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City S. Ry. Co. & Affiliated Cos. v. Commissioner, 16 B.T.A. 665,
694 (1929) (“the term ‘obligations of the United States’ * * *
[includes] bonds or other similar evidences of indebtedness”),
affd. in part and revd. in part on another issue and remanded 52
F.2d 372 (8th Cir. 1931); see also United States Trust Co. v.
Anderson, 65 F.2d 575, 577 (2d Cir. 1933); Newlin Machinery Corp.
v. Commissioner, 28 T.C. 837, 841-842 (1957); sec. 1.103-1(b),
Income Tax Regs.
Consistent with the notion that exclusions from gross income
are to be construed narrowly, Commissioner v. Schleier, 515 U.S.
323, 328 (1995); Harbor Bancorp & Subs. v. Commissioner, 105 T.C.
260, 287 (1995), affd. 115 F.3d 722 (9th Cir. 1997), not all
interest-bearing obligations issued by State and local
governments qualify as section 103(c)(1) obligations. Courts
have long held that, in order to entitle the holder to an
exclusion from gross income for interest earned thereon, the
subject obligation must have been issued by the State or
political subdivision as an exercise of its sovereign borrowing
power. See, e.g., Stewart v. Commissioner, 714 F.2d 977, 981-982
(9th Cir. 1983), affg. T.C. Memo. 1982-209; Drew v. United
States, 551 F.2d 85, 87 (5th Cir. 1977); United States Trust Co.
v. Anderson, supra at 577-578; King v. Commissioner, 77 T.C.
1113, 1118 (1981). This limitation derives from the notion that
the purpose of the section 103 exclusion is to enable States and
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