July 24, 1990
TO: MONEY MARKET MEMBERS - ONE PER COMPLEX NO. 10-90
TAX MEMBERS NO. 27-90
RE: DELAWARE PASS-THROUGH OF FEDERAL INTEREST
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We are pleased to inform you that Delaware has become the
most recent state to permit federal obligation interest to retain
its tax-exempt character when passed-through a regulated
investment company ("RIC") to RIC shareholders. The attached
Delaware statute was signed by the Governor on July 18, 1990 and
is effective, in part, for tax years beginning after December 31,
1989. It provides that the Delaware personal income tax does not
apply to dividends of a regulated investment company ("RIC") to
the extent attributable to interest on obligations of the United
States, its territories and possessions, or of any authority,
commission or instrumentality of the United States, which
interest would be exempt from the Delaware personal income tax if
earned directly by an individual. The pro rata share of the
dividends of the RIC attributable to exempt federal interest or
the dollar amount of such dividends must be reported to the
shareholder in writing.
In addition, effective for tax years beginning after
December 31, 1990, interest on state and local bonds exempt from
tax under section 103 of the Internal Revenue Code, other than
interest on obligations of Delaware and its political
subdivisions and authorities, will be subject to tax in Delaware,
whether earned directly by an individual or through a RIC.
Although this new provision has a prospective effective date, it
may be merely a clarification of existing law as it is consistent
with the State's prior administrative position, as evidenced by
its response to the Institute's 1989 state tax survey. (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.) Prior statutory
provisions had not dealt specifically with the taxation of
exempt-interest dividends of a RIC, whether derived from Delaware
obligations or from the obligations of other states.
We will keep you informed of developments.
David J. Mangefrida, Jr.
Assistant General Counsel
Attachment