Were interests in a series trust exempt from Florida intangible tax when at least 90% of net assets were exempt?

Plain-English summary

The beneficial interests in the described municipal-bond trust were exempt from Florida intangible personal property tax under the ruling's 90% net-asset test. The Department also concluded that the trust's net asset value was attributable solely to the assets held in the trust.

The sponsor proposed Delaware statutory trusts organized as separate series. Each series would hold a single issue of bonds and issue two classes of beneficial interests: a synthetic variable-rate class and a residual class. For federal tax purposes, each series would be treated as a partnership because its assets were insulated from liabilities of other series.

The portfolio consisted only of exempt Florida municipal bonds

Each series, and therefore the trust as a whole, would hold solely securities issued by Florida or its counties, municipalities, subdivisions, agencies, and instrumentalities. The ruling states that interest on those securities was exempt from federal income tax and Florida intangible personal property tax.

Section 199.185(1)(j), as quoted in the body, exempted trust interests when at least 90% of the corresponding portfolio's net asset value was invested in assets exempt from the tax imposed by section 199.032. Because the proposed portfolio consisted solely of the described Florida municipal bonds, the Department found the portfolio exempt.

Net asset value followed the held assets

The Department agreed that the trust's net asset value would be attributable solely to the assets it held. The business-trust rule separated exempt U.S. government obligations, treated other exempt assets as exempt, and treated the remaining portion as taxable if it contained an asset taxable under Florida law.

What this means for you

This ruling depended on the precise asset composition and series structure presented by the sponsor. A trust applying the historical rule needed to measure the exempt portion of net asset value and account for any taxable asset under the valuation rule. The result should not be extended to a portfolio containing different securities without separate analysis.

Common questions

Q: What percentage of net asset value had to be exempt?
A: At least 90% under the statute quoted and applied in the TAA.

Q: What assets did the proposed trust hold?
A: Solely the described Florida municipal bonds.

Q: Did liabilities of one series reach another series' assets?
A: No, under the structure described; each series' assets were insulated from other series' liabilities.

Citations and references

• Fla. Stat. § 199.032 — intangible personal property tax referenced by the exemption
• Fla. Stat. § 199.185(1)(j) — 90% exempt-net-asset test quoted in the body
• Fla. Stat. § 199.185(1)(i) — paragraph cited in the TAA heading
• Fla. Admin. Code r. 12C-2.010(1)(j) — business-trust net-asset valuation

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 05C2-001

Original ruling text

SUMMARY
QUESTION: Will shares, units of, or other undivided interest in, the Trust be exempt from tax if at least 90 percent of
the Trust's net asset value is exempt, and will the net asset value of the Trust be attributable solely to the assets held
in the Trust?
ANSWER - Based on Facts Below: The shares, units of, or other undivided interest in, the Trust will be exempt if 90
percent of the Trust's net asset value is exempt. The net asset value of the Trust will also be attributable solely to the
assets held in the Trust.

January 21, 2005

Re: Technical Assistance Advisement No. 05C2-001
Intangible Tax - Trust
Sections 199.023, 199.032, 199.185(1)(i) , F.S.
Rule 12C-2.010(1)(j), F.A.C.
XXX (hereinafter Sponsor)
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
The Sponsor will establish several substantially identical Trusts, which for ease of the presentation are described
as just a single Trust.
Each Trust was (or will be) formed under Delaware law as a Delaware Statutory Trust to meet the demand for
short-term or variable rate municipal bonds (principally from mutual funds). The municipal bonds are often converted
into synthetic variable rate tax-exempt bonds and a residual class using a two-class trust structure. With respect to
each series of securities that are issued, the Trust will hold a single issue of bonds and issue two classes of beneficial
interests. One class (synthetic variable rate class) is entitled to all or a portion of the principal on the bonds and
interest on the principal amount at a rate determined periodically by a remarketing agent. This rate would cause the
synthetic variable rate class to have a value equal to par. The second class (residual class) is entitled to all remaining
principal and interest. The synthetic variable rate class is entitled to a portion of any gain (generally 10 percent) on
any disposition of the bonds. All remaining capital gains, all accrued market discounts, and all of the losses on the
bonds are allocated to the residual class.
As a result of the two class structure, the Trust is not (or will not be) and the series within the Trust are not (or will

not be) classified as a trust for federal tax purposes. Under Treasury Regulations, each series within the Trust is (or
will be) treated as a partnership.
In the past, the trusts were established for the purposes described above as separate common law trusts under
New York law. For reasons unrelated to the tax, the Sponsors now wish to establish the Trust under The Delaware
Statutory Trust Act. The trusts will be created, not as separate trusts, but rather as separate series in a single "series
trust" under the provisions of Section 3806 of the Delaware Statutory Trust Act. Within the series, the rights and
obligations of creditors and equity holders of the Trust will be determined on a series-by-series basis as if each series
is a separate trust. Thus, the assets of one series will not be available to make payments due to creditors or equity
holders of a different series. For federal tax purposes, each series will be treated as a separate partnership because
the assets of the series will be insulated from liabilities of the other series.
The objective of the Trust is to provide its owners with a high level of tax-exempt income through investments in a
portfolio of investments securities, the interest on which is exempt from federal income tax and Florida Intangible
Personal Property Tax. This objective will be achieved by investing in a portfolio of securities issued by the State of
Florida, including its counties, municipalities, subdivisions, agencies and instrumentalities. Interest from these
securities is exempt from federal income tax and Florida Intangible Personal Property Tax. The assets of each series,
and thus the assets of the Trust as a whole, will consist solely of Florida Municipal Bonds. The bonds will be held by
an out-of-state trustee, in an out-of-state location. The only contact the Trust will have with the State of Florida is that
certain of its owners may be Florida residents.
Request for Advisement
A request is made on behalf of the Sponsor that a Technical Assistance Advisement be issued confirming that:
1) Shares or units of, or other undivided interest in, the Trust will be exempt from the Intangible Tax pursuant to s.
199.185(1)(j)[, F.S.,] if at least 90 percent of the net asset value of the Trust's assets are exempt from the [Intangible]
Tax, notwithstanding the fact that the Trust will not be registered under the Investment Company Act; and
2) For purposes of Rule 12C-2.010(1)(j)[, F.A.C.,] the net asset value of the Trust will be attributable solely to the
assets then held by the Trust.
Provisions of Law and Discussion
Section 199.185(1)(j), F.S., provides:
Units of a unit investment trust and shares or units of, or other undivided interest in, a business trust organized under
an agreement, indenture, or declaration of trust and registered under the Investment Company Act of 1940, as
amended, shall be exempt if at least 90 percent of the net asset value of the portfolio of assets corresponding to such
shares, units, or undivided interests is invested in assets that are exempt from the tax imposed by s. 199.032.
Rule 12C-2.010(1)(j), F.A.C. provides:

Business Trust - A money market or mutual fund which is organized under an agreement or indenture of trust shall be
valued based upon the following guidelines to determine what portion, if any, of the net asset value of the trust will be
exempt from taxation:

1. The portion of the net asset value of the trust that is attributable to direct obligations of the United States
   Government is exempt from taxation.
2. If the remaining portion of the net asset value of the trust, after removing the portion representing United States
   Government obligations, represents assets which are themselves exempt from Florida's intangible tax, then this
   portion of the net asset value of the trust's portfolio is also exempt from tax.
3. If the remaining portion of the net asset value of the trust, after removing the portion attributable to United States
   Government obligations, represents any asset which is taxable under Florida law, then the remaining portion of the
   net assets value of the trust is subject to tax.
   Position of the Department
   The portfolio of assets in the series held in the Trust consists or will consist solely of Florida Municipal Bonds.
   Pursuant to the Statute and Rule, the portfolio will be exempt from intangible tax, because at least 90 percent of the
   portfolio assets is exempt from tax. Additionally, the net value of the Trust will be attributable solely to the assets held
   in the Trust.
   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
   CG/mh