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September 21, 1990
TO: MONEY MARKET MEMBERS - ONE PER COMPLEX NO. 12-90
TAX MEMBERS NO. 38-90
RE: MARYLAND HIGH COURT AFFIRMS PASS-THROUGH OF FEDERAL
OBLIGATION INTEREST
__________________________________________________________
The Maryland Court of Appeals (the State's highest court)
has affirmed, in part, a lower court ruling that held the State's
attempt to tax mutual fund dividends derived from federal
obligation interest to be a violation of federal law. The
attached case thus effectively overrules legislation enacted last
year by Maryland while this case was pending which permitted
pass-through treatment if at least 50 percent of the fund's
interest income was derived from federal obligations (see
Institute Memorandum to Tax Members No. 20-89 and Money Market
Fund Chief Executive Officers No. 5-89, dated July 3, 1989).
The Court of Appeals held the State's attempts to tax
dividends of mutual funds derived from interest on federal
obligations to be a violation of the federal law prohibition on
the direct or indirect state taxation of federal obligations.
Thus, all dividends received by a Maryland shareholder of a
mutual fund are exempt from state tax to the extent that the
dividends are derived from interest on federal obligations,
regardless of the percentage of the fund's holdings in federal
obligations.
The Court of Appeals did, however, reverse the lower
court's decision that exempted from tax dividends derived from
repurchase agreements involving federal obligations.
We will keep you informed of further developments.
David J. Mangefrida, Jr.
Assistant General Counsel
Attachment