Who owned the underlying securities for Florida intangible-tax purposes, and what taxable property did the customer hold under the repurchase agreement?

Plain-English summary

The bank remained the owner of the underlying securities, while the customer held a taxable loan receivable. The agreement did not transfer full ownership rights to the customer: legal title and possession stayed with the bank, and interest on the securities accrued to the bank.

The Department characterized the arrangement as a collateralized loan rather than a true purchase of the securities. The bank could claim the cited exemption only for underlying securities that were direct obligations of the U.S. government.

For the customer, the repurchase agreement was an intangible loan receivable. The ruling valued that obligation at its unpaid balance on January 1 unless the taxpayer established a lower value to the Department's satisfaction.

What this means for you

The label "repurchase agreement" did not decide the tax treatment. The Department examined who held title, possession, income rights, and other incidents of ownership under the actual contract.

An agreement that leaves the securities with the seller and gives the customer a repayment claim can be treated as a collateralized loan, separating the seller's securities position from the customer's receivable.

Common questions

Q: Did the customer own the government securities? No. The Department found that title and possession remained with the bank and that the customer lacked all ownership rights.

Q: Could the bank claim an exemption for every underlying security? No. The answer was limited to securities that were direct obligations of the U.S. government under the cited exemption.

Q: What did the customer own for tax purposes? A loan receivable from the bank under the repurchase agreement.

Q: How was that receivable valued? At its unpaid January 1 balance unless the taxpayer proved a lower value acceptable to the Department.

Citations and references

• Fla. Admin. Code r. 12C-2.002(1)(x) — intangible-tax treatment of repurchase agreements
• Fla. Stat. § 199.103(5) — valuation of notes and other obligations
• Fla. Stat. § 199.185(1)(d) — exemption referenced for direct U.S. government obligations
• Department of Revenue v. Page, 541 So. 2d 1270 (Fla. 5th DCA 1989) — factors distinguishing a loan from securities ownership
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97C2-007

Original ruling text

Oct 07, 1997

Re: Technical Assistance Advisement 97(C)2-007 Intangible Tax; Property Subject to Tax - Repurchase Agreement XXX (The Bank)

Dear :

This is the response to your correspondence of May 13, 1997, requesting a Technical Assistance Advisement regarding the taxability of certain Repurchase Agreements being entered into by the Bank and its customers. Our response to your request is contained in the following paragraphs.

FACTS AS STATED BY BANK

The Bank makes available to its customers the opportunity to deposit funds in a Commercial Automated Investment Account ("Investment Account"). Under the Agreement, the customer establishes an Investment Account whereby various funds are deposited. To the extent that the amount in the customer's Investment Account exceeds a certain amount, such excess funds are invested in one or more investment vehicles, including the Repurchase Agreement. Under the terms of the Repurchase Agreement, The Bank sells to the customer an interest in securities that are direct obligations of, or fully guaranteed as to principal and interest by, the United States Government or an agency thereof (" Underlying Securities"). The Bank agrees to repurchase the customer's interest in the Underlying Securities the following business day for an agreed upon amount.

LAW & DISCUSSION

Rule 12C-2.002(1)(x), F.A.C., states on Repurchase Agreements:

1. Repurchase agreements between banks are not taxed as an
   intangible, but are treated as cash.
2. Repurchase agreements where securities are offered as

collateral for the agreement are taxable at face value.

3. Repurchase agreements where title to the security passes
   to the purchaser are not subject to taxation.

The court in Department of Revenue v. Page, 541 So.2d 1270 (Fla.App. 5 Dist. 1989), states:

In determining whether the taxpayer owned the securities or whether the securities were merely collateral, the court considered the entire transaction and looked to the following indicia of a loan:

• 1. Whether the seller could require the purchaser to
     resell the securities;
• 2. Whether the purchaser could require the seller to
     repurchase them;
• 3. Whether the agreement provides either party a specific
     remedy in the event that the other defaults;
• 4. Whether the seller agreed to pay interest at a
     stipulated rate between the sale and resale;
• 5. Whether the amount advanced does not necessarily equal
     the fair market value of the securities sold;
• 6. Whether the identical securities are bought and sold;
     and
• 7. Whether the purchaser may sell the security for the
     seller's account in the event of the default.

REQUESTED RULING

Based upon the scenario presented above, you have requested technical advice on the following statements:

• 1. For purposes of applying the annual intangible tax,
     the Bank is the owner of the Underlying Securities, and is entitled to claim the exemption from taxation for such Underlying Securities provided in section 199.185(1)(d), F.S.

Response:

We have carefully examined the copy of the Repurchase Agreement submitted and have determined that the Customer does not have

all rights of ownership to the securities. We call your attention especially to Section 6. of the Repurchase Agreement, which states that "... Any and all interest paid on the underlying securities will accrue to the benefit of Bank and not to the Customer..." Based on the pertinent parts of the Repurchase Agreement submitted for review, the legal title and possession of the securities remains with the seller, the Bank. In other words, the title to the underlying securities will not pass to the Customer, the purchaser, but will remain with the Bank. The Bank is entitled to claim the exemption from taxation only those underlying securities that are direct obligations of the U.S. Government, pursuant to section 199.185(1)(d), F.S.

• 2. The Customer has, pursuant to the Repurchase
     Agreement, a receivable from the Bank that is subject to the annual intangible tax.

Response:

It is a well established principle in Florida Law that where the parties have entered into an agreement which has clear meaning no interpretation is necessary. It is the position of this office that the "Repurchase Agreement" between "The Bank" and "The Customer" is a collaterized loan as characterized by the document. As such, the loan is to be valued in accordance with s. 199.103(5), F.S., which states:

All notes and other obligations shall have a value equal to their unpaid balance as of January 1 of each year, unless the taxpayer can establish a lesser value upon proof satisfactory to the department.

Therefore, it is the opinion of the Department that the Repurchase Agreement will be taxed as a loan receivable to the Customer.

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
Technical Assistance & Dispute Resolution Office of the General Counsel

MOD/md
Ctrl #: 29101