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    Tobacco Money Tax Exempt

    IRS rules states will not have to declare MSA payments as additional revenue.

    WASHINGTON --

    The Internal Revenue Service has ruled that funds paid by the tobacco industry to settle lawsuits filed by states are tax-exempt.

    The IRS refunded a total of $60.3 million to the states involved in the 1998 Master Settlement Agreement (MSA). The refund, which includes interest, is for federal taxes paid in 1999 and 2000. The funds were held in escrow pending the IRS decision.

    States will receive the payments from big tobacco companies annually for the next 25 years. Pennsylvania, for example, is projected to collect about $11 billion over the next 25 years from major tobacco companies, who reached out-of-court settlements with virtually every state. The settlements called for tobacco concerns to pay states a designated figure each year in exchange for the states agreeing not to sue to recoup dollars spent on residents with smoking-related illnesses.

    The amount paid out annually by the tobacco companies is based on a formula that will allow those payments to decrease should a state's number of smokers decline.

    Pennsylvania has decided to spend its share of the tobacco funds on health-related issues. Other states, including Iowa and North Dakota have said they would use the tobacco payments to fund a variety of projects ranging from schools to morgues.

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