Actually, "Municipal bonds or munis as they are widely known in the United States are debt securities issued by municipal government agencies."
Who issues these Bonds?
Potential issuers of municipal bonds include cities, counties, redevelopment agencies, school districts, publicly owned airports and seaports, and any other governmental entity (or group of governments) below the state level. Since Municipal bonds are guaranteed by a local government, a subdivision thereof, or a group of local governments, and are assessed for risk and rated accordingly, the Interest Income received by holders of municipal bonds is often tax exempt from Federal taxes and state taxes (from the state in which they are issued).
Thus, as a C Corporation receiving NY Muni bond interest from NY C corporation, these would be tax-exempt on the Corporate Tax Return. In other words the Corporation would not have to pay corporation tax on this interest income.
On the M-1 schedule of the C corporation, you would report on Line 15, an amount equal to the tax-exempt interest income, representing the amount of income reported on the books this year but not recorded on the tax return.
You asked for some specific IRS reference on this subject. Please refer to this site below for more information on this subject. http://www.irs.gov/pub/irs-tege/teb_...-3module_b.pdf