Taxation; New Income; Interest Upon Obligations of the United States

Subject:

Requested By: W. L. Cole, Administrator Savings and Loan Division North Carolina Department of Commerce

Question: Is a savings and loan association required to include in its net taxable income for excise tax purposes interest income earned on participation certificates and mortgagebacked bonds guaranteed by the Government National Mortgage Association?

Conclusion: Yes.

G.S.

105-228.24 imposes upon savings and loan associations an annual excise tax computed on net taxable income, which is defined as "net income" for corporate income tax purposes. "Net income," in turn, is defined in G.S. 105-130.3 to mean "taxable income" as defined in the Internal Revenue Code in effect on January 1, 1975, subject to the adjustments provided in G.S. 105-130.5." Taxable income, as defined in § 63 of the Code, means gross income less certain deductions not here relevant. The gross income definition in § 61 of the Code specifically includes interest as an item falling within gross income. The particular securities in question are Mortgage Participation Certificates issued and guaranteed by the Federal National Mortgage Association (now obligations of GNMA) and Mortgage Backed Bonds issued by FNMA and the Federal Home Loan Mortgage Corporation and guaranteed by GNMA. It appears from the statutes discussed above that interest paid to holders of such securities is includable in federal gross income and federal taxable income and, therefore, in G.S. 105-130.3 net income also, provided it is not deleted by G.S. 105-130.5(b).

G.S.

105-130.5(b)(1) provides that for purposes of computing State net income, federal taxable income must be reduced by the amount of interest received on obligations of the United States. Consequently, savings and loan associations holding these securities would be liable for excise tax on the interest unless the securities are obligations of the United States.

§ 306(g) of the National Housing Act (12 USC 1721(g)) authorized GNMA "to guarantee the timely payment of principal of and interest on" securities of this type. The statute further provides that "(the) full faith and credit of the United States is pledged to the payment of all amounts which may be required to be paid under any guaranty under this subsection." In a May 15, 1970, opinion construing this provision, then Assistant Attorney General William H. Rehnquist wrote that the guaranties "constitute general obligations of the United States backed by its full faith and credit."

The question which arises at this point is whether the fact that the guaranties are general obligations of the United States renders the securities themselves general obligations of the United States.

As a practical matter there is no real distinction, since the holder of a bond or certificate may look to U.S. treasury for payment in either case. Nevertheless, the wording of § 306 seems to require that interest earned on these securities by regarded as taxable income and not an interest on obligations of the United States. The statute could easily have been drafted to provide that the securities themselves constitute general obligations; but, as written, it states only that the guaranties constitute general obligations.

G.S. 105-130.5(b)(1), which permits interest on U.S. obligations to be deducted from taxable income, is in the nature of an exemption. Consequently, taxation is presumed, and the relevant statutes must be strictly construed. Viewing the statutes in this manner, we must conclude that interest earned on the securities in question may not be excluded from taxable income for purposes of the excise tax imposed by G.S. 105-228.24.

Rufus L. Edmisten Attorney General

Marilyn R. Rich Associate Attorney