Technical Information Release  TIR 89-8: Income Tax Treatment of Interest and Gains on Federal Obligations; IRA Distributions Consisting of Interest Derived from Federal Obligations

Date:	09/18/1989
Organization:	Massachusetts Department of Revenue
Referenced Sources:	Massachusetts General Laws

Personal Income Tax

Massachusetts General Laws Chapter 62, § 2(a)(2)(A) excludes from Massachusetts gross income "[i]nterest on obligations of the United States exempt from state income taxation to the extent [such interest is] included in federal gross income" Gain on the sale of obligations of the United States is included in Massachusetts Part A gross income as capital gain. G.L. c. 62, § 2(b)(1).

The purpose of this technical Information Release (TIR) is to describe the circumstances under which a financial instrument is an exempt obligation of the United States and to provide examples of commonly held exempt obligations. In addition, this TIR describes the Massachusetts personal income tax treatment of interest derived from exempt obligations of the United States where the interest is received as part of an Individual Retirement Account (IRA) distribution. This TIR applies only to the personal income tax, imposed under General Laws Chapter 62.

A. Exempt Obligations of the United States Defined.
Exempt obligations of the United States are those financial instruments that are exempt from state taxation as "[s]tocks and obligations of the United States Government" under 31 U.S.C. § 3124(a). A financial instrument is an exempt obligation of the United States only if:

1. It is issued by the United States or one of its instrumentalities or is otherwise backed by the full faith and credit of the United States; and
2. it embodies a direct and binding promise by the Unites States to pay specified sums on specified dates.
   See Smith v. Davis, 323 U.S. 111, 115 (1944).

Interest on exempt obligations of the United States held directly by individual taxpayers is excluded from Massachusetts gross income under Chapter 62, § 2(a)(2)(A). The following are examples of commonly held financial instruments that are exempt obligations of the United States:

1. Banks for Cooperatives - Notes, debentures, and other similar obligations issued by Banks for Cooperatives (12 U.S.C. § 2134);
2. Commodity Credit Corporation - Bonds, notes, debentures, and other similar obligations issued by the Commodity Credit Corporation (15 U.S.C §713a-5);
3. Federal Deposit Insurance Corporation - Bonds, notes, debentures, and other similar obligations issued by the Federal Deposit Insurance Corporation (12 U.S.C. § 1825);
4. Federal Farm Credit Banks - Consolidated system-wide bonds, notes debentures, and other obligations issued jointly and severally under 12 U.S.C. § 2153 by Banks of the Federal Farm Credit System (12 U.S.C. §§ 2055, 2079, 2098, 2134);
5. Federal Financing Bank - Obligations issued by the Federal Financing Bank (12 U.S.C. § 2290);
6. Federal Home Loan Banks - Bonds, notes, debentures, and other similar obligations issued by Federal Home Loan Banks (12 U.S.C. § 1433);
7. Federal Intermediate Credit Banks - Bonds, notes, debentures, and other similar obligations issued by Federal Intermediate Credit Banks (12 U.S.C. § 2079);
8. Federal Land Banks and Federal Land Banks Associations - Bonds, notes, debentures, and other similar obligations issued by Federal Land Banks and Federal Land Bank Associations (12 U.S.C. § 2055);
9. Federal Savings and Loan Insurance Corporation - Bonds, notes, debentures, and other similar obligations issued by the Federal Savings and Loan Insurance Corporation (12 U.S.C. § 1725(e));
10. General Insurance Fund -

1. Debentures issued by General Insurance Fund under the War Housing Insurance Law
   (12 U.S.C. § 1739(d));
2. Debentures issued by the General Insurance Fund to acquire rental housing projects
   (12 U.S.C. § 1747g(g));
3. Armed Services Housing Mortgage Insurance Debentures issued by the General Insurance Fund (12 U.S.C. § 1748b(f));

1. GSA Public Building Trust Participation Certificates - First Series, Series A through E; Second Series, Series F; Third Series, Series G; Fourth Series, Series H and I (31 U.S.C. § 3124(a));
2. Guam - Bonds issued by the Government of Guam (48 U.S.C. § 1423(a));
3. Federal Assets Financing and Liquidation Trusts - Participation Certificates in the Federal Assets Financing Trust, Series A through D, due in 1987 and 1988, and Participation Certificates in the Federal Assets Liquidation Trust, Series B, due in 1987, issued by the Federal National Mortgage Association as trustee (the Government National Mortgage Association is the current trustee) under 12 U.S.C. § 1717(c) (31 U.S.C. § 3124 (a));
4. Production Credit Association - Notes, debentures, and other similar obligations issued by the Production Credit Association (12 U.S.C. § 2098);
5. Puerto Rico - Bonds issued by the Government of Puerto Rico (48 U.S.C. § 745);
6. Tennessee Valley Authority - Bonds issued by the Tennessee Valley Authority (16 U.S.C. § 831n-4(d));
7. United States Postal Service - Obligations issued by the United States Postal Service (39 U.S.C. § 2005(d)(4));
8. United States Treasury - Bonds, notes, bills, certificates and savings bonds issued by the United States Treasury (31 U.S.C. § 3124(a));

B. Non-Exempt Obligation Distinguished.

Financial instruments that do not meet the criteria of 31 U.S.C. § 3124(a) and Smith v. Davis, supra, are not exempt obligations of the United States for purposes of Chapter 62, § 2(a)(2)(A). Specifically, a financial instrument is not an exempt obligation of the United States if it is not issued by the United States or one of its instrumentalities, or if it is not otherwise backed by the full faith and credit of the United States. Similarly, a financial instrument is not exempt if the obligation it embodies is secondary, indirect, or contingent, such as a federal guaranty of a non-governmental obligor's primary obligation. Such federal instruments are not exempt obligations because they are not direct binding promises by the United States or its instrumentalities to pay specified sums on specified dates.
Interest on non-exempt obligations is included in Massachusetts Part A gross income. The following are examples of commonly held financial instruments that are not exempt obligations of the United States:

1. Asian Development Bank - Obligations issued by the Asian American Bank (22 U.S.C. § 285 et seq.);
2. District of Columbia - Bonds and other obligations issued by the District of Columbia (31 U.S.C. § 3124(b));
3. Federally Chartered Financial Institutions - Obligations issued by federally chartered banks, savings and loan associations, building and loan associations, credit unions, and other federally chartered financial institutions (12 U.S.C. §§ 21 et seq., 1751 et seq.);
4. Federal Home Loan Mortgage Corporation ("Freddie Mac") - Mortgages, certificates and other securities guaranteed by the Federal Home Loan Mortgage Corporation (12 U.S.C. § 1455);
5. Federal National Mortgage Association ("Fannie Mae") - Participation certificates and other obligations guaranteed by the Federal National Mortgage Association (12 U.S.C. § 1719(d));
6. Government National Mortgage Association ("Ginnie Mae") - Participation certificates and other obligations guaranteed by the Government National Mortgage Association (12 U.S.C. § 1721(5));
7. Inter-American Development Bank - Obligations issued by the InterAmerican Development Bank (12 U.S.C. § 283 et seq.);
8. International Bank for Reconstruction and Redevelopment (World Bank) - Obligations issued by the International Bank for Reconstruction and Redevelopment (22 U.S.C. § 286 et seq.);
9. Student Loan Marketing Association ("Sallie Mae") - Obligations guaranteed by the Student Loan Marketing Association (20 U.S.C. § 1087-2).

C. IRA Distributions Consisting of Income Derived from Exempt Obligations of the United States.
The exclusion afforded by General Laws Chapter 62, § 2(a)(2)(A) does not apply to interest derived from exempt obligations of the United States where the interest is received as part of an IRA distribution. IRA distributions consisting of interest derived from exempt obligations are treated in the same manner as any other IRA distributions. ¹ This is so whether or not the IRA takes the form of a mutual fund organized as a Massachusetts corporate trust that qualifies as a regulated investment company under section 851 of the Internal Revenue Code.

/s/ Stephen W. Kidder
Commissioner of Revenue

September 18, 1989

1. For taxable years beginning during calendar years 1989 and 1990 IRA distributions included in Massachusetts gross income are taxed as Part C income. St.1989, c. 287, §§ 18, 19. For taxable years beginning before calendar year 1989 or after calendar year 1990 IRA distributions included in Massachusetts gross income are taxed as Part B income. (return to text)