96-000937 Kuro, Inc. vs. Department Of Revenue
 Status: Closed
Recommended Order on Tuesday, April 22, 1997.


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Summary: Corporation owned by individuals who transferred real property to it in exchange for stock must pay documentary stamp tax plus interest but not penalty here.

1STATE OF FLORIDA

4DIVISION OF ADMINISTRATIVE HEARINGS

8KURO, INC., )

11)

12Petitioner, )

14)

15vs. ) CASE NO. 96-0937

20)

21DEPARTMENT OF REVENUE, )

25)

26Respondent. )

28___________________________________)

29RECOMMENDED ORDER

31A hearing was not held in this case. Pursuant to

41stipul a tion of the parties, a formal hearing was waived and the

54parties agreed that a Recommended Order would be entered by the

65Admini s trative Law Judge based upon a stipulated record.

75Consistent with the stipulation between the parties, this

83Recommended Order is hereby entered, under the provisions of

92Section 120.80(14)(b), Florida Statutes , by Arnold H. Pollock, an

101Administrative Law Judge with the Division of Administrative

109Hearings.

110APPEARANCES

111For Petitioner: C. Samuel Whitehead, Esquire

1172199 Ringling Boulevard

120Sarasota, Florida 34237

123For Respondent: James F. McAuley, Esquire

129Office of the Attorney General

134The Capital - Tax Section

139Tallahassee, Florida 32399-1050

142STATEMENT OF THE ISSUE

146The issue for consideration in this case is whether deeds by

157property owners which convey unencumbered real property to a

166co r poration solely owned by them, are subject to a documentary

178stamp tax imposable under Section 201.021(1), Florida Statutes ,

186and Rule 12B-4.013(7), Florida Administrative Code .

193PRELIMINARY MATTERS

195On November 10, 1994, the Department issued a Notice of

205Intent to Make Documentary Stamp Tax and Discretionary Surtax

214Audit Changes to Petitioner, Kuro, Inc. This was followed, on

224March 27, 1995, by the Department’s Notice of Proposed

233Assessment, which denoted the tax, penalty and interest claimed.

242Petitioner thereafter filed a timely protest.

248By Notice of Decision, dated January 11, 1996, the

257Respo n dent herein, Department of Revenue, advised the Petitioner,

267Kuro, Inc., that it had sustained the assessment as proposed and

278advised Petitioner of its right to request formal hearing.

287Thereafter, on February 19, 1996, Petitioner filed its Petition

296for Administrative Hearings and this proceeding ensued.

303After a formal hearing was delayed on several occasions by

313requested continuances filed by the Department, the parties

321agreed that a Recommended Order would be entered in this matter

332by the Administrative Law Judge, without an evidentiary hearing,

341based upon a submittal of a corporate deposition and other

351documentary evidence to be supplemented by written argument by

360counsel. Thereafter, the deposition of Herbert Richard Byrd,

368Secretary of Petitioner corporation, was filed with the Division

377of Administrative Hearings by counsel for the Department on

386February 28, 1997. Counsel for the Department also filed with

396the Division the Department’s audit file and work papers. No

406other evidence was presented by either party.

413Subsequent to the filing of all the evidentiary matters,

422both counsel submitted Proposed Findings of Fact which were

431carefully considered in the preparation of this Recommended

439Order.

440FINDINGS OF FACT

4431. By Warranty Deed dated April 30, 1991, W. Dewey Kennell

454sold eight condominium apartments, units 1731, 1733, 1735, 1737,

4631741, 1743, 1745 and 1747, in Baywood Colony Southwood Apartments

473IV, a condominium, to Kurt Rabau and Ronald Rabau, his son,

484residents of Germany. The Rabaus purchased the properties as an

494investment in rental property for income. At the time of the

505sale, the property was subject to mortgages totaling $250,000,

515which the Rabaus paid off on May 24, 1994.

5242. Sometime after the purchase, the Rabaus were advised to

534incorporate and hold title to the properties in a corporate

544capacity to protect themselves against personal liability.

551Thereafter, on September 14, 1994, the Rabaus formed Kuro, Inc.,

561the Petitioner herein, to take and hold title to the properties,

572with Kurt Rabau and Ronald Rabau each owning 50% of the corporate

584stock. There were no other owners of stock in the corporation.

5953. On October 12, 1994, the Rabaus transferred all eight

605properties to Kuro, Inc. Kuro, Inc. had no assets other than the

617eight apartments, and did no business prior to the transfer of

628those apartments to it. Consequently, the stock of Kuro, Inc.

638was valueless prior to the receipt of the transferred apartments.

6484. The corporation’s federal tax form relating to transfer

657of property to a corporation, the “Corporation’s Statement on

666Transfer of Property Under Code Section 351” reflects that the

676Rabaus “transferred the jointly owned property [described

683therein] for which Kuro Inc. issued the stock”. From the

693evidence presented it is clear that the Kuro Inc. stock was

704issued in exchange for the contribution of the apartments to the

715corporation.

7165. Other documents in the corporation’s 1994 tax return

725indicate that the property was valued at fair market value at the

737time of transfer to the corporation, and the transferee’s,

746(corporation’s) adjusted basis was identical after the transfer.

754Each of the Rabaus received 500 shares of the corporation’s stock

765which was valued at $618,642. Of that amount, $617,642 was

777considered additional paid-in capital. There was no additional

785property received or possessed by the corporation.

7926. A minimal documentary stamp tax was paid by the parties

803at the time the eight Warranty Deeds for the apartments were

814transferred to the corporation. The consideration reflected on

822the face of each deed was “...the sum of $10.00 and other

834valuable consideration.”

8367. Subsequent to the transfer, the Department conducted an

845audit of the Clerk of Circuit Court in Sarasota County and, on

857November 10, 1994, issued a Notice of Intent to Make Documentary

868Stamp Tax and Discretionary Surtax Audit Changes, by which it

878indicated its intent to impose a documentary tax of $4,207.00 on

890the transfers, a 50% penalty of $2,103.50, and interest totaling

901$38.73 through November 10, 1994, with additional interest to

910accrue at the rate of 1% per month, prorated daily ($1.38), until

922date of payment. Thereafter, on March 27, 1995, the Department

932issued a Notice of Proposed Assessment to Kuro, Inc., and

942Petitioner timely filed a protest. Subsequent to that action, on

952January 11, 1996, the Department issued its Notice of Decision

962sustaining the proposed assessment, penalty and accrued interest,

970and Petitioner requested formal hearing.

975CONCLUSIONS OF LAW

9788. The Division of Administrative Hearings has jurisdiction

986over the parties and the subject matter in this case. Section

997120.57(1), Florida Statutes .

10019. The Department of Revenue seeks to impose an assessment,

1011penalty and interest on the Petitioner herein, Kuro, Inc.,

1020contending it’s failure to pay appropriate documentary tax stamps

1029upon deeds of real estate from the Rabaus to the corporation.

1040The First District Court of Appeal has determined that tax

1050assessments such as these must be considered prima facie correct,

1060with the burden of proof resting on the party against whom the

1072assessment is made. Department of Revenue v. Nu-Life Health and

1082Fitness Center , 623 So.2d 747, 751-752 (Fla. 1DCA 1992). The

1092burden in such a case is a preponderance of the evidence.

110310. The Rabaus gave up their interest in real property for

1114stock in a corporation, which is intangible personal property.

1123They formed a corporation for the purpose of limiting their

1133personal liability related to the ownership of the real property

1143and the business uses to which it was put. This is a perfectly

1156legitimate tactic, but once the incorporators elect to form the

1166limited liability entity, they must accept the ramifications of

1175that election and may not disavow the existence of the

1185corporation for a tax advantage. Regal Kitchens, Inc. v Fla.

1195Dept. of Revenue 641 So.2d 158 (Fla. 1DCA 1994).

120411. Section 201.02(1), Florida Statutes , provides, in

1211pertinent part:

1213On deeds, instruments, or writings

1218whereby any lands, tenements, or other real

1225property, or any interest therein, shall be

1232granted, assigned, transferred, or otherwise

1237conveyed to, or vested in, the purchaser or

1245any other person by his direction, on each

1253$100 of the consideration therefore the tax

1260shall be 70 cents.

126412. The term “consideration” is further defined in the

1273statute as including but not being limited to:

1281... the money paid or agreed to be paid;

1290the discharge of an obligation; and the

1297amount of any mortgage; purchase money

1303mortgage lien; or other encumbrance, whether

1309or not the underlying indebtedness is

1315assumed. If the consideration paid or given

1322in exchange for real property or any interest

1330there include property other than money, it

1337is presumed that the consideration is equal

1344to the fair market value of the real property

1353or interest therein.

135613. Consistent therewith, the Department of Revenue has

1364promulgated Rule 12B-4.012(2), Florida Administrative Code ,

1370wherein it states:

1373Property other than money includes, but

1379is not limited to, property that is corporeal

1387or incorporeal, tangible or intangible,

1392visible or invisible, real or personal;

1398everything that has an exchangeable value or

1405which goes to make up wealth or estate.

141314. Rule 12B-4.013(7), Florida Administrative Code

1419provides:

1420A conveyance of realty to a corporation

1427in exchange for shares of its capital stock,

1435or as a contribution to the capital of a

1444corporation, is subject to tax. There is a

1452presumption that the consideration is equal

1458to the fair market value of the real

1466property.

1467The taxability of an exchange of stock for property was also

1478provided for in the 1983 version of the above-cited Department

1488rule. (See Rule 12B-4.13(7) Florida Administrative Code , 1983

1496Ed.) Since each rule was lawfully promulgated by the Department

1506it is presumed valid. City of Palm Bay v. State, Dept. of

1518Transportation , 588 So.2d 624 (Fla. 1DCA 1991). In addition, the

1528taxability of a conveyance to a corporation in consideration of

1538corporate stock of the corporation is considered a taxable

1547transaction. (See Attorney General Opinion 63-18).

155315. It is the transfer of an interest in real estate which

1565is subject to the tax. It matters not who the parties to the

1578transfer are. In the instant case, the Kuros transferred real

1588property they owned to a corporation in which they were the only

1600shareholders, and this transfer was paid for by the issue of

1611stock in that corporation of a value equal to the value of the

1624property conveyed. As such, the transfer is taxable.

163216. Section 201.17(2)(a),(b) and (c), Florida Statutes ,

1640provides that whenever a document tax due under the statute is

1651not paid timely, the person liable for the tax is subject to

1663payment of the tax not paid, payment of a penalty equal to 50

1676percent of the tax not paid, and payment of interest. However,

1687consistent with subsection (3) of the statute, the Department may

1697settle or compromise any interest or penalties pursuant to

1706Section 72.011, Florida Statutes . At subsection (3)(a), it

1715provides:

1716A taxpayer’s liability for penalties

1721under any of the chapters specified in s.

172972.011(1) may be settled or compromised if it

1737is determined by the department that the

1744noncompliance is due to reasonable cause and

1751not to willful negligence, willful neglect,

1757or fraud. In addition, a taxpayer’s

1763liability for penalties under any of the

1770chapters specified in s. 72.011(1) in excess

1777of 25 percent of the tax shall be settled or

1787compromised if the department determines that

1793the noncompliance is due to reasonable cause

1800and not to willful negligence, willful

1806neglect, or fraud.

180917. In the instant case, Kuro, Inc. received the property

1819as a transfer for stock in the corporation. The deeds were

1830subsequently recorded in the office of the Clerk of Circuit

1840Court, and a tax based on the token consideration paid. There

1851appears to be no evidence of fraud, willful concealment or

1861willful misconduct on the part of the Rabaus or any of their

1873employees or advisers. At worst, what appears to be an erroneous

1884interpretation of the law is involved. That being so, it would

1895appear that a compromise of the amount due from the corporation

1906is appropriate. Clearly the tax is due and payable, as is the

1918interest on the amount of tax. However, the penalty as assessed

1929by the Department should be compromised and waived.

1937RECOMMENDATION

1938Based on the foregoing Findings of Fact and Conclusions of

1948Law, it is recommended that the Department of Revenue enter a

1959final order imposing a tax in the amount of $4,207.00 with

1971interest from date of filing at 1 percent per month based on the

1984amount of tax not paid to date of payment.

1993DONE and ENTERED this 22nd day of April, 1997, in

2003Tallahassee, Florida.

2005ARNOLD H. POLLOCK

2008Administrative Law Judge

2011Division of Administrative Hearings

2015The DeSoto Building

20181230 Apalachee Parkway

2021Tallahassee, Florida 32399-3060

2024(904) 488-9675 SUNCOM 278-9675

2028Fax Filing (904) 921-6947

2032Filed with the Clerk of the

2038Division of Administrative Hearings

2042this 22nd day of April, 1997.

2048COPIES FURNISHED :

2051C. Samuel Whitehead, Esquire

20552199 Ringling Boulevard

2058Sarasota, Florida 34237

2061James F. McAuley, Esquire

2065Office of the Attorney General

2070The capitol - Tax Section

2075Tallahassee, Florida 32399-1050

2078Linda Lettera

2080General Counsel

2082Department of Revenue

2085204 Carlton Building

2088Tallahassee, Florida 32399-0100

2091Larry Fuchs

2093Executive Director

2095Department of Revenue

2098Tallahassee, Florida 32399-1011

2101NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

2107All parties have the right to submit written exceptions within 15

2118days from the date of this recommended order. Any exceptions to

2129this recommended order should be filed with the agency that will

2140issue the final order in this case.

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Date
Proceedings
Date: 10/23/1997
Proceedings: Record on Appeal (filed with the 2nd DCA) filed.
Date: 07/18/1997
Proceedings: Second DCA case number 2-97-3021 filed.
Date: 07/14/1997
Proceedings: Notice of Appeal filed. (filed by: )
Date: 06/16/1997
Proceedings: Final Order filed.
PDF:
Date: 06/13/1997
Proceedings: Agency Final Order
PDF:
Date: 06/13/1997
Proceedings: Recommended Order
Date: 04/23/1997
Proceedings: Ltr to L. Lettera from AHP enclosing deposition of H. Byrd that was inadvertently left out of the Recommended Order sent out.
PDF:
Date: 04/22/1997
Proceedings: Recommended Order sent out. CASE CLOSED. No Hearing held.
Date: 04/04/1997
Proceedings: Petitioner`s Proposed Recommended Order filed.
Date: 03/31/1997
Proceedings: Order Granting Extension of Time to File Proposed Recommended Orders sent out. (PRO`s due by 3/31/97)
Date: 03/31/1997
Proceedings: Respondent`s Notice of Filing Proposed Recommended Order; Respondent`s Proposed Recommended Order filed.
Date: 03/24/1997
Proceedings: Renewed Agreed Motion for Extension of Time to File Proposed Recommended Orders filed.
Date: 03/11/1997
Proceedings: Defendant`s Notice of Filing Audit File and Work Papers filed.
Date: 02/28/1997
Proceedings: Defendant`s Notice of Filing Original Transcript of the Deposition of Herbert Richard Byrd filed.
Date: 02/20/1997
Proceedings: Order sent out. (parties shall file their proposed recommended orders on or before 3/24/97)
Date: 02/12/1997
Proceedings: (Respondent) Notice of Taking Corporate Deposition Duces Tecum filed.
Date: 02/12/1997
Proceedings: (Respondent) Notice of Taking Corporate Deposition Duces Tecum (filed via facsimile).
Date: 12/23/1996
Proceedings: Amended Notice of Hearing (As to Location of Hearing Only) sent out. (hearing set for 3/4/97; 10:00 a.m.; Sarasota)
Date: 11/22/1996
Proceedings: Order Granting Third Continuance sent out. (hearing rescheduled for 3/4/97; 10:00am; Sarasota)
Date: 11/15/1996
Proceedings: (Respondent) Unopposed Motion for Continuance (filed via facsimile).
Date: 08/21/1996
Proceedings: Order Granting Second Continuance sent out. (hearing rescheduled for 12/4/96; 10:00am; Sarasota)
Date: 08/16/1996
Proceedings: (Respondent) Unopposed Motion for Continuance filed.
Date: 06/25/1996
Proceedings: Order Granting Continuance sent out. (hearing rescheduled for 9/4/96; 10:00am; Sarasota)
Date: 06/19/1996
Proceedings: (Respondent) Unopposed Motion for Continuance filed.
Date: 05/31/1996
Proceedings: Respondent`s First Request for Admissions; Respondent`s Notice of Serving Second Set of Interrogatories to Petitioner filed.
Date: 04/05/1996
Proceedings: Respondent`s Notice of Serving First Set of Interrogatories to Petitioner; Respondent, Department of Revenue`s Request for Production of Documents filed.
Date: 03/12/1996
Proceedings: Notice of Hearing sent out. (hearing set for 7/9/96; 10:00am; Sarasota)
Date: 03/08/1996
Proceedings: Parties` Joint Response to Initial Order filed.
Date: 03/08/1996
Proceedings: Respondent, Department of Revenue`s Answer filed.
Date: 02/27/1996
Proceedings: Initial Order issued.
Date: 02/22/1996
Proceedings: Agency referral letter; Petition for Chapter 120 Hearing; Agency Action letter filed.

Case Information

Judge:
ARNOLD H. POLLOCK
Date Filed:
02/22/1996
Date Assignment:
02/27/1996
Last Docket Entry:
10/23/1997
Location:
Sarasota, Florida
District:
Middle
Agency:
ADOPTED IN TOTO
 

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Related Florida Statute(s) (5):

Related Florida Rule(s) (2):