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Section 246A provides that there shall be a reduction in the
amount of the deduction allowable for dividends received (under
sections 243, 244, or 245(a)) with respect to debt-financed
portfolio stock. Debt-financed portfolio stock is defined in
section 246A(c) as any portfolio stock with respect to which
there is portfolio indebtedness. Portfolio indebtedness means
"any indebtedness directly attributable to investment in the
portfolio stock." Sec. 246A(d)(3)(A). We have found no cases
that interpret the expression "directly attributable" in the
context of applying section 246A. Section 246A was added by the
Deficit Reduction Act of 1984, Pub. L. 98-369, sec. 51, 98 Stat.
494, 562-564. H. Rept. 98-432, which accompanied H.R. 4170,
which became the Deficit Reduction Act of 1984, indicates that we
should inquire into the taxpayer’s purpose for incurring the
indebtedness and trace the use of the borrowed money: "[I]f
indebtedness is clearly incurred for the purpose of acquiring
dividend-paying stock or otherwise is directly traceable to such
an acquisition, the indebtedness would constitute portfolio
indebtedness." Id. at 1181.
Thus, the inquiry is similar under both sections 265(a)(2)
and 246A(d)(3)(A): In both cases, we must determine whether
there is a sufficient purposive connection between the borrowing
and the investments.
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