New York Advisory Opinion TSB-A-82(5)I: Are exempt-interest dividends from a mutual fund holding Puerto Rico, Virgin Islands, and Guam bonds subject to New York personal income tax?

Plain-English summary

John J. Driscoll asked whether exempt-interest dividends attributable to obligations of Puerto Rico, the Virgin Islands, and Guam are subject to New York personal income tax under Article 22 of the Tax Law.

The Department's answer followed directly from how New York's tax base is built. Tax Law § 612 makes federal adjusted gross income the starting point for a resident's New York adjusted gross income, subject to certain modifications. Exempt-interest dividends - the type of dividend a regulated investment company (mutual fund) pays that's attributable to its holdings of tax-exempt bonds - are excluded from federal gross income under Internal Revenue Code § 852(b)(5)(B), meaning they never enter federal adjusted gross income at all when the obligations are those of Puerto Rico, the Virgin Islands, or Guam.

Because Article 22 contains no provision requiring these particular exempt-interest dividends to be added back into New York adjusted gross income, they remain excluded for New York purposes too - there's simply no New York addback rule that would pull them into the state tax base. The Department noted this conclusion applies equally to nonresident individuals.

What this means for you

Investors holding mutual funds that pay exempt-interest dividends from Puerto Rico, Virgin Islands, or Guam bonds

These dividends are not taxed by New York, for both residents and nonresidents. Since they're excluded from federal gross income and New York has no addback rule for them, you don't need to report them as New York taxable income.

Investors comparing exempt-interest dividends from different territorial or state bond sources

This opinion is specific to Puerto Rico, Virgin Islands, and Guam obligations - the same federal exclusion under IRC § 852(b)(5)(B) may extend more broadly to other municipal bond interest, but always confirm the specific bond source and whether any New York addback provision applies to it before assuming the same tax-free treatment.

Accountants preparing returns for clients holding territorial-bond mutual funds

Confirm the underlying obligations are genuinely Puerto Rico, Virgin Islands, or Guam bonds (which get this specific federal exclusion), then exclude the exempt-interest dividends from New York taxable income with no further addback - the same treatment applies whether the taxpayer is a resident or nonresident.

Common questions

Q: I received exempt-interest dividends from a fund holding Puerto Rico municipal bonds - do I owe New York tax on them?
A: No. These dividends are excluded from federal gross income under IRC § 852(b)(5)(B), and New York's Tax Law has no provision adding them back into New York taxable income.

Q: Does this treatment differ for New York residents versus nonresidents?
A: No - the Department confirmed the same exclusion applies to both resident and nonresident individuals.

Q: Does this exclusion apply to all municipal bond exempt-interest dividends, or just Puerto Rico, Virgin Islands, and Guam?
A: This specific opinion addresses only Puerto Rico, Virgin Islands, and Guam obligations. Other bond sources may have their own federal exclusion rules and New York treatment, so don't assume identical treatment without checking the specific source.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1982.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a82_5i.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-82 (5) I
Income Tax
September 22, 1982

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. I820511A

On May 11, 1982 a Petition for Advisory Opinion was received from John J. Driscoll, c/o
Lovejoy, Wasson, Lundgren and Ashton, 250 Park Avenue, New York, New York 10177.
The issue raised is whether exempt-interest dividends attributable to obligations of Puerto
Rico, Virgin Islands, and Guam are subject to the Personal Income Tax imposed under Article 22
of the Tax Law.
Section 612 of the Tax Law, contained in Article 22, provides that the New York adjusted
gross income of a resident individual, the starting point in determining his New York taxable
income, means his Federal adjusted gross income, with certain modifications. Exempt-interest
dividends are excluded from Federal gross income, and thus from Federal adjusted gross income,
by virtue of section 852(B)(5)(B) of the Internal Revenue Code. Inasmuch as Article 22 of the Tax
Law contains no provision requiring an addition to Federal adjusted gross income of interest income
attributable to obligations of Puerto Rico, the Virgin Islands and Guam, such income is not
includible in New York taxable income. Similar considerations apply with respect to nonresident
individuals.

DATED: September 21, 1982

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau

ROBERT W. BOUCHARD, ACTING COMMISSIONER
LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (8/82)