DRS: PS 92(3.1), 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

450 Columbus Blvd
Hartford CT 06103

This Policy Statement has been modified and superseded by PS 2003(6)

PS 92(3.1)

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);
  • 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);
  • 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); 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).

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.


STATUTORY AUTHORITY: Conn. Gen. Stat. 12-701(a)(10)(14) and (20). Conn. Agencies Regs. 12-701(a)(10)-2, 12-701(a)(20)-2 and 12-701(a)(20)-3.


EFFECTIVE DATE: Applicable for income years beginning on or after January 1, 1992.


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.

Individuals: Under Conn. Gen. Stat. 12-701(a)(20)(A)(i), any income with respect to which taxation by any state is prohibited by federal law (including interest income 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.

Trusts and estates: Under Conn. Gen. Stat. 12-701(a)(10)(B)(i), any income with respect to which taxation by any state is prohibited by federal law (including interest income 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 taxable income in computing Connecticut taxable 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 to be subtracted from federal adjusted gross income of the seller in computing the Connecticut adjusted gross income).

Modification for expenses - United States Government obligations:

Individuals: Under Conn. Gen. Stat. 12-701(a)(20)(A)(vii) and (viii), any interest on indebtedness paid, or incurred or continued to purchase or carry United States government obligations, the interest on which is exempt from Connecticut income tax, and the amortizable bond premium for the taxable year on any United States government obligations, the interest on which is exempt from Connecticut income tax, is, to the extent deductible in determining federal adjusted gross income, to be added to federal adjusted gross income in computing Connecticut adjusted gross income.

Trusts and estates: Under Conn. Gen. Stat. 12-701(a)(10)(A)(vi) and (vii), any interest on indebtedness paid or incurred or continued to purchase or carry United States government obligations, the interest on which is exempt from Connecticut income tax, and the amortizable bond premium for the taxable year on any United States government obligations, the interest on which is exempt from Connecticut income tax, is, to the extent deductible in determining federal taxable income prior to deductions relating to distributions to beneficiaries, to be added to federal taxable income in computing Connecticut taxable 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.

Individuals: Under Conn. Gen. Stat. 12-701(a)(20)(B)(i), 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.

Trusts and estates: Under Conn. Gen. Stat. 12-701(a)(10)(B)(i), 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 taxable income in computing Connecticut taxable 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.

Modification for expenses - Obligations (other than United States government obligations) that Congress has prohibited States from taxing:

Individuals: Under Conn. Gen. Stat. 12-701(a)(20)(A)(vii) and (viii), any interest on indebtedness paid or incurred or continued to purchase or carry obligations or securities, the interest on which is exempt from Connecticut income tax, and the amortizable bond premium for the taxable year on any bonds or obligations, the interest on which is exempt from Connecticut income tax, is, to the extent deductible in determining federal adjusted gross income, to be added to federal adjusted gross income in computing Connecticut adjusted gross income.

Trusts and estates: Under Conn. Gen. Stat. 12-701(a)(10)(A)(vi) and (vii), any interest on indebtedness paid or incurred or continued to purchase or carry obligations or securities, the interest on which is exempt from Connecticut income tax, and the amortizable bond premium for the taxable year on any bonds or obligations, the interest on which is exempt from Connecticut income tax, is, to the extent deductible in determining federal taxable income prior to deductions relating to distributions to beneficiaries, to be added to federal taxable income in computing Connecticut taxable income.


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.

Individuals: Under Conn. Gen. Stat. 12-701(a)(20)(A)(i), any interest income from State and municipal government obligations (other than obligations of the State of Connecticut or of a Connecticut municipality) is, to the extent not properly includable in gross income for federal income tax purposes, to be added to federal adjusted gross income in computing Connecticut adjusted gross income.

Trusts and estates: Under Conn. Gen. Stat. 12-701(a)(10)(A)(i), any interest income from State and municipal government obligations (other than obligations of the State of Connecticut or of a Connecticut municipality or of any territory or possession of the United States, such as Puerto Rico, Guam and the Virgin Islands) is, to the extent properly not includable in gross income for federal income tax purposes, to be added to federal taxable income in computing Connecticut taxable income.

Modification for expenses - State and municipal obligations:

Individuals: Under Conn. Gen. Stat. 12-701(a)(20)(B)(viii) and (ix), any interest on indebtedness paid or incurred or continued to purchase or carry obligations or securities (including State or municipal government obligations (other than obligations of the State of Connecticut or of a Connecticut municipality or of any territory or possession of the United States, such as Puerto Rico, Guam and the Virgin Islands)), the interest on which is subject to Connecticut income tax but exempt from federal income tax, and the amortizable bond premium for the taxable year on any bonds (including State or municipal government obligations (other than obligations of the State of Connecticut or of a Connecticut municipality or of any territory or possession of the United States, such as Puerto Rico, Guam and the Virgin Islands)), the interest on which is subject to Connecticut income tax but exempt from federal income tax, is, to the extent that such interest on indebtedness is not deductible in determining federal adjusted gross income and is attributable to a trade or business carried on by such individual, to be subtracted from federal adjusted gross income in computing Connecticut adjusted gross income.

Trusts and estates: Under Conn. Gen. Stat. 12-701(a)(10)(B)(vi) and (vii), any interest on indebtedness paid or incurred or continued to purchase or carry obligations or securities (including State or municipal government obligations (other than obligations of the State of Connecticut or of a Connecticut municipality or of any territory or possession of the United States, such as Puerto Rico, Guam and the Virgin Islands)), the interest on which is subject to Connecticut income tax but exempt from federal income tax, and the amortizable bond premium for the taxable year on any bonds or obligations (including State or municipal government obligations (other than obligations of the State of Connecticut or of a Connecticut municipality or of any territory or possession of the United States, such as Puerto Rico, Guam and the Virgin Islands)), the interest on which is subject to Connecticut income tax but exempt from federal income tax, is, to the extent that such interest on indebtedness is not deductible in determining federal taxable income prior to deductions relating to distributions to beneficiaries, to be subtracted from federal taxable income in computing Connecticut taxable income.


MUTUAL FUNDS QUALIFIED TO PAY EXEMPT-INTEREST 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 consist 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-interest dividends, as defined in 26 U.S.C. 852(b)(5). Exempt-interest dividends are properly not includable in federal gross income.

Individuals: Under Conn. Gen. Stat. 12-701(a)(20)(A)(ii), any exempt-interest dividends (other than those derived from obligations of the State of Connecticut or of a Connecticut municipality) are to be added to federal adjusted gross income in computing Connecticut adjusted gross income.

Trusts and estates: Under Conn. Gen. Stat. 12-701(a)(10)(A)(ii), any exempt-interest dividends (other than those derived from obligations of the State of Connecticut or of a Connecticut municipality or of any territory or possession of the United States, such as Puerto Rico, Guam and the Virgin Islands) are to be added to federal taxable income in computing Connecticut taxable income.

Modification for expenses - Mutual funds qualified to pay exempt-interest dividends:

Individuals: Under Conn. Gen. Stat. 12-701(a)(20)(B)(ix), any interest on indebtedness paid or incurred or continued to purchase or carry shares of a mutual fund (1) at least 50% of the value of whose assets, at the close of each quarter of such fund's taxable year, consists of State and municipal government obligations (other than obligations of the State of Connecticut or of a Connecticut municipality or of any territory or possession of the United States, such as Puerto Rico, Guam and the Virgin Islands) and (2) the exempt-interest dividends from which fund are subject to Connecticut income tax but exempt from federal income tax, is, to the extent that such interest on indebtedness is not deductible in determining federal adjusted gross income and is attributable to a trade or business carried on by such individual, to be subtracted from federal adjusted gross income in computing Connecticut adjusted gross income.

Trusts and estates: Under Conn. Gen. Stat. 12-701(a)(10)(B)(vii), any interest on indebtedness paid or incurred or continued to purchase or carry shares of a mutual fund (1) at least 50% of the value of whose assets, at the close of each quarter of such fund's taxable year, consists of State and municipal government obligations (other than obligations of the State of Connecticut or of a Connecticut municipality or of any territory or possession of the United States, such as Puerto Rico, Guam and the Virgin Islands) and (2) the exempt-interest dividends from which fund are subject to Connecticut income tax but exempt from federal income tax, is, to the extent that such interest on indebtedness is not deductible in determining federal taxable income prior to deductions relating to distributions to beneficiaries, to be subtracted from federal taxable income in computing Connecticut taxable 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 Conn. Gen. Stat. 12-701(a)(14). Generally, these dividends are includable in federal adjusted gross income, which is the starting point for computing Connecticut adjusted gross income.

Individuals: Under Conn. Gen. Stat. 12-701(a)(20)(B)(ii), 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.

Trusts and estates: Under Conn. Gen. Stat. 12-701(a)(10)(B)(ii), any exempt dividends are, to the extent properly includable in gross income for federal income tax purposes, to be subtracted from federal taxable income in computing Connecticut taxable income.

Modification for expenses - Mutual funds qualified to pay exempt dividends:

Individuals: Under Conn. Gen. Stat. 12-701(a)(20)(A)(viii), any interest on indebtedness paid or incurred or continued to purchase or carry shares of a mutual fund (1) at least 50% of the value of whose assets, at the close of each quarter of such fund's taxable year, consists of obligations or securities (including United States government obligations) and (2) the dividends from which are exempt from Connecticut income tax but subject to federal income tax, is, to the extent deductible in determining federal adjusted gross income, to be added to federal adjusted gross income in computing Connecticut adjusted gross income.

Trusts and estates: Under Conn. Gen. Stat. 12-701(a)(10)(A)(vii), any interest on indebtedness paid or incurred or continued to purchase or carry shares of a mutual fund (1) at least 50% of the value of whose assets, at the close of each quarter of such fund's taxable year, consists of obligations or securities (including United States government obligations) and (2) the dividends from which are exempt from Connecticut income tax but subject to federal income tax, is, to the extent deductible in determining federal taxable income prior to deductions relating to beneficiaries, to be added to federal taxable income in computing Connecticut taxable income.


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.1. 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 (12 U.S.C. 1087-2(1))

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)

A.13. Federal Home Loan Banks - Bonds, notes, debentures, and other similar obligations issued by Federal Home Loan Banks (12 U.S.C. 1433)

A.14. Commodity Credit Corporation - Bonds, notes, debentures, and other similar obligations issued by the Commodity Credit Corporation (15 U.S.C. 713a-5)

A.15. 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))

A.16. Resolution Funding Corporation - Obligations issued by the Resolution Funding Corporation (12 U.S.C. 1441b(f)(7))

 

List A obligations: See Modification for expenses - Obligations (other than United States government obligations) that Congress has prohibited States from taxing, above.


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

B.2. Puerto Rico - Bonds issued by the government of Puerto Rico (48 U.S.C. 745)

B.3. Virgin Islands - Bonds issued by the government of the Virgin Islands (48 U.S.C. 1574(b))

 

List B obligations: See Modification for expenses -Obligations (other than United States government obligations) that Congress has prohibited States from taxing, above.

 

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.1. 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. 21 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 C obligations: Any interest on indebtedness paid or incurred or continued to purchase or carry these obligations or securities, and any amortizable bond premium for the taxable year on these bonds or obligations, is deductible only to the extent deductible in determining federal adjusted gross income.


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.1. 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 (31U.S.C. 3124(b)

List D obligations: See Modification for expenses - State and municipal obligations, above.


EFFECT OF THIS DOCUMENT: A Policy Statement is a document that explains in depth a current Department policy or practice affecting the liability of taxpayers. Unlike a Ruling, a Policy Statement does not apply a policy or practice to a specific set of facts but it may be referred to for general guidance by taxpayers.


EFFECT ON OTHER DOCUMENTS: PS 92(3) is modified and superseded and may not be relied upon for taxable years beginning on or after the date of issuance of this policy statement.


FOR FURTHER INFORMATION: To order forms and publications or for further information, call the Department of Revenue Services at 860-297-5962 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.

Electronic Delivery Options: You can also obtain tax forms and publications 24 hours a day from our site on the World Wide Web at http://www.ct.gov/drs. Telecommunications Device for the Deaf (TDD/TT) users only call 860-297-4911 during business hours.


PS 92(3.1)
Income tax
Issued: 1/8/97
Replaces: PS 92(3), issued 3/13/92