How did Florida determine the intangible-tax exemption for fund shares backed by federal and Florida tax-exempt securities?

Plain-English summary

Florida allowed the fund-share exemption to follow the exempt character of the underlying portfolio at the statutory valuation time.

The structure involved registered investment companies using a hub-and-spoke arrangement. A fund series would invest substantially all assets in a portfolio holding short-term Florida municipal securities and other obligations exempt from Florida intangible tax.

The Department set out a sequence. First, the portion of net asset value attributable to direct U.S. government obligations was exempt. If all remaining assets were also exempt under Florida law, the rest of the fund value was exempt too. If the remaining portfolio contained any taxable asset, the remaining net asset value was taxable.

Shares owned on January 1 were valued at net asset value as of the close of the prior year's last business day. Securities held at other times during the prior or current year did not enter that snapshot. The Trust, Fund, Series, and Florida Series themselves were also not subject to the tax because of the registered-investment-company exemption and lack of Florida situs.

What this means for you

• The fund-share exemption depended on the portfolio's composition at the statutory valuation snapshot.
• Direct U.S. government obligations retained their exemption even if other portfolio assets were taxable.
• Midyear holdings did not change the annual valuation described in the ruling.

Common questions

Q: Were shares fully exempt when all underlying assets were exempt? A: Yes.

Q: What happened if the nonfederal remainder held a taxable asset? A: The Department said that remaining portion of net asset value was taxable.

Q: Were the registered investment companies themselves taxable? A: No, under the exemption and no-situs facts cited in the ruling.

Citations and references

• 31 U.S.C. § 3124(a) — state-tax exemption for federal obligations
• Fla. Stat. § 199.032 — annual intangible tax
• Fla. Stat. § 199.103(2) — valuation date and net asset value
• Fla. Stat. § 199.175 — taxable situs
• Fla. Stat. § 199.185(1) — exempt assets and registered investment companies
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96C2-068

Original ruling text

Jul 10, 1996

Re: Technical Assistance Advisement 96(C)2-068 Intangible Tax - Valuation - Property Subject to Tax XXX ("Trust") XXX ("Fund") XXX ("Series") Sections 199.103, 199.175, 199.185, F.S. Rule 12C-2.010, F.A.C.

Dear :

This letter is in response to your request for a Technical Assistance Advisement on the application of the Intangible tax to the referenced securities.

Statement of Facts

"Trust" is a Massachusetts business trust, established pursuant to a declaration of trust governed by the laws of the Commonwealth of Massachusetts. "Trust" operates as an open-end management investment company, and is registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended. The declaration of trust permits "Trust" to offer an unlimited number of separate portfolios, each of which would be established as a separate subtrust with interests therein separate and distinct from the interests in any other portfolios in the series. Interest in the various portfolios in the series, which would be classified as partnership interest for federal income tax purposes, would be held by various funds, including those described below, and institutional investors. Each portfolio in the series would constitute a separate part of a hub and spoke structure.

"Fund" is an open-end management investment company established as a Massachusetts business trust under declaration of trust. "Fund" itself has several separate series of shares representing interest in a separate portfolio of securities. Among such portfolios in the series is "Series." "Series" is

managed and controlled outside Florida, and is treated as a registered investment company for federal income tax purposes. The primary objective of "Series" is to achieve current income that is exempt from regular federal income tax. "Series" constitutes a spoke of the hub and spoke structure. "Series" will invest all or substantially all of its assets in a newly established portfolio series of "Trust" ("Florida Series") that will only invest in municipal obligations that are exempt from Florida intangible tax. "Florida Series" will have the same investment objective, policies, and limitations as "Series." "Florida Series" will pursue its investment objective through investment in Florida municipal securities maturing in 13 months or less.

Requested Rulings

"1. An advisement is requested that the shares of "Series" are exempt from Florida intangible personal property tax levied by s. 199.032, F.S. in each year that "Series" owns, on January 1 of that year, only an interest is a series of "Trust" whose portfolio of investments is limited to notes, bonds, and other obligations issued by the State of Florida or its municipalities, counties, and other taxing districts, the United States Government and its agencies, instrumentalities, territories, and possessions, including without limitation Puerto Rico, Guam, American Samoa, Northern Mariana Islands, and the U.S. Virgin Islands, and other property exempt from Florida intangible personal property tax under s. 199.185(1), F.S." "2. An advisement is requested that the exemption from Florida intangible personal property tax described in Advisement 1., above, based upon the ownership of exempt assets on January 1 of a calendar year, still applies notwithstanding that "Series," through its interest in "Florida Series," may own nonexempt securities at any time thereafter during the same calendar year or in the preceding calendar year." "3. An advisement is requested that, if on January 1 of any year, "Trust's" portfolio of assets contains any property not exempt from Florida intangible personal property tax, the portion of the net asset value attributable to direct obligations of the United States Government or territories or possessions of the United States Government nevertheless will

continue to be exempt from such tax."
"4. An Advisement is requested that neither "Series" nor "Trust" is subject to Florida's intangible personal property tax levied by s. 199.032, F.S."

Response to Requested Advisement

The first advisement is answered in the positive. This type of fund is governed by federal and Florida law for purposes of valuation. Obligations of the United States Government are exempt from state taxes under 31 U.S.C. s. 3124(a). Under Florida law shares of a trust, whose portfolio of assets is invested in assets that are exempt from tax, are themselves exempt from tax.

Applying the federal statute and Florida statute 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 attributed 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 removing the portion representing United States Government obligations, represents assets which are themselves exempt from Florida's intangible tax, then this portion of the net assets of the "Fund's" portfolio is also exempt from tax.

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

The second advisement requested is answered in the positive. Section 199.103, F.S., prescribes the day on which intangible personal property subject to annual taxation is to be valued. Shares of trust owned by Florida residents on January 1

of the tax year are to be valued at net asset value as of the close of business on the last business day of the previous calendar year (s. 199.103(2), F.S.) Securities owned by the Fund at other times of the year are not considered when calculating the value as prescribed by the statute.

The third requested advisement is answered by the response to the first advisement. (See response to first requested advisement.)

The fourth requested advisement is answered in the positive. The assets of a company registered under the Investment Act of 1940 are exempt from tax under s. 199.185(1)(g), F.S. Further, there is no indication that "Trust", "Fund", "Series", or "Florida Series" have a taxable situs in Florida as described in s. 199.175, F.S.

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
JVP/mh