PURPOSE: This rule explains when a taxpayer may deduct or must add back income from a regulated investment company on its Missouri return.

Editor’s Note: The secretary of state has determined that the publication of this rule in its entirety would be unduly cumbersome or expensive. The entire text of the material referenced has been filed with the secretary of state. This material may be found at the Office of the Secretary of State or at the headquarters of the agency and is available to any interested person at a cost established by state law.

1. (1) The term regulated investment company, (RIC or mutual fund) as used in this rule, shall mean an organization which meets the qualifications and has made the proper election required by Internal Revenue Code (IRC) section 851.

2. (2) Pass through of Exempt-Interest on United States Obligations. As used in this section, the term United States Obligations means those obligations described in section 143.121.3(a), RSMo, including those obligations described in 12 CSR 10-2.150. An RIC having income from United States Obligations may pass the exempt character of that income through to its shareholders as state income tax exempt-interest dividends. To the extent provided in this section, this exempt-interest is allowable as a modification on the shareholder’s income tax return. The modification allowed will be the amount received by the shareholder as a state income tax exempt-interest dividend, less the amounts described in subsections (2)(A) and (B). A state income tax exempt-interest dividend means any dividend or part of a dividend paid by an RIC, attributable to United States Obligations (other than exempt-interest dividends as defined in Internal Revenue Code (Section 852(b)(5)) as determined by the RIC, and designated by the RIC as a state income tax exempt-interest dividend in a written notice mailed to its shareholders not later than sixty (60) days after the close of its taxable year. The notice also must state the amount of interest paid or expense incurred by an RIC in the production of the state income tax exempt-interest dividends. The taxpayer’s state income tax exempt-interest dividends shall be reduced by the amount of—

   1. (A) The federal corporate dividend received deduction attributable to the state tax exempt-interest dividends; and
   2. (B) Interest paid or expense incurred to produce the state tax exempt-interest dividends, to the extent that the interest paid or expense incurred exceeds five hundred dollars ($500) pursuant to section 143.121.3(a), RSMo.
3. (3) A copy of the year-end statement received from the RIC identifying all United States Obligations by issuer or a summary document indicating the percentage of dividends attributable to interest on United States Obligations must be attached to the Missouri income tax return when filed. The percentage referred to in the preceding sentence shall be identical for every person who was a shareholder at any time during a calendar year, irrespective of whether that shareholder acquired or disposed of his/her interest during that year.

4. (4) Amounts excluded from federal taxable income on the taxpayer’s federal return as exempt-interest dividends, as defined in IRC section 852(b)(5), must be included in Missouri taxable income pursuant to section 143.121.2(b), RSMo, to the extent that the interest from which they are derived would not be exempt from Missouri income tax if held directly by a resident.

   1. (A) Example: An RIC declares and pays a federal exempt-interest dividend pursuant to IRC section 852(b)(5) of 100x dollars to all of its shareholders. The dividend is therefore exempt from federal income taxation. 20x 12 CSR 10-2

dollars of the federal exempt-interest paid is attributable to the net interest earned by the RIC on obligations issued by Missouri and its political subdivisions. 10x dollars of the federal exempt-interest dividend is attributable to the net interest earned on obligations of the territory of Puerto Rico, the interest on which, pursuant to federal law and section 143.121.3(a), RSMo is exempt from Missouri income taxation. The remaining 70x dollars of the federal exempt-interest dividend is attributable to the net interest earned on obligations from other states, the interest on which is not excludable from Missouri taxable income. An RIC may designate 30x dollars of the federal exempt-interest dividend as a dividend which need not be included in Missouri taxable income. Each shareholder of the RIC may exclude thirty percent (30%) of his/her federal exempt-interest dividend (20x dollars plus 10x dollars divided by 100x dollars) from Missouri taxable income. The remaining seventy percent (70%) of the federal exempt-interest dividend is includable in Missouri taxable income by the shareholders of the RIC pursuant to section 143.121.2(b), RSMo.

AUTHORITY: section 143.961, RSMo 1994.* Original rule filed Jan. 7, 1986, effective May 11, 1986. Emergency amendment filed Dec. 2, 1992, effective Jan. 1, 1993, expired April 30, 1993. Emergency amendment filed April 14, 1993, effective May 1, 1993, expired Aug. 28, 1993. Amended: Filed Dec. 2, 1992, effective July 8, 1993.

*Original authority 1972.