Tax Type
Individual Income Tax
Description
Income from mutual funds that invest in U.S. Government securities
Topic
Taxability of Persons and Transactions
Date Issued
05-10-1988
May 10, 1988
Re: Ruling Request
Individual Income Tax
Exemption for U.S. Government Securities
Dear*************
This is in reply to your letter of February 16, 1988 in which you ask for a ruling regarding the taxability, for Virginia income tax purposes, of income you received from certain mutual funds that invest in U.S. Government securities.
Virginia Code §58.1-322 provides in part:
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- C. To the extent included in federal adjusted gross income, there shall be subtracted:
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- 1. 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.
- 1. 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.
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- C. To the extent included in federal adjusted gross income, there shall be subtracted:
The department recognizes that interest from exempt government obligations received by an investment company and passed through to stockholders retains its exempt status in the hands of the stockholders; however, the Regulation states "[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."
It is our understanding that the general practice in the industry is to compute and to credit dividends monthly, even though the computations may be based upon a daily interest rate and account balances which fluctuate daily. Therefore, the department has determined -that in order to substantiate the subtraction claimed, a taxpayer must furnish the department with a breakdown of the dividends earned on a monthly basis.
While it appears that a portion of the dividends paid by the two mutual funds in question may be exempt from Virginia income tax, you have not presented sufficiently detailed information in order for the department to make a definitive determination of the taxability of the funds.
If you are able to obtain the required documentation, please contact our Technical Services Section for assistance in determining the portion of income exempt from taxation.
If you have any further questions, please do not hesitate to contact me.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner