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

NCP/mh