Municipal Bond - Statutory History

Statutory History

The U.S. Supreme Court held in 1895 that the federal government had no power under the U.S. Constitution to tax interest on municipal bonds. But, in 1988, the Supreme Court stated the Congress could tax interest income on municipal bonds if it so desired on the basis that tax exemption of municipal bonds is not protected by the Constitution. In this case, the Supreme Court stated that the contrary decision of the Court 1895 in the case of Pollock v. Farmers' Loan & Trust Co. had been "effectively overruled by subsequent case law."

The Revenue Act of 1913 first codified exemption of interest on municipal bonds from federal income tax.

The Tax Reform Act of 1986 greatly reduced private activities that may be financed with tax-exempt bond proceeds.

IRC 103(a) is the statutory provision that excludes interest on municipal bonds from federal income tax. As of 2004, other rules, however, such as those pertaining to private activity bonds, are found in sections 141–150, 1394, 1400, 7871.