Tax Type
Individual Income Tax
Description
Dividends
Topic
Computation of Income
Date Issued
03-21-1986
March 21, 1986
Re: Request For Ruling/Individual Income Tax
Dear ******************
This will reply to your letter of February 11, 1986, in which you wish to determine if dividend income from is subject to the Virginia income tax.
Based upon the prospectus enclosed with your letter, ********** is a regulated investment company that invests primarily in securities issued by the U.S. Treasury and other agencies or instrumentalities of the federal government. In addition, the ************* may invest up to twenty percent of its assets in money market instruments (including commercial paper of domestic corporations and certificates of deposit or other obligations of domestic and foreign banks).
Section 58.1-322 of the Code of Virginia provides for the subtraction from federal adjusted gross income, upon which the Virginia income tax is based, of "dividends on obligations of the United States or securities of any authority, commission or instrumentality of the United States to the extent exempt from state income taxes under the laws of the United States." Interpreting this law, Section 630-2-322.C.2. of the Virginia Individual Income Tax Regulations defines an "obligation" as "a debt obligation or security issued by the United States or any authority, commission or instrumentality of the United States...issued in the exercise of the borrowing power of the United States...and... backed by the full faith and credit of the United States." Therefore, unless an obligation is issued in the exercise of the borrowing power of the United States and backed by the full faith and credit of the United States, dividends received from the investment will be taxable. The only exception to this rule is if a particular obligation is specifically exempted from state taxes under federal law.
Because the *********** in this case invests in some government obligations that may not be backed by the full faith and credit of the United States (and which may not be exempt under federal law) and also invests in non-governmental money market instruments, dividends paid by the ********* will generally be considered taxable in full. Regulation 630-2-322.C.3 provides that "when taxable income is commingled with exempt income (by a regulated investment company) 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."
Therefore, based on the foregoing, dividends paid by the *********** will be nontaxable for Virginia purposes only to the extent that the ********* can substantiate the portion of each distribution to each shareholder relating to investments in exempt securities. As noted in Regulation 630-2-32.C.3, "as a practical matter, only pass-through entities (regulated investment companies) which invest exclusively in U.S. or Virginia obligations, or which have extremely stable investment portfolios, will be likely to make such determinations." You may wish to contact the Fund to confirm whether it will be able to substantiate the exempt percentage of each distribution made to stockholders.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner