How did Florida's intangible personal property tax apply to fund shares backed by federal debt and to life-insurance cash values?

Plain-English summary

Florida allowed two exemptions in the trust's intangible-tax base. First, shares in the Massachusetts business trust were exempt in the same proportion that the fund's January 1 portfolio consisted of debt obligations of the United States government or its agencies.

Second, the cash values of the trust's permanent-life and flexible-premium variable-life policies were exempt. For the variable policies, the insurance company—not the policy owner—owned the separate-account assets, while the policies retained a death benefit and cash surrender value.

What this means for you

The fund-share exemption was proportional, not all-or-nothing: taxable fund shares were reduced by the percentage invested in exempt federal obligations. The insurance result depended on the contracts remaining life-insurance policies and the policy owner having no ownership interest in the insurer's underlying investments.

Common questions

Q: Were all money-market fund shares exempt? No. The exemption matched only the portion of the fund invested in U.S.-government or agency debt obligations.

Q: What date controlled the fund percentage? The ruling used the fund's portfolio as of January 1, the intangible-tax valuation date described in the facts and analysis.

Q: Were variable-life cash values exempt despite investment choices? Yes. The insurer owned the separate-account assets, and the contracts retained life-insurance death benefits and cash surrender values.

Citations and references

• 31 U.S.C. § 3124(a) — federal obligations protected from state taxation
• Fla. Stat. § 199.185(1)(a), (d) — exempt money and federal obligations
• Fla. Stat. § 199.023(2) — cash equivalent of life-insurance policies
• Fla. Admin. Code rr. 12C-2.002(1)(u), 12C-2.003(8) — fund and business-trust shares
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 99C2-005

Original ruling text

SUMMARY

Question 1: What is the tax status of an investment in a
Massachusetts business trust whose portfolio of assets
consist of instruments issued by the United States
Government or its agencies?

Answer - Based on Facts Below: Shares of the Massachusetts
business trust are exempt from intangible personal property
tax in proportion to the percentage of the trust's
portfolios that consist of debt obligations of the United
States Government or its agencies.

Question 2: Is the cash value of life insurance polices are
exempt from the intangible personal property tax?

Answer - Based on Facts Below: The cash value of life
insurance policies are exempt from the intangible personal
property tax.

Aug 20, 1999

Re: Technical Assistance Advisement No. 99(C)2-005
Intangible Tax - Exempt Assets in Fund -Taxable Situs
ss. 199.185(1), 199.023(2), F.S.
XXX (the "Company")
XXX (the "Trust")
XXX (the "Trustee")
XXX (the "Fund")

Dear Mr. Madsen:

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 FACTS PRESENTED BY PETITIONER

The Company, as grantor, established the Trust in April, 1998.
The assets contributed to the Trust, and the assets to be
contributed in the future, are intended to help the Company
fulfill its obligations under certain deferred compensation,
incentive, and retirement plans that benefit certain management
employees of the Company and its subsidiaries. Such employees
have no direct beneficial interest in the Trust, and the Trust
does not constitute a tax-qualified employee benefit plan. The
Company is sole beneficiary of the trust, except in the event of
the Company's insolvency, in which case the creditors of the
Company may have certain rights in the assets of the Trust. The
Trust is assumed to be a Florida-situs trust for purposes of
this request. The Company and the Trustee anticipate that the
assets in the Trust will vary in overall value, but will be
comprised of the three categories listed below as of each
January first during the existence of the Trust. On January 1,
1999, the assets of the Trust included the following three
categories of assets:

1. Shares in the Fund, a money market fund organized as a
   Massachusetts business trust. A portion of the assets of the
   Fund on January 1, 1999, consisted of debt instruments issued by
   the United States government.

2. Cash deposits.

3. Life insurance policies issued by various insurance
   companies. These policies were originally issued to the Company
   as owner, but have been assigned to, and are owned by, the
   Trust. The policies insure the lives of current and former
   employees of the Company and its subsidiaries. The Trust is
   beneficiary of the policies which are classified as follows:

a. Two of the policies offer "whole life" or "permanent
life" insurance that includes a protection feature, by
which the Trust is paid a defined death benefit if the
insured person dies while the policy is in force, and also
includes a savings or investment feature, by which the
policy increases in "cash value" or "cash surrender value"
during the time the policy is in force. Typically, there is

a schedule of minimum, guaranteed cash values, increasing
over the life of the policy. Often, a whole life policy
will generate values greater than the guaranteed values,
depending on the insurance company's success over time in
investing the premiums paid by the pool of policy holders.
There are two basic benefits payable under these policies:
either a death benefit payable to the beneficiary upon
death of the insured, or the cash surrender value payable
to the policy owner upon surrender of the policy. The life
insurance company and not the policy holder owns the
investments purchased by the insurance company with the
pooled premium dollars paid by policy holders. As of
January 1, 1999, each of the policies had a positive cash
value.

b. Four of the policies offer flexible premium variable
life insurance having the features of whole life insurance
with a death benefit payable to the beneficiary. The death
benefit may vary over the life of the policy, but the
benefit is still defined by the policy terms and
conditions. There also is a cash surrender value, which may
be withdrawn by the policy owner in whole or in part while
the policy is in force. The policies also provide for the
policy owner to designate a portion of the premium dollars
to be invested in a "Separate Account," and to designate,
from among alternatives listed in the policy, how the
Separate Account will be invested. However, neither the
policy owner, the insured, nor the beneficiary has any
ownership interest in the assets in which the Separate
Account is invested. One of the policy states, "We own the
assets in the Separate Account." Two of the policies
state, "We have exclusive and absolute control of our
assets, including all assets in the Separate Accounts,"
and, further, "The assets in each variable account are our
property." While, the fourth provides, "The variable
benefits under this policy are provided through investments
in Separate Account Eleven," and, further, "We hold the
assets of Separate Account Eleven."

ADVISEMENT REQUESTED

Based on the fact as presented, an advisement is requested on
the following questions:

1. Whether a percentage of the Trust's investment in the Fund
   held as of each January first, corresponding to the percentage
   of that Fund's total assets invested in instruments issued by
   the United States Government as of the same date, is and will be
   exempt from the intangible personal property tax imposed by
   Chapter 199, Florida Statutes.

2. Whether the cash values of the above described life insurance
   policies will be exempt from the intangible personal property
   tax imposed by Chapter 199, Florida Statutes.

DISCUSSION AND ANALYSIS OF LAW

I. Shares or units in the Fund, organized as a Massachusetts
business trust, are exempt from intangible personal property tax
in proportion to the Fund's percentage of investment in debt
obligations of the United States Government or its agencies.

By federal statute, "Stocks and obligations of the United States
Government are exempt from taxation by a State or political
subdivision of a State." 31 U.S.C. s. 3124(a). "The exemption
applies to each form of taxation that would require the
obligation... to be considered in computing a tax..." Id. Under
this language, taxation of federal government debt instruments
is prohibited.

Among the assets specifically exempted from taxation under
Chapter 199 are "Notes, bonds, and other obligations issued
by... the United States Government and its agencies." s.
199.185(1)(d), Florida Statutes. Thus, while shares in money
market funds organized as corporations or business trusts
ordinarily are taxable, Rule 12C-2.002(1)(u), Florida
Administrative Code, the Department's rule regarding business
trusts, recognizes that the tax does not reach federal
government obligations indirectly through the tax on shares in
business trusts:

(8) Business trust -- shares or units of a business trust

are exempt if the portfolio of assets contains only assets
which are exempt from taxation. The net asset value of a
business trust with taxable assets must be proportionately
reduced if the portfolio of assets contains debt
obligations of the United States Government.

Rule 12C-2.003(8), Florida Administrative Code [emphasis added].
Thus, to the extent that the assets of a business trust consist
of federal government obligations, a taxpayer's intangible tax
base, representing ownership of shares in the business trust, is
reduced proportionally.

The Fund is a Massachusetts business trust whose investments
include obligations of the United States Government. Id.
Therefore, under Rule 12C-2.003(8), Florida Administrative Code,
the net asset value of the Fund on January first is reduced by
the percentage of the Trust's portfolio invested in obligations
of the United States Government.

II. The cash value of life insurance policies are exempt from
the intangible personal property tax.

"Money" is among the intangible assets expressly exempt from the
intangible personal property tax. Florida Statutes s.
199.185(1)(a). The statutory definition of "money" for this
purpose includes "the cash equivalent of annuities and life
insurance policies." s. 199.023(2), Florida Statutes. The
Department interprets the phrase "cash equivalent" to mean "cash
value" or "cash surrender value," the latter two terms being
more commonly associated with life insurance. Therefore, the
cash value of the two "whole life" or "permanent life" insurance
polices are exempt from the intangible personal property tax.

Furthermore, while the four flexible premium-variable life
insurance policies are designed to give greater flexibility and
investment discretion to the policy owner, the policies retain
the hallmarks of life insurance. The policy owner has no
ownership interest in any intangible asset in which the premium
dollars may be invested; those assets are owned by the life
insurance company. The policy benefits include a death benefit
and a cash surrender value, the same benefits as other permanent

life insurance. Therefore, the cash values of the four flexible
premium-variable life insurance policies are considered exempt
from the intangible personal property tax.

This response constitutes a Technical Assistance Advisement
under s. 213.22, Florida Statutes 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, Florida
Statutes. 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, your request and
related backup documents are public records under Chapter 119,
Florida Statutes, which are subject to disclosure to the public
under the conditions of s. 213.22, Florida Statutes.
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 Request, the back up material and this
response, deleting names, addresses and any other details which
might lead to identification of the taxpayer. Your response
must be received by the Department within 15 days of the date of
this letter.

Sincerely,

George Turner
Senior Tax Specialist
Technical Assistance and Dispute Resolution
Office of General Counsel
(850) 922-4839