A version of this article was published in The Daily Record on June 25, 2013.
Affirming the holding of the Maryland Tax Court, the Circuit Court for Howard County ruled this month that when the recordation tax becomes due on an indemnity mortgage or an indemnity deed of trust (an “IDOT”), the party responsible to pay the tax is the guarantor who executed the IDOT.
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, who owns real property. To secure the guaranty, the guarantor grants to the lender the IDOT on property it owns. An IDOT is an effective financial 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.
In its June 13 decision, the circuit court noted that before July 1, 2012, IDOTs enjoyed a recordation tax advantage even though the Maryland Code did not make any specific provision for or reference to IDOTs. The Maryland Attorney General issued opinions in 1973 and 1989 which stated that IDOTs could be recorded without payment of recordation tax. When there is a default under the loan, the Attorney General opined that recordation tax becomes due, and it is the guarantor who must pay the tax. The circuit court found the attorney general’s analysis persuasive and that the legislature had acquiesced in those opinions.
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 then the lenders or the purchasers at foreclosure tried to record deeds relating to the same properties. Recordation and transfer taxes due on the deeds themselves were tendered, but the Clerk of the Circuit Court for Howard County, at the direction of the Department of Finance, refused to record the deeds until the recordation taxes on the prior IDOTs were paid.
The lenders or purchasers of the property paid the recordation taxes under protest and filed for refunds. The Maryland Tax Court, in Atapco Howard Square I Business Trust v. Howard County Dep’t of Finance, Nos. 11-RC-00-805 through 811, 2012 WL 3987381, 2012 Md. Tax LEXIS 4 (Aug. 28, 2012), agreed that the taxpayers were entitled to the return of the sums remitted with interest.
The Department of Finance appealed to the circuit court, which affirmed the decision of the Tax Court on every point. In its Memorandum Opinion, the circuit court discussed and dismissed all of the arguments propounded by the Howard County Department of Finance. The court found that Maryland appellate courts have recognized IDOTs for years and that recordation taxes are excise taxes and are, therefore, not liens on land.
Higher threshold ahead
The law regarding the taxation of IDOTs changed as of July 1, 2012. Senate Bill 1302, Chapter 2 of the First Special Session of the General Assembly of 2012, provided that recordation taxes must be paid on the recordation of IDOTs that secure loans in the amount of $1 million or more. Pursuant to Chapters 267 and 268 of the Laws of Maryland of 2013, as of July 1, 2013, that threshold will rise to $3 million.