Under Florida's 1996 intangible tax, which foreign-trust assets, restricted shares, employee options, and merger shares were taxable?

Plain-English summary

Florida separated the beneficiary's foreign-trust assets and unvested employee awards from vested shares the beneficiary actually owned.

The Florida resident planned to contribute most otherwise-taxable assets to an irrevocable foreign-situs trust before January 1. The independent trustee could make later distributions only in the trustee's sole discretion. The Department found no taxable beneficial interest, so neither the trustee nor beneficiary owed Florida intangible tax on the trust assets under the stated facts. A discretionary distribution soon after January 1 did not change that result without evidence, beyond timing alone, that the arrangement was a sham.

Nonvested restricted stock was not yet the beneficiary's property, and nontransferable unexercised employee options were not taxable. But vested shares received in a merger were the beneficiary's property and were taxable if held on January 1, even though securities-accounting restrictions temporarily prevented transfer and delayed income-tax inclusion.

What this means for you

• Trust ownership and the beneficiary's enforceable rights were analyzed separately.
• Mere timing of a discretionary post-January distribution did not establish a sham.
• Vesting and ownership mattered more than temporary transfer restrictions.
• The ruling distinguished nontransferable options from vested stock.

Common questions

Q: Were the foreign-trust assets taxable to the beneficiary? A: No, because the ruling found no taxable beneficial interest.

Q: Did a distribution shortly after January 1 make the trust assets taxable? A: No, absent other evidence that the contribution and distribution were a sham.

Q: Were nonvested restricted shares taxable? A: No.

Q: Were unexercised, nontransferable employee options taxable? A: No.

Q: Were vested merger shares taxable? A: Yes, if held by the beneficiary on January 1.

Citations and references

• Fla. Stat. § 199.052(5), (6) — Florida- and foreign-situs trust filing duties
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96C2-040

Original ruling text

Apr 01, 1996

Re: Technical Assistance Advisement 96(C)2-040 Intangible Tax - Trust XXX (Beneficiary) XXX (Trust) XXX (Trustee) XXX (Corporation A) XXX (Corporation B)

Dear :

Your letter requesting Technical Assistance advisement for the referenced Beneficiary and Trust has been referred to this office for response. The request for technical advice asks if the beneficiary of the trust and the trust itself are subject to Florida's intangible tax.

Statement of Facts

Beneficiary, a resident of Florida, has created Trust as an irrevocable trust to be held by Trustee in XXX. Trustee has no connection with the State of Florida. It is anticipated that Beneficiary will, prior to January 1, 1996, contribute to Trust substantially all of his assets that might otherwise be subject to the intangible tax. At some time after January 1, 1996, Trustee, in his sole and absolute discretion may distribute some portion of the assets to Beneficiary. It is not anticipated that all assets will be distributed to Beneficiary.

Beneficiary is an employee of Corporation A and is entitled to certain employee benefits as a condition of employment. Among the benefits is a participation in a long term incentive plan. Pursuant to the incentive plan Beneficiary has been issued certain options and restricted shares associated with the stock of Corporation A. Both the options and the restricted shares are restricted from sale, transfer, mortgage, pledge, encumbrance, or other disposition by Beneficiary.

Negotiations are currently underway for Corporation A to be merged with Corporation B. Under the terms of the proposed merger certain unexercised options are to be converted into comparable, vested benefits of Corporation B. Other unexercised options and the non-vested restricted stock are to be converted to vested shares of Corporation B. However, both the options and stock of Corporation B will continue to be restricted from sale or other transfer as the results of "Pooling of Interest Accounting" rules of the Securities and Exchange Commission until financial statements are published containing at least thirty days of post merger combined financial information.

Provisions of Law

Section 199.052, F.S., requires that every person, who, on January 1 owns, manages or controls intangible property having a taxable situs in this State must file a return listing the property owned or controlled. Subsection 199.052(5), F.S., places the responsibility of filing an intangible tax return for trust property on the trustee of a Florida situs trust. Subsection 199.052(6), F.S., states that each Florida resident having a taxable beneficial interest in a foreign situs trust, that is, a trust with situs outside Florida, "... is primarily responsible for returning the resident's equitable share of the trust's intangible personal property and paying the annual tax on it."

Requested Rulings and Discussion

1. The Trustee of the Trust will have no liability for
   the Florida intangible tax so long as the Trustee is not a Florida resident and the assets of the Trust do not have a Florida situs.

Response: So long as Trustee does not have any contact with Florida, Trustee will have no liability for Florida's intangible tax.

2. Beneficiary, as the beneficiary of Trust, will have no
   liability for the Florida intangible tax with respect to intangible assets owned by such Trust.

Response: Based upon the provisions of Trust, Beneficiary has no taxable beneficial interest in Trust. Therefore, Beneficiary has no tax liability for the assets held in Trust.

3. The non-vested restricted stock, while subject to the
   restrictions on transferability and substantial risk of forfeiture under the terms of the Incentive Plan, are not subject to the annual intangible tax.

Response: The non-vested restricted stock is not the property of Beneficiary until some future happening. Therefore, Beneficiary has no tax liability for the nonvested restricted shares.

4. The unexercised options granted under the Incentive
   Plan, either before or after the conversion into options to purchase shares of Corporation B, are not subject to the annual intangible tax.

Response: The options granted to Beneficiary may not be exercised by any person other than Beneficiary. Beneficiary can not transfer, sell or mortgage the options. Therefore, the options issued as part of the incentive plan are not subject to the intangible tax.

5. Vested options and vested shares of Corporation B
   received in exchange for unexercised options and non-vested restricted shares in Corporation A as a result of the proposed merger, while subject to the Pooling-of-interest Accounting rules and not includable in the income of Beneficiary, are not subject to the annual intangible tax.

Response: As stated in the response to "4." above, the options are not subject to the annual intangible tax. However, the vested shares are the property of Beneficiary. The fact that for income tax purposes the shares are not considered income to Beneficiary until post merger financial statement is issued does not stop ownership of the vested shares from resting with Beneficiary.

Therefore, all vested shares are subject to the annual intangible tax if held by Beneficiary on January 1 of any year.

6. The distribution of trust assets soon after January 1,
   even if contributed to Trust immediately prior to January 1, will not cause the assets of Trust to be taxed to Beneficiary, in the absence of some evidence (other than the mere passage of time) that the contribution and subsequent distribution constitute a sham transaction.

Response: The distribution of trust assets is at the discretion of Trustee. If Trustee were to withhold distribution the Beneficiary could not compel the distribution. It can only be anticipated that distribution will occur; it is not required. Therefore, should Trustee decide to distribute assets immediately after January 1 it will not cause Beneficiary to incur any intangible tax liability.

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.
Tax Law Specialist
Tax Policy and Dispute Resolution
Office of General Counsel

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