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

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.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

KURO, INC., )

)

Petitioner, )

)

vs. ) CASE NO. 96-0937

)

DEPARTMENT OF REVENUE, )

)

Respondent. )

___________________________________)

RECOMMENDED ORDER

A hearing was not held in this case. Pursuant to

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

parties agreed that a Recommended Order would be entered by the

Admini s trative Law Judge based upon a stipulated record.

Consistent with the stipulation between the parties, this

Recommended Order is hereby entered, under the provisions of

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

Administrative Law Judge with the Division of Administrative

Hearings.

APPEARANCES

For Petitioner: C. Samuel Whitehead, Esquire

2199 Ringling Boulevard

Sarasota, Florida 34237

For Respondent: James F. McAuley, Esquire

Office of the Attorney General

The Capital - Tax Section

Tallahassee, Florida 32399-1050

STATEMENT OF THE ISSUE

The issue for consideration in this case is whether deeds by

property owners which convey unencumbered real property to a

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

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

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

PRELIMINARY MATTERS

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

Intent to Make Documentary Stamp Tax and Discretionary Surtax

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

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

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

Petitioner thereafter filed a timely protest.

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

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

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

advised Petitioner of its right to request formal hearing.

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

for Administrative Hearings and this proceeding ensued.

After a formal hearing was delayed on several occasions by

requested continuances filed by the Department, the parties

agreed that a Recommended Order would be entered in this matter

by the Administrative Law Judge, without an evidentiary hearing,

based upon a submittal of a corporate deposition and other

documentary evidence to be supplemented by written argument by

counsel. Thereafter, the deposition of Herbert Richard Byrd,

Secretary of Petitioner corporation, was filed with the Division

of Administrative Hearings by counsel for the Department on

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

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

other evidence was presented by either party.

Subsequent to the filing of all the evidentiary matters,

both counsel submitted Proposed Findings of Fact which were

carefully considered in the preparation of this Recommended

Order.

FINDINGS OF FACT

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

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

1741, 1743, 1745 and 1747, in Baywood Colony Southwood Apartments

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

residents of Germany. The Rabaus purchased the properties as an

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

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

which the Rabaus paid off on May 24, 1994.

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

incorporate and hold title to the properties in a corporate

capacity to protect themselves against personal liability.

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

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

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

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

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

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

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

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

was valueless prior to the receipt of the transferred apartments.

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

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

Transfer of Property Under Code Section 351” reflects that the

Rabaus “transferred the jointly owned property [described

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

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

issued in exchange for the contribution of the apartments to the

corporation.

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

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

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

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

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

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

considered additional paid-in capital. There was no additional

property received or possessed by the corporation.

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

at the time the eight Warranty Deeds for the apartments were

transferred to the corporation. The consideration reflected on

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

valuable consideration.”

7. Subsequent to the transfer, the Department conducted an

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

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

Stamp Tax and Discretionary Surtax Audit Changes, by which it

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

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

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

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

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

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

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

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

sustaining the proposed assessment, penalty and accrued interest,

and Petitioner requested formal hearing.

CONCLUSIONS OF LAW

8. The Division of Administrative Hearings has jurisdiction

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

120.57(1), Florida Statutes .

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

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

contending it’s failure to pay appropriate documentary tax stamps

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

The First District Court of Appeal has determined that tax

assessments such as these must be considered prima facie correct,

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

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

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

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

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

stock in a corporation, which is intangible personal property.

They formed a corporation for the purpose of limiting their

personal liability related to the ownership of the real property

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

legitimate tactic, but once the incorporators elect to form the

limited liability entity, they must accept the ramifications of

that election and may not disavow the existence of the

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

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

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

pertinent part:

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 direction, on each

$100 of the consideration therefore the tax

shall be 70 cents.

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

statute as including but not being 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

there include property other than money, it

is presumed that the consideration is equal

to the fair market value of the real property

or interest therein.

13. Consistent therewith, the Department of Revenue has

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

wherein it states:

Property other than money includes, but

is not limited to, property that is corporeal

or incorporeal, tangible or intangible,

visible or invisible, real or personal;

everything that has an exchangeable value or

which goes to make up wealth or estate.

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

provides:

A conveyance of realty to a corporation

in exchange for shares of its capital stock,

or as a contribution to the capital of a

corporation, is subject to tax. There is a

presumption that the consideration is equal

to the fair market value of the real

property.

The taxability of an exchange of stock for property was also

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

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

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

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

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

taxability of a conveyance to a corporation in consideration of

corporate stock of the corporation is considered a taxable

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

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

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

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

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

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

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

property conveyed. As such, the transfer is taxable.

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

provides that whenever a document tax due under the statute is

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

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

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

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

settle or compromise any interest or penalties pursuant to

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

provides:

A taxpayer’s liability for penalties

under any of the chapters specified in s.

72.011(1) may be settled or compromised if it

is determined by the department that the

noncompliance is due to reasonable cause and

not to willful negligence, willful neglect,

or fraud. In addition, a taxpayer’s

liability for penalties under any of the

chapters specified in s. 72.011(1) in excess

of 25 percent of the tax shall be settled or

compromised if the department determines that

the noncompliance is due to reasonable cause

and not to willful negligence, willful

neglect, or fraud.

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

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

subsequently recorded in the office of the Clerk of Circuit

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

appears to be no evidence of fraud, willful concealment or

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

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

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

appear that a compromise of the amount due from the corporation

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

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

by the Department should be compromised and waived.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of

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

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

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

amount of tax not paid to date of payment.

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

Tallahassee, Florida.

ARNOLD H. POLLOCK

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

[phone] SUNCOM 278-9675

Fax Filing [phone]

Filed with the Clerk of the

Division of Administrative Hearings

this 22nd day of April, 1997.

COPIES FURNISHED :

C. Samuel Whitehead, Esquire

2199 Ringling Boulevard

Sarasota, Florida 34237

James F. McAuley, Esquire

Office of the Attorney General

The capitol - Tax Section

Tallahassee, Florida 32399-1050

Linda Lettera

General Counsel

Department of Revenue

204 Carlton Building

Tallahassee, Florida 32399-0100

Larry Fuchs

Executive Director

Department of Revenue

Tallahassee, Florida 32399-1011

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within 15

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

this recommended order should be filed with the agency that will

issue the final order in this case.