Was interest on GNMA (Ginnie Mae) mortgage-backed securities exempt from South Carolina income tax as a U.S. obligation?

Plain-English summary

South Carolina Revenue Ruling 87-4 addressed whether interest from securities guaranteed by the Government National Mortgage Association (GNMA, or "Ginnie Mae") was exempt from South Carolina income tax.

South Carolina Code Section 12-7-430(b) exempts interest on obligations of the United States. The Commission looked to federal law — 31 U.S.C. Section 3124, which decides the tax status of federal obligations under the Internal Revenue Code, and IRC Section 103(h)(3)(A), which provides that an obligation is not treated as federally guaranteed merely because of a guarantee by agencies such as the FHA, VA, FNMA, FHLMC, or GNMA.

Applying those provisions, the Commission concluded that GNMA-guaranteed securities are not direct obligations of the United States. The federal guarantee does not convert them into Treasury obligations. Interest income from GNMA securities was therefore not exempt from South Carolina income tax. (SC Revenue Ruling 87-6 later modified this ruling only to clarify its effective date, leaving the taxability conclusion unchanged.)

Common questions

Q: Is GNMA (Ginnie Mae) interest exempt from South Carolina income tax? No. The ruling held it is taxable.

Q: Why isn't it exempt? GNMA securities are federally guaranteed, but a guarantee does not make them direct obligations of the United States, which is what the exemption requires.

Q: What interest is exempt? Interest on direct obligations of the United States (such as Treasury securities).

Q: Was this ruling later changed? SC Revenue Ruling 87-6 modified it to clarify that the position applies to tax years beginning on or after January 1, 1987; the GNMA result stayed the same.

Citations and references

• S.C. Code § 12-7-430(b) (exemption for interest on U.S. obligations)
• 31 U.S.C. § 3124 (tax status of federal obligations)
• IRC § 103(h)(3)(A) (federal-guarantee exception, including GNMA)
• Modified by SC Revenue Ruling 87-6 (effective-date clarification)

Subject

Exempt Interest

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR87-4.pdf

Original ruling text

SC REVENUE RULING #87-4

SUBJECT:

Exempt Interest

SUPERSEDES:

All previous documents and any oral directives in conflict herewith.

REFEREMCE:

S.C. Code Section 12-7-430

AUTHORITY:

S.C. Code Section 12-3-170

SCOPE:

A Revenue Ruling is the Commission's official interpretation of how tax
law is to be applied to a specific set of facts. A Revenue Ruling is public
information and remains a permanent document until superseded by a
Regulation or is rescinded by a subsequent Revenue Ruling.

Question:
Is interest income from securities commonly known as G.N.M.A. securities exempt from
taxation by South Carolina?
Facts:
The taxpayer has invested in securities issued by approved entities and guaranteed by the
Government National Mortgage Association under 12 U.S.C. Sec. 1721(g).
Law:
South Carolina Code Section 12-7-430(b) exempts from income interest upon obligations of the
United States.
The United States Code Section 12-7-430(b) exempts from income interest upon obligations of
the United States.
The United States Code, Title 31, Section 3124 dealing with the exemption from taxation by a
State or political subdivision of a State of stocks and obligations of the United States
Government provides:
(b) The tax status of interest on obligations and dividends, earnings, or other income from
evidences of ownership issued by the Government or an agency and the tax treatment of gain
and loss from disposition of those obligations and evidences of ownership is decided under
the Internal Revenue Code of 1954...

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Internal Revenue Code Section 103(h) defines federally guaranteed obligations and 103(h) (3)
specifically enumerates exceptions:
(A) Certain insurance programs. An obligation shall not be treated as federally guaranteed
by reason of
(i) any guarantee by the Federal Housing Administration, the Veteran's Administration,
the Federal National Mortgage Association, the Federal Home Loan Mortgage
Corporation, or the Government National Mortgage Association.
Conclusion:
Interest income from securities guaranteed by the Government National Mortgage Association is
not exempt from taxation by South Carolina as they are not direct obligations of the United
States Government.
SOUTH CAROLINA TAX COMMISSION

s/S. Hunter Howard Jr.
S. Hunter Howard, Jr., Chairman

s/John M. Rucker
John M. Rucker, Commissioner

s/Howard E. Duvall Jr.
Howard E. Duvall, Jr., Commissioner

Columbia, South Carolina
, 1987
April 22

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