Did a corporation owe Florida annual intangible tax on contingent residual interests retained in two automobile-receivable trusts?

Subject

Taxable Situs

Plain-English summary

The corporation held taxable ownership interests in both automobile-receivable trusts, but the interests produced zero current intangible-tax liability because their taxable value was then zero. The corporation could receive only excess spread-account funds remaining after required payments, making its residual interests contingent and subordinate to other certificate holders.

The Department did not say the interests were exempt. It said that when the contingency was removed, the ownership interests would be taxed at their just value.

What this means for you

A contingent residual trust interest could still be taxable intangible property even when its current tax value was zero. Classification and present valuation were separate questions.

Common questions

Q: Did the corporation own taxable trust interests? Yes.

Q: Why was current liability zero? The residual distributions were contingent on excess funds remaining after required payments, so the interests' current taxable value was zero.

Q: Were the interests permanently untaxed? No. The Department said tax would apply at just value after the contingency was removed.

Citations and references

• Fla. Stat. §§ 199.023(1) and 199.023(3) — intangible property and business trusts
• Fla. Stat. § 199.032 — annual intangible tax on just value
• Fla. Stat. § 199.052(1) — annual return filing
• Fla. Stat. § 199.175(1) — Florida taxable situs
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 01C2-002

Original ruling text

SUMMARY

QUESTION: Will the corporation's ownership interest in the
trust create a tax liability for intangible tax purposes?

ANSWER - Based on Facts Below: No. The ownership interest
will create a tax liability but because of its contengency
the current taxable value of the interest is $0.

Note: See original 01C2-002 dated Aug. 1, 2001

Oct 16, 2001

Re: Technical Assistance Advisement No. 01C2-002 (REVISED)
Intangible Tax - Taxable Situs
Sections 199.052(1), 199.023(1), & 199.175(1), F.S.
XXX (hereinafter Company)
XXX (hereinafter "Trust B")
XXX (hereinafter "Trust A")

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.

Facts as Presented by Petitioner

Trust B was formed pursuant to a Trust and Servicing
Agreement ("B Agreement") and an Indenture Agreement
("Indenture"). The purpose of Trust B is as follows:

*

to purchase automobile retail installment contracts or
loans (hereinafter "receivables");

*

to issue notes and a certificate of ownership in the trust;
and

*

to make payments and distributions on said notes and the
certificate.

In order to operate Trust B, an owner trustee, an indenture
trustee, and a servicer of the receivables were appointed.
Although the Company appointed the original owner trustee,
indenture trustee, and servicer, it does not have the power to
appoint any of their successors.

As outlined in B Agreement, the Company sold and
transferred its interest in certain of its automobile
receivables to Trust B. In exchange, the Company received cash
and a certificate of ownership in Trust B. Under the terms of
the Indenture, a spread account was established for the benefit
of the note holders and the insurer. Pursuant to B Agreement,
the spread account will hold the excess, if any, of the
collections on the receivables over the amount which Trust B is
required to pay. The Indenture provides that the certificate of
ownership entitles the Company to receive all funds held in the
spread account in excess of the required spread amount on each
payment date after payment of all amounts as provided in
Agreement B. Since payment to the Company is contingent upon an
excess balance being held in the spread account, it is believed
the Company does not have a current right to income and
therefore has no taxable beneficial interest in Trust B. B
Agreement provides that the Trust may be called only if the
principal balance of the notes held in the Trust is 10 percent
or less of the initial note balances. The certificate holder,
which is the Company, must notify the owner trustee in writing
if it plans to exercise the option to purchase the notes. It is
the owner trustee who is authorized to conduct the business and
affairs of Trust B.

The Company does not possess an unqualified power or
unlimited power to revoke or invade the corpus of Trust B. Its
ability to transfer, assign, exchange or otherwise pledge its
rights in the assets of Trust B is significantly limited.
Additionally, there is not a readily available market for such
an interest, but Generally Accepted Accounting Principles
("GAAP") require that the Company's financial statements

disclose the retained interest as an asset with an assigned
value. The Company determines the estimated fair market value
of its retained interest by discounting the expected cash flows.
The expected cash flows represent the net present value of the
excess cash flows of the trust, less cost incurred to service
the portfolio and losses estimated to be incurred on the
receivables.

Trust A was formed pursuant to a Pooling and Servicing
Agreement dated February 1, 1999 (the "A Agreement"). The
property of Trust A includes a pool of simple and precomputed
interest installment loan and security agreements and
installment sales contracts for new and used automobiles, light
trucks, etc. The Company sold and transferred its interest in
certain of its automobile receivables to Trust A. In exchange,
the Company received cash and a certificate of ownership in
Trust A.

Like Trust B, a trustee and servicer were appointed to
operate Trust A. Similarly, an insurer was chosen in the event
that there were insufficient funds to make all required
payments.

A Agreement provides for the establishment of a spread
account. The interests of the Company are subordinate to the
interests of the other certificate holders. The Company
receives the excess, if any, in the spread account after the
required distributions have been made by the servicer on each
payment date. The amounts distributed to the Class IC
Certificate holder, (currently the Company) are released from
Trust A and from any security interest of the trustee or the
insurer.

The Company may also call Trust A, but as with Trust B,
certain conditions must be met before the Company can call Trust
A. In order to call the trust, the notional principal amount
will have been reduced to zero (per Section 16.2) and the pool
balance is equal to or less than 10 percent of the initial
certificate balance. Since these conditions apply, you assert
that the Company does not have an unqualified right to revoke
Trust A.

Request for Advisement

You request a ruling to the effect that the Company has no
intangible tax liability arising out of the subject
securitizations of automobile receivables.

Provisions of Law

According to s. 199.052(1), F.S., annual tax returns are to
be filed by every corporation authorized to do business in this
state and by any person who on January 1 owns, manages or
controls intangible personal property that has a taxable situs
in this state.

Section 199.023(1), F.S., defines intangible personal
property as all personal property which is not in itself
intrinsically valuable, but which derives its chief value from
that which it represents. Section 199.023(1)(a), F.S.,
specifically includes shares of business trusts in the
definition of intangible personal property. Section 199.032,
F.S., imposes annual tax on each dollar of the just valuation of
all intangible personal property that has a taxable situs in
this state.

Section 199.175 (1), F.S., provides:

Intangible personal property shall have a taxable situs in
this state when it is owned, managed, or controlled by any
person domiciled in this state on January 1 of the tax
year. Such intangibles shall be subject to annual taxation
under this chapter, unless the person who owns, manages, or
controls them is specifically exempt or unless the property
is specifically exempt. This provision shall apply
regardless of where the evidence of the intangible property
is kept; where the intangible is created, approved, or
paid; or where business may be conducted from which the
intangible arises....

For purposes of the intangible tax "any person domiciled in
this state" includes any business trust. [See s. 199.023(3),

F.S.]

Position of the Department

Based on the information provided, the Company possesses an
ownership interest in the trust. The ownership interest allows
the Company to receive the excess, if any, in the spread account
only after the required distributions have been made by the
servicer on each payment date. However, the ownership interest
is a residual interest and subordinate in nature to the other
Certificate holders. The Company does possess a taxable
ownership interest in Trust A and Trust B; but, because of its
contingency, the liability for the intangible tax in relation to
these trusts is currently zero. However, upon removal of the
contingency, the ownership interest will be taxed based on the
just valuation of the interest.

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, 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.

Sincerely,

Celestine Grantham
Senior Tax Specialist
Technical Assistance and Dispute Resolution
Office of General Counsel

CG/mh