Document Number
86-153
Tax Type
Corporation Income Tax
Individual Income Tax
Description
Pass-through entities; Capital gains and interest income
Topic
Computation of Income
Taxable Income
Date Issued
07-31-1986
July 31, 1986


Re: Request for ruling; income tax
Pass-through entities


Dear **************


This is in response to your letter of June 23, 1986, in which you requested a ruling on the pass through of interest and capital gain from your client,*************(the "Fund") to its shareholders.

The fund will qualify as a regulated investment company under §§851-855 of the Internal Revenue Code (I.R.C.). Under §852(a) I.R.C. the shareholders of a regulated investment company treat capital gain dividends as capital gain and treat exempt interest dividends as exempt interest.

Because Virginia starts with Federal Adjusted Gross Income (for individuals) or Federal Taxable Income (for corporations), any amount treated as capital gain or exempt interest under federal law will be similarly treated under Virginia law.

Under §§58.1-322C2 and 58.1-402C2 of the Code of Virginia, all interest on obligations of Virginia, its political subdivisions and instrumentalities, is exempt from Virginia Income Tax any such interest is included in Federal Adjusted Gross Income or Federal Taxable Income it may be subtracted.

In addition, some of the acts creating agencies or political subdivisions contain sections which provide that interest and capital gain arising from the sale of the obligations of the agency or political subdivision are exempt from all state and local taxation. other acts creating other agencies refer only to interest or are entirely silent as to the taxation of the agency's obligations.

Regardless of what is contained in the act creating an agency or political subdivision, all interest on Virginia obligations is exempt from Virginia Income Tax under the provisions of §§58.1-322C2 and 58.1-4O2C2 of the Code of Virginia.

Capital gains are included in Federal Adjusted Gross Income or Federal Taxable Income. Virginia Income Tax Law contains no express subtraction for capital gains arising from the sale of a Virginia obligation. Therefore the capital gains arising from the sale of Virginia obligations are subject to Virginia Income Tax unless there is a specific statutory exemption for gain on the sale of a particular obligation.

You state that ". . . at least 80% of the holdings of the Fund will be in obligations of Virginia, its political subdivisions and instrumentalities, , , , n It is not clear what the other 20% of the holdings will be. I call your attention to Virginia Regulation VR 630-2-322C3(b) (copy enclosed) which states:
    • "When taxable income is commingled with exempt income all income is presumed taxable unless the portion of income which is exempt from Virginia income tax can be determined with reasonable certainty and substantiated. The determination must be made for each distribution to each shareholder."
This provision would apply to all types of income received by the Fund and distributed to its shareholders. For example, assume that all of the holdings are Virginia obligations, but only some of them are obligations for which there is a specific statutory exemption for capital gains. All capital gain earned by the Fund and passed-through to the shareholders would be presumed taxable under the regulation quoted above. Because the interest income is segregated from capital gain income, all interest would be exempt from Virginia tax.

Sincerely,



W. H. Forst
Tax Commissioner

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46