NORTH DAKOTA LEGISLATION ON PASS-THROUGH OF INTEREST DERIVED FROM FEDERAL OBLIGATIONS

June 24, 1991 TO: TAX MEMBERS NO. 21-91 MONEY MARKET MEMBERS - ONE PER COMPLEX NO. 17-91 RE: NORTH DAKOTA LEGISLATION ON PASS-THROUGH OF INTEREST DERIVED FROM FEDERAL OBLIGATIONS __________________________________________________________ Attached is a bill recently enacted by the North Dakota Legislature which would exempt from the North Dakota income tax mutual fund dividends derived from interest on North Dakota and federal obligations. Under prior law, the tax-exempt character of federal interest did not pass through a fund. Interest on both North Dakota obligations and the obligations of other states could be passed through, but only if the taxpayer were filing on Form 37-S, the short form. If the filing were on Form 37, the long form, only interest on North Dakota obligations was exempt from tax. See 1990 Surveys of State Income Taxation, Members - One Per Complex No. 51-90, Closed-End Fund Members No. 46-90, Tax Members No. 48-90, Unit Investment Trust Members No. 73-90, and Accounting/Treasurers Members No. 23-90, dated November 21, 1990. As enacted, the bill requires that 100 percent of the fund be in federal or North Dakota obligations in order for any income derived from federal or North Dakota obligations to be exempt. In addition, the Bill would appear to apply only to federal obligations issued by instrumentalities of the United States, not by the United States itself. It is unclear whether any such limitation was intended. As a result of these problems, the Institute has sent the enclosed letter to the North Dakota Tax Commissioner, in which it is suggested that these problems be corrected by regulations or legislation. The bill will become effective July 1, 1991 for tax years beginning after December 31, 1990. We will keep you informed of developments. David J. Mangefrida, Jr. Assistant Counsel - Tax Attachments