Opinion No. 73-317 (1974) Ag ( 1974 )

FARMERS HOME ADMINISTRATION — INSURED NOTES Insured notes sold by the Farmers Home Administration pursuant to 7 U.S.C.A. 1928, 7 U.S.C.A. 1929 and42 U.S.C. § 1487 constitute general obligations of the United States backed by its full faith and credit, and, under the provisions of 31 U.S.C.A. 742, the interest earned by investors on such notes is tax exempt for Oklahoma income tax purposes. The Attorney General has received your request for an opinion wherein you ask, in effect, the following questions: 1. Are insured notes sold by the Farmers Home Administration general obligations of the United States backed by its full faith and credit? 2. If the answer to the first question is in the affirmative, is the interest earned on such notes tax exempt for Oklahoma income tax purposes? Pursuant to federal statutes the Farmers Home Administration sells to investors notes evidencing loans made by said federal agency. Title7 U.S.C.A. 1928, 7 U.S.C.A. 1929, and 42 U.S.C.A. 1487 authorize the Farmers Home Administration to insure loans purchased from it by investors, said contracts of insurance constituting obligations supported by the full faith and credit of the United States. Because of the increase in interest rates generally during the past several years, the maximum statutory interest rate on insured loans paid by borrowers is below the prevailing market rate. In order to sell these loans to investors, it is necessary to offer them in one of three ways: (1) at a discount reflecting the prevailing market rate, (2) at par value with an agreement to make supplementary payments to investors in amounts which, when added to the rate borne by the notes, would give the investors a total yield equal to the yield they would receive if they purchased the notes at a discount, or (3) by a combination of these methods, with the same net financial result to the government and investors. In order to further insure marketability of the notes, the Farmers Home Administration agrees to repurchase the notes after a specified period of time, said agreement being an integral part of the contract of insurance. In a September 21, 1972, opinion of the United States Attorney General to the Secretary of the Agriculture the Attorney General affirmed an earlier opinion to the Secretary of the Agriculture, 42 Op. A. G., No. 38, in holding that insured notes sold by the Farmers Home Administration to private investors are general obligations of the United States backed by its full faith and credit. The opinion concluded that: ". . . the proposed payment of principal and interest, repurchase of notes on a specified date, and supplemental payments to investors in amounts sufficient to make the notes marketable at par value are authorized for notes sold . . . ., and that sales of notes from these funds on such terms will be general obligations of the United States backed by its full faith and credit." In Attorney General Opinion 73-277, issued to the Commissioners of the Land Office, we held that Farmers Home Administration Notes are general obligations of the United States backed by its full faith and credit. We have examined that opinion and affirm the holding therein. Title 21 U.S.C.A. 742, provides in pertinent part: "Except as otherwise provided by law, all stocks, bonds, treasury notes, and other obligations of the United States, shall be exempt from taxation by or under state or municipal or local authority . . . ." (Emphasis added) This section was enacted to prevent taxes which diminish in the slightest degree the market value or investment attractiveness of obligations issued by the United States in an effort to secure necessary credit. New Jersey Realty Title Insurance Company v. Division of Tax Appeals in Department of Taxation and Finance of New Jersey, 70 S.Ct. 413, 338 U.S. 665. It is apparent that Farmers Home Administration Notes fall within the purview of the purpose for which the section was enacted and, being general obligations of the United States backed by its full faith and credit, said notes come within the meaning and intent of the wording "and other obligations of the United States". It is, therefore, the opinion of the Attorney General that your questions be answered as follows: Insured notes sold by the Farmers Home Administration pursuant to7 U.S.C.A. 1928, 7 U.S.C.A. 1929 and 42 U.S.C.A. 1487 constitute general obligations of the United States backed by its full faith and credit, and, under the provisions of 31 U.S.C.A. 742, the interest earned by investors on such notes is tax exempt for Oklahoma income tax purposes. (Mike D. Martin)