DRS: PS 92(3), Connecticut Income Tax on Bonds or Obligations Issued by the United States Government, by State Governments or Municipalities

 

STATE OF CONNECTICUT
DEPARTMENT OF REVENUE SERVICES

25 Sigourney Street
Hartford CT 06106-5032
 
 
 
 
 
 

 
 

This Policy Statement has been modified and superseded by PS 92(3.1)

PS 92(3)

Connecticut Income Tax on Bonds or Obligations
Issued by the United States Government,
by State Governments or Municipalities


BACKGROUND: Generally, the taxation of interest income for Connecticut income tax purposes conforms to its taxation for federal income tax purposes. In the case of certain bonds or obligations that are issued by the United States government, by State governments or by municipalities, there are exceptions. The interest of some may be taxable for federal income tax purposes or for Connecticut income tax purposes, but not for both.


PURPOSE: This Policy Statement indicates generally whether the interest income received on governmental obligations is subject to Connecticut income tax. This Policy Statement contains lists of such obligations, including a list of:

  • exempt obligations the interest from which is to be subtracted from federal adjusted gross income in computing Connecticut adjusted gross income (see List A, below);
  • exempt obligations the interest from which is not includable in federal gross income so that no subtraction is to be made from federal adjusted gross income in computing Connecticut adjusted gross income (see List B, below);
  • taxable obligations the interest from which is includable in federal gross income so that no addition is to be made to federal adjusted gross income in computing Connecticut adjusted gross income (see List C, below); and
  • taxable obligations the interest from which is to be added to federal adjusted gross income in computing Connecticut adjusted gross income (see List D, below).

These lists are neither all-inclusive nor intended to be conclusive of the taxable or exempt status of any particular obligation issued by or in conjunction with a listed agency or instrumentality. Even though a listed agency or instrumentality generally only issues either exempt obligations or taxable obligations, it does not follow that each and every obligation carrying the name of that particular agency or instrumentality is either exempt or taxable. An agency or instrumentality may issue its own obligations that are exempt and also may handle private obligations that are taxable. For example, the agency or instrumentality may administer, purchase and sell, insure, or guarantee an otherwise private obligation. Such action by the agency or instrumentality does not convert a private obligation into a direct and primary obligation of the United States government and, therefore, does not make the private obligation tax-exempt. The taxable status of each obligation must be determined separately in accordance with this Policy Statement.


EFFECTIVE DATE: Applicable for taxable years beginning on or after January 1, 1991.


UNITED STATES GOVERNMENT OBLIGATIONS: 31 U.S.C. 3124(a) prohibits States from taxing income from stocks and obligations of the United States government. In Smith v. Davis, 323 U.S. 111 (1944), the United States Supreme Court described four characteristics of such obligations: (1) written documents, (2) the bearing of interest, (3) a binding promise by the United States to pay specified sums at specified dates and (4) specific Congressional authorization which also pledged the faith and credit of the United States in support of the promise to pay. Generally, the interest income received on United States government obligations is includable in federal adjusted gross income, which is the starting point for computing Connecticut adjusted gross income.

Under 1991 Conn. Pub. Acts 3, 52(a)(20) (June Spec. Sess.), any income with respect to which taxation by any state is prohibited by federal law (including interest received from United States government obligations) is, to the extent properly includable in gross income for federal income tax purposes, to be subtracted from federal adjusted gross income in computing Connecticut adjusted gross income.

Interest received on a federal income tax refund is not interest received on a United States government obligation because there is neither a written document in which the United States has promised to pay a definite amount at a specified date nor is there any binding acknowledgment by the United States of the correctness of the refund claim.

Interest received on obligations with respect to which the United States is merely the guarantor and not the obligor are not United States government obligations.

Interest must be paid by the United States government. Where a person ("the seller") other than the United States government sells to a buyer United States government obligations, and simultaneously agrees to repurchase these obligations at a future time for a price which includes interest from the date of sale ("repurchase agreement"), interest paid to the buyer at the time of repurchase is interest paid by the seller, not interest paid by the United States government on United States government obligations (and thus not to be subtracted from federal adjusted gross income of the buyer in computing Connecticut adjusted gross income). Any interest paid by the United States government on such obligations during the period prior to repurchase is paid to the seller, not to the buyer (and thus is to be subtracted from federal adjusted gross income of the seller in computing Connecticut adjusted gross income).


OTHER INCOME THAT CONGRESS HAS PROHIBITED STATES FROM TAXING:

Certain instrumentalities of the United States government are empowered to issue obligations to provide funding for their stated purposes. While these obligations may not meet the four characteristics of United States government obligations that were established in Smith v. Davis, the enabling legislation may prohibit the imposition of State or local taxes upon the obligations of these instrumentalities.

Under 1991 Conn. Pub. Acts 3, 52(a)(20) (June Spec. Sess.), any income with respect to which taxation by any state is prohibited by federal law (including income received from obligations which are not United States government obligations but which Congress has prohibited States from taxing) is, to the extent properly includable in gross, income for federal income tax purposes, to be subtracted from federal adjusted gross income in computing Connecticut adjusted gross income.

A Congressional prohibition of State taxation of the income of a federal instrumentality is not to be extended beyond its express terms. For example, while Congress has prohibited States from taxing the income of federal credit unions, it has not prohibited States from taxing depositors on interest received on their deposits at such federal credit unions. Also, while Congress has prohibited States from taxing Federal Home Loan Bank bonds and debentures, it has not prohibited States from taxing depositors on interest received on demand/overnight deposits at such banks.


STATE AND MUNICIPAL GOVERNMENT OBLIGATIONS: 26 U.S.C. 103(a) provides that, for federal income tax purposes, gross income does not include interest on any State or municipal government obligations. Such obligations do not include private activity bonds unless those bonds are "qualified bonds" within the meaning of 26 U.S.C. 141.

Under 1991 Conn. Pub. Acts 3, 52(a)(20) (June Spec. Sess.), any interest income from State and municipal government obligations (other than obligations of the State of Connecticut or Connecticut municipalities) is, to the extent properly not includable in gross income for federal income tax purposes, to be added to federal adjusted gross income in computing Connecticut adjusted gross income.


MUTUAL FUNDS QUALIFIED TO PAY EXEMPT-INTEREST DIVIDENDS: If, at the close of each quarter of a mutual funds taxable year, at least 50% of the value of the fund's assets consists of State and municipal government obligations described in 26 U.S.C. 103(a), that portion of the fund's distribution to its shareholders that is attributable to those obligations will qualify as exempt dividends, as defined in 26 U.S.C. 852(b)(5). Exempt-interest dividends are properly not includable in federal gross income.

Under 1991 Conn. Pub. Acts 3, 52(a)(20) (June Spec. Sess.), any exempt-interest dividends (other than those derived from obligations of the State of Connecticut or Connecticut municipalities) are to be added to federal adjusted gross income in computing Connecticut adjusted gross income.


MUTUAL FUNDS QUALIFIED TO PAY EXEMPT DIVIDENDS: If, at the close of each quarter of a mutual fund's taxable year, at least 50% of the value of the fund's assets consists of obligations, the income from which Congress has prohibited States from taxing, that portion of the fund's distribution to its shareholders that is attributable to those obligations will qualify as exempt dividends, as defined in 1991 Conn. Pub. Acts 3, 52(a)(14) (June Spec. Sess.). Generally, these dividends are includable in federal adjusted gross income, which is the starting point for computing Connecticut adjusted gross income.

Under 1991 Conn. Pub. Acts 3, 52(a)(20) (June Spec. Sess.), any exempt dividends are, to the extent properly includable in gross income for federal income tax purposes, to be subtracted from federal adjusted gross income in computing Connecticut adjusted gross income.


DEDUCTIBILITY OF INTEREST EXPENSE INCURRED OR CONTINUED TO PURCHASE OR CARRY GOVERNMENT BONDS: Because, under 26 U.S.C. 265(a), no deduction is allowed for federal income tax purposes with-respect to interest on indebtedness incurred or continued to purchase or carry:

  • obligations the interest from which is exempt from-federal income taxes (such as State and municipal government obligations) and
  • shares of stock of a mutual fund that distributes exempt-interest dividends.

To the extent that indebtedness is incurred or continued to purchase or carry obligations the interest from which is properly includable in gross income for federal income tax purposes, (such as United States government obligations), the interest on such indebtedness may be deductible in determining federal adjusted gross income (for example, if attributable to a trade or business carried on by the individual), but under no circumstance is any additional deduction allowable with respect to the interest on such indebtedness in computing Connecticut adjusted gross income.


APPLICABILITY TO TRUSTS AND ESTATES: While this Policy Statement expressly addresses whether income is to be added to or subtracted from federal adjusted gross income in computing Connecticut adjusted gross income of a natural person, the principles stated herein are also to be applied in determining whether income is to be added to or subtracted from the taxable income of the fiduciary of a trust or estate, for federal income tax purposes, in computing the Connecticut fiduciary adjustment.


LIST A: EXAMPLES OF OBLIGATIONS EXEMPT FROM CONNECTICUT INCOME TAX (MODIFICATION REQUIRED IN COMPUTING CONNECTICUT ADJUSTED GROSS INCOME) The following are examples of exempt obligations the income from which is properly includable in gross income for federal income tax purposes and which is subtracted from federal adjusted gross income in computing Connecticut adjusted gross income:

A.l. Banks for Cooperatives -- Notes, debentures, and other similar obligations issued by Banks for Cooperatives (12 U.S.C. 2134)

A.2. Federal Deposit Insurance Corporation--Bonds, notes, debentures, and other similar obligations issued by the Federal Deposit Insurance Corporation (12 U.S.C. 1825)

A.3. 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)

A.4. Federal Financing Bank --Obligations issued by the Federal Financing Bank (12 U.S.C. 2290)

A.5. Federal Intermediate Credit Banks--Bonds, notes, debentures, and other similar obligations issued by Federal Intermediate Credit Banks (12 U.S.C. 2079)

A.6. Federal Land Banks and Federal Land Bank Associations--Bonds, notes, debentures, and other similar obligations issued by Federal Land Banks and Federal Land Bank Associations (12 U.S.C. 2055)

A.7. General Services Administration 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))

A.8. Production Credit Associations--Notes, debentures, and similar obligations issued by Production Credit Associations (12 U.S.C. 2098)

A.9. Student Loan Marketing Association ("Sallie Mae")--Obligations issued by the Student Loan Marketing Association (20 U.S.C. 1087-2(l))

A.10. Tennessee Valley Authority--Bonds issued by the Tennessee Valley Authority (16 U.S.C. 831n-4(d))

A.11. United States Postal Service--Obligations issued by the United States Postal Service (39 U.S.C. 2005(d)(4))

A.12. United States Treasury--Bonds, notes, bills, certificates and savings bonds issued by the United States Treasury (31 U.S.C. 3124(a))

 

LIST B: EXAMPLES OF OBLIGATIONS EXEMPT FROM CONNECTICUT INCOME TAX (NO MODIFICATION REQUIRED IN COMPUTING CONNECTICUT ADJUSTED GROSS INCOME) The following are examples of exempt obligations the income from which is properly not includable in gross income for federal income tax purposes and which is not subtracted from federal adjusted gross income in computing Connecticut adjusted gross income:

B.1. Commodity Credit Corporation--Bonds, notes, debentures, and other similar obligations issued by the Commodity Credit Corporation (15 U.S.C. 713a-5).

B.2. Federal Home Loan Banks--Bonds, notes, debentures, and other similar obligations issued by Federal Home Loan Banks (12 U.S.C. 1433)

B.3. 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))

B.4. Guam--Bonds issued by the Government of Guam (48 U.S.C. 1423a)

B.5. Puerto Rico--Bonds issued by the Government of Puerto Rico (48U.S.C. 745)

B.6. Resolution Funding Corporation--obligations issued by the Resolution Funding Corporation (12 U.S.C. 144lb(f)(7))

B.7. Virgin Islands--Bonds issued by the Government of the Virgin Islands (48 U.S.C. 1574(b))

 

LIST C: EXAMPLES OF OBLIGATIONS SUBJECT TO CONNECTICUT INCOME TAX (NO MODIFICATION REQUIRED IN COMPUTING CONNECTICUT ADJUSTED GROSS INCOME) The following are examples of taxable obligations the income from which is properly includable in gross income for federal income tax purposes and which is not added to federal adjusted gross income in computing Connecticut adjusted gross income:

C.l. Asian Development Bank-Obligations issued by the Asian American Bank (22 U.S.C. 285 et seq.)

C.2. 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. 921, et seq., 1461 et-seq., 1751 et seq.)

C.3. Federal Home Loan Mortgage Corporation ("Freddie Mac") -- Mortgages, certificates and other securities guaranteed by the Federal Home Loan Mortgage Corporation (12 U.S.C. 1452(e))

C.4. Federal National Mortgage Association ("Fannie Mae") -- Participation certificates and other obligations guaranteed by the Federal National Mortgage Association (12 U.S.C. 1719(d))

C.5. Government National Mortgage Association ("Ginnie Mae") --Participation certificates and other obligations guaranteed by the Government National Mortgage Association (12 U.S.C. 1721(b))

C.6. Inter-American Development Bank--Obligations issued by the Inter-American Development Bank (22 U.S.C. 283 et seq.)

C.7. 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.)

C.8. Student Loan Marketing Association ("Sallie Mae")--Obligations guaranteed by the Student Loan Marketing Association (20 U.S.C. 1087-2)

 

LIST D: EXAMPLES OF OBLIGATIONS SUBJECT TO CONNECTICUT INCOME TAX (MODIFICATION REQUIRED IN COMPUTING CONNECTICUT ADJUSTED GROSS INCOME) The following are examples of taxable obligations the income from which is properly not includable in gross income for federal income tax purposes and is added to federal adjusted gross income in computing Connecticut adjusted gross income:

D.l. Other States and their municipalities--Bonds and obligations issued by other States or by municipalities of other States

D.2. District of Columbia--Bonds and other obligations issued by the District of Columbia (31 U.S.C. 3124(b))


EFFECT ON OTHER DOCUMENTS: Bulletin No. 18 is superseded and may not be relied upon for taxable years beginning on or after January 1, 1991.


PLEASE NOTE THE FOLLOWING NEW INFORMATION ABOUT DRS.

FOR FURTHER INFORMATION: To order forms and publications or for further information, call the Department of Revenue Services at 860-297-5962 (Hartford area or out-of-state) or 1-800-382-9463 (in-state). Forms and publications may be ordered through voice-mail 24-hours a day by choosing Option 3 on your touch tone telephone.

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PS 92(3)
Income Tax
Issued 3/13/92