Iowa Administrative Code › Agency 701 - Revenue Department › Title IV - Individual Income Tax › Chapter 302 - Determination of Net Income › Rule 701-302.2 - Interest and Dividends From Federal Securities

Current through Register Vol. 47, No. 3, July 24, 2024
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 U.S.C.S. 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 U.S.C.S. 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.
(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