Tax Policy

Deducting Interest on Funds Borrowed to Purchase or Carry Tax-Exempt Bonds Gao ID: GGD-89-14 December 19, 1988

In response to a congressional request, GAO reviewed various Internal Revenue Code (IRC) provisions that prohibited deduction of interest expenses associated with borrowing funds to purchase or carry tax-exempt obligations to: (1) determine whether the Internal Revenue Service (IRS) could adequately administer the provisions; (2) quantify potential compliance problems; and (3) evaluate the effects of establishing a total mechanical disallowance rule for corporate taxpayers.

GAO found that IRS could not adequately administer IRC because it could not: (1) verify amounts that individual taxpayers reported for their tax-exempt interest income, since there was no such reporting requirement; (2) determine whether a nonfinancial corporation was subject to the de minimis rule, since it did not require corporations to report separately on the tax form their taxable and tax-exempt assets; (3) evaluate whether large numbers of nonfinancial corporations were properly reporting their circumstances; (4) measure the extent of individual taxpayer compliance with the provision; and (5) has not studied corporate compliance. GAO believes that extending the mechanical disallowance rule to all corporations would aid IRS in administering IRC.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

Director: Team: Phone:


The Justia Government Accountability Office site republishes public reports retrieved from the U.S. GAO These reports should not be considered official, and do not necessarily reflect the views of Justia.