Were mutual-fund distributions directly attributable to income from U.S. Government obligations subject to Rhode Island personal income tax?

Plain-English summary

Rhode Island did not tax interest or dividend income distributed by the Fund to the extent the distribution was directly attributable to qualifying U.S. Government obligations. The ruling covered obligations or securities of the United States and its authorities, commissions, or instrumentalities that federal law exempted from state income tax.

The Fund was an open-end mutual fund organized as a Massachusetts business trust. It represented that it would invest only in securities issued or guaranteed by the U.S. Government, its agencies, or instrumentalities and would continue to qualify as a regulated investment company under Internal Revenue Code § 851.

At the time, R.I. Gen. Laws § 44-30-2 imposed Rhode Island personal income tax using federal tax liability adjusted by state modifications. Sections 44-30-12 and 44-30-32 reduced federal adjusted gross income for qualifying interest on U.S. obligations and for qualifying interest or dividend income from U.S. authorities, commissions, or instrumentalities.

The Division therefore approved the requested exclusion for distributions directly traceable to that qualifying federal-obligation income. The order did not state that unrelated fund earnings would receive the same treatment.

What this means for you

Mutual-fund investors

The exclusion depended on what generated the distribution. Keep the fund's tax reporting or other documentation showing the portion directly attributable to qualifying U.S. Government obligations.

Fund administrators

Accurate attribution matters. The ruling relied on the Fund's representation that it invested only in U.S. Government securities and on complete, accurate supporting documentation.

Accountants and tax professionals

Apply the exclusion only to the qualifying portion and verify current Rhode Island modification rules. The order addressed both resident and nonresident income-modification provisions in effect in 1996.

Common questions

Was every mutual-fund dividend exempt? No. The holding was limited to income directly attributable to the qualifying U.S. Government obligations described in the order.

What investments did the Fund hold? Securities issued or guaranteed by the U.S. Government, its agencies, or instrumentalities.

Did the ruling cover both interest and dividend distributions? Yes, when directly attributable to the qualifying federal-obligation income described by the ruling.

Who could rely on the order? The Fund and its existing and future shareholders, subject to the representations, documentation, law, and facts stated in the ruling.

What could end the ruling's validity? Express revocation, a federal or Rhode Island statutory change requiring a different result, or a change in the underlying circumstances.

Citations and references

• R.I. Gen. Laws § 44-30-2 — Rhode Island personal income tax framework quoted in the order.
• R.I. Gen. Laws § 44-30-12 — resident income modifications.
• R.I. Gen. Laws § 44-30-32 — nonresident income modifications.
• Internal Revenue Code § 851 — regulated investment company qualification represented by the Fund.

Source

• Landing page: Rhode Island Declaratory Rulings
• Declaratory order: Declaratory Order 1996-01

Original ruling text

Ruling Request No. 96-01

Declaratory Rulings

Ruling Request No. 96-01

Re: Request for Ruling Regarding the Investing In a Certain Fund Under the Personal Income Tax Law

Request for Ruling

You request a ruling concerning the Rhode Island income tax consequences of investing in a certain fund.

Facts

The Fund is an open-end management investment company (a mutual fund) organized in 1988 as a Massachusetts business trust. The Fund is registered with the Securities and Exchange Commission under the Securities Act of 1993 and the Investment Company Act of 1940 and will always qualify as a Regulated Investment Company under Section 851 of the Internal Revenue Code of 1986, as amended (the "Code").

The Fund will invest only in U.S. Government securities. These instruments are either issued or guaranteed by the U.S. Government, its agencies, or instrumentalities ("United States Government Obligations").

Ruling Requested

That the interest or dividend income distributed to Rhode Island taxpayers that is directly attributable to interest or dividend income earned by the Fund from obligations, or securities of any authority, commission or instrumentality of the United States will not be subject to Rhode Island income tax.

Discussion

R.I.G.L. Section 44-30-2 imposes a personal income tax on the Rhode Island income of residents and nonresidents at a percentage of federal income tax liability. Federal income tax liability is the amount of federal income tax (excluding self-employment tax, social security tax or any supplemental Medicare premium) or supplemental premium surcharge imposed by the Medicare Catastrophic Coverage Act of 1988 (P.L. 100-360) which the Rhode Island taxpayer would be liable for if taxpayer had paid federal income tax based on federal taxable income as adjusted by the modifications provided in Parts II and III of Chapter 30, Title 44, R.I.G.L.

In determining the Rhode Island income of a resident or nonresident, R.I.G.L. Sections 44-30-12 and 44-30-32 provide for certain modifications to federal adjusted gross income is decreased by the following amounts:

Any interest income on obligations of the United States and its possessions to the extent includable in gross income for federal income tax purposes, and any interest or dividend income on obligations, or securities of any authority, commission, or instrumentality of the United States to the extent includable in gross income for federal income tax purposes but exempt from state income taxes under the laws of the United States.

Accordingly, income distributed to Rhode Island taxpayers that is directly attributable to income earned by the Fund from the United States Government Obligations is not subject to Rhode Island income tax.

Ruling

That the interest or dividend income distributed to Rhode Island taxpayers that is directly attributable to interest or dividend income earned by the Fund from obligations, or securities of any authority, commission, or instrumentality of the United States will not be subject to Rhode Island income tax.

This ruling is based upon the representations which have been indicated to be true, correct and complete and upon documentation submitted and represented to be true, accurate and complete.

This ruling may be relied upon by the Fund and its existing and future shareholders. It will be valid until expressly revoked or until the applicable statutory provisions of federal or Rhode Island law are amended in a manner that requires a different result or until the underlying situations described above change.

**R. Gary Clark

Tax Administrator**

January 26, 1996