Was a London-branch market-linked deposit exempt from Florida intangible tax even though its interest depended on financial-index performance?

Plain-English summary

Florida ruled that the market-linked deposit was exempt from intangible personal property tax as a deposit of money.

Customers placed cash in an account at a New York bank, which invested the proceeds in one-year deposits issued by its London branch. The interest payment depended on selected market measures and could be zero. Principal, less a 0.5% management fee, was guaranteed at maturity, although early termination could produce a loss.

The Department noted that Florida defined money to include bank deposits and expressly exempted money. It also relied on banking authorities concluding that a deposit did not lose its status because interest was calculated through a stock-market or other contingent formula.

The deposits were not FDIC insured because a non-U.S. branch issued them, but they remained liabilities of the bank to its clients like bank deposits generally.

What this means for you

• A market-based or contingent interest formula did not by itself turn the deposit into a taxable investment instrument.
• The product's classification as a bank deposit drove the money exemption.
• Early-withdrawal risk and lack of FDIC insurance did not change the Department's conclusion on these facts.

Common questions

Q: Was the market-linked deposit subject to Florida intangible tax? A: No.

Q: Did contingent interest change its classification? A: No. The Department treated the method of calculating interest as irrelevant to deposit status.

Q: Did the London branch and lack of FDIC insurance make it taxable? A: Not under the ruling's analysis.

Citations and references

• Fla. Stat. § 199.023(2) — money includes deposits in or with banks
• Fla. Stat. § 199.185(1) — exemption for money
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96C2-069

Original ruling text

Jul 22, 1996

Re: Technical Assistance Advisement 96(C)2-069 Intangible Tax - Taxable Situs - Bank Deposit Sections 199.023 and 199.185, F.S. XXX (Taxpayer)

Dear :

Your letter of May 20, 1996, requesting a Technical Assistance Advisement regarding the taxable situs of certain "deposit" products being offered by the above referenced bank, has been received and examined by this office. The scenario presented for consideration is summarized below:

FACTS

The deposit product is being offered by the Taxpayer, a New York state-chartered commercial bank (the Bank). A customer's cash investment will be placed in an account (referred to as FlexAccount) at the Bank. The proceeds in the FlexAccount will then be invested by the Bank in time deposits (referred to as Market-Linked Deposits) that are issued by the Bank's London Branch.

The Market-Linked Deposits bear interest at a rate determined, in whole or in part, by reference to a formula related to the performance of certain chosen price, index, spread or other financial indicators (referred to as Market Measures). The Market-Linked Deposit will have a maturity of one year, and proceeds payable at maturity of the Market-Linked Deposit in the client's FlexAccount will automatically "roll over" and be invested in new Market-Linked Deposits for an additional one year period unless the client notifies the Bank within 15 days before the one-year maturity, of any intention to withdraw the investment.

Instead of having a fixed interest rate, the Market-Linked Deposits issued by the London Branch of the Bank provide for

repayment of the amount invested in the Market-Linked Deposit at maturity and payment of a contingent interest payment by reference to a formula related to one or more of the Market Measures. The interest earned by reference to such Market Measure may be zero, depending on the performance of the Market Measure. While the interest payable on the Market-Linked Deposit depends on the performance of the Market Measures, the full principal amount invested by a client (less a .5% management fee) is guaranteed by the Bank to be paid at maturity.

There is no assurance of a return of full investment if a client desires to terminate a Market-Linked Deposit prior to its maturity.

Because these Market-Linked Deposits are issued by a non-U.S. branch of the Bank, they are not insured by the U.S. Federal Deposit Insurance Corporation. The Market-Linked deposits represent a liability of the Bank to its clients, as do all bank deposits generally.

REQUESTED RULING

Based upon the scenario described above, you have requested technical assistance advisement on the following issue:

Will the Bank's deposit product be exempt from Florida intangible personal property taxation?

LAW & CONCLUSION

Section 199.023(2), F.S. defines money to include deposit in or with banks. However, s. 199.185(1), F.S., exempts money as defined in s. 199.023(2), F.S.

In a decision dated August 8, 1988, the U.S. Comptroller of the Currency ruled that the Chase Manhattan Bank "Stock Market CD," which is similar to the "deposit" product at issue, was a "deposit." Pursuant to the furnished Federal Deposit Insurance Corporation (FDIC) rulings [namely, FDIC Advisory Opinion No. 86-40 issued December 24, 1986, and FDIC Advisory Opinion No.

86-26 issued September 9, 1986] which held that the method by which interest is computed on a deposit does not affect its status as a deposit, and the provisions of ss. 199.023(2) and 199.185(1), F.S., it is the opinion of this office that the above-described deposit product would be exempt from the Florida intangible personal property tax imposed by Chapter 199, F.S., as a deposit of "money."

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 based 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,

Moses O. Daramola
Senior Tax Specialist
Tax Policy & Dispute
Resolution Office of General
Counsel

MOD/md