The Attorney General of Maryland has filed suit against a landowner challenging the use of an Indemnity Deed of Trust (IDOT) to avoid payment of recordation tax.

Earlier this month, the Attorney General filed suit in the Circuit Court for Howard County against Grayson Homes at Piney Station, LLC seeking state recordation tax in the amount of $110,950 on an IDOT recorded eight months prior.

For at least two decades, the use of IDOTs has been a preferred mechanism to avoid recordation tax. The determination of whether recordation tax should be imposed upon the recordation of an ‘indemnity deed of trust’ hinges on whether the indemnitor land owner is one ‘primarily liable’ for the debt secured. If the landowner is not primarily liable, but is liable only, under the deed of trust it is granting, in the event of a default by the actual maker of the note, no tax is imposed on the theory that the current debt has not been incurred by the landowner. In a 1989 published opinion, the Attorney General acknowledged the practice of using IDOTs when it held the failure to pay the recordation tax does not invalidate the secured party’s lien under the IDOT.

In this instance, when the clerk of the court requested a copy of the note evidencing the underlying indebtedness, as is common at the time of presenting IDOTs for recordation. The clerk was shown a note, of even date with the IDOT, in the amount of $15,850,000, the identical amount of the IDOT, but the note was not between Mercantile Mortgage Corporation, as lender, and Grayson Homes, Inc., as borrower. Rather the clerk was shown (apparently inadvertently) a related note between Grayson Homes at Piney Station, LLC, the landowner, as borrower and Grayson Homes, Inc., as lender. The Attorney General argues in its pleadings that the presented note shows that a current debt was incurred by the landowner and tax was due.

It is those difficult facts that gave rise to the suit. We are aware that the Attorney General has been reviewing other IDOTs already accepted for recordation. At least one other suit to collect recordation taxes alleged due on an IDOT was recently commenced and then quickly settled by the landowner.

In the weeks since the Grayson Homes suit was filed, this firm has continued to advise clients that there are factual circumstances under which a properly documented IDOT remains an appropriate vehicle to avoid recordation tax. Appropriate factual circumstances might include a construction loan where the borrower is related to, but is a different entity than the landlowner granting an indemnity deed of trust. That the indemnitor landowner is benefitted by having a building constructed on its land is not the operative event resulting in tax being due; that operative event is borrowed dollars flowing to the landlowner. Recordation tax should also not be due in the commonplace situation where spouses grant an IDOT in the family house further securing a loan to a corporate family business. Again, that the landowner benefits, presumably as shareholders in the family business, should not trigger tax when no borrowed dollars flow to the landowner.

If you have questions about recordation tax, including questions about structuring real estate transactions to avoid or delay taxation I invite you to browse the several articles on tat subject in the Legal Library section of our website www.stuartkaplow.com, or if this firm can be of specific assistance to you, do not hesitate to give me a call.