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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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Last modified: May 25, 2011