PSB Holdings, Inc. - Page 2




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               Debra Sadow Koenig, for petitioner.                                    
               Lawrence C. Letkewicz, Christa A. Gruber, and Sharon S.                
          Galm, for respondent.                                                       


                                       OPINION                                        

               LARO, Judge:  This case was submitted to the Court under               
          Rule 122 for decision without trial.1  Petitioner petitioned the            
          Court to redetermine respondent’s determination of deficiencies             
          of $33,622, $38,571, $41,654, and $31,868 in the 1999, 2000,                
          2001, and 2002 Federal income taxes, respectively, of its                   
          affiliated group.  For those years, the group filed consolidated            
          Federal corporate income tax returns.  The group included                   
          petitioner, petitioner’s wholly owned subsidiary Peoples State              
          Bank (Peoples), and Peoples’ wholly owned investment subsidiary             
          PSB Investments, Inc. (Investments).                                        
               We decide whether Peoples must include the tax-exempt                  
          obligations purchased and owned by Investments in the calculation           
          of Peoples’ average adjusted bases of tax-exempt obligations                
          under sections 265(b)(2)(A) and 291(e)(1)(B)(ii)(I).  We hold               
          that the calculation does not include those obligations.                    




               1 Rule references are to the Tax Court Rules of Practice and           
          Procedure.  Unless otherwise noted, section references are to the           
          applicable versions of the Internal Revenue Code.                           





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