Tax Type
Individual Income Tax
Description
Tax-exempt investment fund
Topic
Subtractions and Exclusions
Taxable Income
Date Issued
11-25-1987
November 25, 1987
Re: Ruling Request
Individual Income Tax
Dear **********************
This is in reply to your letter of October 5, 1987 to *************** Director, Tax Policy Division, on behalf of *********** (Fund). In that letter you requested a ruling concerning the income taxation of distributions from a regulated investment company that invests primarily in obligations, the interest on which is exempt from Virginia income tax.
FACTS
The Fund is a business trust registered with the Securities and Exchange Commission as a diversified, open-ended management company under the Investment Company Act of 1940. The Fund will consist of a number of independently managed portfolios, which will invest in obligations which will provide its shareholders the maximum amount of income exempt from federal income tax and, except for one portfolio, the income tax of the state where the shareholder resides. The portfolio for each state will invest primarily in obligations the interest on which is exempt from federal income tax as well as the income tax of that state.
The Virginia portfolio intends to qualify each year as a regulated investment company under §§851-855 of the Internal Revenue Code. The Virginia portfolio will have a policy of being fully invested in obligations exempt from Virginia income tax. However, because of market conditions, the Virginia portfolio may invest in obligations, the interest on which is taxable by Virginia, in order to maximize the return for its shareholders.
The Virginia portfolio, on a daily basis, will compute and credit to each shareholder his pro rata share of that portfolio's interest income. The portfolio will then make monthly distributions of interest received. After the end of each calendar year, the portfolio will provide each shareholder a report stating the percentage of each monthly distribution that represents interest earned on obligations exempt from Virginia income tax. In so doing, each shareholder will be given twelve percentages, one for each month.
You request that the department allow any shareholder invested in the Virginia portfolio who is not a shareholder for the entire month, to compute his share of exempt interest by using the exempt percentage computed by the Virginia portfolio for the entire month.
RULING
A regulated investment company is treated as a pass-through entity for both federal and Virginia income tax purposes. Virginia Regulation 630-2-322 (C)(3) provides that tax-exempt interest distributed by a regulated investment company will be treated as tax-exempt interest to its shareholders. This regulation further provides:
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- 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.
- 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 department recognizes the administrative problems of attempting to reconcile an exempt percentage unique to certain of the shareholders who held shares for less than the full month. Therefore, consistent with our stated position, the department agrees to allow any shareholder invested in the Virginia portfolio, who is not a shareholder for the entire month, to compute his share of exempt interest by using the exempt percentage computed by the Virginia portfolio for the entire month.
In order for the shareholder to substantiate the subtraction claimed from federal adjusted gross income, it will be necessary for him to attach a copy of the statement provided by the Virginia portfolio to his Virginia income tax return at the time that it is filed.
I trust that this response answers your question sufficiently and if you have any further questions, please do not hesitate to call me.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner