Industrial Development Revenue (IDR) Bonds and Alternative Minimum Tax
An investor is subject to the Alternative Minimum Tax (AMT). If she purchases an Industrial Development Revenue (IDR) bond issued on behalf of a private corporation, how is the interest income treated?
Industrial Development Revenue (IDR) bonds are classified as Private-Activity Bonds. Under the Internal Revenue Code, interest on non-essential private-activity municipal debt is a tax preference item subject to the Alternative Minimum Tax (AMT).
Complete Analysis & Legal Rationale
If a client is subject to AMT, recommending private-activity IDR bonds can result in unexpected federal tax liability, violating suitability unless yields compensate for AMT taxation.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
Private-activity IDR bond interest is a tax-preference item under the AMT.
Private activity bonds lose regular federal exemption under AMT rules.
The municipality does NOT back the bond; debt service depends solely on the corporate lease payments.
Coupon payments are interest income, not return of capital.
Official Standard: Codifies private activity municipal debt as AMT preference items.