129 T.C. No. 15
UNITED STATES TAX COURT
PSB HOLDINGS, INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14724-05. Filed November 1, 2007.
P is the holding company of an affiliated group of
corporations that files consolidated Federal income tax
returns. The other members are P’s wholly owned bank
(B) and B’s wholly owned investment company (IC). Both
B and IC own tax-exempt obligations. Only B incurs
interest expenses. IC’s tax-exempt obligations were
either purchased by IC or received from B before the
subject years as contributions to capital. R
determined that B must include all of IC’s tax-exempt
obligations in the calculation of B’s average adjusted
bases of tax-exempt obligations under secs.
265(b)(2)(A) and 291(e)(1)(B)(ii)(I), I.R.C. On the
consolidated income tax returns for the subject years,
B included IC’s obligations in the calculation only to
the extent that B had purchased the obligations and
transferred them to IC; in other words, B omitted from
the calculation those obligations that IC purchased.
Held: The calculation of B’s average adjusted
bases of tax-exempt obligations does not include the
tax-exempt obligations purchased by IC.
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