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acquisition or holding of the tax-exempt obligations.” Indian
Trail Trading Post, Inc. v. Commissioner, supra at 500 (citations
omitted). HEI, through the Investment Divisions, used the cash
portion of the distribution to purchase tax-exempt obligations
and domestic shares within weeks of receiving the funds and
maintained a substantial portion of its investment portfolio in
such investments for the years in issue. Accordingly, we find
that the borrowed funds were used directly to purchase tax-exempt
obligations and domestic shares and that sections 265(a)(2) and
246A apply. See Bradford v. Commissioner, supra at 258 ("Equally
clearly, the deduction is not allowable if the proceeds of the
borrowing are directly traceable to the purchase of tax-exempts."
(Citations omitted.)). The facts that the borrowed funds were
not used by Waldorf II to purchase tax-exempt obligations and
Waldorf II had a purpose for incurring the 1987 indebtedness (to
make a distribution to HEI) are simply not determinative in the
affiliated group context before us. We are, thus, satisfied
that, here, where the borrowing and distribution are all part of
a preplanned sequence, the distributed funds are distributed to a
parent corporation, and those funds are used to purchase tax-
exempt obligations and domestic shares, the required purposive
connection has been shown.
Petitioner also argues that Waldorf II incurred the 1987
indebtedness in order to obtain more advantageous terms on its
debt and to implement a new stock purchase plan for its
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