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October 18, 1990
TO: MONEY MARKET MEMBERS - ONE PER COMPLEX NO. 15-90
TAX MEMBERS NO. 45-90
RE: NORTH CAROLINA ALLOWS FULL PASS-THROUGH OF FEDERAL
OBLIGATION INTEREST
__________________________________________________________
The Institute is pleased to inform you that North Carolina
has reinterpreted its income tax statutes to allow interest on
federal obligations to retain its tax-exempt character when
passed-through as a dividend to mutual fund shareholders.
Prior to 1989, mutual fund dividends attributable to fed-
eral obligation interest were not taxed by North Carolina. (See
Institute Memorandum to Members - One Per Complex No. 61-88, Tax
Members No. 61-88, Unit Investment Trust Members No. 70-88,
Closed-End Fund Members No. 58-88, and Accounting/Treasurers Com-
mittee No. 45-88, dated December 12, 1988.) Last year, North
Carolina altered the method by which mutual fund dividends were
taxed, eliminating the subtraction from federal taxable income of
ordinary income dividends from mutual funds that were derived
from interest on federal obligations and replacing it with a
dividend tax credit of up to $300. (See Institute Memorandum to
Money Market Fund Chief Executive Officers No. 12-89 and Tax Mem-
bers No. 51-89, dated December 26, 1989.)
The attached information release states that federal law
prohibits the taxation of dividends which represent direct
obligations of the federal government. Prior administrative
material inconsistent with this revised position is rescinded,
although no effective date is given. In addition, the release
requires funds to provide shareholders with the amount of divi-
dends eligible for the exclusion, not merely a percentage based
on the assets of the fund.
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The release makes no change in the treatment of mutual fund
dividends attributable to interest income from obligations of
states other than North Carolina; these dividends remain taxable.
We will keep you informed of further developments.
David J. Mangefrida, Jr.
Assistant General Counsel
Enclosure