Tax Type
Corporation Income Tax
Individual Income Tax
Description
Bond interest
Topic
Taxable Income
Date Issued
07-18-1986
July 18, 1986
Re: Request for ruling; income tax
Interest on obligations of a political subdivision
Dear **********************
This is in response to your letter of July 14, 1986, requesting a ruling on the taxability of interest on bonds to be issued by your client, ********** (the "Authority.") The Authority is a political subdivision of Virginia created under the Virginia Housing Authorities Law, Chapter 1, Title 36 of the Code of Virginia.
The Authority proposes to issue two series of bonds. Series A would be issued in such a manner that the interest on the bonds would be exempt from taxation under federal law. Series B bonds will not qualify for federal exemption. Therefore the interest on Series B bonds will be taxable under federal law and included in the bondholder's Federal Adjusted Gross Income (for individuals) or Federal Taxable Income (for corporations.) You request a ruling as to whether the interest on Series B bonds will qualify for the subtraction under §§58.1-322C2 and 58.1-402C2 for ". . . interest on obligations of this Commonwealth or of any political subdivision or instrumentality of this Commonwealth."
DETERMINATION
The regulations under the two sections of the Virginia Code cited above treat the subtraction for interest on U.S. obligations and Virginia obligations in a similar manner. See V.R. 630-2-322C2(a) and 630.3-402C1(a). However, upon careful analysis of the two subsections allowing the subtractions I conclude that the General Assembly intended that a different standard be applied to interest on U.S. obligations than to interest on Virginia obligations.
The subsection authorizing a subtraction for interest on U.S. obligations qualifies that subtraction by adding the clause ". . . to the extent exempt from state income taxes under the laws of the United States . . ." The subsection authorizing a subtraction for interest on Virginia obligations does not contain any such limitation. Compare subsections C1 and C2 of §§58.1-322 and 58.1-402.
I construe the subtraction for interest on U.S. obligations as applying only to interest which Virginia is prohibited from taxing under the U.S. Constitution and statutes. Therefore the
Virginia regulations properly limit the subtraction for interest on U.S. obligations.
There is no prohibition against Virginia taxing the interest on its own obligations, however the General Assembly has chosen not to do so. The subsection authorizing a subtraction for obligations of Virginia, its political subdivisions and instrumentalities is not qualified in any way except that the interest must be included in Federal Adjusted Gross Income (for individuals) and Federal Taxable Income (for corporations.)
The Authority is clearly a political subdivision of Virginia. The Series B bonds will be issued pursuant to §36-29 and will be obligations of the Authority. The interest will be included in Federal Adjusted Gross Income (for individuals) and Federal Taxable Income (for corporations.) Accordingly, I am of the opinion that the interest on the Series B bonds will qualify for the subtraction under §§58.1-322C2 and 58.1-402C2.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner