Could employees discount publicly traded shares bought through a restricted stock-purchase plan for Florida intangible tax?

Subject

Property Subject to Tax - Stock Option Plan -Valuation

Plain-English summary

Participants could value the plan shares at a 40% discount from the year-end closing market price for Florida intangible-tax purposes. The Department allowed 25% for lack of marketability and another 15% because the purchased shares were not immediately available to participants.

The plan required a 5% down payment and financed the balance with an interest-bearing, nonrecourse note secured by all purchased shares. Participants did not receive the shares until the note, accrued interest, withholding taxes, and costs were paid. The ruling also stated that participants could be classified as control persons under SEC rules, further restricting marketability.

What this means for you

The 40% discount was tied to this plan's particular restrictions. Although regularly traded stock ordinarily used the last business day's closing price, Florida's rule allowed restricted stock to be valued from the facts and circumstances of the case.

Common questions

Q: How was the 40% discount built? The ruling combined a 25% lack-of-marketability discount with a separate 15% discount for restricted availability.

Q: Did the ruling discount every share of the corporation's publicly traded stock? No. It addressed shares purchased by participants under the described plan.

Q: What restrictions mattered? The shares secured the purchase notes, were not delivered until all stated amounts were paid, and participants could face additional SEC control-person restrictions.

Citations and references

• Fla. Stat. § 199.103(1) — valuation of regularly traded stock
• Fla. Admin. Code r. 12C-2.010(1)(b) — restricted or letter stock
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 93C2-011

Original ruling text

Apr 02, 1993

Re: Technical Assistance Advisement 93(C)2-011
Intangible Tax - Property Subject to Tax - Valuation
XXX (Corporation)
XXX (The Plan)

Dear :

This letter is in response to your request for a Technical
Assistance Advisement on the value of the Corporation's common
stock purchased under The Plan.

Description of The Plan

The Plan specifies that certain employees of Corporation
are provided the opportunity to participate in stock ownership
through the Plan. Under the terms of The Plan participants will
be permitted to purchase stock through "Purchase Awards". The
"Purchase Award" entitles the participant to purchase a stated
number of shares of Corporation's common stock and entitles a
participant who exercises a "Purchase Award" to receive a
"Purchase Loan". The purchase price of the stock is the average
closing price of the common stock on the New York Stock Exchange
for the five consecutive business days immediately preceding the
day the "Purchase Award" is granted.

A "Purchase Award" is exercised by notifying Corporation
and delivery of a down payment which is equal to 5% of the
purchase price. The remainder of the purchase price will be
represented by a nonrecourse promissory note (Purchase Note),
having a term not in excess of five years and bearing interest.
Purchase Note is secured by a pledge of all of the shares of
common stock granted to the participant upon the exercise of the
"Purchase Award". Dividends paid on the shares of common stock
which are pledged as security for the Purchase Note are
dedicated to the payment of accrued and unpaid interest on the
Purchase Note and then to repayment of the principal amount of
the Purchase Note. The Purchase Note may not be repaid prior to

the expiration of three years (two years if a four year
maturity) without the consent of the Compensation and Pension
Committee and the Board of Directors.

At maturity the participant may repay the principal and
accrued interest together with amounts equal to applicable
withholding taxes and cost. Only after these amounts have been
paid will the shares purchased by the exercise of the "Purchase
Awards" be received by the participants. In the event all
amounts owed are not paid Corporation may purchase or sell on
the market a sufficient number of the pledged shares at the open
market price to repay the amounts then owing on the Purchase
Note.

Ruling Requested

It is requested that the shares of common stock subject to
The Plan be considered restricted stock and valued at less than
full fair market value for intangible tax purposes.

Provisions of Law

Section 199.103(1), F.S. requires that all shares of stock
regularly traded on an exchange or over-the-counter be valued at
their closing market price on the last business day of the
previous calendar year.

Rule 12C-2.010(1)(b), F.A.C. states in pertinent part:

"Shares of stock of corporations which are subject to
restrictions or are letter stock shall be valued based on
the facts and circumstances of each case."

Discussion of Law

Based upon the provisions of the law and administrative
code, shares of stock which have restrictions upon their sale
may be valued at less than the traded value on the open market.
The shares which the participants in The Plan purchased are not
available for immediate sale by the participant. Further, each
of the participants may be classified by the Securities and

Exchange Commission (SEC) as a control person within the meaning
of the SEC Rules and Regulations further restricting their
ability to market these shares. As a member of the control
person class it is felt that each participant is entitled to a
discount for lack of marketability of 25% off the year end
closing market value of the shares purchased under The Plan.
Further, because of the restricted availability of the shares
purchased under The Plan the participants are entitled to an
additional discount of 15% off the end year closing market
price. In total, a participant is entitled to discount of 40%
off the closing market price of the Corporation's common shares
stock.

This response constitutes a Technical Assistance Advisement
under s. 213.22, F.S., which is binding on the Department only
under the facts and circumstances described in the request for
this advice as specified in s. 213.22, F.S. Our response is
predicated on those facts and the specific situation summarized
above. You are advised that subsequent statutory or
administrative rule changes or judicial interpretations of the
statutes or rules upon which this advice is based may subject
similar future transactions to a different treatment than
expressed in this response.

You are further advised that this response and your request
are public records under Chapter 119, F.S., which are subject to
disclosure to the public under the conditions of s. 213.22, F.S.
Your name, address, and any other details which might lead to
identification of the taxpayer must be deleted by the Department
before disclosure. In an effort to protect the confidentiality
of such information, we request you notify the undersigned in
writing within 15 days of any deletions you wish made to the
request or the response.

Sincerely,

J.V. Parramore, Jr.
Technical Assistant
Technical Assistance

JVP/mh