Municipal and Governmental Bond Institutional Holders

Definition

Institutional holders of municipal and governmental bonds are banks, insurers, mutual funds and other institutions that buy debt issued by states, local governments and their agencies, whose interest is generally excluded from federal gross income.^[1] Banks and other financial institutions generally cannot deduct interest expense allocable to tax-exempt bonds they buy, except for designated small-issuer "qualified tax-exempt obligations" (bank-qualified bonds).^[2]

Federal law

A market and contract term. No Act of Congress defines it; the federal laws below apply as described.

1. Tax Reform Act of 1986, Pub. L. 99-514, § 1301, 100 Stat. 2602. Rewrote 26 U.S.C. § 103 (interest on State or local bonds excluded from gross income, subject to private activity and arbitrage exceptions) and enacted §§ 141-150. Official text: govinfo.gov, U.S. Government Publishing Office.
2. Tax Reform Act of 1986, Pub. L. 99-514, § 902, 100 Stat. 2380. Added 26 U.S.C. § 265(b): disallows financial institutions' interest expense allocable to tax-exempt interest, with the qualified tax-exempt obligation exception. Official text: govinfo.gov, U.S. Government Publishing Office.