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April 18, 1990
TO: BOARD OF GOVERNORS NO. 28-90
MONEY MARKET MEMBERS - ONE PER COMPLEX NO. 5-90
SEC RULES MEMBERS NO. 31-90
STATE SECURITIES MEMBERS NO. 9-90
TAX MEMBERS NO. 17-90
UNIT INVESTMENT TRUST MEMBERS NO. 20-90
RE: TENNESSEE TAX LEGISLATION DEFEATED
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Legislation was introduced in Tennessee earlier this year
to amend the state tax provisions to retroactively repeal the
exemptions from state income tax for dividends paid by mutual
funds and interest paid by unit investment trusts that invest in
Tennessee municipal obligations. The Commissioner of Revenue
requested the legislation in response to an opinion issued by the
Tennessee Attorney General's Office that concluded Tennessee tax
law violates the U.S. Constitution because it exempts from
taxation income from mutual funds and unit investment trusts that
invest in municipal obligations but does not exempt income from
funds and trusts that invest in federal obligations. The opinion
stated that this situation could be remedied by repealing the
exemptions for funds and trusts investing in Tennessee municipal
obligations or by permitting an exemption for distributions from
funds and trusts that invest in federal obligations.
The Institute testified in opposition to the proposed
repeal of the exemptions before the Tennessee Joint Business Tax
Study Committee on March 12, 1990 and distributed an analysis of
the constitutional issue to the Committee. The Institute
testified that repeal of the exemptions would not cure the
constitutional problem since federal law requires that Tennessee
exempt from taxation mutual fund dividends derived from interest
on federal obligations. Further, repeal of the exemptions would
unfairly discriminate against less wealthy Tennessee investors
who cannot afford to buy municipal obligations directly and would
subject Tennessee investors to tax assessments for prior years.
A copy of the Institute's testimony and analysis is attached.
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The Committee voted not to repeal the current exemptions
from state income tax for income paid by mutual funds and unit
investment trusts that invest in Tennessee municipal obligations.
The Tennessee Legislature adjourned for the year on April 13,
1990 without taking any action on the proposed legislation.
We will keep you advised of further developments.
Patricia Louie
Assistant General Counsel
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