Can a Utah taxpayer deduct fiduciary fees and investment expenses tied to out-of-state municipal bond interest that HB 1006 made newly taxable in Utah?

Plain-English summary

A corporate trustee sends tax reports to its fiduciary-account clients (trusts, investment management agency accounts, custody accounts) that break out the trustee's fees and investment expenses between those deductible on federal Schedule A and those tied to tax-exempt municipal income (and so not federally deductible). Before 2003, this didn't matter for Utah purposes, because Utah didn't tax any municipal bond income either.

That changed with House Bill 1006 (2001 First Special Session), which amended Utah Code Ann. § 59-10-114(1)(g) and (6) to make interest on municipal bonds issued by non-Utah governmental entities taxable in Utah if acquired after January 1, 2003 — even though that interest stays exempt from federal tax. (An exception in § 59-10-114(6) still shields the interest if the issuing state doesn't tax Utah's own municipal bonds either.) The trustee asked whether its clients could now deduct the fees and expenses tied to earning that newly-taxable interest, and if so, where on the Utah return to report it.

The Commission said no deduction is available. HB 1006 taxes the "interest" itself, with no statutory language reducing it by associated expenses, and the Commission wouldn't read "interest" to silently mean "interest net of expenses." It pointed to a structural contrast: § 59-10-114(2)(a) does expressly allow subtracting expenses tied to certain other bonds (those exempt from Utah tax but taxable federally) — meaning the Legislature knew how to pair income and expenses when it wanted to, and chose not to do so for HB 1006's newly-taxable municipal interest. The Commission also considered the general "equitable adjustment" provision in § 59-10-115(4), which lets the Commission write a rule addressing double tax benefits or detriments, but concluded no such rule existed and it was unlikely to write one given the Legislature's apparent intent.

What this means for you

Trust and estate professionals / corporate trustees

If you administer fiduciary accounts holding out-of-state municipal bonds acquired after January 1, 2003, report the full interest amount as Utah taxable income (subject to the § 59-10-114(6) reciprocal exception) with no offsetting deduction for fiduciary fees or investment expenses allocable to that income — regardless of whether the beneficiary itemizes on the federal return.

Individual taxpayers with municipal bond income

Owning out-of-state municipal bonds bought after January 1, 2003 can create Utah taxable income that has no federal counterpart, and any advisory or management fees tied to that income don't reduce it on your Utah return. Check whether the bond issuer's home state taxes Utah municipal bonds — if it doesn't, § 59-10-114(6) may exempt your interest entirely.

Accountants and tax software preparers

There's no special line or code for these expenses; the Commission confirmed there's no statutory basis to report the taxable municipal interest net of expenses, and no equitable-adjustment rule fills the gap. Report the gross taxable interest under § 59-10-114(1)(g)/(6) with no expense offset.

Common questions

Q: Does this apply to all municipal bond interest?
A: Only to interest from non-Utah municipal bonds acquired after January 1, 2003, that HB 1006 made taxable in Utah under § 59-10-114(1)(g)/(6) — and only if the reciprocal exception in (6) doesn't apply (i.e., the issuing state does tax Utah's own municipal bonds).

Q: Is there any way to get relief for these expenses through an "equitable adjustment"?
A: Not as of this ruling. Section 59-10-115(4) lets the Commission prescribe a rule addressing double tax benefits or detriments, but the Commission said no such rule existed and it saw the Legislature's intent as clearly against allowing the deduction.

Q: Can other trustees or taxpayers rely on this ruling?
A: No. It binds the Commission only for the requesting trustee and the facts described. If your situation differs, seek your own advice or ruling.

Citations and references

Statutes:

• Utah Code Ann. § 59-10-114(1)(g), (6) (HB 1006 — taxable out-of-state municipal bond interest)
• Utah Code Ann. § 59-10-114(2)(a) (contrast: expenses tied to state-exempt/federally-taxable bonds ARE deductible)
• Utah Code Ann. § 59-10-115(4) (equitable adjustment for double tax benefit/detriment — no rule prescribed)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original page: https://files.tax.utah.gov/tax/commission/ruling/03-012.html

Original ruling text

REQUEST
LETTER

03-012

NAME

ADDRESS

Re: House Bill 1006

Taxable Municipal Income

Expenses related to taxable municipal income

As you know, House Bill 1006 (HB 1006), enacted by the 2001 First Special Session of the Utah Legislature, provides that interest from municipal bonds issued by non-federal governmental entities outside Utah will be subject to Utah�s income tax if acquired after January 1, 2003. Section 59-10-114(6) provides that interest earned on non-Utah municipal bonds will not be subject to Utah tax if the state (or political subdivision) where the entity issuing the bonds is located does not impose a tax based on income on bonds issued by Utah.

As a corporate trustee, we send our client�s tax reports regarding income received by many fiduciary accounts (trust accounts, investment management agency accounts, custody accounts, etc.) owned by Utah residents. We anticipate that many of these clients will have some municipal income that is taxable on their Utah returns.

These clients also receive a report of our fiduciary fees and certain other investment expenses. The fees and expenses are broken out between those that are deductible on federal Schedule A, Form 1040 that are related to income that is taxable on the federal return and those that are not deductible on the federal return because they are related to tax-exempt (municipal) income. In the past, since Utah did not tax any municipal income, what was not deductible on the federal return was also not deductible on the Utah return. As of January 1, 2003, that is no longer the case.

By this letter, we are requesting clarification with regard to the portion of the fiduciary fees and investment expenses that are allocable to municipal income that is taxable on the Utah return. 1) Will a deduction for these expenses be allowed on the Utah return regardless of whether or not the taxpayer itemizes his/her deductions on the federal return? 2) Will there be a special box in the deduction areas of the return to claim these expenses? If not, assuming the 2003 form is similar to the 2002 form, would line 13 of Form TC40, code 79 (Equitable Adjustments), be the appropriate place to enter these expenses? 3) Alternatively, will the taxable municipal income be reportable net of these expenses?

We look forward to your response. IT will be used to help guide those who are programming our tax software. In turn, we hope our tax reports will assist our clients in preparing accurate income tax returns. We would appreciate your prompt attention.

RESPONSE
LETTER

July 25, 2003

NAME

ADDRESS

RE: Private Letter Ruling Request � Expenses Associated with Taxable Municipal Bonds

Dear NAME,

We have received your request for information concerning fiduciary fees and other investment expenses (�expenses�) associated with municipal bonds that are exempt from federal taxation. Because such bonds are exempt from federal taxation, any expenses associated with them do not qualify as deductions for federal tax purposes. With the enactment of House Bill 1006 by the 2001 First Special Session of the Utah Legislature (�HB 1006�), certain bonds and other evidences of indebtedness (�bonds�) are now subject to taxation in Utah, even though they remain nontaxable for federal purposes. For such bonds, you ask whether Utah will allow a taxpayer to deduct from Utah taxable income the expenses associated with them.

HB 1006 amended Utah Code Ann. �59-10-114(1)(g),(6) to provide that the �interest� from certain bonds exempt from federal taxation is now subject to Utah taxation. However, this provision does not specifically provide for any deduction of expenses associated with these taxable bonds. Nor do we infer from the language of the statute that the Legislature intended the term �interest� to mean �interest net of expenses.� In addition, we note that Section 59-10-114(2), which lists subtractions from Utah taxable income, specifically refers in subsection (a) to expenses associated with state-exempt federal bonds that are subject to federal taxation, but makes no reference to expenses associated with federal-exempt bonds subject to Utah taxation. For these reasons, we conclude that the Legislature did not provide for any deduction from Utah taxable income for the expenses at issue.

You also inquire whether an equitable adjustment, as permitted by Utah Code Ann. �59-10-115, is allowed under these circumstances. Although none of the specifically identified equitable adjustments apply to these circumstances, subsection 115(4) directs the Commission by rule to prescribe an adjustment in circumstances where, solely because of Utah�s individual income tax laws, �the taxpayer would otherwise receive or have received a double tax benefit or suffer or have suffered a double tax detriment.� However, as no rule has yet been prescribed to address this impact, no equitable adjustment is available. Nor is it likely the Commission would enact such a rule because the Legislature�s intent not to allow for such deductions appears clear. The Legislature has explicitly tied income and expenses generating that income in one subsection of the same statute but chose not to do so here. See U.C.A. 59-10-114(2)(a).

To summarize, there is no statutory relief that allows for a deduction for the expenses associated with bonds that are taxable in Utah, yet exempt from federal taxation. Please contact us if you have any other questions.

For the Commission,

Marc B. Johnson

Commissioner

MBJ/KC

03-012