Did a grantor trust have to file a Florida corporate income tax return even when it had no federal taxable income?

Plain-English summary

Florida separated the trust's filing obligation from whether it owed corporate income tax.

The grantor trust was not among the estates and testamentary trusts exempted by section 220.02. It therefore remained subject to Florida's corporate-income-tax filing and reporting rules whenever a federal income or information return was required.

Because the trust represented that it would have no federal taxable income at the trust level, it also had no Florida taxable income under the analysis in the TAA. Even so, it had to file Florida Form F-1120 and detail the amounts distributed to each beneficiary or investor. That duty continued as long as any federal return showing income or information remained required.

What this means for you

Trust administrators

Do not equate zero taxable income with no return. Determine whether the trust still has a federal filing or information-reporting requirement and preserve beneficiary allocation data.

Securitization and corporate tax teams

The TAA was expressly narrow and did not shift the Florida corporation's income or loss through the described securitization structure. Analyze each entity's return separately.

Common questions

Did the trust owe Florida corporate income tax? Not on the represented facts, because it had no federal taxable income at the trust level.

Did it still have to file? Yes. It had to file Form F-1120 while any federal income or information return was required.

What had to be reported? The appropriate amounts distributed to each beneficiary or investor.

Could other parties rely on this TAA? No. The document expressly limited reliance to this trust and these facts.

Citations and references

• Fla. Stat. § 220.02(1)
• Fla. Stat. § 220.11(1)
• Fla. Stat. § 220.12(1)
• Fla. Stat. § 220.22(1)
• Fla. Stat. § 213.22

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 99C1-001

Original ruling text

SUMMARY

A grantor trust is subject to the filing and reporting
requirements of the Florida Corporate Income Tax Code,
whether or not the organization has federal taxable income.
If there is no income, but there is a filing requirement,
the grantor trust would be required to file Florida Form F1120, detailing the appropriate amounts distributed to each
beneficiary or investor, as required by the Florida
Statutes. This filing requirement will continue for as
long as there is a filing requirement for any federal
return that shows income, informational or otherwise.

May 24, 1999

Re: Technical Assistance Advisement 99(C)1-001
Request for Technical Assistance Advisement Regarding
Florida Corporate Income Tax Treatment of Grantor Trust
XXX ("Taxpayer")
XXX ("Financial")
XXX ("LLC")
XXX ("SPC")
XXX (the "Trust")
s. 220.02(1), F.S., Legislative Intent
s. 220.22(1), F.S., Returns; filing requirement

Dear :

Your letter of May 12, 1998, requested a Technical Assistance
Advisement on the application of corporate income tax to a
grantor trust. This response to your request constitutes a
Technical Assistance Advisement under Chapter 12-11, Florida
Administrative Code, and is issued to you under authority of s.
213.22, Florida Statutes.

FACTS AS PRESENTED BY TAXPAYER

Taxpayer, the party forming the grantor trust, will be a limited

partnership formed under the laws of XX. The sole general
partner of taxpayer will be SPC. SPC will be a bankruptcy
remote special purpose corporation formed under the laws of XX.
Financial will be Taxpayer's only limited partner.

Financial, a Florida corporation, makes loans, typically secured
by Florida real estate and tangible personal property, to
unrelated restaurant operators. Further, Financial engages in
sale/leaseback financing whereby it purchases operating
restaurants and simultaneously leases the restaurants back to
such operators under triple net leases. Through these loans and
its sale/leaseback financing, Financial generates a significant
amount of receivables, as well as acquiring additional
receivables through its affiliate limited liability company.
Financial conducts its lending and sale/leaseback activities
both within and outside of Florida. Currently, Financial borrows
capital from unrelated banks as a method of financing its
business activities.

Financial now desires to transfer its receivables "off balance
sheet" for credit enhancement purposes. The process that
Financial proposes to engage in is commonly referred to as
"securitization". The securitization will allow Financial to
obtain capital, not from traditional lenders, but from the sale
of securities backed by or "collateralized" by Financial's
receivables. The securitization will allow Financial to obtain
additional capital to make new loans and engage in other
business activity. The securitization plan contemplates issuing
and selling a series of bonds secured by the receivables. The
bond proceeds will be used to pay off loans owed by Financial to
the unrelated lenders. For bona fide business reasons, the
bonds must be issued by Taxpayer rather than by Financial.
Accordingly, the securitization plan calls for Financial to
transfer the receivables to the Taxpayer in exchange for a
limited partnership interest in Taxpayer. In turn, Taxpayer
will issue the bonds with the receivables pledged as security
for the repayment of the bonds. In furtherance of the
securitization plan, Taxpayer will collaterally assign the
receivables to a not yet determined national bank ("Trustee")
that will hold the receivables as security for the holders of
the bonds. Trustee is an out-of-state branch of a bank whose

principal office is outside of Florida. In other words,
Financial proposes to conduct business as it always has, except
that it will transfer its assets (receivables) in a series of
transactions merely to facilitate the sale of securities.

As part of the securitization plan, Taxpayer will form a grantor
trust in accordance with the common law of the State of New York
(the "Trust"). The Trust will not register with the State of
New York or any other state. The Taxpayer will transfer the
bonds to the Trust, which then will issue certificates to
investors. The investors may include any number of individuals,
corporations, trusts, partnerships, limited liability companies,
pension funds, and other special purposes entities. Under the
terms of the grantor trust agreement, each investor in a
certificate owns an undivided beneficial interest in the
underlying bonds. The investors are entitled to payments from
the Trust of specified amounts in accordance with their
certificates. The Trustee will not own the bonds for its own
account, but will hold the bonds for the protection and
exclusive benefit of the investors.

The Trustee will collect the monthly bonds payments made to
Taxpayer and distribute the payments to the investors. For
federal income tax purposes, the investors will be treated as
the owners of the bonds. The Trustee will not have the power to
reinvest the proceeds from the bonds or to engage in any
activity other than collecting principal and interest payments
on the bonds and making payments to the investors. For federal
tax purposes, the Trust will not be considered as engaged in
business.

Under federal law, the Trust will not be considered an
association taxable as a corporation or even a partnership.
Instead, the Trust will be, for federal purposes, an investment
trust as described in Treasury Regulations s. 301.7701-4(c). As
an investment trust, the investors will be considered the
owners.

The Trust will not file a federal corporate income tax return
(Form 1120) or a federal partnership return (Form 1065). Under
the applicable Treasury regulations, the Trust may report items

of income, deduction, and credit attributable to any portion of
the Trust in one of two ways: (1) the Trust may file a federal
trust tax return (Form 1041) which is blank (i.e., it reports no
items of income, deduction and credit), along with a separate
statement attached to the return reporting each investor's
proportionate share of items of income, deduction and credit; or
(2) the Trust may file the appropriate Forms 1099 (federal payor
statements) reporting items of income paid to the Trust by all
payors during the taxable year attributable to the portion of
the Trust treated as owned by each investor, and showing the
Trust as payor and each investor as the payee.

Treasury Regulations s. 1.671-4. The investors then will report
their share of the Trust's income on their respective federal
income tax returns. Any investors that are corporations subject
to the Florida Corporate Income Tax will be obligated to file
Florida corporate income tax returns and are liable for Florida
corporate income tax. The Trust will not have federal taxable
income as defined in s. 63, I.R.C.

QUESTION

Will the Trust be subject to the Florida Corporate Income Tax?

STATUTORY AUTHORITY

Section 220.02(1), F.S., states in part:

It is the intent of the Legislature in enacting this code
to impose a tax upon all corporations, organizations,
associations, and other artificial entities which derive
from this state or from any other jurisdiction permanent
and inherent attributes not inherent in or available to
natural persons, such as perpetual life, transferable
ownership represented by shares or certificates, and
limited liability for all owners.... This code is not
intended to tax, and shall not be construed so as to tax,
any natural person who engages in a trade, business, or
profession in this state under his or her own or any
fictitious name, whether individually as a proprietorship
or in partnership with others; any estate of a decedent or

incompetent; or any testamentary trust....

Section 220.11(1), F.S., states in part:

A tax measured by net income is hereby imposed on every
taxpayer for each taxable year... for the privilege of
conducting business, earning or receiving income in this
state, or being a resident or citizen of this state....

Section 220.22(1), F.S. provides:

A return with respect to the tax imposed by this code shall
be made by every taxpayer for each taxable year in which
such taxpayer either is liable for tax under this code or
is required to make a federal income tax return, regardless
of whether such taxpayer is liable for tax under this code.

DISCUSSION AND ANALYSIS OF LAW

Section 220.02, F.S., explains which business organizations are
subject to and which are exempt from the Florida Income Tax
Code. Specifically, this section exempts estates of individuals
and testamentary trusts. However, under s. 220.02, F.S.,
grantor trusts are not exempt from the filing or reporting
requirements of the Florida Income Tax Code. Thus, a grantor
trust generally and the Trust, specifically, are subject to the
filing and reporting requirements of the Florida Income Tax
Code, whether or not the organization has federal taxable income
in the current year.

To compute the amount of income actually subject to the Florida
Corporate Income Tax ("CIT"), taxpayers typically begin with
federal taxable income (one notable exception is the computation
of corporate income tax for limited liability companies). Thus,
Florida taxable income generally uses federal taxable income as
the starting point for determining the amount of income that is
subject to taxation under the Florida Corporate Income Tax Code.

Subsection 220.12(1), F.S., states that a taxpayer's net income
for a taxable year shall be its adjusted federal income for such
year, apportioned to this state, plus any non-business income

allocated to this state. When an organization does not have
income subject to tax at the federal level, the organization
generally will not have taxable income for Florida CIT purposes
(even though the filing requirements may continue for purposes
of the Florida Income Tax Code).

You represent that the Trust will not report federal taxable
income at the trust level, and therefore, has no Florida taxable
income. You also represent that the federal regulations give the
Trust the option of filing a federal trust return, Form 1041, or
a Form 1099 showing the appropriate amounts of distributions to
each beneficiary or investor as the case may be. Because there
may be no income, but there may be a filing requirement, the
Trust will be required to File Florida Form F-1120, detailing
the appropriate amounts distributed to each beneficiary or
investor, as required by the Florida Statutes. This filing
requirement will continue for as long as there is a filing
requirement for any federal return that shows income,
informational or otherwise.

Further, the forgoing advisement has a very narrow application.
That is, the information extended only applies to the Trust in
this particular situation based on the facts as understood by
the Department. No other party involved in this transaction may
rely, in any way, on this decision. Additionally, this decision
may not be used as a reference for treatment of a taxpayer with
respect to any other tax collected by the Department. Moreover,
Financial, the Florida corporation under these facts will file
returns as it always has. The utilization of the asset
securitization plan, for purposes of raising capital, will not
shift corporate income (or loss), if any, for purposes of the
CIT. Financial operates by making loans and participating in
the sale/leaseback or restaurant locations within and without
Florida, notwithstanding the securitization plan described
herein.

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
based on those facts and specific situation summarized above.

You are advised that subsequent statutory or administrative rule
changes or judicial interpretation of the statutes or rules upon
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, your request and
related backup documents are public records under Chapter 119,
F.S., and are subject to disclosure to the public under the
conditions of s. 213.22, F.S. Confidential information must be
deleted before public disclosure. In an effort to protect
confidentiality, we request you provide the undersigned with an
edited copy of your request for Technical Assistance Advisement,
the backup material and this response, deleting names, addresses
and any other details which might lead to identification of the
taxpayer. Your response should be received by the Department
within 15 days of the date of this letter.

Cordially,

Beverly L. Hayes
Attorney
Technical Assistance and Dispute Resolution
Office of General Counsel

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