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Monday, May 19, 2008

Supreme Court Issues Muni Bond Ruling

by: Erin Kello

The Supreme Court overturned a ruling Monday that could have posed a threat to many single state muni-bond funds. Reuters reports that the 7-2 ruling reversed a decision by a Kentucky appeals court that would have made it unconstitutional for a state to give tax breaks in interest from its own bonds while still taxing interest from other states' bonds.

Fund companies with funds that held single state bonds have been holding their collective breath on this decision as it would have forced a reorganization of the funds.

So far, Aquila Investment Management, adviser to a family of seven single-state tax-free municipal bond funds and the Investment Company Institute have issued press releases in reaction to the ruling.


ICI Press Release

Washington, DC, May 19, 2008 - The Investment Company Institute issued the following statement in response to the U.S. Supreme Court's 7-2 decision in Department of Revenue of Kentucky v. Davis, which permits states to exempt from tax the interest received by their residents from in-state municipal bonds while taxing residents on interest received from out-of state muni bonds:

"Tax-free investment returns are vital for millions of investors. We welcome the Court's decision, which preserves income that is free of state as well as federal taxes for investors who held about $156 billion in 450 state municipal bond funds at the end of 2007.

Aquila Investment Management Press Release

New York, NY 5-19-08 – Aquila Investment Management LLC, adviser to a family of seven single-state tax-free municipal bond funds, today applauded the United States Supreme Court’s ruling in Kentucky v. Davis, which upheld the right of states to tax interest on out-of-state municipal bonds while exempting their own bond interest from taxation.

“This ruling, which allows the states to continue to exempt their own bonds from taxation, represents a victory for the single-state municipal bond market and re-emphasizes the fundamental role it plays in financing vital municipal projects, such as roads, schools, and hospitals at both the state and local levels,” stated Diana Herrmann, Aquila’s Chief Executive Officer.

The ruling came as a result of a Kentucky lawsuit filed in 2003, in which the plaintiffs challenged the constitutionality of Kentucky’s practice of taxing other states’ bonds, while exempting its own.

“In addition to re-emphasizing the importance of tax-exempt status for municipal bonds as a means for states to support their infrastructures, it also represents a victory for local shareholders, who can continue to invest in their own backyards and communities,” Herrmann added.

The Aquila Group of Funds has made its mark as a niche player in the mutual-fund industry, with seven single-state municipal bond funds, including one in Arizona, Colorado, Hawaii, Kentucky, Oregon, Rhode Island and Utah. The funds invest in each state through municipal securities issued by various state, county and community agencies to provide shareholders of those states with income exempt from both state and federal taxes. In addition, the Aquila Group of Funds also manages a regional equity fund, a high-yield corporate bond fund and three money market funds.  

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