Tax Type
Individual Income Tax
Description
Interest and dividends received through a mutual fund
Topic
Taxable Income
Date Issued
05-31-1989
May 31, 1989
Re: Request for Ruling: Individual Income Tax
Dear*********************
This will reply to your letter dated February 27, 1989 in which you seek information regarding the tax status of interest or dividends received from various U.S. obligations and municipal bond funds.
The taxable income of individuals for Virginia income tax purposes is defined in Virginia Code §58.1-322. This section provides in part that:
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- B. To the extent excluded from federal adjusted gross income, there shall be added:
l. Interest, less related expenses to the extent not deducted in determining federal taxable income, on obligations of any state other than Virginia, or of a political subdivision of any such other state unless created by compact or agreement to which Virginia is a party;
2. Interest or dividends, less related expenses to the extent not deducted in determining federal taxable income, on obligations or securities of any authority, commission or instrumentality of the United States, which the laws of the United States exempt from federal income tax but not from state income taxes.
- B. To the extent excluded from federal adjusted gross income, there shall be added:
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- C. To the extent included in federal adjusted gross income, there shall be subtracted:
l. Interest or dividends on obligations of the United States and on obligations 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 including, but not limited to, stocks, bonds, treasury bills, and treasury notes, but not including interest on refunds of federal taxes, interest on equipment purchase contracts, or interest on other normal business transactions.
2. Interest on obligations of this Commonwealth or of any political subdivision or instrumentality of this Commonwealth.
- C. To the extent included in federal adjusted gross income, there shall be subtracted:
These statutory modifications have been interpreted in Virginia Individual Income Tax Regulation 630-2-322, copy enclosed. I have also enclosed a copy of Virginia Tax Bulletin 82-3 which further details the department's policy regarding the exemption for interest and dividends contained in Va. Code §58.1-322 (previously Va. Code §58-151.013) and the tax treatment of distributions made by regulated investment companies (mutual funds).
The department recognizes that interest or dividends on exempt U.S. or Virginia obligations received by a mutual fund and passed through to the shareholders in qualifying distributions will retain their exempt status in the hands of shareholders. However, as provided in VR 630-2-322, "[w]hen 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." (emphasis added)
Thus distributions received from a mutual fund which invests exclusively in exempt U.S. or Virginia obligations are exempt for Virginia income tax purposes. If the mutual fund invests in federal or state obligations which are both taxable and exempt, the entire income is taxable unless the portion of exempt income can be substantiated. It is the department's understanding that the standard practice in the industry is to compute and to credit dividends monthly. Therefore, generally the department requires that an investor provide a breakdown between taxable and exempt dividends earned on a monthly basis, or in any other reasonable manner provided by the mutual fund.
I have included a list indicating the Virginia tax status of interest received from various government securities in which you are interested. This list is not inclusive of all federal obligations and is based upon the department's analysis of federal and state law.
I hope the foregoing information is helpful. If you have any further questions, please contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner