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IV. Discussion
In H Enterprises I, we held that, in appropriate
circumstances, sections 246A and 265(a) may be applied when one
member of an affiliated group is the borrower and another member
is the purchaser of the portfolio stock or tax-exempt securities.
H Enterprises I at 81. Implicit in that holding is the
recognition that the search for a prohibited purpose cannot be
focused exclusively on the subsidiary’s purpose in borrowing to
make a distribution. Generally, a distributing corporation has
no control over (or concern with) the use to which distributions
are put by the shareholder recipient. If we were to limit our
inquiry to whether the board of directors of a subsidiary
corporation borrowed to make a distribution to its parent and
whether the subsidiary used the borrowed funds for that purpose,
then the use of the distributed funds would be irrelevant and the
purpose of the distributing corporation would always be
acceptable. We, therefore, reject petitioner's argument that we
should look only to Waldorf II's purpose for incurring the 1987
indebtedness, and we direct our inquiry to the larger purposes of
HEI manifest by the actions of both Waldorf II and HEI.
Here, Waldorf II incurred the 1987 indebtedness, at least in
part, in order to make the distribution. Coincident, or nearly
coincident, events may indicate purpose: “[T]he deduction will
be barred if there is ‘a sufficiently direct relationship’
between the incurring or continuing of the indebtedness and the
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