- 20 -
connection between the tax-exempt securities and the loans before
interest deductibility is disallowed.” Wisconsin Cheeseman, Inc.
v. United States, supra at 423. If the tax-exempt securities are
used for collateral for the indebtedness or the proceeds of the
borrowing are directly traceable to the purchase of tax-exempt
securities, then section 265(a)(2) will apply. See Levitt v.
Commissioner, supra at 1345; Wisconsin Cheeseman, Inc. v. United
States, supra at 422; Kirchner, Moore & Co. v. Commissioner, 54
T.C. 940 (1970), affd. 448 F.2d 1281 (10th Cir. 1971); Bishop v.
Commissioner, 41 T.C. 154 (1963), affd. 342 F.2d 757 (6th Cir.
1965). If neither factual setting exists, then we must examine
the facts of each case to determine whether a sufficiently direct
relationship exists between the indebtedness and tax-exempt
securities. See Estate of Norris v. Commissioner, supra.
Respondent’s agent, Mr. Halpert, testified why he applied
section 265(a):
When I first inspected the return prior to even
contacting the petitioner, I noticed that there was a large
amount of investment interest expense claimed on Schedule A
as well as a substantial amount of tax exempt interest
income reported on the front page of the 1040. This in
itself leads to at least asking questions, leading up to
section 265(a).
Respondent did not provide any additional evidence to establish a
direct relationship between the indebtedness and the tax-exempt
interest. The record does not establish when the debt was
incurred, nor does it reflect a connection of the indebtedness
Page: Previous 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 NextLast modified: May 25, 2011