How did Florida value fund shares invested through underlying tax-free portfolios for historical intangible-tax purposes?

Subject

Valuation - Business Trust

Plain-English summary

Florida confirmed that the funds and underlying portfolios were not taxed on their assets because they lacked Florida commercial domicile. Shareholders also received full exemption when a fund held only an interest in a portfolio whose assets consisted solely of exempt government obligations.

If the portfolio included any taxable asset on January 1, the shareholder-level calculation was narrower: only net asset value attributable to direct U.S. government obligations and obligations of U.S. territories or possessions could be removed, and the remaining balance was taxable.

What this means for you

The historical ruling looked through a fund's interest to the underlying portfolio. A single taxable asset changed the treatment from full exemption to the rule's limited direct-government-obligation reduction.

Common questions

Were the funds themselves commercially domiciled in Florida? No, under the represented facts.

When were shareholder shares fully exempt? When the fund and underlying portfolio chain contained only the specified exempt assets.

What happened if any taxable asset was present on January 1? Only direct federal, territorial, and possession obligations could be excluded from net asset value.

Citations and references

• Fla. Stat. §§ 199.052, 199.103, 199.175, 199.185(1)(i), and 213.22
• Fla. Admin. Code r. 12C-2.010(1)(j)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 94C2-002

Original ruling text

Jan 24, 1994

Re: Technical Assistance Advisement No. 94(C)2-002
Intangible Personal Property Tax; Valuation - Business
Trust
Sections 199.052, 199.175, 199.103, 199.185, F.S.
Rule 12C-2.010(1)(j), F.A.C.
XXX (Funds)
XXX (Trusts)

Dear :

This is in response to your recent request for a technical
assistance advisement.

Facts

The Funds and Trusts are managed by (Company).

The Trusts are Massachusetts business trusts registered
with the Securities and Exchange Commission (SEC) under the
Investment Company Act of 1940, as amended, as open-end
management investment companies. The Funds are a new series of
the Trusts and will invest their assets in Florida Tax Free
Portfolios (Portfolios). The Portfolios, in turn, will have the
same investment objective as the Funds investing therein and
will invest in Exempt Government Obligations.

Rulings Requested

1. The Funds and the Portfolios will not be subject to
   the intangible tax on their assets;
2. Shareholders of the Funds will not be subject to the
   intangible tax on their shares in the Funds, provided
   that the Fund's Portfolio of assets consists entirely
   of an interest in a Portfolio whose assets consist
   solely of Exempt Government Obligations; and
3. If on the last day of any calendar year the Portfolio
   owns any assets not exempt from the intangible tax,

then with regard to a Fund whose assets consist of an
interest in such Portfolio, the portion of the Fund's
net asset value representing assets subject to the
intangible tax will be determined as follows: The net
asset value of a Fund representing obligations other
than U.S. Government (resulting from the Fund's
interest in the Portfolio) would be equal to the
product of (a) a ratio, the numerator of which would
be the value of the Portfolio's assets which are
obligations other than U.S. Government, and the
denominator of which would be the total value of the
Portfolio's assets, times (b) the value of the Fund's
investment in the Portfolio.

Discussion and Law

In the first scenario, the intangible tax applies only to
intangible property having a taxable situs in Florida.
Commercial domicile is defined in s. 199.175, F.S., as the state
where a business maintains it chief or principal office, where
executive or management functions are performed or where the
course of business operations is determined. Neither the Funds
nor the Portfolios have commercial domiciles in Florida.

The second scenario is covered under s. 199.185(1)(i),
F.S., which provides that units of a unit investment trust
organized under an agreement or declaration of trust and
registered under the Investment Company Act of 1940, as amended,
whose portfolio of assets consists solely of assets exempt under
this section (199.185), are exempt from the Florida intangible
personal property tax.

Regarding the third scenario, Rule 12C-2.010(1)(j), F.A.C.,
provides that the following guidelines be used to determine what
portion, if any, of the net asset value of the trust will be
exempt from taxation:

The portion of the net asset value of the trust that is
attributable to direct obligations of the United States
Government is exempt from taxation.

If the remaining portion of the net asset value of the
trust, after removing the portion attributable to United
States Government obligations, represents assets which are
themselves exempt from Florida's intangible tax, then this
portion of the net asset value of the trust's portfolio is
also exempt from tax.

If the remaining portion of the net asset value of the
trust, after removing the portion attributable to United
States Government obligations, represents any asset which
is taxable under Florida law, then the remaining portion of
the net assets value of the trust is subject to tax.

Should either of the Funds have any portion of its
portfolio invested in taxable assets on January 1 of any tax
year, only the portion of the net asset value which is made up
of direct obligations of the United States Government, or its
territories and possessions, may be excluded from the net asset
value. The balance of the net asset value would be subject to
tax.

Conclusion

Based upon the statutory provisions and the information
provided in your letter, the three requested rulings are
answered in the affirmative.

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,

Nadine C. Posey
Tax Audit Specialist III
Technical Assistance

NCP/mh