REQUEST LETTER

 

 

03-012

 

NAME

ADDRESS

 

Re: House Bill 1006

Taxable Municipal Income

Expenses related to taxable municipal income

 

As you know, House Bill 1006 (HB 1006), enacted by the 2001 First Special Session of the Utah Legislature, provides that interest from municipal bonds issued by non-federal governmental entities outside Utah will be subject to Utah’s income tax if acquired after January 1, 2003. Section 59-10-114(6) provides that interest earned on non-Utah municipal bonds will not be subject to Utah tax if the state (or political subdivision) where the entity issuing the bonds is located does not impose a tax based on income on bonds issued by Utah.

 

As a corporate trustee, we send our client’s tax reports regarding income received by many fiduciary accounts (trust accounts, investment management agency accounts, custody accounts, etc.) owned by Utah residents. We anticipate that many of these clients will have some municipal income that is taxable on their Utah returns.

 

These clients also receive a report of our fiduciary fees and certain other investment expenses. The fees and expenses are broken out between those that are deductible on federal Schedule A, Form 1040 that are related to income that is taxable on the federal return and those that are not deductible on the federal return because they are related to tax-exempt (municipal) income. In the past, since Utah did not tax any municipal income, what was not deductible on the federal return was also not deductible on the Utah return. As of January 1, 2003, that is no longer the case.

 

By this letter, we are requesting clarification with regard to the portion of the fiduciary fees and investment expenses that are allocable to municipal income that is taxable on the Utah return. 1) Will a deduction for these expenses be allowed on the Utah return regardless of whether or not the taxpayer itemizes his/her deductions on the federal return? 2) Will there be a special box in the deduction areas of the return to claim these expenses? If not, assuming the 2003 form is similar to the 2002 form, would line 13 of Form TC40, code 79 (Equitable Adjustments), be the appropriate place to enter these expenses? 3) Alternatively, will the taxable municipal income be reportable net of these expenses?

 

We look forward to your response. IT will be used to help guide those who are programming our tax software. In turn, we hope our tax reports will assist our clients in preparing accurate income tax returns. We would appreciate your prompt attention.

 

 

RESPONSE LETTER

 

July 25, 2003

 

NAME

ADDRESS

 

RE: Private Letter Ruling Request – Expenses Associated with Taxable Municipal Bonds

 

Dear NAME,

 

We have received your request for information concerning fiduciary fees and other investment expenses (“expenses”) associated with municipal bonds that are exempt from federal taxation. Because such bonds are exempt from federal taxation, any expenses associated with them do not qualify as deductions for federal tax purposes. With the enactment of House Bill 1006 by the 2001 First Special Session of the Utah Legislature (“HB 1006”), certain bonds and other evidences of indebtedness (“bonds”) are now subject to taxation in Utah, even though they remain nontaxable for federal purposes. For such bonds, you ask whether Utah will allow a taxpayer to deduct from Utah taxable income the expenses associated with them.

 

HB 1006 amended Utah Code Ann. §59-10-114(1)(g),(6) to provide that the “interest” from certain bonds exempt from federal taxation is now subject to Utah taxation. However, this provision does not specifically provide for any deduction of expenses associated with these taxable bonds. Nor do we infer from the language of the statute that the Legislature intended the term “interest” to mean “interest net of expenses.” In addition, we note that Section 59-10-114(2), which lists subtractions from Utah taxable income, specifically refers in subsection (a) to expenses associated with state-exempt federal bonds that are subject to federal taxation, but makes no reference to expenses associated with federal-exempt bonds subject to Utah taxation. For these reasons, we conclude that the Legislature did not provide for any deduction from Utah taxable income for the expenses at issue.

 

You also inquire whether an equitable adjustment, as permitted by Utah Code Ann. §59-10-115, is allowed under these circumstances. Although none of the specifically identified equitable adjustments apply to these circumstances, subsection 115(4) directs the Commission by rule to prescribe an adjustment in circumstances where, solely because of Utah’s individual income tax laws, “the taxpayer would otherwise receive or have received a double tax benefit or suffer or have suffered a double tax detriment.” However, as no rule has yet been prescribed to address this impact, no equitable adjustment is available. Nor is it likely the Commission would enact such a rule because the Legislature’s intent not to allow for such deductions appears clear. The Legislature has explicitly tied income and expenses generating that income in one subsection of the same statute but chose not to do so here. See U.C.A. 59-10-114(2)(a).

 

To summarize, there is no statutory relief that allows for a deduction for the expenses associated with bonds that are taxable in Utah, yet exempt from federal taxation. Please contact us if you have any other questions.

For the Commission,

 

 

 

Marc B. Johnson

Commissioner

 

MBJ/KC

03-012