in the
artificial legal entity.]

Kuro, Inc. v. Department of Revenue, 713 So.2nd 1021 (Fla.
2nd DCA 1998), rev. den., 728 So.2d 201 (Fla. 1998), involved a
father and son who formed a corporation so that they could avail
themselves of the benefits of incorporation. The father and son
had equal shares of the ownership interests in the corporation.
They also had equal ownership interests in certain real
property, and conveyed the property by deed into the
corporation, as a contribution to the capital of the
corporation. The Second District Court of Appeal, in reversing
the opinion of an Administrative Law Judge, wrote that although
the "transactions affected a change in the legal ownership of
the property, the beneficial ownership of the land remained
unchanged." Kuro, at 1209. The court's opinion on this matter
departs from the uniform view of Florida law that a stock
certificate does not vest the owner thereof with any legal right
or title to the corporate property. See, e.g., Fla.Jur. 2nd
Business Relationships s.11; Damico v. State, 16 So.2nd 43 (Fla.
1943).

The decision rendered in Kuro conflicted with many cases.
For example, in Marks v. Green, 122 So.2nd 491 (Fla. 1st DCA
1960), the First District Court of Appeal rejected a claim of
beneficial ownership of corporate property by a sole shareholder
assessed for Florida intangible tax. The court applied the
intangible tax against the individual (on the ownership interest
in the artificial legal entity) even though the artificial legal
entity had already paid intangible tax on the property owned by
the entity. The court rejected a claim of beneficial ownership

(and improper double taxation) because the artificial legal
entity's property did not constitute a trust estate. Green, at

494. The Kuro decision departed from these foundational and
     established principals; instead, the Kuro court treated
     corporate property as if held in a trust when it suggested that
     the corporation held bare legal title, while the beneficial
     interest was retained by the stockholders.

The term "beneficial ownership" or "beneficial owner" is
not defined in Chapter 201, F.S. The Securities Exchange Act of
1934, Rule 13d-3, entitled "Determination of Beneficial
Ownership," states in (a) that:

For the purposes of sections 13(d) and 13(g) of this Act, a
beneficial owner of a security includes any person who,
directly or indirectly, through any contract, arrangement,
understanding, relationship, or otherwise has or shares:

1) Voting power which includes the power to vote, or
to direct the voting of, such security; and/or
2) Investment power which includes power to dispose,
or to direct the disposition of, such security.

The term "beneficial owner," as defined under the
Securities and Exchange Act, clearly shows that the use of the
term by the Kuro court departs from general legal understanding
and application of the concept. Under the SEC definition,
"beneficial owner" is clearly connected with ownership of the
interest in the artificial legal entity, as opposed to ownership
of real property owned by that entity, and is limited to
attributes of ownership interests in the entity itself. In Kuro,
the Court did not define "beneficial ownership." However, plain
language clearly indicates that the term means "benefits of
ownership," and further, as related to an artificial legal
entity such as a corporation, it is limited to the "benefits of
ownership" of the shares of stock.

Additionally, in Kuro, Footnote 1 stated "The sequence of
events was this: Kurt Rabau and Ronald Rabau bought the real
estate in question. The Rabaus then formed a corporation which
the two of them owned. The Rabaus then transferred their

interests in the real estate to the corporation. These facts do
not support the hearing officer's recommended findings that "the
Kuro, Inc. stock was issued in exchange for the contribution of
the [real estate] to the corporation." It was conceded at oral
argument that the stock had never been literally `issued.' Thus,
we need not address the applicability of the presumption of
consideration if the stock had, in fact, been issued in exchange
for the real estate." (E.S.)

Rule 12B-4.013(7), F.A.C., titled "Corporation," imposes
the documentary stamp tax on conveyances of realty to a
corporation in exchange for shares of its capital stock. In the
Kuro case, the court clearly stated that both parties stipulated
that no shares of stock had literally been issued. Thus, the
ruling in Kuro, as shown in Footnote 1 above, did not address
the situation where shares of stock were issued in exchange for
the real property.

Furthermore, the ruling in Kuro did not address this
situation where a commercial artificial legal entity was the
grantor on the deed.

DETERMINATION

The transfer by Corporation of Stores to New Corp is
subject to documentary stamp tax based on the fair market value
of the property coming to rest in New Corp. According to your
request, the shares of New Corp will be issued in exchange for
the real property being transferred to it (i.e. the Stores).
This scenario is factually different from Kuro on its face, and
thus the facts of the case are not applicable. Rule 12B4.013(7), F.A.C., supports this determination.

The subsequent transfer by Corporation of the New Corp
stock to its shareholders is not subject to this tax. Stock
transfers are not taxable under Chapter 201, 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 from that
which is expressed in this response.

You are further advised that this response, your request
and related backup 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 the date of this letter.

Sincerely,

Joy B. Eldred, C.P.A.
Tax Law Specialist
Technical Assistance and Dispute Resolution
Office of the General Counsel

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