- 1 -
February 22, 1989
TO: TAX MEMBERS NO. 6-89
MONEY MARKET FUND CHIEF EXECUTIVE OFFICERS NO. 2-89
RE: VIRGINIA PASS-THROUGH REQUIREMENTS
__________________________________________________________
Last spring, the Virginia Department of Taxation announced
that Virginia would permit pass-through treatment for federal
obligations and for certain state obligations. (See Institute
Memorandum to Tax Members No. 25-88 and Money Market Chief
Executive Officers No. 24-88, dated May 31, 1988.) The
Announcement provided that "in order that taxpayers may have
sufficiently detailed information upon which they can
substantiate the exempt interest claimed, they should be
furnished with a breakdown of the dividends on a monthly basis."
The State's instructions for preparing 1988 Virginia income
tax returns (attached) provide that pass-through treatment will
not be permitted
unless you attach a statement to your return from the fund
which:
(1) details the amount of dividends you earned from the
fund; and
(2) summarizes the prorations between exempt and
taxable dividends on a monthly basis.
If the company only provides a statement that a certain
percentage of the income from the fund is from exempt
obligations, this is not sufficient for exempting this
income from Virginia income taxation.
The instructions provide similar requirements for passing through
income derived from certain state obligations.
Upon learning of these instructions, the Institute
contacted the Virginia Tax Commissioner and indicated that the
Virginia reporting requirements would be extremely burdensome for
funds and could not be met, in many instances, before
- 2 -
shareholders would be required to file their State income tax
returns. The attached response from the State Tax Commissioner
provides that it is not "the [State Department of Taxation's]
policy to deny a subtraction for exempt mutual fund interest if
the fund's report to the taxpayer, whether on a monthly or less
frequent basis, segregates taxable and exempt interest on a
percentage or average percentage basis." The letter further
provides that the instructions are "only intended to be a general
guide" and that they "are not intended to require taxpayers to
provide the department with information that is not available to
them from the mutual fund in which they invest."
We will keep you informed of developments.
Keith D. Lawson
Assistant General Counsel
Attachments