Section 103 – Interest on State and Local Bonds

Section 103 of the tax code provides exemptions for inclusion in gross income of certain bonds that qualify for federal tax exemption.   These include bonds issued by state and local governments, private activity bonds that meet certain qualifications, qualified 501(c)(3) bonds, affordable housing bonds, and other types of issues specifically described.  In order to achieve tax-exempt status, an issuer must follow all of the specific requirements of bond issuance.   Tax-exempt status can be challenged by the IRS throughout the life of the issue if the IRS believes that certain elements of the transaction warrant investigation.  One topic that the IRS has recently shown an interest in is the issue price of the bonds.  Issuers should be careful to monitor their post issuance trading activity and should take an active role in monitoring their transactions.