May 7, 1992
TO: TAX MEMBERS NO. 28-92
UNIT INVESTMENT TRUST MEMBERS NO. 28-92
MONEY MARKET MEMBERS - ONE PER COMPLEX NO. 4-92
RE: TENNESSEE ENACTS PASS-THROUGH OF FEDERAL OBLIGATION INTEREST
__________________________________________________________
The Institute is pleased to inform you that the Tennessee
legislature has enacted legislation allowing the pass-through of
federal obligation interest effective as of January 1, 1992.
Under the attached legislation, which was passed unanimously by
both the Tennessee House and Senate, a mutual fund or unit
investment trust (UIT) will be able to designate a dividend that
will be exempt from Tennessee income tax. Although the bill will
not become law until signed by the governor, we anticipate that
he will sign the bill.
The bill also will have the effect of restoring the tax-
exempt status of investment company dividends and UIT
distributions derived from interest on Tennessee obligations. As
you may know, Tennessee previously had taxed the interest derived
from federal obligations while exempting that derived from
Tennessee obligations. In February of this year the Tennessee
Commissioner of Revenue declared that as of April 1, 1992, a
deduction would no longer be allowed with respect to dividends or
distributions derived from interest on Tennessee obligations.
(See Institute Memoranda to Unit Investment Trust Committee No.
13-92, Tennessee Members and Members with Tennessee Bond Funds,
dated March 9, 1992; and to Tax Committee No. 8-92 and Money
Market Members - One Per Complex No. 3-92, dated March 11, 1992.)
The Commissioner took this position in response to an opinion of
the Tennessee Attorney General that the disparate treatment of
federal and Tennessee obligations violated the United States
Constitution. The efforts to reverse the Commissioner's action
have resulted in the passage of legislation that exempts both
federal and Tennessee interest from tax.
We will keep you informed of further developments.
David J. Mangefrida Jr.
Assistant Counsel - Tax
Attachment