H Enterprises International, Inc., and Subsidiaries - Page 1

                                 T.C. Memo. 1998-97                                   

                               UNITED STATES TAX COURT                                

                   v. COMMISSIONER OF INTERNAL REVENUE, Respondent                    

               Docket No. 11478-93.                    Filed March 9, 1998.           

                    W II, a subsidiary of HEI, borrowed funds, a part                 
               of which was distributed to HEI with respect to its                    
               stock in W II.  HEI used a portion of the distribution                 
               to buy portfolio stock and tax-exempt obligations and                  
               held such stock and obligations for the 3 tax years in                 
               issue.  Held:  the indebtedness was incurred to                        
               purchase tax-exempt obligations for the purpose of                     
               sec. 265(a)(2), I.R.C., and is directly attributable to                
               the acquisition of portfolio stock for the purpose of                  
               sec. 246A, I.R.C.; respondent's disallowances of an                    
               interest deduction pursuant to sec. 265(a)(2), I.R.C.                  
               and of a dividend received deduction pursuant to sec.                  
               246A, I.R.C., are sustained.                                           

               William L. Hippee, Jr., and Edward J. Pluimer, for                     
               John Schmittdiel and Jonathon Decatorsmith, for respondent.            

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