How did Florida value investment-fund shares holding exempt government securities for annual intangible tax?

Subject

Valuation

Plain-English summary

Florida used a three-step rule to determine the taxable net asset value of shares in the investment trusts. The funds invested in Florida municipal securities, direct obligations of the United States and its agencies, and obligations of U.S. territories and possessions.

First, the portion of a trust's net asset value attributable to direct U.S. government obligations was exempt. Second, if every asset left after removing that federal portion was itself exempt from Florida intangible tax, the remaining value was also exempt. Third, if the remaining portfolio included any taxable asset, the entire remaining net asset value was taxable—not merely the value of that one taxable asset.

A fund interest was fully exempt when the portfolio was 100% exempt on the last business day of the previous calendar year. The Department also agreed that the funds themselves were not taxed on their assets under the stated guidelines.

Reorganizing the Massachusetts business trusts as Delaware business trusts did not affect the result. The state of organization was irrelevant to this Florida intangible-tax determination.

What this means for you

The historical rule did not always apply a simple asset-by-asset exemption percentage. Direct U.S. obligations were carved out proportionally, but one taxable asset in the remaining portfolio could make that entire remainder taxable.

Portfolio composition on the specified valuation date therefore mattered substantially. Fund managers and shareholders needed records identifying direct federal obligations and showing whether every other asset qualified for exemption.

Common questions

Q: How were fund shares valued? At net asset value unless the full-exemption rule applied.

Q: Was the value tied to direct U.S. obligations exempt? Yes.

Q: What if all remaining assets were also exempt municipal or territorial securities? The remaining portion was exempt as well.

Q: What if the remaining portfolio held one taxable asset? The ruling treated the entire remaining net asset value as taxable.

Q: Did changing the trust's state of organization matter? No. The Massachusetts-to-Delaware reorganization did not alter the determinations.

Citations and references

• Fla. Stat. §§ 199.032, 199.103(2), 199.185(1)(d), (i) — annual intangible tax, net-asset-value measurement, and exemptions
• Fla. Admin. Code r. 12C-2.010(1)(j) — trust and fund valuation method
• 31 U.S.C. § 3124 — exemption for federal obligations
• 48 U.S.C. §§ 745, 1403, 1423a, 1670, 1681 — territorial obligations cited by the advisement
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98C2-007

Original ruling text

May 07, 1998

Re: Technical Assistance Advisement No. 98(C)2-007
Intangible Tax - Valuation
Sections 199.032, 199.103 and 199.185, F.S.
Rule 12C-2.010(1)(j), F.A.C.
XXX (hereinafter referred to collectively as Trusts)
XXX (hereinafter referred to collectively as Funds)

Dear :

Your request for a Technical Assistance Advisement on the
taxability on the referenced Trusts has been received and
examined by this office.

Statement of Facts

The Funds are open-end management investment companies,
organized as business trusts under the laws of the Commonwealth
of Massachusetts by Declarations of Trust. The Funds are
comprised of separate series of trusts, each of which is a
separate portfolio offering shares to selected groups of
purchasers. The Funds have registered under the Investment
Company Act of 1940, as amended. The objective of the Trusts is
to provide investors with income which is exempt from state and
federal tax. The Trusts intend to achieve their objectives by
investing in a portfolio of tax-exempt municipal securities of
Florida issuers including the State, counties, municipalities
and political subdivisions, agencies and instrumentalities of
the State of Florida or by the United States Government, its
agencies, instrumentalities, territories, and possessions.

Each of the Funds is in the process of reorganizing as a
Delaware business trust. In the reorganization, the Delaware
business trusts will acquire all of the assets of the
Massachusetts trusts in exchange for shares of the Delaware
trusts and the liabilities of the Massachusetts business trusts.
The reorganization plan provides for the distribution of shares
of each of the successor funds to the shareholders of the

Massachusetts trusts and liquidation and subsequent termination
of those funds.

Based on the information submitted, you have requested the
following rulings:

a) the Funds will not be subject to Florida intangible tax
upon their assets;
b) to the extent the assets of a Fund consist exclusively
of securities exempt from the Florida intangibles tax on
the last business day of the previous calendar year,
ownership interest in the Fund will not be subject to
Florida intangibles tax;
c) to the extent the assets of a Fund do not consist
exclusively of securities exempt from Florida intangibles
tax on the last business day of the previous calendar year,
ownership interest will be exempt from intangibles tax with
respect to the portion of such interests which relate[s] to
securities issued by the United States and its possessions
and territories and the remaining portion of such ownership
interest will be subject to the intangibles tax; and
d) the reorganization of such Funds will not affect the
determinations sought hereunder, and the rulings issued for
items a), b), and c) of this paragraph should apply to the
Funds and ownership interests therein, both currently and
as they exist following the reorganization.

Statutory Provisions

The applicable provisions of the Florida Statutes impose an
annual tax of 2 mills on the just value of all intangible
property, owned by Florida residents, as of January 1 of each
calendar year (s. 199.032, F.S.) The tax is based upon the
value of the intangible property as prescribed by s. 199.103(2),
F.S. This subsection requires that shares of corporations,
mutual funds, money market funds or trusts be valued at their
net asset value unless exempt by s. 199.185(1)(i), F.S. Section
199.185(1)(i), F.S., exempts from the intangible tax shares of
trusts whose portfolio of assets is 100% exempt from intangible
tax. Title 31 U.S.C. s. 3124 states that securities issued by
the United States Government are exempt from the intangible tax

(also see s. 199.185(1)(d), F.S.) Under the provisions of 48
U.S.C. ss. 745, 1403, 1423a, 1670 and 1681 obligations issued by
the governments of Puerto Rico, Guam, the Virgin Islands,
American Samoa and the Northern Mariana Islands are exempt from
state and local taxation.

Application of Statutory Provisions

Applying the Federal and Florida statutes to the Trusts
requires that the following guidelines be used to determine what
portion, if any, of the net asset value of the Trusts will be
exempt from taxation (See Rule 12C-2.010(1)(j), F.A.C.):

The portion of the net asset value of the Trust that is
attributable to direct obligations of the United States
Government is exempt from taxation.

If the remaining portion of the net asset value of the
Trust, 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 asset value of the Trust's portfolio is
also exempt from tax.

If the remaining portion of the net asset value of the
Trust, after removing the portion attributable to United
States Government obligations, represents any asset which
is taxable under Florida law, then the remaining portion of
the net asset value of the Trust is subject to tax.

To the extent the Funds conform to these guidelines, your
inquires a), b), & c) are answered in the affirmative.

As to item d), it too is answered in the affirmative. The
state of organization of the Funds has no consequence in the
determination of Florida intangible taxation.

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