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those obligations were owned by Investments during the year,
having been earlier transferred by Peoples to the capital of
Investments.
The notice of deficiency states as follows:
It has been determined that you transferred
tax-exempt securities from your bank to investment
subsidiaries. By this transfer, you managed to
separate tax-exempt investments from their interest
expense which resulted in a reduction of your exposure
to the TEFRA interest expense disallowance rules under
Internal Revenue Code sections 291 and 265(b).
It has further been determined that the investment
subsidiaries do not carry on any real business
operations on their own. Rather, they are merely an
incorporated “Shell” whose only real purpose is to
avoid taxation. In actuality, their business is
conducted by or through their parent banks.
It has further been determined that the investment
subsidiaries’ assets and liabilities are those of their
parent banks, since for all other reporting purposes,
both financial and regulatory, reporting is required to
be done on a consolidated basis. The assets and
liabilities are considered those of their parent banks.
Therefore, it is determined that for purposes of
computing your income tax liabilities, you must include
the assets and tax-exempt securities of the
subsidiaries in your computation of unallowable
interest expense under the TEFRA provisions.
The recalculation of non deductible interest
expense, under Sections 291 and 265(b) of the Internal
Revenue Code, based on the inclusion of the assets and
tax-exempt balances of Peoples State Bank and/or PSB
Investments, Inc. with that of the assets and
tax-exempt balances of their respective parent banks
increases your taxable incomes by: $98,890 for the
year ended 12-31-1999; $113,445 for the year ended
12-31-2000; $122,513 for the year ended 12-31-2001 and;
$93,731 for the year ended 12-31-2002. Refer to
Exhibit A through Exhibit D for further explanation.
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Last modified: March 27, 2008