Did two proposed land-trust restructurings create a taxable note-and-mortgage renewal by changing the obligor?

Plain-English summary

A Florida land trust held mortgaged real property. Its corporate trustee was the named borrower on a nonrecourse loan, while the trust beneficiary controlled the property and economically supported the trust. The parent wanted to eliminate the land trust and proposed two ways to reaffirm and modify the already-taxed note and mortgage.

Florida focused on whether the restructuring changed the obligor—the legal party obligated to repay the loan.

Alternative 1: deed to the beneficiary—taxable

The trustee would deed the property to the beneficiary, dissolve the trust, and have the beneficiary sign the loan modification. Florida found a change in obligor. It rejected the argument that the beneficiaries were always the "true borrowers" because the land-trust agreement did not override the named liability under the loan and mortgage.

The beneficiary's modification was therefore a taxable renewal under section 201.08(5), with documentary stamp tax due on the entire outstanding principal balance.

Alternative 2: merger and LLC conversion—not taxable

The beneficiary would merge into the corporate trustee, combining beneficial and legal title and terminating the trust. The surviving trustee corporation would then convert to an LLC. Florida law transferred the corporation's property, liabilities, and obligations to the surviving LLC by operation of law.

Because the original borrower continued through the surviving entity, there was no change in obligor. The LLC's reaffirmation and modification did not trigger additional documentary stamp tax, assuming all other section 201.09 requirements were satisfied.

What this means for you

Economic responsibility is not the same as legal obligor status

Control of the property and internal responsibility for payments did not make the beneficiaries the named borrowers. Florida followed the legal obligation in the loan documents.

A direct substitution of borrowers can tax the full balance

Even without increasing principal or changing loan terms, replacing the original obligor with another entity can create a taxable renewal.

Statutory succession can preserve obligor continuity

A qualifying merger or conversion can move assets and liabilities to the surviving entity by law, avoiding a borrower substitution.

Sequence and entity law matter

The two economically similar efforts to simplify the structure had different tax outcomes because one used a deed and new signer while the other used merger and conversion statutes.

Common questions

Q: Was Alternative 1 taxable?
A: Yes. The beneficiary became a different obligor and the modification was taxed on the full outstanding principal.

Q: Was Alternative 2 taxable?
A: No additional documentary stamp tax was due if all other renewal requirements were met, because the LLC succeeded to the original borrower's obligations by law.

Q: Did Florida accept that the beneficiaries were the true borrowers?
A: No. The Department treated the legally named trust or trustee borrower as the original obligor.

Citations and references

• Fla. Stat. § 201.08(1), (5) (tax on written obligations and modifications)
• Fla. Stat. §§ 201.09(1) and 201.133 (renewal by original obligor and tax-paid notation)
• Fla. Stat. §§ 608.438 and 608.4383 (merger and succession to liabilities)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)
• Fla. Admin. Code r. 12B-4.053(1) (signed promise to pay)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 08B4-005

Original ruling text

SUMMARY
QUESTION: Are documentary stamp taxes due on a modification of a note and mortgage
pursuant to a restructuring (a merger and restructuring) where the parties involved are a
beneficiary and trustee (a corporation) of a land trust, with the land trust owning real property in
Florida and the borrower under the note and mortgage being the trustee?
ANSWER: No documentary stamp tax would be due on the modification of the note and
mortgage as a result of the merger and conversion because there will be no change in obligor.
The beneficiary will merge with the trustee, thereby merging the legal and beneficial title in the
real property and terminating the land trust pursuant to the merger doctrine. The trustee will
continue to exist as a corporation, and will then convert to an LLC. The property of the
corporation will transfer to the LLC as the surviving entity by operation of law, and the LLC will
become owner of the assets and liabilities as a result of the conversion. Since the trustee signed
the original note and mortgage and the resultant entity after the conversion (the LLC) will sign
the modification of the note and mortgage, there will be no change in obligor.
September 19, 2008
Re:

Technical Assistance Advisement No. 08B4-005
Documentary Stamp Tax – Note and Mortgage Modification/Restructuring Alternatives
Sections 201.02, 201.08, F.S.
XXX (“Taxpayer/Current Beneficiary”)
XXX (“Parent”)
XXX (“Land Trust”)
XXX (“Trustee”)

Dear:
This is in regard to your request for a Technical Assistance Advisement letter dated April
10, 2008, requesting a ruling as to the taxability for documentary stamp tax on certain
restructuring activities involving an affirmation of a note and mortgage.
Facts Presented by the Petitioner
As a result of a restructuring on XXX, the Taxpayer/Current Beneficiary and the Trustee
became wholly owned by the Parent, and the Taxpayer/Current Beneficiary became the sole
beneficiary of the Land Trust. The Trustee (a corporation) of the Land Trust owns real property
in Florida (the “Property”). The Trustee is also the borrower on a non-recourse loan (the
“Loan”), which is encumbered by a mortgage (the “Mortgage”) on the Property. The principal
amount of the Loan is equal to the current amount owed of XXX, and the appropriate
documentary stamp tax and nonrecurring intangible tax have been paid on the Loan.

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Prior to the restructuring, there were two beneficiaries (the “Prior Beneficiaries”) of the
Land Trust. As a result of a conversion and merger under the restructuring, the Prior
Beneficiaries became the Taxpayer/Current Beneficiary of the Land Trust.
Although the Trustee is the borrower on the Loan secured by the Mortgage, because the
Trustee and the Land Trust exist merely to hold legal title to the property, to accomplish specific

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business purposes in connection with former partners of the Prior Beneficiaries of the Land Trust
and to effectuate federal income tax planning, the Prior Beneficiaries of the Land Trust were
always treated as the true borrowers under the Loan. Specifically, under the Land Trust, the
Prior Beneficiaries reserved the rights to direct the Trustee with respect to all title and
operational matters of the Property; to manage and control the Property; and to receive proceeds
of the rental, sale, mortgage, or other disposition of the Property. Additionally, the Trustee, on
behalf of the Prior Beneficiaries, determined the amount of principal and interest payments due,
and to the extent there were not sufficient income and proceeds available, the Trustee could
demand from the Prior Beneficiaries their respective proportionate shares of unpaid expenses and
obligations, including without limitation for principal, interest, taxes, and any other liens or
assessments. The Land Trust further provides that the Trustee had no individual liability or
obligation arising from its ownership, as Trustee, of the legal title to the Property or with respect
to any indebtedness incurred by it in dealing with the Property. The only personal liability under
the Loan was the indemnifications and guaranties of the Parent and its controlling shareholders
(this remained the same after the restructuring and will remain the same after the proposed
alternatives presented in this request).
The reasons for the use of the Land Trust no longer exist, and the Parent plans to further
simplify its organizational structure by dissolving the Land Trust pursuant to one of the two
alternatives presented below. The documents titled “Loan Reaffirmation and Modification
Agreement” for each of the proposed alternatives have been provided with the request.
Requested Ruling
A ruling is requested whether the planned dissolution of the Land Trust will incur documentary
stamp tax under Alternative 1 and/or Alternative 2.

1. Alternative 1: Convey the Property from the Trust by Trustee’s deed to the
   Taxpayer/Current Beneficiary of the Land Trust. After the conveyance, the Trust will be
   dissolved. As part of the dissolution, the terms of the Loan will not be modified, and the
   Taxpayer/Current Beneficiary will sign an affirmation with respect to the Loan. The
   Parent’s controlling shareholders will execute affirmations of their respective guaranties.
   It is your position that no additional documentary stamp tax is due under Alternative 1,
   even though the Trustee is the borrower under the Loan secured by the Mortgage. The Prior
   Beneficiaries of the Land Trust were always treated as the true borrowers under the Loan, and
   because there is no specific definition of the term “obligor” under the statute, the signing of the
   loan affirmation by the Taxpayer/Current Beneficiary meets the parameters of an exempt
   renewal under s. 201.09(1), F.S.
2. Alternative 2: Merge the Taxpayer/Current Beneficiary into the Trustee (and convert the
   Trustee to an LLC), thereby merging the legal and beneficial title in the Property in the
   Trustee and terminating the Land Trust. The transfer by operation of law of the title in
   the Property will be reflected in a Trustee’s deed (executed and given after the transfer by
   operation of law) or by the recording of the applicable merger documents. As part of the

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merger, the terms of the loan will not be modified, and the LLC will sign an affirmation
with respect to the Loan.
It is your position that no additional documentary stamp tax is due under Alternative 2,
since the Trustee signed the original note on the Loan on behalf of the Trust, and the resulting
entity after the conversion (the LLC) will sign the affirmation of the Loan and the amendment of
the Mortgage, so there will be no change in obligor.
Law and Discussion
Section 201.08(1), F.S., imposes the documentary stamp tax at the rate of $.35 per $100
or fraction thereof based on the indebtedness or obligation evidenced by promissory notes and
other written obligations to pay money which are made, executed, delivered, sold, transferred, or
assigned in Florida, or secured by a Florida mortgage, including renewals.
Per s. 201.08(5), F.S., a renewal includes modifications of an original document which
change the terms of the indebtedness evidenced by the original document by adding one or more
obligors, increasing the principal balance, or changing the interest rate, maturity date, or payment
terms. Section 201.09(1), F.S., allows a promissory note evidencing a term obligation to be
renewed for the unpaid principal balance without incurring additional tax, provided it is not
executed by any person other than the original obligor, and the original promissory note is
attached with the proper notation that tax was paid pursuant to s. 201.133, F.S.
Rule 12B-4.053, F.A.C., titled “Taxable Documents,” states in part:
(1) Signature Required: Tax is on "Promise to Pay" and each renewal thereof and to be a
“note or obligation" it must be signed by the maker or obligor to be taxable. (Lee v.
Quincy State Bank, 127 Fla. 765, 173 So. 909 (1937))
The terms maker, obligor, or debtor are sometimes used synonymously within the statutes
governing documentary stamp tax and the Uniform Commercial Code in connection with both
secured and unsecured obligations. Using this rationale, the plain meaning of “obligor” means
one who is obligated to pay back money borrowed.
Department’s Position – Alternative #1
The proposed restructuring presented in Alternative #1, where the Taxpayer/Current
Beneficiary would sign the Loan Reaffirmation and Modification Agreement (the “Modification
Agreement”) after the property has been transferred from the Trust would result in a change in
obligor. The Modification Agreement constitutes a renewal under s. 201.08(5), F.S., The
original obligor/borrower under the Loan and Mortgage was the Trust, who also held title to the
Property. Under the proposed restructuring, the Trust will be dissolved after the property is
conveyed to the Taxpayer/Current Beneficiary. The Taxpayer/Current Beneficiary would then
sign the Modification Agreement as borrower.
The Land Trust agreement does not govern who is liable under the Loan and Mortgage
even though the Trustee acted on behalf of the Trust for the benefit of the Beneficiaries at the

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time the Trust became obligated under the Loan and Mortgage. Therefore, the Department does
not accept the position that the Beneficiaries were the true obligors under the Loan and
Mortgage.
The dissolution of the Trust after the transfer of the property does not result in a merger
of the Trustee into the Taxpayer/Current Beneficiary. Simply put, the original obligor/borrower
will not be the same party as the obligor/borrower under Agreement #1. The modifications to
the Mortgage are spelled out in the Modification Agreement on Page 4 (6)(a), and are
modifications to the original Loan and Mortgage. Since the Modification Agreement will be
signed by a party different from the party to the original Loan and Mortgage, it constitutes a
taxable renewal with documentary stamp tax due on the entire outstanding principal balance of
the Mortgage, since the provisions of s. 201.09, F.S., are not met.
Department’s Position - Alternative #2
Section 608.438(2), F.S., allows for a limited liability company to merge with or into one
or more other business entities, which by definition includes a corporation formed or organized
in this state. The title to all real estate and other property, or any interest therein, owned by the
limited liability company and other business entity that is a party to the merger, is vested in the
surviving entity without reversion or impairment. Section 608.4383(3), F.S., provides that when
a merger becomes effective the "surviving entity shall thereafter be responsible and liable for all
the liabilities and obligations of each limited liability company and other business entity that is a
party to the merger, including liabilities arising out of the rights of dissenters with respect to
such merger under applicable law."
The obligations of an entity merging under s. 608.438, F.S., become by operation of law
the obligations of the surviving entity. The conversion provisions are identical in that respect.
The proposed merger of the Taxpayer/Beneficiary into the Trustee merges the legal and
beneficial title in the Property which terminates the Land Trust pursuant to the Merger Doctrine.
As a consequence, the Trustee ceases to exist in such a capacity, but remains a legal entity in its
corporate form. In this form, the corporation will then convert to an LLC. The property of the
corporation will transfer to the LLC as the surviving entity by operation of law, with the LLC
becoming owner of the assets and liabilities as a result of the conversion. Therefore, no
documentary stamp would be due under s. 201.08(1), F.S., on the Loan Reaffirmation and
Modification Agreement proposed under Alternative #2 upon its signature by the LLC. As the
surviving entity under the conversion, since the LLC becomes the owner of the assets and
liabilities in the converting entity, there is no resultant change of obligors. This presumes all of
the other requirements of s. 201.09, F.S., are met.
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.

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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.
If you have any further questions with regard to this matter and wish to discuss them, you
may contact me directly at (850) 922-4844.
Sincerely,

Joy B. Eldred, CPA
Tax Law Specialist
Technical Assistance and Dispute Resolution
JBE/mh
Record ID: 44370