Section 701.40.2. Interest and dividends from federal securities.

 For individual income tax purposes, the state is prohibited by federal law from taxing dividends from corporations owned or sponsored by the federal government, or interest derived from obligations of the United States and its possessions, agencies, and instrumentalities. Therefore, if the federal adjusted gross income of an individual, taxable by Iowa, includes dividends or interest of this type, an adjustment must be made by deducting the amount of the dividend or interest. If the inclusion of an amount of income or the amount of a deduction is based upon federal adjusted gross income and federal adjusted gross income includes dividends from corporations owned or sponsored by the federal government, or interest derived from obligations of the United States and its possessions, agencies, and instrumentalities, a recomputation of the amount of income or deduction must be made excluding dividends or interest of this type from the calculations.

A federal statute exempts stocks and obligations of the United States Government, as well as the interest on the obligations, from state income taxation (see 31 USCS Section 3124(a)).

“Obligations of the United States” are those obligations issued “to secure credit to carry on the necessary functions of government.” Smith v.    Davis (1944) 323 U.S. 111, 119, 89 L.Ed.            107, 113, 65 S.Ct.          157, 161. The exemption is aimed at protecting the “borrowing” and “supremacy” clauses of the United States Constitution. Society for Savings v.          Bowers (1955) 349 U.S. 143, 144, 99 L.Ed.2d 950, 955, 75 S.Ct.   607, 608; Hibernia v.      City and County of San Francisco (1906) 200 U.S. 310, 313, 50 L.Ed.         495, 496, 26 S.Ct.          265, 266.

Tax-exempt credit instruments possess the following characteristics:

            1.      They are written documents,

            2.      They bear interest,

            3.      They are binding promises by the United States to pay specified sums at specified dates, and

      4.           They have Congressional authorization which also pledges the faith and credit of the United States in support of the promise to pay. Smith v.     Davis, supra.

A governmental obligation that is secondary, indirect, or contingent, such as a guaranty of a nongovernmental obligor’s primary obligation to pay the principal amount of and interest on a note, is not an obligation of the type exempted under 31 USCS Section 3124(1). Rockford Life Ins.            Co.       v.          Department of Revenue, 107 S.Ct.            2312 (1987).

The following list contains widely held United States Government obligations, but is not intended to be all-inclusive.

This noninclusive listing indicates the position of the department with respect to the income tax status of the listed securities. It is based on current federal law and the interpretation thereof by the department. Federal law or the department’s interpretation is subject to change. Federal law precludes all states from imposing an income tax on the interest income from direct obligations of the United States Government. Also, preemptive federal law may preclude state taxation of interest income from the securities of federal government-sponsored enterprises and agencies and from the obligations of U.S. territories. Any profit or gain on the sale or exchange of these securities is taxable.

         40.2(1) Federal obligations and obligations of federal instrumentalities the interest on which is exempt from Iowa income tax.

            a.                United States Government obligations: United States Treasury—Principal and interest from bills, bonds, and notes issued by the United States Treasury exempt under 31 U.S.C. Section 3124[a].

            1.      Series E, F, G, H, and I bonds

            2.      United States Treasury bills

            3.      U.S. Government certificates

            4.      U.S. Government bonds

            5.      U.S. Government notes

            6.      Original issue discount (OID) on a United States Treasury obligation

            b.                Territorial obligations:

            1.      Guam—Principal and interest from bonds issued by the Government of Guam (48 USCS Section 1423[a]).

            2.      Puerto Rico—Principal and interest from bonds issued by the Government of Puerto Rico (48 USCS Section 745).

            3.      Virgin Islands—Principal and interest from bonds issued by the Government of the Virgin Islands (48 USCS Section 1403).

            4.      Northern Mariana Islands—Principal and interest from bonds issued by the Government of the Northern Mariana Islands (48 USCS Section 1681(c)).

            c.                Federal agency obligations:

            1.      Commodity Credit Corporation—Principal and interest from bonds, notes, debentures, and other similar obligations issued by the Commodity Credit Corporation (15 USCS Section 713a-5).

            2.      Banks for Cooperatives—Principal and interest from notes, debentures, and other obligations issued by Banks for Cooperatives (12 USCS Section 2134).

            3.      Farm Credit Banks—Principal and interest from systemwide bonds, notes, debentures, and other obligations issued jointly and severally by Banks of the Federal Farm Credit System (12 USCS Section 2023).

            4.      Federal Intermediate Credit Banks—Principal and interest from bonds, notes, debentures, and other obligations issued by Federal Intermediate Credit Banks (12 USCS Section 2079).

            5.      Federal Land Banks—Principal and interest from bonds, notes, debentures, and other obligations issued by Federal Land Banks (12 USCS Section 2055).

            6.      Federal Land Bank Association—Principal and interest from bonds, notes, debentures, and other obligations issued by the Federal Land Bank Association (12 USCS Section 2098).

            7.      Financial Assistance Corporation—Principal and interest from notes, bonds, debentures, and other obligations issued by the Financial Assistance Corporation (12 USCS Section 2278b-10[b]).

            8.      Production Credit Association—Principal and interest from notes, debentures, and other obligations issued by the Production Credit Association (12 USCS Section 2077).

            9.      Federal Deposit Insurance Corporation (FDIC)— Principal and interest from notes, bonds, debentures, and other such obligations issued by the Federal Deposit Insurance Corporation (12 USCS Section 1825).

            10.     Federal Financing Bank—Interest from obligations issued by the Federal Financing Bank. Considered to be United States Government obligations (12 USCS Section 2288, 31 USCS Section 3124[a]).

            11.     Federal Home Loan Bank—Principal and interest from notes, bonds, debentures, and other such obligations issued by any Federal Home Loan Bank and consolidated Federal Home Loan Bank bonds and debentures (12 USCS Section 1433).

            12.     Federal Savings and Loan Insurance Corporation (FSLIC)—Principal and interest from notes, bonds, debentures, and other such obligations issued by the Federal Savings and Loan Insurance Corporation (12 USCS Section 1725[e]).

            13.     Federal Financing Corporation—Principal and interest from notes, bonds, debentures, and other such obligations issued by the Federal Financing Corporation (12 USCS Section 2288(b)).

            14.     Financing Corporation (FICO)—Principal and interest from any obligation of the Financing Corporation (12 USCS Sections 1441[e][7] and 1433).

            15.     General Services Administration (GSA)—Principal and interest from General Services Administration participation certificates. Considered to be United States Government obligations (31 USCS Section 3124[a]).

            16.     Housing and Urban Development (HUD).

            ●       Principal and interest from War Housing Insurance debentures (12 USCS Section 1739[d]).

            ●       Principal and interest from Rental Housing Insurance debentures (12 USCS Section 1747g[g]).

            ●       Principal and interest from Armed Services Mortgage Insurance debentures (12 USCS Section 1748b[f]).

            ●       Principal and interest from National Defense Housing Insurance debentures (12 USCS Section 1750c[d]).

            ●       Principal and interest from Mutual Mortgage Insurance Fund debentures (12 USCS Section 1710[d]).

            17.     National Credit Union Administration Central Liquidity Facility—Income from notes, bonds, debentures, and other obligations issued on behalf of the National Credit Union Administration Central Liquidity Facility (12 USCS Section 1795k[b]).

            18.     Resolution Funding Corporation—Principal and interest from obligations issued by the Resolution Funding Corporation (12 USCS Sections 1441[f][7] and 1433).

            19.     Student Loan Marketing Association (Sallie Mae)—Principal and interest from obligations issued by the Student Loan Marketing Association. Considered to be United States Government obligations (20 USCS Section 1087-2[1], 31 USCS Section 3124[a]).

            20.     Tennessee Valley Authority—Principal and interest from bonds issued by the Tennessee Valley Authority (16 USCS Section 831n-4[d]).

            21.     United States Postal Service—Principal and interest from obligations issued by the United States Postal Service (39 USCS Section 2005[d][4]).

            22.     Treasury Investment Growth Receipts.

            23.     Certificates on Government Receipts.

         40.2(2) Taxable securities. There are a number of securities issued under the authority of an Act of Congress which are subject to the Iowa income tax. These securities may be guaranteed by the United States Treasury or supported by the issuing agency’s right to borrow from the Treasury. Some may be backed by the pledge of full faith and credit of the United States Government. However, it has been determined that these securities are not direct obligations of the United States Government to pay a specified sum at a specified date, nor are the principal and interest from these securities specifically exempted from taxation by the respective authorizing Acts. Therefore, income from such securities is subject to the Iowa income tax. Examples of securities which fall into this category are those issued by the following agencies and institutions:

            a.                Federal agency obligations:

            1.      Federal or State Savings and Loan Associations

            2.      Export-Import Bank of the United States

            3.      Building and Loan Associations

            4.      Interest on federal income tax refunds

            5.      Postal Savings Account

            6.      Farmers Home Administration

            7.      Small Business Administration

            8.      Federal or State Credit Unions

            9.      Mortgage Participation Certificates

            10.     Federal National Mortgage Association

            11.     Federal Home Loan Mortgage Corporation (Freddie Mac)

            12.     Federal Housing Administration

            13.     Federal National Mortgage Association (Fannie Mae)

            14.     Government National Mortgage Association (Ginnie Mae)

            15.     Merchant Marine (Maritime Administration)

            16.     Federal Agricultural Mortgage Corporation (Farmer Mac)

            b.                Obligations of international institutions:

            1.      Asian Development Bank

            2.      Inter-American Development Bank

            3.      International Bank for Reconstruction and Development (World Bank)

            c.                Other obligations:

Washington D.C. Metro Area Transit Authority

Interest from repurchase agreements involving federal securities is subject to Iowa income tax. Nebraska Department of Revenue v.         John Loewenstein, 513 US 123 (1994). Everett v.  State Dept.        of Revenue and Finance, 470 N.W.2d 13 (Iowa 1991).

For tax years beginning on or after January 1, 1987, interest from Mortgage Backed Certificate Guaranteed by Government National Mortgage Association (“Ginnie Maes”) is subject to Iowa income tax. See Rockford Life Insurance Company v. Illinois Department of Revenue, 96 L.Ed.2d 152.

For the treatment of interest or dividends from regulated investment companies (mutual funds) that invest in obligations of the type discussed in this rule, see rule 701—40.52(422).

This rule is intended to implement Iowa Code section 422.7.

[ ARC 7761B , IAB 5/6/09, effective 6/10/09;    ARC 1101C , IAB 10/16/13, effective 11/20/13]