H Enterprises International, Inc., and Subsidiaries - Page 9

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          Tax-Exempt Interest; Dividends on Domestic Stock                            
               During the taxable years in issue, HEI received interest and           
          dividends on tax-exempt obligations and domestic shares,                    
          respectively, held by the Investment Divisions.  HEI deducted               
          70 percent of the dividends received on those domestic shares.              
          Respondent's Adjustments                                                    
               Respondent proposes that we make the following adjustments             
          to petitioner's claimed interest expense deductions and dividends           
          received deductions:                                                        
          Tax Year     Interest Expense Deduction    Dividends Received Deduction     
          Ending       Claimed      Disallowed         Claimed     Disallowed         
          Sec. 265(a)(2)                   Sec. 246A                                  
          6/30/89     $18,197,732    $2,891,294        $393,201      $393,201         
          6/30/90     $17,580,023    $3,478,858        $587,781      $572,329         
          6/30/91     $13,862,253    $4,380,018        $337,410      $337,410         
                              ULTIMATE FINDING OF FACT                                
               Based on the restructuring plan, the shareholder agreement,            
          and the sequence of events that followed, we find that the                  
          dominant purpose for incurring the 1987 indebtedness was to                 
          purchase tax-exempt obligations and portfolio stock.                        


                                       OPINION                                        
          I.  Introduction                                                            
               We must determine whether section 246A applies to eliminate            
          the dividends received deduction claimed by HEI with respect to             
          dividends received on the domestic shares owned by it and whether           






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