How did one taxable asset affect Florida intangible tax on shares of a fund otherwise holding exempt securities?

Subject

Intangible-Tax Treatment of Mixed Fund Assets

Plain-English summary

Direct obligations of the United States remained exempt, but one taxable asset elsewhere in the portfolio made the fund's entire remaining net asset value taxable. The test was applied to the portfolio held on the last business day of the previous calendar year.

The fund first removed the share of net asset value attributable to direct U.S. obligations; that portion was exempt under federal law. If every asset in the remaining portfolio was itself exempt from Florida intangible tax, the remaining portion was also exempt.

If any asset in that remaining portfolio was taxable under Florida law, however, the entire non-U.S.-obligation portion of each share became taxable—not merely the value of the one taxable holding.

What this means for you

Under this historical fund rule, exemption was not computed asset by asset across the nonfederal portion. A small taxable holding could taint all remaining net asset value after the separately protected direct U.S. obligations were removed.

Portfolio composition on the specified year-end measurement date therefore controlled the treatment of shares held by Florida residents.

Common questions

Q: Were direct U.S. government obligations exempt? Yes. The portion of fund value attributable to those obligations was separately exempt.

Q: What if all other portfolio assets were exempt? Then the fund shares held by Florida residents were entirely exempt under the ruling.

Q: What if one nonfederal asset was taxable? The whole remaining net asset value, after removing direct U.S. obligations, was taxable.

Q: What date controlled the portfolio test? The last business day of the previous calendar year.

Q: Did the ruling apply to every shareholder? Its conclusion specifically addressed shares held by Florida residents.

Citations and references

• 31 U.S.C. § 3124(a) — state-tax exemption for United States obligations
• Fla. Stat. § 199.185(1)(i) — shares of a trust invested in exempt assets
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98C2-002

Original ruling text

Jan 12, 1998

Re: Technical Assistance Advisement No. 98(C)2-002

Intangible Tax - Exempt Assets in Fund
s. 199.185(1)(i), F.S.
XXX (hereinafter Fund)

Dear :

Your letter requesting a Technical Assistance Advisement has been referred to this office for response. The specific scenario for which advice has been requested is summarized

below.

Statement of the Facts

The Fund is a non-diversified closed-end management investment company, which was organized outside the State of Florida. The Fund is registered under the Investment Company

Act of 1940.

The Fund holds a portfolio that consists of long-term obligations issued by or on behalf of Florida or its political subdivisions, agencies or instrumentalities. The Fund may also hold long-term obligations of the United States, its subdivisions, agencies, instrumentalities, or territories, and possessions of other states. However, the Fund may invest in securities not issued by or on behalf of a state or its territories if it is believed the securities pay interest or distributions that are exempt from Federal income taxation. The portfolio may also include non-municipal securities exempt from federal tax to the extent the investments are permitted by the 1940 Act, as well as variable rate demand obligations ("“VRDO's")

held by financial institutions.

Assuming the Fund's portfolio consists solely of assets exempt from the annual intangible tax on the last business day

of the previous calendar year, you request advice as to whether

the entire net asset value of a share of the investments securities in the portfolio will be exempt from the annual

intangible tax.

Secondly, you inquire as to whether the advisement would change if any portion of the assets in the portfolio consisted of investments subject to the annual tax on the last business

day of the previous calendar year.

Provision of the Law and Analysis

The portfolio of assets will be governed by federal and Florida law. Obligations of the United States Government are exempt from state taxes under 31 U.S.C. s. 3124(a). Under s. 199.185(i), F.S., 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 portfolio of assets requires that the following guidelines be used to determine what portion, if any, of the net asset value

of the securities will be exempt from taxation:

The portion of the net asset value of the securities that is attributed to direct obligations of the United States

Government is exempt from taxation.

If the entire remaining portion of the net asset value of the securities, 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 securities in the portfolio is

also exempt from tax.

However, if any of the remaining portion of the net asset value of the securities in the portfolio, after removing the portion attributable to United States Government obligations, represents any asset that is taxable under Florida law, then the entire remaining portion of the net asset value of the

securities is subject to tax.

Conclusion

If on the last business day of the previous year the portfolio of securities contains only securities exempt from the annual intangible tax, shares of the Fund held by Florida residents will be exempt from tax. However, if any portion of the securities in the portfolio represents taxable securities on the last business day of the previous year, tax will be due on the total net asset value of each share not attributed to United

States Government obligations.

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,

Celestine Grantham

Senior Tax Specialist

Technical Assistance and Dispute Resolution

Office of General Counsel

CG/mh