How did Florida apply intangible tax to an out-of-state fund investing through a portfolio of government obligations?

Subject

Valuation

Plain-English summary

The fund and its underlying portfolio were not subject to Florida intangible tax because they were organized, located, controlled, and managed outside Florida and had no Florida commercial domicile. The fund invested substantially all its assets in an out-of-state portfolio with the same investment objective.

Fund shareholders were also exempt while the fund's only asset was its portfolio interest and the portfolio held solely exempt government obligations. For valuation, the portion attributable to direct United States government obligations was exempt. If the remaining portfolio represented only other exempt assets, that portion was exempt too; if the remaining portfolio included any Florida-taxable asset, the remaining net asset value was taxable.

What this means for you

The analysis separated two questions: whether the fund or portfolio had Florida situs, and what portion of a shareholder's fund value represented exempt assets. Both management location and the exact year-end asset mix mattered.

Common questions

Did the fund or portfolio owe Florida intangible tax? No, because neither had Florida taxable situs or commercial domicile on the stated facts.

Were shareholders' fund interests exempt? Yes, while the fund held only its portfolio interest and the portfolio held solely exempt obligations.

What if the portfolio held a taxable asset? Direct United States government obligations remained exempt, but the remaining net asset value became taxable under the Department's stated formula.

Citations and references

• Fla. Stat. §§ 199.052, 199.103, 199.175(1)(b), and 199.185
• Investment Company Act of 1940
• Fla. Stat. § 213.22

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 94C2-025

Original ruling text

Dec 21, 1994

Re: Technical Assistance Advisement No. 94(C)2-025 Intangible Personal Property Tax - Valuation Sections 199.052, 199.103, 199.175, 199.185, F.S. XXX (Fund) XXX (Trust)

Dear :

Your recent request for a technical assistance advisement has been received in this office.

Facts

The Fund and Trust are managed by XXX (Company).

The Trust is a Massachusetts business trust registered with the Securities and Exchange Commission (SEC) under the Investment Company Act of 1940, as amended, as an open-end management investment company.

The Fund will invest its assets in the XXX Portfolio (Portfolio). The Portfolio is a non-diversified open-end investment company organized as an out-of-state common law trust and is primarily managed out-of-state. The Fund and Portfolio are structured according to a Hub and Spoke structure, whereby substantially all of the assets of the Fund will be represented by its interest in the Portfolio, and the Portfolio, in turn will have the same investment objective as the Fund investing its assets in exempt government obligations. The Portfolio qualifies as a partnership for federal income tax purposes.

Rulings Requested

1. The Fund and the Portfolio will not be subject to the
   intangible tax on their assets;
2. Shareholders of the Fund will not be subject to the
   intangible tax on their shares in the Fund, provided that

the fund's portfolio of assets consists entirely of its interest in the Portfolio, and the Portfolio's 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 the Fund (whose assets consist solely of its interest in the Portfolio), the portion of the Fund's net asset value representing assets subject to the intangible tax will be determined as follows:

The Portion of the net asset value of a 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 a trust, after removing the portion representing United Sates 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.

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 asset value of the trust is subject to tax.

Discussion and Law

In the first scenario, the intangible tax applies only to intangible personal property having a taxable situs in Florida. Intangible personal property owned by a trust has a taxable situs in Florida only if the trust is (i) a business trust organized under the laws of the State of Florida, or (ii) a trust with a commercial domicile in Florida. The Fund is a series of the Trust organized under the laws of a state other than Florida. In addition, the Portfolio is also organized under the laws of a state other than Florida.

Section 199.175(1)(b), F.S., provides that a business or other artificial entity acquires its commercial domicile in this state when it maintains its chief or principal office in this state where

executive or management functions are performed, or where the course of business operations is determined. The Fund does not have commercial domicile in Florida because it is, and will remain after conversion to the Hub and Spoke structure, located, controlled, and managed in a state other than Florida. Likewise, the Portfolio will be controlled and managed in a state other than Florida.

The second scenario is covered under s. 199.185, F.S., which provides exemptions from the intangible tax. 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 s. 199.185, are exempt from the Florida intangible personal property tax.

Concerning the third scenario, applying the Federal Statutes and Florida Statutes to the Fund requires that the following guidelines be used to determine what portion, if any, of the net asset value of the Fund will be exempt from taxation:

The portion of the net asset value of the Fund 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 Fund, after excluding the portion representing 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 Fund's portfolio is also exempt from tax.

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

Should the Fund 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.

Based upon statutory provisions and the information provided in your request, the three rulings requested 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

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