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indebtedness and the investments for purposes of sections 246A
and 265(a)(2). Respondent would have us find that Waldorf II and
HEI had a "common purpose established by [HEI]", to provide funds
to HEI by borrowing "in excess of the needs of the [Waldorf]
business" so that HEI could invest in a variety of products,
including tax-exempt obligations and domestic shares.
III. The Code
Section 265(a)(2) provides:
No deduction shall be allowed for * * * [i]nterest on
indebtedness incurred or continued to purchase or carry
obligations the interest on which is wholly exempt from
the taxes imposed by this subtitle * * *
Section 265(a)(2) does not operate to disallow interest on
indebtedness simply because the taxpayer simultaneously holds or
acquires tax-exempt obligations and incurs or carries
indebtedness. Bradford v. Commissioner, 60 T.C. 253, 257-258
(1973). The touchstone for decision is whether the taxpayer’s
purpose in incurring or continuing indebtedness was to purchase
or carry such obligations. Indian Trail Trading Post, Inc. v.
Commissioner, 60 T.C. 497, 500 (1973), affd. 503 F.2d 102 (6th
Cir. 1974). Purpose may be inferred from the taxpayer’s conduct
and the circumstances surrounding the borrowing. Id. (citing
Leslie v. Commissioner, 50 T.C. 11, 20-21 (1968), revd. on other
grounds 413 F.2d 636 (2d Cir. 1969)).
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