Were Florida residents' fund shares exempt from annual intangible tax when the portfolio held exempt securities?

Subject

Exempt Assets in Fund

Plain-English summary

Under the 1998 annual intangible-tax rules, Florida residents' fund shares were exempt if the fund's year-end portfolio contained only exempt assets. Direct obligations of the United States were exempt under federal law. The remaining share value was also exempt when every remaining portfolio asset was itself exempt from Florida intangible tax.

The result was not proportional if the non-U.S. portion included a taxable asset. After removing the value attributable to direct U.S. government obligations, any taxable asset in the remaining portfolio made that entire remaining portion of each share's net asset value taxable.

What this means for you

The ruling used a year-end, all-or-nothing test for the portfolio value outside direct U.S. obligations. Fund managers and Florida investors could not simply exempt the percentage represented by qualifying nonfederal assets if even one asset in that portion was taxable.

Common questions

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

Q: Were direct U.S. government obligations always separated out? Yes. Their portion of net asset value was exempt under 31 U.S.C. § 3124(a).

Q: What happened if one remaining security was taxable? The entire remaining share value outside direct U.S. obligations became taxable under the ruling's analysis.

Citations and references

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

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98C2-010

Original ruling text

Oct 01, 1998

Re: Technical Assistance Advisement 98(C)2-010 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 of 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 nonmunicipal 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 State 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,

George Turner
Senior Tax Specialist
Technical Assistance and Dispute Resolution Office of General Counsel