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2. Section 265(a)(2)
Respondent disallowed part of the investment interest
pursuant to section 265(a)(2). Section 265(a)(2) provides that a
taxpayer is not entitled to a deduction for interest on
indebtedness incurred or continued to purchase or carry
obligations on which the interest is tax exempt. The purpose of
section 265(a)(2) is to prevent a taxpayer from obtaining a
double tax benefit by deducting interest on borrowed funds used
by the taxpayer to purchase or carry securities bearing tax-
exempt interest. See Denman v. Slayton, 282 U.S. 514, 515
(1931); Levitt v. United States, 517 F.2d 1339, 1343 (8th Cir.
1975); Jacobson v. Commissioner, 28 T.C. 579 (1957); Estate of
Norris v. Commissioner, T.C. Memo. 1981-368.
The mere fact that a taxpayer carries or purchases
securities concurrently with his increase in indebtedness is
insufficient to apply section 265(a)(2). See Levitt v. United
States, supra at 1344; Mariorenzi v. Commissioner, 490 F.2d 92,
93 (1st Cir. 1974), affg. T.C. Memo. 1973-141. In interpreting
section 265(a)(2), the courts require a “sufficiently direct
relationship” between the carrying or purchasing of tax-exempt
securities and the indebtedness. Wisconsin Cheeseman, Inc. v.
United States, 388 F.2d 420, 422 (7th Cir. 1968); Swenson Land &
Cattle Co. v. Commissioner, 64 T.C. 686, 696 (1975). “Here we
are not applying a mechanical rule but are insisting upon a
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