Taxation; Income Tax; Interest

Subject:

G.S. 105-130.5(b)(1)

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

Question: Is a savings and loan association which holds a Guaranteed Mortgage Certificate or Mortgage Participation Certificate liable for excise tax on the interest on such obligations paid to it by the issuer, Federal Home Loan Mortgage Corporation?

Conclusion: Yes

G.S. 105-228.24 imposes upon savings and loan associations an annual exise tax computed on net taxable income, which is defined as "net income" for corporate income tax purposes. "Net income", in turn, is as 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 mentions interest as an item to be included within gross income.

It appears from the foregoing that interest on obligations issued by the Federal Home Loan Mortgage Corporation is includable in federal gross income and also in federal taxable income and, therefore, in G.S. 105-130.3 net income as well, provided none of the G.S. 105-130.5 adjustments delete it.

G.S. 105-130.5(b)(1), one of the adjustments noted above, 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.

Thus, interest on obligations issued by the Federal Home Loan Mortgage Corporation may be excluded from net income and, therefore, from taxable income for excise tax purposes only if such obligations are obligations of the United States.

It does not appear from the face of either the Guaranteed Mortgage Certificate or the Mortgage Participation Certificate that the full faith and credit of the United States is pledged for payment of the obligations. In fact, the prospectus circulated in connection with each of the above issues clearly states that they do not constitute general obligations of the United States and that the United States does not guarantee payment.

Since the Guaranteed Mortgage Certificates and Mortgage Participation Certificates issued by the Federal Home Loan Mortgage Corporation do not constitute general obligations of the United States, interest paid to holders of such certificates may not be deducted when computing net income under G.S. 105-130.3. Therefore, such interest is includable in taxable income for purposes of determining the excise tax liability of savings and loan associations under G.S. 105-228.24.

Rufus L. Edmisten Attorney General

Marilyn R. Rich Associate Attorney General