Oregon Administrative Rules › Chapter 150 - DEPARTMENT OF REVENUE › Division 316 - PERSONAL INCOME TAX GENERAL PROVISIONS › Section 150-316-0507 - Modification of Federal Taxable Income: Interest and Dividends

Current through Register Vol. 63, No. 7, July 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.