[1995/oagheade.htm]

OAG 95-12

March 31, 1995

Subject: State tax on legal processes and instruments.

Written by: Gerard Gerhard

Requested by: Hon. Donald W. Blevins, Fayette County Clerk

Syllabus: A "contract for deed," a "mineral lease," and a "real estate lease," are "conveyances" taxable under KRS 142.010(1). An "easement release," a "deed of restriction" and a "land use restriction," are not "conveyances," and thus are not subject to taxation under KRS 142.010(1), commonly known as the "Legal Process and Instrument Tax."

OAGs cited: 69-313, 76-532.

Statutes construed: KRS 100.3681; 142.010, and Subs. (a) thru (e) thereof; KRS 142.010(2)

OPINION OF THE ATTORNEY GENERAL

The following question has been presented:

Does KRS 142.010 require the collection of the legal process tax on the following land record instruments?

1. Contract for Deed

2. Mineral Lease

3. Lease - Real Estate

4. Easement Release

5. Deed of Restriction

6. Land Use Restriction

In our view a "contract for deed," a "mineral lease," and a "real estate lease," are taxable conveyances pursuant to either KRS 142.010(1)(d) or 142.010(1)(e), depending upon the nature of a given instrument. An "easement release," a "deed of restriction" and a "land use restriction" are not "conveyances," and thus are not subject to taxation under KRS 142.010.

KRS 142.010, known commonly as the "Legal Process or Instrument Tax," provides, in part pertinent to the question(s) posed:

(1) The following taxes shall be paid:

(a) A tax of three dollars and fifty cents ($3.50) on each marriage license;

(b) A tax of three dollars ($3) on each power of attorney to convey real or personal property;

(c) A tax of three dollars ($3) on each mortgage, financing statement, or security agreement;

(d) A tax of three dollars ($3) on each conveyance of real property; and

(e) A tax of three dollars ($3) on each lien or conveyance of coal, oil, gas, or other mineral right or privilege.

(Emphasis added.)

We reviewed the Kentucky Revenue Cabinet's Revenue Circular 73C203 (Revised 7/1/86), which relates to the "legal process tax." The circular essentially restates the statute, and does not aid in answering the questions addressed here.

None of the types of instruments you have asked about fall within subsections (a), (b), and (c) of KRS 142.010(1). Subsections (d) and (e) of KRS 142.010(1) (see above), however, impose a tax upon certain types of "conveyances." Whether a given type of instrument asked about is taxable hinges on whether an instrument is a "conveyance" within the meaning of either KRS 142.010(1)(d) or 142.010(1)(e).

We have analyzed each of the types of instruments asked about and indicated our views below.

1. "Contract for Deed"

Taxable. Discussion follows.

A "contract for deed" is taxable as (1) a "conveyance of real property" pursuant to KRS 142.010(1)(d), or, (2), if conveying coal, oil, gas, or "other mineral right or privilege," is taxable pursuant to KRS 142.010(1)(e).

The determination that a "contract for deed" is taxable pursuant to KRS 142.010 rests upon whether such instrument involves a "conveyance of real property," pursuant to KRS 142.010(1)(d), or a "conveyance of coal, oil, gas, or other mineral right or privilege," as provided in KRS 142.010(1)(e).

A "contract for deed" is also known as a "land contract" or "bond for deed." See Kentucky Real Estate Law and Practice, Vol. II, Section III (15.8), Office of Continuing Legal Education, University of Kentucky College of Law (1990).

In Sebastian v. Floyd, Ky., 585 S.W.2d 381, 382 (1979), the Kentucky Supreme Court indicated:

When a typical installment land contract is used as the means of financing the purchase of property, legal title to the property remains in the seller until the buyer has paid the entire contract price or some agreed-upon portion thereof, at which time the seller tenders a deed to the buyer. However, equitable title passes to the buyer when the contract is entered.

(Emphasis added.)

The court further indicated:

The modern trend is for courts to treat land sale contracts as analogous to conventional mortgages, thus requiring a seller to seek a judicial sale of the property upon the buyer's default.

* * *

We are of the opinion that a rule treating the seller's interest as a lien will best protect the interests of both buyer and seller.

(Id., 383.)

In our view the language quoted above from Sebastian indicates that, in the case of a "land contract" or "contract for deed" in Kentucky, there is a "conveyance of real property," although subject to the seller's lien, at the time such a contract is entered into. It follows, we believe, that a "contract for deed," is taxable under statutory language which provides for a tax of three dollars on "each conveyance of real property." KRS 142.010(1)(d), Sebastian, above. And see, Gamble v. Bryant, Ky.App., 599 S.W.2d 472, 474 (1980), and, Gr. Louisville First Fed. S. & L. v. Etzler, Ky.App., 659 S.W.2d 209, 212 (1983).

Additionally, if a "contract for deed" is related to "coal, oil, gas, or other mineral right or privilege," it would be taxable pursuant to KRS 142.010(1)(e) as a conveyance of coal, oil, gas, or other mineral right or privilege. This observation does not mean that a contract for deed related to "coal, oil, gas, or other mineral right or privilege" is subject to two separate taxes under KRS 142.010, just that such instrument would be taxable under either provision as discussed.

2. "Mineral Lease"

Taxable. Discussion follows.

KRS 142.010(e) provides for:

A tax of three dollars ($3) on each lien or conveyance of coal, oil, gas, or other mineral right or privilege.

(Emphasis added.)

A "lease" is a "conveyance." As was observed by Kentucky's then highest court in Moore v. Brandenburg, 234 Ky. 400, 28 S.W.2d 477, 478 (1930), in connection with a real estate title controversy:

A lease is a conveyance of an estate in realty. It divests the owner for a given time of a cer- tain estate in the land, leaving in the owner the right of reversion at the expiration of the grant. [Citations omitted.]

(Emphasis added.)

Further, it is well recognized in this state that minerals in place are real estate. See for example, Gillis v. Yount, Ky., 748 S.W.2d 357, 358 (1988), wherein the Court observed:

As stated in Williams' Adm'r v. Union Bank and Trust Co., 283 Ky. 644, 143 S.W.3d 297, 300 (1940): '[I]t has long been the law of this State that minerals in place are real estate . . . .' And as stated in Commonwealth v. Elkhorn-Piney Coal Min. Co., 241 Ky. 245, 43 S.W.2d 684, 686 (1931):

'[T]he rights created by a coal lease . . . constitute real estate for the purposes of taxation under our present statutes.'

Given the commentary above, a "mineral lease," if a lease of coal, oil, or gas, obviously is taxable as a conveyance of such minerals, and whether in relation to those minerals or others, is taxable as a "conveyance" of an "other mineral right or privilege."

3. "Lease - Real Estate"

Taxable. Discussion follows.

A real estate lease is taxable as (1) a "conveyance of real property" pursuant to KRS 142.010(1)(d), or, (2), if conveying coal, oil, gas, or "other mineral right or privilege," is taxable pursuant to KRS 142.010(1)(e).

In our view, drawing in part upon the language quoted above from Moore, a real estate lease is a "conveyance of real estate" for the term of such a lease. It follows that a real estate lease is taxable pursuant to KRS 142.010(1)(d), or, if a lease of coal, oil, gas, or "other mineral right or privilege," taxable pursuant to KRS 142.010(1)(e).

4. "Easement Release"

Not taxable under KRS 142.010. Discussion follows.

While an "easement" is taxable as a "conveyance" under either KRS 142.010(1)(d) (real property) or 142.010(1)(e) (minerals or other mineral right or privilege) (see for example, Opinion of the Attorney General (OAG) 69-313 and 76-532), we believe the release of an easement is not taxable.

First, we believe that an "easement release" is not a "conveyance," so as to be subject to taxation under the provisions of concern here. An "easement release," in our view, is a mechanism for relinquishing a right to use real estate, but does not "convey" real estate (by contrast to an "easement" which conveys real estate to the extent the easement provides). Because KRS 142.010(1)(d) and (e) impose a tax only upon certain "conveyances," and since we believe an "easement release" is not a "conveyance" we believe an "easement release" is not taxable under KRS 142.010(1)(d) or (e).

Secondly, we note that the 1986 General Assembly added language to KRS 142.010 (Acts 1986, ch. 52 � 1) to the effect that the tax imposed under such provision is a prerequisite to the "original filing of an instrument subject to the tax."

KRS 142.010(2) provides, in part pertinent here:

The tax imposed by this section shall be collected by each county clerk as a prerequisite to . . . the original filing of an instrument subject to the tax. Subsequent assignment of the original instrument shall not be cause for additional taxation under this section. This section shall not be construed to require any tax upon a deed of release of a lien retained in a deed or mortgage.

We believe, reading KRS 142.010(2) as a whole, that an "easement" itself would be viewed as the "original filing" of an instrument subject to the tax here at issue, and that an "easement release" is of the nature of an assignment not subject to taxation under KRS 142.010(1).

5. "Deed of Restriction"

Not taxable under KRS 142.010. Discussion follows.

In our view, while a "deed of restriction" imposes certain restraints on particular uses of real property, such instrument is not a "conveyance" taxable pursuant to KRS 142.010(1)(d) or 142.010(1)(e).

6. "Land Use Restriction"

Not taxable under KRS 142.010. Discussion follows.

In our view, while a "land use restriction" (see, for example, KRS 100.3681) imposes certain restraints on particular uses of real property, such instrument is not a "conveyance," and thus is not taxable pursuant to KRS 142.010(1)(d) or 142.010(1)(e).

Sincerely,

CHRIS GORMAN

ATTORNEY GENERAL

Gerard R. Gerhard

Assistant Attorney General