REQUEST LETTER
02-007
NAME
ADDRESS
Dear NAME
Per our conversation, I am writing to request a clarification on HB 1006.
Would you please help with how the State will treat “Mutual Funds” that hold “Muni bonds”?
I am curious how you will administer and audit a Fund’s investments. Do you expect that the fund companies will be reporting percentages of Utah bonds owned before and after the 1/1/03 date or will the Fund type securities lose their tax advantage since most of their bonds will be from other states?
Thanks for your help.
NAME
RESPONSE LETTER
April 25, 2002
NAME
Dear NAME,
You have requested an advisory opinion 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 question as follows.
You specifically ask how the interest earned by a mutual fund comprised of municipal bonds will be taxed under HB 1006. 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. 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.
If you have any other question, please contact us.
For the Commission,
Marc B. Johnson
Commissioner
MBJ/KC
02-007
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 02-007 (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
Commissioner
MBJ/KC