26 C.F.R. § 1.103-1

Interest upon obligations of a State, territory, etc

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(a) Interest upon obligations of a State, territory, a possession of the United States, the District of Columbia, or any political subdivision thereof (hereinafter collectively or individually referred to as “State or local governmental unit”) is not includable in gross income, except as provided under section 103 (c) and (d) and the regulations thereunder.

(b) Obligations issued by or on behalf of any State or local governmental unit by constituted authorities empowered to issue such obligations are the obligations of such a unit. However, section 103(a)(1) and this section do not apply to industrial development bonds except as otherwise provided in section 103(c). See section 103(c) and §§ 1.103-7 through 1.103-12 for the rules concerning interest paid on industrial development bonds. See section 103(d) for rules concerning interest paid on arbitrage bonds. Certificates issued by a political subdivision for public improvements (such as sewers, sidewalks, streets, etc.) which are evidence of special assessments against specific property, which assessments become a lien against such property and which the political subdivision is required to enforce, are, for purposes of this section, obligations of the political subdivision even though the obligations are to be satisfied out of special funds and not out of general funds or taxes. The term “political subdivision”, for purposes of this section denotes any division of any State or local governmental unit which is a municipal corporation or which has been delegated the right to exercise part of the sovereign power of the unit. As thus defined, a political subdivision of any State or local governmental unit may or may not, for purposes of this section, include special assessment districts so created, such as road, water, sewer, gas, light, reclamation, drainage, irrigation, levee, school, harbor, port improvement, and similar districts and divisions of any such unit.

[T.D. 7199, 37 FR 15486, Aug. 3, 1972]

Notes of Decisions

Cited in 4 cases, 1971–1998 · leading case: Hernandez v. Comm'r, 1998 T.C. Memo. 46 (Tax Ct. 1998).

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Hernandez v. Comm'r, 1998 T.C. Memo. 46 (Tax Ct. 1998). · cites it 2× “Consistent with the notion that exclusions from gross income are to be construed narrowly, Commissioner v.”

Indep. Gravel Co. v. Comm'r, 56 T.C. 698 (Tax Ct. 1971). · cites it 6× “Respondent, on the other hand, argues that the special tax bills were not obligations of a political subdivision pursuant to section 1.”

State of Michigan & Michigan Educ. Trust v. United States, 40 F.3d 817 (6th Cir. 1995). “The Internal Revenue Code does not define the term “political subdivision,” but the term has been defined by Treasury regulations pertaining to the exemption of interest on state obligations as “any division of any State or local governmental unit which is a municipal…”

Thompson v. Comm'r, 45 T.C.M. 693 (Tax Ct. 1983). · cites it 2× “Respondent determined that the interest Thompson & Green received from its governmental purchasers was not tax exempt because the city or county officials who had contracted with Thompson & Green had not obtained authority to enter into such contracts, and therefore the…”

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