June 15, 1990
TO: TAX MEMBERS NO. 20-90
MONEY MARKET MEMBERS - ONE PER COMPLEX NO. 8-90
RE: CALIFORNIA EXPANDS PASS-THROUGH OF FEDERAL OBLIGATION
INTEREST
__________________________________________________________
The attached California statute, effective June 1, 1990,
amends section 17145 of the Taxation and Revenue Code to permit a
fund to pay dividends derived from interest on federal
obligations free of state tax if, at the close of each quarter of
its taxable year, at least 50% of the value of its total assets
consists of obligations the interest on which, if received
directly by an individual, would be exempt from tax under the
Constitution or laws of the United States or California.
Under prior law, this pass-through treatment was available,
with respect to federal obligation interest, only for
"obligations of the United States" which paid interest excludable
from state tax under the Constitution or laws of the United
States. The California Franchise Tax Board took the position
that pass-through treatment was unavailable under the old statute
with respect to many obligations, such as Puerto Rican
obligations and obligations of certain government agencies, the
interest on which would not have been taxable if received
directly by an individual. (See Institute Memorandum to Members-
One Per Complex No. 43-89, Closed-End Fund Members No. 71-89, Tax
Members No. 49-89, Unit Investment Trust Members No. 72-89 and
Accounting/Treasurers Members No. 7-89, dated December 20, 1989).
In addition, prior law required that the 50% threshold be
calculated with respect to either California obligations or U.S.
obligations before the interest income attributable to both could
be passed through. Under the new law, California and U.S.
obligations can be aggregated to determine whether the 50%
threshold has been satisfied.
We will keep you informed of developments.
David J. Mangefrida, Jr.
Assistant General Counsel
Attachment