excluding gain on muni sales from state income


Dan Lanciani

A year or so ago I asked about the nature of capital gain
distributions from a Fidelity Massachusetts municipal fund
that are exempt from Mass. tax. Each year Fidelity reports
the percentages of the distributions that might be exempt
but doesn't mention why they might be exempt. Obviously I'm
interested in whether any of the munis I hold directly might
enjoy a similar exemption.

I've been keeping an eye on the tax exemption statements
associated with new muni issues in hopes of learning more.
Unfortunately, I don't get to buy all that many bonds at
issue so my sample is small. Today I received a prospectus
for Mass. Water Pollution Abatement Trust Pool Program
Bonds, Series 11 which seems to be relevant. It states in
part, ``In the opinion of Bond Counsel, interest on the Pool
11 Bonds, and any profit made on the sale thereof, are
exempt from Massachusetts personal income taxes and the Pool
11 Bonds are exempt from Massachusetts personal property

This is the first time I've seen such an exemption of profit
from sale in a prospectus. There is nothing obvious in the
longer tax implications section to suggest why this bond
might be special. Anybody know?

A second-order question: does the exemption for ``profit''
include capital gains that would by federal rules be
converted into taxable interest (e.g. more than minimal
market discount)?

Dan Lanciani
[email protected]*com
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