Kuro and Muben-Lamar In the Eye of the Beholder?

In Florida, when you transfer an interest in real property to a company or individual, you have to pay a tax called the deed tax. This tax is based on the amount of money or other property exchanged in the transfer. This tax has been around since 1931 but has become more important as real estate transactions have become more common. The state of Florida gets about $1.3 billion from this tax each year. For most people buying a house, this tax is not a big deal, but for big commercial real estate deals, it can be a significant amount of money. The Florida deed tax used to be similar to a federal tax, but they split in 1966. Despite this, Florida still looks at federal case law to help interpret the deed tax. The Florida Legislature passed changes in 1990 to prevent people from avoiding paying taxes on transferring property to a corporation they own. The law says that if you transfer property to someone else, you have to pay a tax based on the value of the transfer. The courts decided in 1976 that a “purchaser” is someone who gets property by paying for it. Before 1990, there was no clear definition of the term “consideration” in deed tax law. Case law said it meant the “purchase price” and had to have a value that could be determined.

For transfers to corporations, the tax was based on the value of shares given in exchange for real property. If the shares had no value, tax was based on their par value. In one case, the only consideration for transferring property to a newly formed corporation was the par value of the shares.

After losing a court case, the tax department changed the rules to say that transferring property to a corporation as a capital contribution was not taxed if it was not for valuable consideration.

For transfers to partnerships, if the grantors were the only partners, it wasn’t taxed. But if there were other partners, the tax was based on the value of the partnership interest received. Contributions of property to a partnership before July 1, 1986, are still exempt from the tax. And the law allows specific types of transfers to be taxed, instead of just general language added in 1990. In simple terms, the Florida Supreme Court decision in De Maria said that a “purchaser” is someone who pays money or takes on financial responsibility, like a mortgage. In 1990, the law was changed to include a broader definition of “consideration,” meaning what is given in exchange for the property. This was to close a loophole that allowed people to avoid paying full taxes on property transfers. Some may argue that the hole in the law got smaller, but only a little, because the amendment didn’t work in a couple of ways. It didn’t tax the transfer of real property to a company, and it didn’t define the term “purchaser.” So, there are still loopholes that people can use to avoid paying taxes on certain transfers. Despite changes to the rules, some people still believed that they didn’t have to pay deed tax when transferring real property to a controlled entity. In a court case called Kuro, the court decided that no deed tax was required when a father and son transferred unencumbered real property to a corporation they both owned equally. The court said there was no “purchaser” as required by the law. The department says the decision only applies to that specific situation, but some cases have still been settled based on the Kuro decision. The First District Court of Appeal confirmed a decision stating that when a new family limited partnership received unencumbered real estate in exchange for a limited partnership interest, it was taxable based on the fair market value of the property. In another case, an insurance company formed a partnership with two general partners, one of which was connected to the company. When the company transferred real property to the partnership, the court ruled that it was subject to a tax because the company received something in exchange for the property. The court disagreed with a previous decision and stated that the company could have avoided the tax by issuing capital stock to the partners before the transfer. In the case of Kuro, the court ruled that small business owners shouldn’t be taxed as if they were selling their property when they use different business structures. The Supreme Court initially agreed to review a similar case called Muben-Lamar, but later changed their minds and dismissed the appeal, saying that the two cases were different and not in conflict. The Florida Supreme Court didn’t want to hear a case about whether taxes should apply when real property is given to a family-controlled company. The decision might depend on where the property is. It’s unclear if a different structure for the transfer or a different type of person receiving the property would change the result. Without a new law, the issue won’t be resolved. A law should be changed to make it clear when taxes apply to these kinds of transfers. If not, people could find ways to avoid paying taxes.

Source: https://www.floridabar.org/the-florida-bar-journal/kuro-and-muben-lamar-in-the-eye-of-the-beholder/