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July 3, 1989
TO: TAX MEMBERS NO. 20-89
MONEY MARKET FUND CHIEF EXECUTIVE OFFICERS NO. 5-89
RE: MARYLAND TAX DEVELOPMENTS
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1. Pass-Through of Federal Obligation Interest
As you know, the Institute has been working for some time
to eliminate state taxation of investment company dividends
derived from interest on federal obligations. We are pleased to
inform you that Maryland has now become a "pass-through" state
with its recent enactment of legislation providing pass-through
treatment for federal obligation interest. The Maryland statute,
a copy of which is attached, provides that individuals shall
subtract from federal adjusted gross income, in determining
Maryland adjusted gross income, "state tax exempt interest"
received from a regulated investment company (RIC) so long as at
least 50 percent of the interest received by the RIC during its
taxable year is from U.S. Government obligations.
2. Trustee Allocations of RIC Capital Gain
Distributions
For the past two years, the Institute has supported
legislation in Maryland to amend its law requiring that all
realized and unrealized capital gains of a trust accrue to the
benefit of remaindermen rather than income beneficiaries. This
legislation is intended to broaden the investment opportunities
available to trustees seeking to maximize total return to income
beneficiaries and remaindermen without violating their fiduciary
obligation not to benefit either class over the other. Under the
existing statute, many investments with attractive returns might
not have been suitable for trusts, because the investments might
be deemed to favor either current income distributions or capital
appreciation. Funds that invest primarily in growth stocks, for
example, might be deemed to be more beneficial to the
remaindermen of a trust than to its income beneficiaries.
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We are pleased to inform you that this legislation has now
been enacted. The new statute, a copy of which is attached,
permits trustees to irrevocably elect to treat as income eligible
to be paid to an income beneficiary a portion of the capital gain
dividend paid to a trustee by a mutual fund. The portion of the
capital gain dividend subject to this election will be limited so
that the total distribution to income beneficiaries cannot exceed
the annual federal mid-term rate. All remaining capital gain
dividend amounts, plus all unrealized capital gains, will accrue
to the benefit of the remaindermen.
We will keep you informed of developments.
Keith D. Lawson
Assistant General Counsel
Attachments