Were REMIC securities exempt from Florida's annual intangible personal property tax?

Subject

Intangible-Tax Treatment of REMIC Securities

Plain-English summary

The REMIC securities were generally subject to Florida's annual intangible personal property tax. Mortgage-backed securities represented undivided interests in pools of mortgages, but those mortgage-backed securities served only as collateral when grouped into the REMIC. Ownership of the underlying mortgages did not transfer to the REMIC-security holder.

The Department therefore treated the REMIC security as a debt instrument holding a collateral interest, not as an exempt direct interest in a mortgage or an exempt obligation of the United States. The federal statutes governing Fannie Mae and Freddie Mac prohibited certain direct taxes on those entities' property and income but did not prohibit tax on securities they issued.

The TAA identified one holder-specific exception: REMIC securities owned directly by a bank were exempt under section 199.185(1)(k).

What this means for you

The historical intangible-tax classification turned on the property rights represented by the security, not merely on the mortgages supporting its cash flow. A layered security backed by mortgage interests could be taxable even where some direct mortgage or federal obligations had statutory exemptions.

This ruling applied a tax regime in effect in 1998. Its disclaimer expressly warned that later statutory changes could produce a different result.

Common questions

Q: Why was a REMIC security taxable? It represented a collateral interest in mortgage-backed securities and was classified as a debt instrument subject to the annual tax.

Q: Did the holder own the underlying mortgages? No. The Department said title or ownership of the mortgages remained unchanged.

Q: Did the federal-obligation exemption apply? No. The cited federal protections did not prohibit taxation of securities issued by Fannie Mae or Freddie Mac.

Q: What if a bank owned the REMIC directly? Section 199.185(1)(k) exempted direct bank ownership.

Citations and references

• Fla. Stat. § 199.032 — annual intangible personal property tax
• Fla. Stat. § 199.133 — nonrecurring tax on promises secured by Florida real property
• Fla. Stat. § 199.185(1)(d), (f), (k) — exemptions discussed in the TAA
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98C2-005

Original ruling text

Apr 03, 1998

Re: Technical Assistance Advisement 98(C)2-005
Intangible Personal Property Tax; Property Subject to Tax
Mortgages - Real Estate Mortgage Investment Conduits
(REMIC's)
ss. 199.032, 199.133, 199.185(1)(f), and 199.185(1)(k),
F.S.
XXX (Bank or Trustee)

Dear :

This letter is in response to your request for a Technical
Assistance Advisement on the taxation of Real Estate Mortgage
Investment Conduits (REMIC's).

Your request presents the question of taxability of a
security that from outward appearance is a debt instrument
secured by a mortgage on real property. However, upon analysis
of the security the question is much more complex than just a
debt secured by mortgage of real property. REMIC's are
multiple-class mortgage cash flow securities collateralized by
Mortgage Backed Securities (MBS). An MBS is and an investment
instrument that represents ownership of an undivided interest in
a group of mortgages. Principal and interest from the mortgages
are used to pay principal and interest on the MBS. A mortgage
is a document that pledges real property as collateral for a
debt and represents a lien on real property.

Chapter 199, F.S., addresses the taxation of mortgages for
intangible tax purposes. First a promise to pay secured by lien
on Florida real property is subject to a one-time nonrecurring
tax of 2 mills. (See s. 199.133, F.S.) Second, s.
199.185(1)(f), F.S., states that notes, to the extent secured by
real property located outside this State, are exempt from the
intangible tax. Under s. 199.185(1)(d), F.S., obligations of
the United States are exempt from the intangible tax. Applying
these statutes to the request requires that the structure of the
transaction from which the REMIC's arises be understood.

The starting point in the REMIC transaction is a single
loan secured by real property, usually a single family home
mortgage. The originator of the loan passes the loan onto the
Federal National Mortgage Association (Fannie Mae) or the
Federal Home Loan Mortgage Corporation Freddie Mac). Many
mortgages are gathered as a single group called a Mortgage
Backed Security (MBS). The MBS are grouped with other MBS and
restructured into another security called a REMIC. The MBS
becomes the collateral for the REMIC. The REMIC is a multipleclass mortgage cash flow security, backed by residential
mortgage loan. REMIC's are structured into separately traded
securities known as tranches. Tranches are designed to offer
different investment objectives to investors.

In determining if this security is subject to taxation
under Florida's intangible tax statute one must also look at
federal law. Florida Statutes exempt notes, bonds and other
obligations of the United States Government from the intangible
tax. Under the United States Code creating Fannie Mae and
Freddie Mac there are certain prohibitions against taxing
directly the property and income of these entities. However,
there is no prohibition against the taxation of securities
issued by either of these entities. So, the question of
taxation of REMIC's securities falls squarely on what the
security represents. From an income tax approach it is deemed
to be the receipt of principal and interest derived from
mortgages. However, the intangible tax is not an income tax, but
an ad valorem property tax. Therefore, it must be determined
what property rights are given to the holder of the pass through
certificates. The structure of the REMIC's gives us the answer.
The MBS are understood to represent an undivided interest a pool
of mortgages. When a group of MBS is gathered and the REMIC's
formed, the MBS are given as collateral. Since title or
ownership of the mortgage remains unchanged the REMIC's
securities represent only a collateral interest in mortgages.
As a collateral interest the REMIC's securities are not exempt
from the intangible tax. They are securities that are debt
instruments subject to the annual tax imposed by s. 199.032,
F.S. However, REMIC's owned directly by a bank are exempt from
tax by s. 199.185(1)(k), 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