Were shares of a fund holding exempt government obligations exempt from Florida's annual intangible tax?

Subject

Intangible-Tax Exemption for Fund Shares

Plain-English summary

Florida residents' shares of the fund were exempt if the portfolio contained only assets exempt from the annual intangible tax on the last business day of the prior year. The fund held various government, municipal, and other tax-exempt obligations.

The calculation first removed the net asset value attributable to direct obligations of the United States, which federal law exempted. If every asset in the remaining portfolio was also exempt under Florida law, that remaining share value was exempt too.

But the rule was all-or-nothing for the nonfederal remainder. If any remaining portfolio asset was taxable, the entire remaining net asset value of each share was taxable—not merely the percentage attributable to the taxable holding.

What this means for you

Under this historical tax, a fund's exemption depended on its full portfolio at a specific measurement date. A small taxable position could contaminate the exemption for the entire non-U.S.-government portion of the share value.

Direct U.S. obligations were treated separately and retained their federal exemption even when another portfolio holding caused the remaining value to be taxed.

Common questions

Q: When was portfolio composition measured? On the last business day of the previous calendar year.

Q: What if every holding was exempt? The entire net asset value of fund shares held by Florida residents was exempt.

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

Q: Did taxable holdings eliminate the federal-obligation exemption? No. The value attributable to direct U.S. obligations remained exempt under 31 U.S.C. § 3124(a).

Citations and references

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

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98C2-004

Original ruling text

Mar 26, 1998

Re: Technical Assistance Advisement No. 98(C)2-004
Intangible Tax - Exempt Assets in Fund
s. 199.185(1)(j), 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, or other states. In addition, the Fund may invest
in securities not issued by or on behalf of a state or territory
or by an agency or instrumentality thereof, if the interest or
distributions therefrom are expected to be exempt from federal
income tax. 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 are requesting advice whether
the entire net asset value of a share of the investment

securities in the portfolio will be exempt from the annual
intangible tax.

Secondly, you are inquiring 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. 3124(a). Under s.
199.185(1)(j), F.S., shares of an investment 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
remaining 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