REQUEST LETTER
02-001
NAME
ADDRESS
Re: Tax Treatment of Tax Exempt Bonds in 2003
Gentlemen:
It is requested that you provide me with an advisory opinion on the treatment of tax exempt bond interest for Utah residents after the passage of new tax legislation during this past summers special session of the Utah Legislature. More specifically my questions relate to the grand fathering of bonds held by Utah residents prior to January 1, 2003 through the various investment products offered by financial institutions.
1. Will tax-exempt mutual funds be fully grand fathered even though they may actively trade their bond holdings? How will reinvested dividends be treated?
2. Will closed end tax exempt bond funds that typically hold fixed bond holdings be fully grandfathered?
3. Will unit investment trusts holding tax-exempt bonds and do not change their bond holdings throughout the life of the trust be fully grand fathered?
4. Is the tax commission requesting the Utah Legislature to address any new legislation in the upcoming session to clarify the grand fathering guidelines?
I realize this request may seem premature but I hope to fully understand how this new tax policy will be applied so that I can realign my investments as necessary this next year to meet the legislatures intent for this new tax law to be revenue neutral and the Tax Commission staffs opinion that the new law would be revenue neutral.
Thank you for your response to these questions.
Sincerely
NAME
RESPONSE LETTER
April 25, 2002
NAME
ADDRESS
RE: Advisory Opinion – Effect of HB 1006 on Taxation of Mutual Fund Income
Dear NAME,
You have presented several questions concerning the implementation of House Bill 1006 (“HB 1006”), which was enacted by the 2001 First Special Session of the Utah Legislature. HB 1006 provides that interest from certain bonds, notes, and other evidences of indebtedness (hereinafter referred to as “bonds”) issued by non-federal governmental entities outside Utah will be subject to Utah’s income tax if acquired after January 1, 2003 (see Utah Code Ann. §59-10-114(1)(g)). However, Section 59-10-114(6) of the bill also contains a reciprocity provision concerning such bonds. This provision provides that interest earned on the bonds will not be subject to taxation in Utah if the state where the entity (as well as its political subdivisions, agencies, and instrumentalities) issuing the bonds is located does not impose a tax based on income on bonds issued by Utah. Given this statutory framework, we address your questions as follows.
Your letter identifies several investment products, all of which specifically concern the interest earned by mutual funds and investment trusts (“mutual funds”) that are comprised of bonds issued by multiple governmental entities. To implement the statute, any interest earned by such a mutual fund will not be subject to Utah taxation if the fund is purchased prior to January 1, 2003, even if the fund changes its holdings after that date. However, a dividend reinvestment that occurs on or after January 1,2003, would be considered a new and separate purchase of the mutual fund subject to the provisions of HB 1006, even though the original mutual fund was purchased prior to January 1, 2003. Accordingly, any interest earned by the portion of the mutual fund related to such a dividend reinvestment would be subject to Utah taxation unless it qualified for the reciprocity exception provided in Section 59-10-114(6) and is evidenced as explained below, or was related to bonds issued by Utah governmental entities.
For a mutual fund comprised of governmental bonds that is purchased on or after January 1, 2003, Utah will assume that any income earned from such a fund is subject to Utah taxation unless the taxpayer shows that the income is nontaxable, either because the bonds comprising the mutual fund are issued by Utah governmental entities or because the bonds are issued by non-Utah governmental entities that qualify under the Section 59-10-114(6) reciprocity exception.
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For mutual funds comprised only of bonds issued by Utah governmental entities, there would be no Utah taxation upon showing that the funds contains only such bonds. For mutual funds that contain bonds issued by non-Utah governmental entities, the income earned by such mutual funds will be taxable in Utah, unless either the bond company or the taxpayer researches the bonds comprising the mutual fund and determines and evidences which are subject to taxation under HB 1006 and which are not.
The Tax Commission has not proposed any legislation to the Legislature that would amend or clarify HB 1006. If you have any other question, please contact us.
For the Commission,
Marc B. Johnson
Commissioner
MBJ/KC
02-001
December 23, 2002
NAME
ADDRESS
Dear NAME,
Earlier this year, you asked the Commission for a private letter ruling pertaining to the implementation of House Bill 1006 (“HB 1006”), which was enacted by the 2001 First Special Session of he Utah Legislature. We replied to your request on April 25, 2002 in Private Letter Ruling 02-001 (copy enclosed). In this ruling, we stated that any interest earned by a mutual fund that is purchased prior to January 1, 2003, would not be subject to Utah taxation, even if the fund changes its holdings after that date.
Recently, this interpretation has been challenged and new information has come to our attention. As a result, the Commission will be reconsidering this policy and will be undertaking a rule-making process, where we will be taking public comment. In particular, we will consider whether instead of using the purchase date of the mutual fund to determine taxability, we would use the purchase date of each bond in a mutual fund to determine whether the interest from that particular bond is subject to taxation under HB 1006.
Accordingly, we are notifying you that our current policy may be revised in the near future. We will welcome your comments concerning any proposed revision and will keep you informed of any developments concerning this issue.
For the Commission,
Marc B. Johnson