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IDOT ruling costs Howard County $500K

Maryland jurisdictions cannot require that lenders and purchasers of foreclosed properties pay the recordation taxes on guarantor-backed deeds of trust, the state’s administrative Tax Court has ruled.

The decision requires Howard County to return more than $500,000 in collected taxes.

While purchasers remain obligated to pay recordation taxes on the property deed, the recordation taxes on Indemnity Deeds of Trust are owed by the guarantors, the Tax Court said.

The decision essentially leaves counties with no recourse to collect taxes on IDOTs, as often the guarantor lacks the assets to cover the tax. If the guarantors were able to pay, the loans they guaranteed would not have gone into default, said attorney Edward J. Levin, who represented the foreclosure purchasers who successfully challenged the county’s action.

The tax court, with its decision, answered the “$64,000 question” regarding recordation taxes and IDOTs, Levin said.

“When the IDOT becomes due, who is responsible?” Levin said last week. “The Tax Court made it clear that it is only the guarantor.”

Howard County is the only Maryland jurisdiction that has sought to impose on lenders and foreclosed property purchasers the recordation taxes on IDOTs, Levin said. Other jurisdictions have properly sought to recover from guarantors or have waived the tax when the guarantor has been unable to pay, he said.

Howard County was “just trying to collect once, and they wanted to collect from a solvent party,” said Levin, of Gordon Feinblatt LLC in Baltimore. “That’s all well and good, but it’s not consistent with Maryland law.”

But if Howard County appeals and ultimately prevails in the courts, other counties would begin imposing the tax on lenders and purchasers, Levin said.

Howard County has not decided whether it will appeal the agency ruling to the circuit court. The deadline for filing an appeal is Thursday.

Gary W. Kuc, the county’s senior assistant solicitor, defended the county’s efforts to collect IDOT recordation taxes.

“The guarantors who were ‘supposed’ to pay the recordation tax under this tax-avoidance scheme would not pay the tax when the Department [of Finance] demanded payment and because they only owned the land foreclosed upon,” Kuc said in an email message Friday. “These cases are really about equal treatment of all parties who record deeds of trust in the land records, an action that is taxed.”

Affiliated parties

An IDOT transaction involves a loan to a borrower that is backed by a guarantor, who grants the lender an indemnity deed of trust on property owned by the guarantor. The guarantor, not the purchaser at foreclosure, becomes liable for the recordation tax when the borrower defaults, the Tax Court said.

“[T]here is no statutory authority or legal precedent that provides for liability of any other party (i.e., the lender) other than the guarantor on an indemnity deed of trust,” the court said in Atapco Howard Square 1 Business Trust et al. v. Howard County Department of Finance, No. 11-RC-00-0805 through 0811.

In IDOTs, the guarantor is often closely affiliated with the borrower, such as a person who puts his or house up as collateral to secure a bank loan to his or her business. Other examples include a subsidiary that puts commercial property up as collateral for a loan to the parent company.

The petitioners in the case were lenders who foreclosed, purchasers at foreclosure sales, a transferee of a deed out of bankruptcy and a lender that entered into a forbearance agreement with its borrowers and guarantors. The case involved commercial properties in Howard County.

Real estate attorney Jon M. Laria, who is not involved in the case, said the Tax Court’s ruling was in line with a 1989 advisory opinion from the Maryland Office of the Attorney General that recordation taxes on IDOTs were owed exclusively by the guarantor.

The attorney general’s nonbinding opinion said that failure to pay a recordation tax on an IDOT did not create a lien on the property, thus the purchaser could not be held responsible for that tax. The tax is imposed on the recorded document and remains the obligation of the guarantor, the opinion added.

“Howard County should have abided by the attorney general’s opinion,” said Laria, of Ballard Spahr LLP in Baltimore.

“Counties are hungry for revenue during these times, but the law is the law,” he added. “I think that Howard County overreached.”

Kuc, though, said the 1989 opinion “is legal advice from the attorney general to his client, the clerk of a circuit court, and is not the law, which only a judicial court has the power to declare.”

To assist counties in getting recordation taxes for some IDOTs, a Maryland law that went into effect July 1 requires guarantors to record — and pay taxes on — loans of $1 million or more when the guarantee is made. On smaller loans, the guarantor’s recordation-tax obligation still does not accrue until the borrower defaults.

In the tax court case, Howard County refused to permit purchasers of foreclosed properties to record the deeds unless they paid the recordation tax owed on the IDOT, as well as on the property deed. The purchasers paid the IDOT recordation taxes, about $500,000, under protest with a right to appeal and, if successful, to request a refund of the tax plus 6 percent annual interest.

The Howard County Department of Finance sided with the county, prompting the purchasers to appeal to the Maryland Tax Court.