Tax Type
Individual Income Tax
Description
Municipal interest of other states
Topic
Estates and Trusts
Date Issued
01-14-1988
January 14, 1988
Re: Ruling Request: Individual Income Tax
Municipal Interest of Other States
Dear*****************
This is in reply to your letter of December 15, 1987 in which you request a ruling regarding the Virginia taxation of interest earned on municipal bonds of other states received by the beneficiaries of certain trusts.
FACTS
Under §645 of the Internal Revenue Code all trusts, other than trusts exempt from tax and charitable trusts, are required to conform their taxable year to a calendar year effective for taxable years beginning after December 31, 1986. However, §1403(c)(2) of the federal Tax Reform Act of 1986 (P. L. 99-514) provides the following transitional rule.
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- With respect to any trust beneficiary who is required to include in gross income amounts under sections 652(a) or 662(a) of the Internal Revenue Code of 1986 in the 1st taxable year of the beneficiary beginning after December 31, 1986, by reason of any short taxable year of the trust required by amendments made by this section, such income shall be ratably included in the income of the trust beneficiary over the 4-taxable year period beginning with such taxable year.
You are concerned with the proper Virginia income tax treatment of interest earned on municipal bonds issued by other states, which may be included in the income of the beneficiaries of a trust for the short taxable year. Such interest is exempt from federal taxation, yet taxable for Virginia income tax purposes. Specifically, you ask whether this interest income should be reported ratably over four years on the Virginia return of the beneficiary or whether all of it should be reported on the Virginia return of the beneficiary for the short taxable year of the trust.
RULING
Section 1403(c)(2) of the federal Tax Reform Act of 1986, requiring the ratable proration of income for the short taxable year over four years, does not distinguish between taxable and nontaxable income. In fact, §1525 of the same Act requires that every taxpayer report the amount of exempt interest paid or accrued during that taxable year. Accordingly, to the extent that municipal interest exempt from federal taxation but not from Virginia taxation is reported ratably over four years for federal income tax purposes, it shall be reported and taxed for Virginia purposes in a similar manner.
If you have any further questions, please do not hesitate to contact me or my staff.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner