Current through Register Vol. 63, No. 9, September 1, 2024
(1) The character
of interest and dividends received by an intermediary entity which owns the
underlying obligations shall flow through to a taxpayer receiving a
distribution from the intermediary entity.
(2) Oregon law allows the character of the
interest or dividends to flow through to the taxpayer as if the taxpayer had
received the interest or dividends directly from the obligor. If federal or
Oregon law allows the character of such interest or dividends to flow through
to the taxpayer, then such laws shall determine whether the distributions are
taxable or nontaxable for Oregon purposes.
(3) No modifications will be allowed on the
taxpayer's Oregon return if the intermediary entity is the guarantor of the
taxpayer's principle and interest. See Example 6.
Example
1
: Bill and Fay invested in a mutual fund in 1987
that invests in federal Series E obligations. The mutual fund holds title to
the obligations. The mutual fund qualifies under ORS
316.683 to pay state
exempt-interest dividends from the fund. Because the state exempt-interest
dividends are treated as an item of interest described in ORS
316.680(1)(a),
Bill and Fay may subtract those dividends from federal taxable
income.
Example 2
:
Frank is a shareholder in an S corporation (qualifying as such for Oregon
purposes after 12/31/82) which purchased some federal Series E obligations.
Frank's share of income from the S corporation includes interest income from
the Series E obligations. Federal law, IRC §1366, allows the character of
the interest to flow through to Frank. Therefore, ORS
316.680(1)(a)
allows Frank to subtract his share of the Series E interest from federal
taxable income.
Example 3
: Mary is a shareholder in a mutual fund. The mutual fund invests
solely in obligations of this state. The mutual fund qualifies under IRC
§852(b)(5) to pay exempt-interest dividends. Mary received a distribution
of exempt-interest dividends from the fund. The exempt-interest dividends
retain the character given to them by the underlying obligations owned by the
fund. Therefore, since federal and Oregon law do not tax such income, Mary is
not required to make a modification to her federal taxable income for such
distributions.
Example 4
: Susan is a shareholder in a mutual fund. The mutual fund invests
solely in obligations of states (other than Oregon). The mutual fund qualifies
under Internal Revenue Code Section 852(b)(5) to pay exempt-interest dividends.
Susan received a distribution of the federally exempt-interest dividends from
the fund. Since exempt-interest dividends retain the character given to them by
the underlying obligations owned by the fund, and ORS
316.680(2)
requires interest from other states' obligations to be added to federal taxable
income, Susan shall add the amount of the distribution from the fund to her
federal taxable income.
Example 5
: Barbara is a shareholder in a mutual fund. The mutual fund
invests solely in obligations of territories and possessions of the United
States. The mutual fund qualifies under IRC §852(b)(5) to pay
exempt-interest dividends. Barbara received a distribution of the
exempt-interest dividends from the fund. The exempt-interest dividends retain
the character given to them by the underlying obligations owned by the fund.
The dividends retain the exempt character and are not taxed by federal. Federal
law also prohibits states or other authorities from taxing interest on such
obligations. Barbara is not required to make any modification to her federal
taxable income for the distribution.
Example
6
: Leo invests $500 in an interest bearing
obligation issued by an investment firm. The obligation issued by the firm is a
certificate entitling Leo to $1,000 payable by the firm in 1995. Although the
firm makes investments in various securities, including U.S. government
obligations, none of the interest received by Leo will qualify for subtraction
on the Oregon return. The investment firm is liable for making repayment of the
principal and interest, not the U.S. government.
Stat. Auth.: ORS
305.100
Stats. Implemented: ORS
316.680