Information Release

IT 1992-01 - Exempt federal interest income - January 9, 1992

This information release lists exempt federal interest income. Taxpayers (corporate and individual) are entitled to deduct in their computation of "base income"¹ such amounts that would otherwise be taxable but which are exempt from taxation by this state by reason of the constitution, treaties, or statutes of the United States. NOTE: This is not an all-inclusive list. Taxpayers can deduct other interest only if they can establish that such interest is not subject to Ohio income tax.

I.  Interest on Obligations of the United States Federal statute, 31 U.S.C.A. Section 3124(a), exempts from state income taxation "stocks and obligations of the United States Government", as well as "the interest on the obligation(s)".

a. Interest on U.S. Treasury bonds, notes, bills, certificates, and saving bonds (example; series E, F, G, and H Bonds).

b. Interest income from GSA Public Building Trust Participation Certificates: First Series - series A through E, Second Series - series F, Third Series - Series G and Fourth Series - series H and I.

II.  Other interest income exempt from state taxation due to additional federal statutes The following is a list of interest bearing obligations whose interest income is exempt from state taxation as a result of various federal statutes.

a. Banks' notes, debentures and other obligations issued for cooperatives (12 U.S.C.A. section 2134)

b. Commodity credit corporation's bonds, notes, debentures, and other similar obligations (15 Federal Trade Commission)

c. Farm credit system financial assistance corporation's (Financial Assistance Corporation) notes, bonds, debentures, and other similar obligations (12 U.S.C.A. section 2278b-10).

d. Federal Deposit Insurance Corporation's notes, bonds, debentures or other such obligations (12 U.S.C.A. section 1825)

e. Federal Farm Credit Banks' consolidated system-wide notes, bonds, debentures, and other similar obligations (12 U.S.C.A. SECTION 2023)

f. Federal Home Loan Banks' notes, bonds, debentures and other similar obligations or consolidated federal home loan bonds and debentures (12 U.S.C.A. section 1441)

g. Federal intermediate credit banks' notes, bonds, debentures and other similar obligations (12 U.S.C.A. sections 2204 and 2023) (Treated as a subclass of Fed. Farm Credit Bank)

h. Federal Land Banks and Associations' notes, bonds, debentures or other such obligations (12 U.S.C.A. section 2098)

i. Federal Savings and Loan Insurance Corporations' notes, bonds, debentures or other such obligations, (12 U.S.C.A. section 1825)

j. Financing corporation's (FICO) obligations (12 U.S.C.A. section 1441(e)(8))

k. General Insurance Fund's (i) debentures issued under the War Housing Insurance Law (12 U.S.C.A. section 1739(d)) (ii) debentures issued to acquire rental housing projects (12 U.S.C.A. section 1747g(g)) and (iii) debentures issued under the Armed Services Housing Mortgage Insurance (12 U.S.C.A. section 1748b(f))

l. National Credit Union Administration Central Liquidity Facility's notes, bonds, debentures and other similar obligations (12 U.S.C.A. section 1795k(b))

m. Production Credit Association's notes, debentures, and other similar obligations (12 U.S.C.A. section 2077)

n. Resolution Funding corporation's obligations (12 U.S.C.A. section 1441b(f)(7)(A))

o. Student Loan Marketing Association's obligations (20 U.S.C.A. section 1087-2(b)(2))

p. Tennessee Valley Authority's bonds (16 U.S.C.A. secton 831n-4(d))

q. United States Postal Service's obligations (39 U.S.C.A. section 2005(d)(4))

r. Export-Import Banks of the United States' obligations (12 U.S.C.A. section 635(d))

s. District of Columbia's obligations

t. Farmers Home Corporation's obligations (12 U.S.C.A. Section 2023)

u. Federal Farm Loan Corporation's obligations (12 U.S.C.A. section 2023)

v. Federal Housing Administration's obligations (12 U.S.C.A. section 1723a(c))

w. Home Owner's Loan Corporation's obligations (12 U.S.C.A section 1463 - abolished 1953)

x. Joint Stock Land Banks' farm loan bonds and mortgages (12 U.S.C.A. section 2098)

y. Maritime Administration's Merchant Marine Bonds (12 U.S.C.A.)

z. Small Business Administration's obligations (15 U.S.C.A. section 633)

aa. U.S. Housing Authority's obligations (42 U.S.C.A. section 1437(i))

bb. Territorial Obligations:

1. American Samoa - Interest from industrial development bonds for Eastern Samoa issued by the Government of American Samoa as set forth in 48 U.S.C. § 1670.
2. Guam - Interest from bonds issued by the Government of Guam as set forth in 48 U.S.C. § 1423a.
3. Northern Mariana - Interest from bonds or other obligations issued by the Government of the Northern Mariana Islands as set forth in 48 U.S.C. § 1801 and § 607 of the Covenant to Establish a Commonwealth of the Northern Mariana Islands.
4. Puerto Rico - Interest from bonds issued by the Government of Puerto Rico as set forth in 48 U.S.C. § 745.
5. Virgin Islands - Interest from bonds issued by the Government of the Virgin Islands as set forth in 48 U.S.C. § 1574(b)(ii)(A).
   

Special Notes to Sections I and II

A. Interest income from repurchase agreements involving exempt federal obligations is not deductible federal interest income for Ohio tax purposes -- see Associated Estate Corporation v. Limbach (May 11, 1990), BTA Case No.s 87-H-743, 87-G-744 and 87-D-756 and Park Poultry Inc. v. Limbach (May 3, 1991), BTA Case No. 88-F-205. See Hartzell v. Limbach (August 23, 1991), BTA Case No. 89-F-590.

B. Interest Income received from the Internal Revenue Service on a tax refund is not exempt federal interest for Ohio tax purposes -- see Gerald R. and Judith K. Beck v. Limbach (Oct. 13, 1989) BTA Case No. 87-G-1163.

C. Interest income derived from Government National Mortgage Association's (Ginnie Mae) securities is not exempt federal interest for Ohio tax purposes -- see Rockford Life Insurance Co. v. Department of Revenue, 112 ILL 2d 174, 492 NE 2d 1278 (1986)

D. Interest income derived from any of the obligations listed in sections I and II above owned indirectly through owning shares in a mutual fund is deductible exempt federal interest for Ohio tax purposes.

Figuring the deduction - If the fund invests exclusively in exempt federal obligations listed in either section I and/or II, the entire amount of the distribution (income) from the fund is deductible. If the fund invests in both exempt and nonexempt obligations, the amount or percentage of the distribution that the mutual fund identifies as income derived from exempt federal obligations is deductible. If the mutual fund does not identify an exempt amount or percentage, figure the deduction by multiplying the distribution by the following fraction: as the numerator, the amount invested by the fund in exempt U.S. obligations listed in sections I and II; as the denominator, the fund's total investment. Use the year-end amounts to figure the fraction if the percentage ratio has remained constant throughout the year. If the percentage ratio has not remained constant, take the average of the ratios from the fund's quarterly financial reports.

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Tax Information Releases are not "Opinions of the Tax Commission" within the meaning of ORC section 5703.53. Accordingly, the Tax Commissioner is not bound by this release. Nevertheless, the above discussion does reflect the Income Tax Audit Division's interpretation of the law.

For further assistance please call 614-846-6712 or 800-282-1780 (within Ohio).

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¹    Base income for corporations is the separate report (Form FT-1120) Schedule B, line 5 base income; base income for individuals is Ohio adjusted gross income.