Were mortgage, property-tax, and improvement payments taxable rent when a shareholder held title but his S corporation occupied the property?

Plain-English summary

Florida treated the corporation's payments of mortgage, ad valorem taxes, and improvements as taxable rent while its shareholder held title to the commercial property. The shareholder and corporation were separate legal persons, and the corporation received the right to occupy property owned by the shareholder.

The husband bought the property in his own name in 1994, saying he intended to act for the newly formed corporation and later transfer title. The corporation occupied the property from the beginning, accounted for it as a corporate asset and the mortgage as a corporate liability, and claimed depreciation, mortgage-interest, and real-estate-tax deductions.

Florida found no evidence in the recorded title that the husband had acquired the property as the corporation's agent.

Third-party payments were indirect rent

The corporation paid the property expenses rather than sending a rent check to the shareholder. Rule 12A-1.070 nevertheless taxed direct or indirect consideration furnished by a related occupant for use of the owner's real property.

Mortgage payments enhanced the value of the shareholder's property and discharged property-related costs. Ad valorem taxes paid on behalf of a lessor were specifically taxable under the rule, including between affiliated entities. Improvements likewise benefited the owner.

Florida therefore treated those economic benefits as rent consideration from 1994 through the title transfer.

Corporate accounting did not erase legal title

The corporation's tax returns and books treated the property and debt as corporate, while the husband reported no rental income. But recorded title remained with the husband until October 27, 2003.

Florida honored the separate legal forms: an individual owner and a corporate occupant created a landlord-tenant relationship even without a written lease or reported rent.

Tax stopped when the corporation became the owner

Once the warranty deed transferred title to the corporation in 2003, the corporation no longer occupied another person's property. The landlord-tenant relationship ended, so the commercial-rent tax no longer applied on that basis.

What this means for you

Closely held corporations

Do not rely on corporate bookkeeping alone when real estate remains titled to a shareholder. Corporate payment of the shareholder's ownership costs can be taxable rent.

Shareholders holding business property

Review mortgage, tax, improvement, and other property payments made by the operating company. Payment to a bank, county, contractor, or other third party can still benefit the owner and count as consideration.

Accountants and tax professionals

Reconcile deeds, financing documents, guarantees, depreciation schedules, tax returns, and actual occupancy. Identify the precise date legal ownership changed because it can end the related-party rental period.

Common questions

Q: Was there a formal written lease?
A: None was required for Florida to find a landlord-tenant relationship under the cited analysis.

Q: Did the corporation pay cash directly to the shareholder?
A: No. It paid mortgage, property-tax, improvement, and related costs that benefited him as owner.

Q: Did corporate accounting make the corporation the legal owner?
A: No. Florida relied on recorded title, which remained with the shareholder until the 2003 warranty deed.

Q: When did the rent tax stop?
A: When title transferred to the corporation and the landlord-tenant relationship ended.

Citations and references

• Fla. Stat. § 212.02(2), (10)(i), and (12) — business, real-property license, and person definitions
• Fla. Stat. § 212.031(1) and (3) — tax on commercial rent, license fees, and other value furnished for occupancy
• Fla. Admin. Code r. 12A-1.070(4) — tenant-paid consideration, including ad valorem taxes
• Fla. Admin. Code r. 12A-1.070(19) — related-party rentals and direct or indirect consideration
• Seaboard Coastline Railroad Co. v. Askew, No. 72-15 (Fla. Cir. Ct. 1972) — third-party payments as rent consideration
• Regal Kitchens, Inc. v. Department of Revenue, 641 So. 2d 158 (Fla. 1st DCA 1994) — separate corporate form and no written-lease requirement

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 04A-034

Original ruling text

SUMMARY

QUESTION: Are mortgage and ad valorem tax payments made by
the Taxpayer/Corporation that occupies the commercial real
estate on behalf of the owners of the real property subject
to Florida sales tax under Section 212.031, F.S.?

ANSWER - Based on Facts Below: Yes. Under the facts
presented, there exist two (2) separate legal entities, the
first being a natural person and the second being the
Taxpayer/Corporation. The natural person held title to the
Property from 1994 to 2003. The Taxpayer/Corporation
occupied the Property during this time. From 1994 to 2003,
the Taxpayer/Corporation paid all the expenses related to
the Property (i.e., mortgage payments, ad valorem tax
payments and improvements to real property). This practice
provided the natural person with economic benefits that are
a form of consideration. Title was effectively transferred
to the Taxpayer/Corporation in 2003. Upon this transfer,
there no longer existed a landlord/tenant relationship and
Florida sales tax was no longer due.

May 26, 2004

Re: Technical Assistance Advisement 04A-034
Florida Sales and Use Tax
Related Entities and Commercial Real Property Rental
Section 212.031, F.S. ("Florida Statutes")
Rule 12A-1.070, F.A.C. ("Florida Administrative Code")

Dear :

This response is in reply to your letter dated October 28, 2003,
requesting the Department's issuance of a Technical Assistance
Advisement ("TAA") pursuant to Section 213.22, F.S., and Chapter
12-11, F.A.C., regarding related entities and commercial real
property rentals. An examination of your letter has established
that you have complied with the statutory and regulatory

requirements for issuance of a TAA. Therefore, the Department
is hereby granting your request for issuance of a TAA.

ISSUE

Are mortgage and ad valorem tax payments made by the
Taxpayer/Corporation that occupies the commercial real estate on
behalf of the owners of the real property subject to Florida
sales tax under Section 212.031, F.S.?

FACTS

Your letter provides in part:

The incorporated entity in question is [the
Taxpayer/Corporation]. This entity is an S corporation for
income tax purposes. The outstanding stock of this
corporation is owned 100% by [Husband and Wife]. During
September 1994 [Husband] purchased the property in his name
as agent for the corporation. Since the corporation was
newly formed [Husband] believed purchasing the property in
his name as agent for the corporation would speed up the
closing. It was his intent to subsequently transfer the
property to the corporation. This intent is in the process
of being carried through. The attorney who represents
[Husband] and [the Taxpayer/Corporation] has been
instructed to transfer the property to the corporation as
soon as possible.(FN 1)

Since day one the property in question has been accounted
for as a corporate asset and the related mortgage as a
corporate liability. The corporation has claimed the
depreciation deduction for the improvements located on the
property. The corporation has also claimed the deduction
for the mortgage interest and real estate taxes. [Husband]
has never treated this property as his personal asset for
federal income tax purposes. He has not claimed any
expenses associated with this property on his federal
income tax return. [emphasis in original]

During 1998[,] the original mortgage on the property that
was assumed as part of the purchase transaction was
refinanced with [bank]. The new mortgage dated June 18,
1998 reports the customer as [the Taxpayer/Corporation] and
the borrower as [the Taxpayer/Corporation]....

According to the County Clerk's Office Official Records
(online), the Husband purchased the property in September, 1994.
No evidence has been provided that Husband took title as the
agent of the Taxpayer/Corporation. The facts provided indicate
that Husband took title individually rather than the
Taxpayer/Corporation taking title to facilitate closing the
purchase. On October 27, 2003, title to the property was
conveyed to the Taxpayer/Corporation via a Warranty Deed. The
County Property Appraiser's office (online) indicates that the
Taxpayer/Corporation is the owner for ad valorem tax purposes.
A promissory note executed in 1988 indicates the
Taxpayer/Corporation is the borrower and Husband and Wife are
guarantors. The note refers to a mortgage also executed by
Husband and Wife as well as the Taxpayer/Corporation. At that
time, Husband owned the real property.

Copies of the Federal Income Tax returns for years 2000, 2001
and 2002, for both the Husband and Wife and the Taxpayer, were
provided. These returns show that the Husband and Wife did not
report any rental income. The returns also show that the
Taxpayer/Corporation did not take any rental expense deductions,
but did show depreciation for the property on its balance sheets
as well as responsibility for the mortgage.

TAXPAYER'S POSITION

Your letter provides in part:

The taxpayer does not agree with your contention that he
should be registered to collect sales tax on the commercial
rental consideration passing from his incorporated
business. There is not any rental consideration that would
be subject to sales tax.

***

APPLICABLE STATUTES AND RULES

Section 212.02, F.S., provides in part:

(2) "Business" means any activity engaged in by any person,
or caused to be engaged in by him or her, with the object
of private or public gain, benefit, or advantage, either
direct or indirect....

(10)(i) "License," as used in this chapter with reference
to the use of real property, means the granting of a
privilege to use or occupy a building or a parcel of real
property for any purpose.

(12) "Person" includes any individual, firm, copartnership,
joint adventure, association, corporation, estate, trust,
business trust, receiver, syndicate, or other group or
combination acting as a unit and also includes any
political subdivision, municipality, state agency, bureau,
or department and includes the plural as well as the
singular number.

Section 212.031, F.S., provides in part:

(1)(a) It is declared to be the legislative intent that
every person is exercising a taxable privilege who engages
in the business of renting, leasing, letting, or granting a
license for the use of any real property....

(c) For the exercise of such privilege, a tax is levied in
an amount equal to 6 percent of and on the total rent or
license fee charged for such real property by the person
charging or collecting the rental or license fee. The
total rent or license fee charged for such real property
shall include payments for the granting of a privilege to
use or occupy real property for any purpose and shall
include base rent, percentage rents, or similar charges....

***
(3) The tax imposed by this section shall be in addition to
the total amount of the rental or license fee, shall be
charged by the lessor or person receiving the rent or
payment in and by a rental or license fee arrangement with
the lessee or person paying the rental or license fee, and
shall be due and payable at the time of the receipt of such
rental or license fee payment by the lessor or other person
who receives the rental or payment....

Rule 12A-1.070, F.A.C., provides in part:

(4)(b) The tax shall be paid at the rate of 5 percent prior
to February 1, 1988, and 6 percent on or after February 1,
1988, on all considerations due and payable by the tenant
or other person actually occupying, using, or entitled to
use any real property to his landlord or other person for
the privilege of use, occupancy, or the right to use or
occupy any real property for any purpose.

(c) Ad valorem taxes paid by the tenant or other person
actually occupying, using, or entitled to use any real
property to the lessor or any other person on behalf of the
lessor, including transactions between affiliated entities,
are taxable.

(d) Common area maintenance charges paid by a tenant to the
lessor for the privilege or right to use or occupy real
property are taxable.

(19)(a) The lease or rental of real property or a license
fee arrangement to use or occupy real property between
related "persons," as defined in s. 212.02(12), F.S., in
the capacity of lessor/lessee, is subject to tax.

(b) The total consideration, whether direct or indirect,
payments or credits, or other consideration in kind,
furnished by the lessee to the lessor is subject to tax

despite any relationship between the lessor and the lessee.

(c) The total consideration furnished by the lessee to a
related lessor for the occupation of real property or the
use or entitlement to the use of real property owned by the
related lessor is subject to tax, even though the amount of
the consideration is equal to the amount of the
consideration legally necessary to amortize a debt owned by
the related lessor and secured by the real property
occupied, or used, and even though the consideration is
ultimately used to pay that debt.

DISCUSSION

The issue presented is whether payments made by a separate legal
entity that is controlled by the owner of commercial real
property are subject to Florida sales tax under Section 212.031,
F.S., when that separate legal entity occupies the commercial
real property of the owner and the payments are made to third
parties to discharge the owner's costs related to the property.

In Florida, the renting, leasing, letting, or granting a license
for the use of any real property is subject to Florida sales
tax. Sales tax is due on the rental consideration paid for the
right to use or occupy commercial real property. See Rule 12A1.070(4) and (19), F.A.C. When the rental or license fee of any
such real property is paid by way of any "other thing of value,"
Florida sales tax is due on the value of the "other thing of
value." See Section 212.031(1)(d), F.S.

The lease or rental of real property between related "persons"
is taxable. See Rule 12A-1.070(19), F.A.C. "Person" is defined
at Section 212.02(12), F.S., and includes all types of entities
including individuals and corporations.

All payments made on behalf of the owner of commercial real
property that benefit the owner of the commercial real property
are considered "rent consideration" and are therefore subject to
Florida sales tax. See Rule 12A-1.070(19)(b), F.A.C., and
Seaboard Coastline Railroad Company v. Askew, #72-15 (Fla. Cir.

Ct., 2nd Cir., Leon Co., 1972) (Rent consideration may be
payable directly to the lessor or to some other person directed
by the lessor.) Finally, there need not be a written lease in
order for there to be a landlord/tenant relationship. See Regal
Kitchens, Inc. v. Department of Revenue, 641 So.2d 158 (Fla. 1st
DCA, 1994).

When a business decision is made to create separate legal
entities for purposes of owning and occupying real property to
achieve advantages such as preferred financing, tax advantage,
risk control, insurance coverage, or the like, the formalities
of such arrangements are recognized for purposes of imposing
Florida sales tax on transactions between those separate legal
entities. See Seaboard Coastline Railroad Company. Courts have
held that parties are not free to "... disavow the existence of
the corporation for the purpose of obtaining a tax advantage."
Regal Kitchens, 641 So.2d at 163. The Regal Kitchens opinion
also held that: "Those who seek the protection afforded by
incorporation must also accept the burdens." Id. Finally, the
Regal Kitchens court held:

Nothing in subsection 212.02(2) Florida Statutes (1989),
suggests that the term "business" is limited to those who
engage in regular course of dealing with different clients
or customers. A person who rents a single duplex unit is
engaged in business as is the owner of an apartment who
rents thousands of units. Id.

Under the facts presented, there exist two (2) separate legal
entities, the first being the Husband and the second being the
Taxpayer/Corporation. The Husband held title to the Property
from 1994 to 2003. The Taxpayer/Corporation occupied the
Property during this time. From 1994 to 2003, the
Taxpayer/Corporation paid all the expenses related to the
Property (i.e., mortgage payments, ad valorem tax payments and
improvements to real property). This practice provided the
Husband with economic benefits that are a form of consideration.

Overlapping the period of 1994 to 2003 is that time from 1998 to
2003 in which the Taxpayer/Corporation is named as the borrower
on the promissory note secured by the mortgage to the Property.

The Husband is listed as a guarantor on the promissory note,
also executed the mortgage and, in fact, title to the Property
remained in the name of the Husband. The Husband receives an
economic benefit during this period because the
Taxpayer/Corporation is paying the mortgage. The value of the
Husband's property is being enhanced by Taxpayer/Corporation
timely paying the mortgage payments on the property.

CONCLUSION

From the period of 1994 to the transfer of title in 2003, the
Taxpayer/Corporation was providing the Husband with forms of
rent consideration that are subject to Florida sales tax under
Section 212.031, F.S.

This response constitutes a Technical Assistance Advisement
under Section 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 Section 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 the date of this letter.

Sincerely,

Eric R. Peate

Senior Attorney
Technical Assistance & Dispute Resolution
(850) 922-4714
Control No.: 57849

FOOTNOTE 1. [Per the County Clerk's Official Records (online),
this transfer was in fact accomplished via a Warranty Deed, the
day prior to the date of your request.]