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

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