An Assistant Attorney General has declared that the use of Indemnity Deeds of Trust (IDOTs) as a vehicle to avoid recordation taxes, in Maryland, is violative of “the step transaction doctrine” and as such, is not permissible.

In the days since the March, 2000 pronouncement at a Bar Association meeting, the use of IDOTs has slowed to a trickle, with many Maryland lenders no longer willing to be a party to the transactions.

By way of background, in Maryland there are three types of taxes to be paid upon the recordation of various instruments in writing which convey title, or create a lien or encumbrance, upon real or personal property. The total effect of State recordation tax (previously known as documentary stamps), State transfer tax, and local transfer tax, upon the recordation of deeds and other title conveyance documents ranges from the imposition of taxes in the minimum amount of 0.83 percent of the purchase price in Dorchester and Somerset Counties to 2.6 percent of the purchase price in Baltimore County.

Obviously, a change in position of the Attorney General’s office that results in the imposition of recordation tax in an amount up to 2.6 percent of the purchase price of real estate, is cause for concern.

There is relatively little law for guidance in this area and the published opinions of the Attorney General are often the best information available.

For 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 neither invalidates the secured party’s lien under the IDOT nor gives the State priority to payment of the tax out of a foreclosure sale.

Last year, the Court of Appeals issued a decision in the case Read v. Supervisor of Assessments for Anne Arundel County. In that decision, the Court adopted in Maryland what is called “the step transaction doctrine.” This doctrine allows the government to collect a tax if a direct step would be subject to the tax, and several smaller steps were taken to indirectly achieve the same effect, for the purpose of avoiding the tax. The doctrine applies to recordation taxes. Using this doctrine, the taxing authorities may look at the true substance of a transaction and ignore the form.

Some days ago, an Assistant Attorney General declared that the use of IDOTs in Maryland to avoid recordation taxes is violative of “the step transaction doctrine” and as such, is not permissible. It is significant that the speech was just that, a speech, and no published opinion has been issued overturning the earlier published Opinions of the Attorney General on this subject.

In the weeks since the stated change in interpretation, this firm has continued to advise clients that there are factual circumstances under which an IDOT remains an appropriate vehicle, to avoid recordation tax.

If you have questions about recordation tax, including questions about structuring real estate transactions to avoid or delay taxation, or if this firm can be of other assistance to you, please give Stuart Kaplow a call.