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II. Arguments of the Parties
Effectively, the parties agree that application of sections
246A and 265(a)(2) depends on the purpose (or purposes) for
incurring the 1987 indebtedness. They disagree, however, as to
whether we may inquire beyond the narrow purposes of Waldorf II
(the borrower) and take into account the purposes of HEI in
forming Waldorf II and establishing the Investment Divisions.
Petitioner makes an argument similar to the argument it made
in H Enterprises I in support of the motion. Petitioner contends
that we should look only to Waldorf II's purposes for incurring
the 1987 indebtedness and to Waldorf II's use of the borrowed
funds in applying sections 246A and 265(a)(2). Petitioner would
have us find that Waldorf II had purposes for incurring the 1987
indebtedness that were unrelated to its parent corporation's
(HEI's) use of the distribution made from the proceeds of that
indebtedness. Although petitioner believes it is irrelevant,
petitioner also argues that HEI had business reasons for
acquiring and maintaining investments in tax-exempt obligations
and domestic shares, including a need for liquid resources to
provide capital for funding business acquisitions and to provide
funds for stock redemptions, if necessary.
Respondent traces the borrowed funds to investments in tax-
exempt obligations and domestic shares and argues that this is
sufficient proof of the relationship between the 1987
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