Tax Type
Individual Income Tax
Description
Subtractions from FAGI; Interest on federal obligations
Topic
Taxable Income
Date Issued
08-05-1996
August 5, 1996
Re: § 58.1-1821 Application: Individual Income Tax
Dear**************
This will reply to your letters of November 29, 1995, and April 11, 1995, concerning your 1991 through 1993 Virginia individual income tax assessments. I apologize for the delay in responding to your correspondence.
FACTS
You claimed subtractions on your 1991 through 1993 Virginia returns for interest income attributable to Certificates of Accrual on Treasury Securities (CATS) dated July 23, 1984. Through the department's compliance program, the subtractions for interest on these CATS were disallowed and assessments were issued. You have provided additional information to describe these securities and contend that the interest income derived from this financial instrument is exempt from Virginia taxation. You are, therefore, requesting that the assessments be abated
DETERMINATION
Code of Virginia § 58.1-322(C)(1) provides that to the extent included in federal adjusted gross income, there shall be subtracted:
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- 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. (Emphasis added.)
Virginia Regulation (VR) 630-2-322(3)(B) sets forth the department's policy on interest or dividends on obligations of the United States and Virginia by providing that:
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- "Obligation" means a debt obligation or security issued by the United States or any authority, commission or instrumentality of the United States or by the Commonwealth of Virginia or any of its political subdivisions, which obligation or security is issued in the exercise of the borrowing power of the United States or Virginia and is backed by the full faith and credit of the United States or Virginia.
CATS are derivative zero coupon obligations that are created when an issuer purchases government securities backed by the full faith and credit of the United States Government. The securities are placed in an escrow account, and a fidelity bond is maintained by the escrow agent-bank. The issuer then sells to an investor certificates, which represent an interest in the escrowed securities. The investor may proceed directly against the U.S. Treasury in the event of default. As indicated in the Offering Memorandum, "The custody accounts will be special accounts separate from the general assets of the Custodian and the Treasury Securities and the moneys therein will not be subject to any right, charge, security interest, lien or claim of any kind in favor of the Custodian or any person claiming through it." The investor in CATS, under these circumstances, is deemed to be the owner of the underlying government securities. To the extent that interest attributable to this offering of CATS is included in federal adjusted gross income, such interest qualifies for the subtraction pursuant to Code of Virginia § 58.1--322(C)(1).
Based on this information, I find basis to allow a subtraction for interest attributable to CATS claimed on your Virginia returns. Your 1991 through 1993 assessments attributable to the CATS will be abated. If further assistance is needed, please contact*****at*********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/9772N
Rulings of the Tax Commissioner