Were mortgage-secured promissory notes owned by section 501(c)(3) nonprofit lenders exempt from Florida's nonrecurring intangible tax?

Plain-English summary

The nonprofit lenders' promissory notes and mortgages were exempt from Florida's nonrecurring intangible tax while the lenders maintained section 501(c)(3) status. Their affordable-housing and community-development lending activities qualified them for the charitable-institution exemption in section 199.183(2).

The exemption followed ownership. If a lender transferred a note and mortgage to an entity that was not exempt under section 199.183, the instruments became taxable at the time of transfer.

What this means for you

Charitable status protected instruments while an exempt organization owned them. A secondary-market sale required a fresh look at the transferee's status rather than assuming the original exemption continued with the paper.

Common questions

Q: Were the nonprofit lenders' notes exempt? Yes, while their section 501(c)(3) status remained unchanged.

Q: Did the exemption survive every transfer? No. Transfer to a nonexempt entity triggered tax.

Q: What activities did the lenders support? Affordable housing, community development, economic development, and targeted distressed markets.

Citations and references

• Fla. Stat. §§ 199.032 and 199.133 — nonrecurring intangible tax
• Fla. Stat. § 199.183(2) — nonprofit charitable-institution exemption
• I.R.C. § 501(c)(3) — federal charitable status
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 02C2-003

Original ruling text

SUMMARY

QUESTION: Are promissory notes owned by lending
corporations exempt from the nonrecurring intangible tax as
long as they maintain their tax exempt status under
s.501(c)(3), IRC?

ANSWER - Based on Facts Below: Lending corporations will
not be subject to nonrecurring intangible tax as long as
their tax exempt status under s. 501(c)(3), IRC is
unchanged. However, if the notes and mortgages are
transferred to an entity not exempt under s. 199.183, F.S.,
the notes and mortgages will become taxable at the time of
the transfers.

Mar 06, 2002

Re: Technical Assistance Advisement No. 02C2-003
Intangible Tax - Charitable Institutions
Sections 199.032, 199.133 and 199.183 , F.S.
XXX (Lending Corporation 1)
XXX (Lending Corporation 11)

Dear :

This is in response to your request for a Technical
Assistance Advisement in which you ask if the promissory notes
owned by s. 501 (c)(3), Internal Revenue Code ("IRC"), lenders
are exempt from Florida intangible tax. The specific scenario
for which advice has been requested is presented below.

Facts Presented by Petitioner

Lending Corporation 1 is a Florida not-for-profit
corporation that is exempt from Federal income taxes pursuant to
s. 501(c)(3) of the IRC of 1986. The exempt purpose of Lending
Corporation 1 is to assist in the formation of capital to
support affordable housing and other community development

initiatives in Florida. This assistance is primarily provided
through loans. All of Lending Corporation 1's members are
national banking associations or state banks that do business in
the State of Florida. Lending Corporation 1 loans are
structured with Lending Corporation 1 as the lead lender and
mortgagee, with each member bank providing a pro rata share of
the funding for the loan in exchange for a pro rata
participation interest in the loan. For some loans, Lending
Corporation 1 uses its own capital to fund a portion of a loan,
with the member banks participating in the balance of the loan.

Lending Corporation 11 is also a Florida not-for-profit
corporation that is exempt from Federal income taxes pursuant to
s. 501(c)(3) of the IRC. The exempt purpose of Lending
Corporation 11 is to provide flexible sources of capital to
targeted populations and distressed markets in Florida for a
variety of purposes, including the provision of affordable
housing and economic development. Lending Corporation 11
provides this assistance through loans, technical assistance, or
other development services. The sole member of Lending
Corporation 11 is Lending Corporation 1. Lending Corporation
11's loans are structured with Lending Corporation 11 as the
lender and the mortgagee; however, the source of funding for
each loan is either capital of Lending Corporation 11 or
governmental funds being administered by Lending Corporation 11
for the express purpose of making such loans. For example, the
source of funds for Lending Corporation 11 loans may be a grant
from the U.S. Department of Treasury or funds administered on
behalf of state and local governmental entities or their
agencies.

Each Lending Corporation 1 or Lending Corporation 11 loan
is serviced by Lending Corporation 1 or Lending Corporation 11,
respectively, and is reported as an asset of Lending Corporation
1 or Lending Corporation 11, as the case may be, on its
respective financial statements and federal information tax
returns. Both Lending Corporations anticipate that some of
their loans may be sold to the secondary market to agencies such
as Fannie Mae or Federal Home Loan Bank, or to commercial banks,
including Lending Corporation 1's member banks.

Each loan by Lending Corporation 1 or 11 is evidenced by a
promissory note executed by the borrower, which is secured by a
mortgage on Florida real estate.

Requested Ruling by the Petitioner

You seek the Department's confirmation that promissory
notes owned by Lending Corporation 1 or 11 will not be subject
to the nonrecurring or annual intangible tax as long as each
Lending Corporation maintains its tax exempt status under s.
501(c)(3), IRC.

Law and Discussion

Section 199.032, F.S., imposes the annual intangible tax on
the just valuation of all intangible property that has a taxable
situs in this state subject only to the exemptions and credits
allowed by law. As stated in s. 199.133, F.S., a one-time
nonrecurring tax of 2 mills is imposed on each dollar of the
just valuation of all notes, bonds, and other obligations for
payment of money which are secured by mortgage, deed of trust,
or other lien upon real property situated in this state. Section
199.183(2), F.S., provides that intangible personal property
owned by any "nonprofit charitable institutions" shall be exempt
from taxation. Under s. 199.183(2)(c), F.S., "charitable
institutions" are defined to include those institutions
qualified as charitable under s. 501(c)(3), IRC.

Conclusion

The Lending Corporations have been designated as charitable
organizations under s. 501(c)(3), IRC, and as such, they qualify
for the exemption provided to "nonprofit institutions" under s.
199.183(2), F.S. Therefore, the intangible personal property of
Lending Corporation 1 and Lending Corporation 11 will not be
subject to taxation, as long as they maintain their federally
exempt status under s. 501(c)(3) of the IRC. However, if the
notes and mortgages are transferred to an entity not exempt
under s. 199.183, F.S., the notes and mortgages will become
taxable at the time of the transfers.

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 interpretation of the
statutes or rules upon which this advise 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
199, 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,

Baldan E. Sulker
Senior Tax Specialist
Technical Assistance & Dispute Resolution
Office of General Counsel

BES/mh