A version of this article was published in The Daily Record on July 31, 2013.
On July 12, Howard County reimbursed five taxpayers for $587,151.56 in connection with recordation taxes that they had paid under protest. This amount includes $499,112.50 for the amount of the taxes that the County forced the taxpayers to pay plus $88,039.06 in interest as required by Maryland law.
As reported in this column in June, the Circuit Court for Howard County held on June 13 that Howard County improperly required the five taxpayers to pay taxes on indemnity deeds of trust (“IDOTs”) in cases where the borrowers had defaulted on loans. The court ruled that the party responsible to pay the tax is the guarantor who executed the IDOT. None of the five affected taxpayers was a borrower or a guarantor of the subject loans. The case is Howard County Department of Finance v. Atapco Howard Square I Business Trust, et al., Circuit Court for Howard County Case No.: 13-C-12-092323.
The Atapco case involved seven underlying matters. In most of them, lenders foreclosed under IDOTs that had gone into default, and the purchasers at the foreclosures tried to record deeds by tendering only the recordation and transfer taxes due on the deeds themselves. Howard County refused to record the deeds until the recordation taxes on the prior IDOTs were paid. The purchasers of the properties paid the recordation taxes and filed for refunds. The Maryland Tax Court (an administrative agency) ruled for the taxpayers in August 2012 and Howard County appealed, but the Circuit Court agreed with the Tax Court.
As previous columns on this topic have explained, IDOTs are security instruments that have been used in Maryland for decades. Most IDOT transactions involve a loan made by a lender to a borrower that is guaranteed by a different person or entity which owns real property. To secure the guaranty, the guarantor grants to the lender an IDOT on the property it owns. An IDOT is an effective financing structure if at the time the loan is made the guarantor is not primarily liable to the lender. Instead, when the IDOT is recorded the guaranty is contingent on the occurrence of an event, such as a default under the loan to the borrower.
The Maryland Attorney General issued opinions in 1973 and 1989 which stated that IDOTs could be recorded without payment of recordation tax. Those opinions also stated that when there is a default under the loan the recordation tax becomes due, and it is the guarantor who must pay the tax. The Tax Court and the Circuit Court agreed with the Attorney General’s opinions.
Ed Levin and George Ritchie at Gordon Feinblatt LLC in Baltimore represented the taxpayers in the case.