Tax Type
Individual Income Tax
Description
Interest from money market fund
Topic
Taxable Income
Date Issued
09-19-1994
September 19, 1994
Re: Ruling Request: Individual Income Taxes
Dear***************
This will reply to your letter of September 6, 1994, in which you request a ruling concerning the income taxation of distributions from***********(the "Fund"), a regulated investment company that will primarily invest 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 an open-end management company under the Investment Company Act of 1940. The Fund will consist of a number of managed portfolios, which will invest in obligations which will provide shareholders with the maximum amount of income that is 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 portfolio for Virginia (the "Virginia portfolio") will invest primarily, but not necessarily exclusively, in obligations the interest of which is exempt from Virginia income tax. 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 not be subject to federal income tax on its net investment income or on capital gains, if any, realized during the taxable year and distributed to its shareholders. Tax-exempt interest distributed by the Virginia portfolio will be treated as tax-exempt interest to its shareholders.
The Virginia portfolio intends to operate as what is commonly known as a "money market fund." On a daily basis, the Virginia portfolio will compute and credit and distribute to each shareholder his pro rata share of the portfolio's interest income. Shortly after the end of each calendar year, the Fund will provide each shareholder a report stating the percentage of total distributions during each month that represents interest earned on obligations from Virginia income tax. Thus, each shareholder will be given twelve exempt percentages, one for each month. The shareholder then would determine the portion of his distributions exempt from Virginia income tax by (i) multiplying his total distributions during each month by that month's exempt percentage and (ii) adding those products.
You request that the department allow any shareholder invested in the Virginia portfolio to compute his share of each day's dividends that represent 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 (VR) 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.
In the instant case, it would be impracticable to require the Fund to provide shareholders with a per distribution breakdown because this would require the Fund to annually provide 365 percentages. This type of requirement would also require the shareholders and the department to suffer an administrative burden in determining the amount of income from the Fund which is tax-exempt for Virginia purposes.
Accordingly, the department will allow any shareholder of the Virginia portfolio to determine his share of income which is exempt from Virginia income taxes by using the exempt percentage computed by the Virginia portfolio for the month during which the Virginia portfolio distributed that share of income to him. The Virginia portfolio must determine the monthly exempt percentage with sufficient mathematical accuracy to ensure that the total amount of Tax-exempt income computed by the individual shareholders does not exceed the total amount of tax-exempt income actually received and distributed by the Virginia portfolio.
In order for a shareholder to substantiate the portion of distributions from the Virginia portfolio which is exempt from Virginia taxation, 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.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/843OM
Rulings of the Tax Commissioner