Could Florida investment funds net short sales against identical long stock positions when calculating intangible personal property tax?

Plain-English summary

Florida did not allow the investment funds to net open short sales against identical long stock positions for intangible-tax purposes.

The Florida limited partnerships used short sales to lock in investment gain or loss without closing their long positions. They asked the Department to treat a long position as outside intangible personal property to the extent an identical short sale remained open.

The Department distinguished ownership of the two positions. An initiated short sale was not itself taxed because the fund did not own the shorted stock. But the funds did own their long stock and securities positions, had Florida taxable situs, and had to value those holdings as of January 1. No long-short netting was permitted.

What this means for you

• A hedging short sale did not erase the tax status of stock the fund actually owned.
• January 1 ownership and value controlled the long-position assessment.
• The ruling treated the short and long positions separately even when the securities were identical.

Common questions

Q: Were the funds' long stock positions taxable? A: Yes, if owned on January 1.

Q: Was an initiated short sale itself taxable? A: No, because the fund did not own the stock sold short.

Q: Could the funds offset long positions with identical short positions? A: No.

Citations and references

• Fla. Stat. § 199.023(1) — intangible personal property
• Fla. Stat. § 199.032 — annual intangible tax
• Fla. Stat. § 199.052 — return requirement
• Fla. Stat. § 199.103 — January 1 valuation
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96C2-060

Original ruling text

May 22, 1996

Re: Technical Assistance Advisement No. 96(C)2-060 Intangible Tax; Long and Short Positions in Shares of Stock XXX (the Company) XXX (the Funds)

Dear :

This is in response to your recent request to a Technical Assistance Advisement.

Facts

The Company is a privately held company organized under the laws of the State of Florida. The Company's principal business activity is the sponsorship and management of investment partnerships. These Florida limited partnerships include the Funds. These Funds are not registered under the Investment Company Act of 1940, qualifying for an exemption by virtue of having fewer than 100 beneficial owners. The Funds enter into short sale transactions to XXX lock in gain or loss on an investment, without actually closing the position, XXX.

Requested Advisement

You have requested a ruling that a long position in shares of stock or securities held by a Fund will not be treated as intangible personal property within the meaning of s. 199.023(1), F.S., to the extent the Fund has open a short sale of identical shares of stock or securities, which short sale was entered into for business purposes by the Fund.

Discussion and Law

Section 199.032, F.S., imposes an annual tax of 2 mills on each dollar of the just valuation of all intangible property which has a taxable situs in this state. Under s. 199.023, F.S., intangible personal property includes, but is not limited

to, all stocks or shares of incorporated or unincorporated companies, business trusts, and mutual funds. Section 199.052, F.S., requires an annual intangible tax return to be filed with the Department by every corporation authorized to do business in this state. The basis of assessment under s. 199.103, F.S., subjects all intangible personal property to the annual tax at its just valuation as of January 1 of each year. Shares of stock of corporations, or any interest of a limited partner in any limited partnership, regularly listed on any public stock exchange or regularly traded over-the counter shall be valued at their closing prices on the last business day of the previous calendar year.

Short sales of stock are not subject to Florida intangible tax because they are not owned by the person who initiated the short sale. However, the Intangible tax statutes and accompanying regulations tax stock (long positions) which is owned by corporations doing business in the State of Florida, and by every person (which includes partnerships) who on January 1 owns, controls, or manages intangible personal property which has a taxable situs in this state. Since the Funds have a taxable situs in this state, the long sales owned by the Funds as of January 1 of each year are subject to the Florida intangible tax, and no netting of long positions against short sales are permitted.

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,

Joy Eldred, C.P.A.
Tax Law Specialist
Tax Policy and Dispute
Resolution
Office of General Counsel

JE/mh