Was cash transferred under a lease-defeasance payment undertaking subject to Florida intangible tax?

Subject

Intangible-Tax Treatment of a Payment Undertaking

Plain-English summary

The payment undertaking was exempt from Florida intangible tax because the Department treated it as a deposit of money. The corporation transferred cash equal to the net present value of its scheduled facility-lease payments and the debt portion of a possible purchase-option price to an out-of-state defeasance entity.

The defeasance entity invested the cash and used the principal plus earnings to make the required payments. If the corporation did not exercise the purchase option, the entity returned an amount equal to the debt portion of that option. If the lease ended early, it returned the unused payment-undertaking amount after its fees.

Those return and payment mechanics led the Department to classify the arrangement as money under section 199.023 and exempt it under section 199.185.

What this means for you

The ruling focused on the substance of the funded arrangement: cash was deposited with another entity to meet defined obligations, and unused amounts could return to the corporation.

It did not announce that every defeasance or lease-financing instrument was exempt. Different control rights, investment exposure, repayment rights, or payment obligations could produce a different classification.

Common questions

Q: What did the corporation transfer? Cash equal to the net present value of specified lease and purchase-option-related payments.

Q: What did the defeasance entity do with it? It invested the funds and used the cash plus earnings to make payments on the corporation's behalf.

Q: Could money come back to the corporation? Yes. The agreement returned the option-related amount if the option was not exercised and unused funds if the lease was canceled, less fees.

Q: How did Florida classify the undertaking? As a deposit of money.

Q: Was that classification taxable? No. Money was exempt under the statute cited in the ruling.

Citations and references

• Fla. Stat. § 199.023 — definition of intangible personal property and money
• Fla. Stat. § 199.185 — exemption for money
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97C2-011

Original ruling text

Dec 12, 1997

RE: Technical Assistance Advisement No. 97(C)2-011 Intangible Personal Property Tax Property Subject to Tax - s. 199.023, F.S. XXX (Corporation)

Dear:

This letter is in response to your request for a technical

assistance advisement based upon the following scenario:

Corporation owns personal property (Facility) located in Florida. Corporation will enter into a lease/leaseback agreement with a grantor trust (Owner Trust) domiciled outside the State of Florida. All agreements related to

the transaction will be negotiated and executed outside of Florida. Corporation and Owner Trust will execute a long- term lease of Facility (Head lease). All rents due under

the Head Lease will be paid at commencement of the lease. The Head Lease will be treated as a sale for income tax purposes; however, legal title to Facility will remain with

Corporation.

To finance the rent payment under the Head Lease, Owner Trust will enter into a loan agreement with a corporate lender (Lender) outside the state of Florida. Owner Trust will secure the loan by an assignment of Leaseback rent

payments and a payment undertaking agreement.

The Facility will be leased back to Corporation under a Facility Lease. The rent paid by Corporation under the Facility Lease will be used to satisfy the Owner Trust Debt (the debt portion of the rent) and provide a return of investment to Owner Trust. At the termination of the Facility Lease, Corporation will have the option to purchase the Facility for a fixed amount or return the

Facility to Owner Trust.

Corporation will enter into a Payment Undertaking Agreement (PUA) with an affiliate of Lender (Defeasance Entity),

under which Corporation will transfer cash to the

Defeasance Entity equal to the net present value of the

total payments due under the PUA. The Defeasance Entity is a non-domiciliary corporation located outside the State of Florida. Defeasance Entity will use the cash, plus earned interest, to make payments equal to: i. Corporation's

required payments under the Facility lease; and ii. the

debt portion of the option price. If Corporation elects

not to exercise its purchase option, the Defeasance Entity will return to Corporation an amount equal to the debt

portion of the purchase option. Corporation will assign

its interest in the PUA to the Owner Trust and the Owner Trust will, in turn, assign its interest in the PUA to the

Lender as collateral for its loan.

Requested Ruling

Will the Payment Undertaking Agreement (PUA), entered into by Corporation and Lender, be subject to Florida's intangible

tax?

Florida Statutes

Section 199.023, F.S., defines intangible personal property to include money. Money is further defined to include cash deposits and the cash equivalent of annuity policies. Under s.

199.185, F.S., money is exempted from the intangible tax.

Discussion of Law

Under the provision of the Defeasance Agreement, the Defeasance Entity agrees to make payments on behalf of Corporation. The funds from which the payments are to be made are those given over to the Defeasance Entity by Corporation and are equal to the net present value of the lease payments required under the lease agreement. Defeasance Entity will invest these funds and use the interest, plus the paid in amount, to meet its obligation under the Defeasance Agreement.

Should Corporation choose not the exercise its purchase option,

Defeasance Entity will return to Corporation an amount equal to the net present value of the purchase option. Should for any reason the lease agreement be canceled, Defeasance Entity is to return the unused portion of the Payment Undertaking Agreement

to Corporation, less its fees.

Based upon the documents furnished and the provisions of the statutes, it is the opinion of this office that the Payment Undertaking Agreement should be considered to be a deposit of money as defined in s. 199.023, F.S., and exempt from intangible

tax under s. 199.185, 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

Technical Assistance and Dispute Resolution

Office of General Counsel

JVP/mh