When were shares of out-of-state investment funds holding Florida municipal and U.S. government obligations exempt from Florida intangible tax?

Plain-English summary

Florida approved full exemption for fund shares when the portfolio measured at the prior calendar year's last business day consisted only of exempt Florida municipal interests and U.S. government obligations.

The Department used net asset value at the close of the last business day before the January 1 assessment date. Securities held at other times during the year did not enter the calculation. A fund could temporarily own taxable investments and still have fully exempt shares if only qualifying exempt assets remained at year-end.

The valuation sequence mattered. The portion attributable to direct U.S. government obligations was removed as exempt. If every asset in the remaining portion was also exempt under Florida law, that remainder was exempt too. But if the remainder contained any taxable asset, the ruling treated the entire remaining portion of net asset value as taxable.

Interests held through common-law trusts or custodial receipts could count as Florida municipal obligations under the structures described. Those arrangements passed through or directly represented future principal and interest on the underlying bonds.

The four funds themselves also lacked Florida taxable situs. They were Massachusetts business trusts or series of those trusts, and their principal offices, asset management, control, and operations were in Minnesota rather than Florida.

What this means for you

Fund sponsors and managers

Portfolio composition on the statutory valuation date can control shareholder exemption. Preserve year-end holdings and net-asset-value support at the security and wrapper level.

Florida investors

The ruling analyzed the fund share through its underlying exempt assets. Midyear taxable holdings did not matter if the year-end portfolio met the stated exemption conditions.

Accountants and tax professionals

Apply the Department's sequence exactly: remove direct U.S. obligations, then test the entire remainder. Also analyze the fund's own state of organization and commercial domicile separately from shareholder valuation.

Common questions

Q: What date controlled portfolio valuation? A: The close of business on the last business day of the previous calendar year for shares owned January 1.

Q: Did taxable securities held earlier in the year matter? A: No.

Q: Were direct U.S. government obligations exempt? A: Yes.

Q: What if the remaining portfolio contained one taxable asset? A: The ruling treated the entire remaining net-asset-value portion as taxable.

Q: Could trust certificates or custodial receipts qualify? A: Yes under the described structures when they represented interests in exempt Florida municipal obligations.

Q: Did the funds themselves have Florida situs? A: No. They were organized outside Florida and managed and controlled from Minnesota.

Q: Can another fund rely on this TAA? A: Not automatically. The advisement states that it binds the Department only on the fund structure, asset wrappers, portfolio composition, valuation date, organization, office, and management facts described.

Citations and references

• Fla. Stat. §§ 199.032 and 199.185(1)(d) — annual tax and exempt trust shares
• Fla. Stat. § 199.103(2) — last-business-day net asset value for January 1 ownership
• Fla. Stat. § 199.175(1)(b) — commercial domicile and taxable situs
• 31 U.S.C. § 3124(a) — state-tax exemption for U.S. obligations
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96C2-110

Original ruling text

Oct 15, 1996

Re: Technical Assistance Advisement 96 (C)2-110 Intangible Personal Property Tax - Valuation Sections 199.052, 199.103, 199.175, 199.185, F.S. XXX (Fund #1) XXX (Fund #2) XXX (Fund #3) XXX (Fund #4) XXX (Trust #1) XXX (Trust #2)

Dear :

Your letter of August 5, 1996, requesting a Technical Assistance Advisement on the taxable situs of certain open-end and closed-end business trusts has been received by this office. The scenario presented for consideration is summarized below:

FACTS

Fund #1, Fund #2 and Fund #3 are open-end management investment companies registered under the Investment Company Act of 1940. Fund #4 is a closed-end management investment company registered under the Investment Company Act of 1940. Funds #1 and #3 were created as separate series of Trust #1, which was organized under the laws of the Commonwealth of Massachusetts under a declaration of trust dated September 16, 1991, as what is commonly known as a Massachusetts business trust. Fund #2 was created as a series of Trust #2, which was organized as a Massachusetts business trust on November 16, 1993. Fund #4 was organized as a Massachusetts business trust on December 29, 1992. The principal business office of all the four Funds, from which the Funds' assets are managed, is located in Minneapolis, Minnesota.

Shares of beneficial interest in Fund #1, Fund #2 and Fund

3 are currently offered in three classes. Class A shares are generally subject to a sales charge at the time of purchase, and

they are also subject to a distribution fee ("Rule 12b-1 Fee") at the annual rate of 0.25% of the Fund's average daily net assets attributable to Class A shares. Class B shares are sold without an initial sales charge, but are subject to a contingent deferred sales charge of up to 5% if redeemed within six years of purchase; they are also subject to a Rule 12b-1 Fee at the rate of 1% of the Fund's average daily net assets attributable to Class B shares. Class B shares automatically convert to Class A shares at net asset value approximately eight years after purchase. Class C shares are sold without an initial sales charge, but are subject to deferred sales charge of up to 1% upon redemption. The Class C shares are subject to a higher Rule 12b-1 Fee than applies to Class A or Class B shares. Shares of beneficial interest in Fund #4 consist of both common shares and preferred shares.

The investment objective of Fund #1, Fund #2, and Fund #4, is to seek as high a level of current income exempt from federal income tax as is consistent with preservation of capital. The investment objective of Fund #3 is to provide investors with preservation of capital and, secondarily, current income exempt from federal income tax. Each of these Funds selects investments that will enable its shares to be exempt from Florida intangible personal property tax. In normal market conditions, each Fund will invest substantially all of its assets in tax-exempt municipal obligations issued by the State of Florida, its instrumentalities, and political subdivisions. For defensive purposes, each Fund also reserves the right temporarily to invest any percent of its total assets in taxable obligations, including securities of the U.S. government, its agencies, instrumentalities, and territories.

Besides investing directly in Florida municipal obligations and U.S. government securities, each Fund may from time to time invest in one or more trusts that hold Florida municipal obligations. Such trusts may be formed by initiative of the Fund or by a third-party market participant. In the former case, a Fund will cause the creation of an irrevocable common law trust and will deposit in the trust a specific series of Florida municipal obligations held by the Fund. In the latter case, a third-party market participant, such as a registered

broker dealer, will cause the creation of a trust. In either case, a bank or other financial institution will act as trustee, and will issue to the Fund participating interests or certificates evidencing ownership of future interest and principal payments on the obligations. The certificates consist of three kinds, namely, floating rate certificates, inverse floating rate certificates, and combination certificates. The latter are issued only in exchange for floating rate certificates and inverse floating certificates to investors holding both types of certificates. All interest and principal payments on the obligations held by a trust, after expenses, will be distributed to the three classes of certificate-holders.

The common law trust will be structured to be treated as a partnership for federal income tax purposes. The qualification as a partnership will ensure that items of income earned by the trust on the bonds (including tax-exempt interest) will flow through to certificate-holders (treated for federal tax purposes as partners) according to their proportionate interest in the trust's income. Alternatively, each fund may purchase custodial receipts evidencing direct ownership of future interest payments, future principal payments, or both, on Florida municipal obligations. A sponsor that owns such obligations will deposit them in a custodial account for which a bank or other financial institution acts as custodian. The latter will make the payments of principal or interest to the holder of the custodial receipt (such as a Fund). For federal income tax purposes, the custodial arrangement is ignored, and each holder of a custodial receipt is treated as owning directly its interest in the underlying obligation.

RULINGS REQUESTED

• 1. Shares of each Fund will be wholly exempt from the tax
     on intangible personal property imposed by Florida Statute s. 199.032 if, on the annual assessment date on January 1 of each year, the portfolio of the Fund consists solely of Florida municipal obligations (including interests in such obligations held through a trust or a custodial receipt) and obligations of the United States Government, its agencies, instrumentalities, and territories.

RESPONSE:

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.

• 2. If each Fund holds non-exempt securities at any time
     during the calendar year, but on the last business day of such calendar year holds solely exempt securities, as defined by Florida Statutes s. 199.185(1)(d), including interests in one or more trusts holding Florida municipal obligations or custodial receipts evidencing ownership of interests in such obligations, shares of the Fund will be wholly exempt from the intangible personal property tax.

RESPONSE: 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 trusts 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.

• 3. Each Fund will be exempt from the tax on intangible
     personal property imposed by Florida Statutes s. 199.032.

RESPONSE: The third requested advisement is answered in the positive. The intangible tax applies only to intangible personal property having a taxable situs in Florida. Intangible personal property owned by a fund has a taxable situs in Florida only if the fund 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. 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 Funds do not have commercial domicile in Florida, because they are located, controlled, and managed in a state other than Florida.

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,

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

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